United States Environmental Protection Agency 

# Economic and Benefits Analysis for the Final Section 316(b) Phase III Existing Facilities Rule June 1, 2006

# U.S. Environmental Protection Agency Office of Water (4303T) 1200 Pennsylvania Avenue, NW Washington, DC 20460

EPA-821-R-06-001

### ACKNOWLEDGMENTS AND DISCLAIMER

This document was prepared by the Office of Water staff. The following contractors provided assistance and support in performing the underlying analysis suppor ting the conclusions detailed in this document.

Abt Associates Inc. (Parts A, C, D, and E)

Eastern Research Group, Inc. (Part B)
and ICF Consulting Science Applications International Corporation Stratus Consulting Inc. Tetra Tech, Inc. The Office of Water has reviewed and approved this document for publication. The Office of Science and Technology directed, managed, and reviewed the work of the contractors in preparing this document. Neither the

United States Government nor any of its employees, contractors, subcontractors, or their employees makes any warranty, expressed or implied, or assumes any legal liabilit y or responsibility for any third party’s use of or the results of such use of any information, apparatus, pro duct, or process discussed in this document, or represents that its use by such party would not infringe on privately owned rights.§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents 

# Table of Contents

P ART 

# A: B ACKGROUND 

# I NFORMATION 

## C HAPTER 

## A1: I NTRODUCTION 

### Introduction.......................................................................................................................................................... A1-1 A1-1 Overview of Potentially Regulated Sectors and Facilities ............................................................... A1-1 A1-1.1 New Offshore Oil and Gas Extraction Facilities ....................................................................... A1-1 A1-1.2 Existing Phase III Fac ilities and Sectors.................................................................................... A1 -2 A1-2 Summary of th e Final Rule ...................................................................................................... ...... A1-10 A1-2.1 New Offshore Oil and Gas Ex traction Facilities ..................................................................... A1-10 A1-2.2 Existing Facilities ............................................................................................................ ........ A1-11 A1-3 Summary of Economic An alysis Results ....................................................................................... A1-1 1 A1-4 Organization of the EA Report.................................................................................................. ..... A1-19 References .................................................................................................................... .................................... A1-21 

## C HAPTER 

## A2: C ONSIDERATIONS IN 

## A SSESSING THE 

## N EED FOR 

## P HASE 

## III R EGULATION 

### Introduction.......................................................................................................................................................... A2-1 A2-1 Description of Environmental Impacts from CWIS ......................................................................... A2-1 A2-2 Levels of Protection at Phase III Facilities................................................................................... .... A2-2 A2-2.1 Phase III New Facilities ....................................................................................................... ...... A2-2 A2-2.2 Potential Phase III Existing Facilities ........................................................................................ A2-3 A2-3 Addressing Market Imperfections ................................................................................................ .... A2-3 References .................................................................................................................... ...................................... A2-4 

# P ART 

# B: E CONOMIC 

# A NALYSIS FOR 

# P HASE 

# III N EW 

# O FFSHORE 

# O IL AND 

# G AS 

# E XTRACTION 

# F ACILITIES 

## C HAPTER 

## B1: S UMMARY OF 

## C OST 

## C ATEGORIES AND 

## K EY 

## A NALYSIS 

## E LEMENTS FOR 

## N EW 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## F ACILITIES 

### Introduction.......................................................................................................................................................... B1-1 B1-1 Cost Categories................................................................................................................ ................. B1-1 B1-1.1 Cost of Installing and Operating Compliance Technology........................................................ B1-2 B1-1.2 Administrative Costs for Complying Facilities ......................................................................... B1-3 B1-2 Key Elements of the Economic Analysis For Ne w Offshore Oil and Gas Extraction Facilities...... B1-7 B1-2.1 Compliance Schedule ............................................................................................................ .... B1-8 B1-2.2 Adjusting Monetary Values to a Common Time Period of Analysis ........................................ B1-8 B1-2.3 Discounting and Annualization – Costs to Society or Social Costs .......................................... B1-9 B1-2.4 Discounting and Annualization – Costs to Complying Facilities ............................................ B1-11 References .................................................................................................................... .................................... B1-13 

## C HAPTER 

## B2: P ROFILE OF THE 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## I NDUSTRY 

### Introduction.......................................................................................................................................................... B2-1 B2-1 Mobile Offshore Drilling Units (MODUs)....................................................................................... B2 -2 B2-1.1 Overview.................................................................................................................................... B2-2 B2-1.2 Existing MODUs and Their Associated Firms .......................................................................... B2-3 B2-1.3 Existing MODUs with Intake Rates Mee ting Proposed Rule Criteria..................................... B2-10 B2-2 Oil and Gas Production Platforms ............................................................................................... ... B2-12

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute i§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### B2-2.1 Overview.................................................................................................................................. B2-12 B2-2.2 Existing Platforms/Structures and Their Associated Firms ..................................................... B2-13 B2-2.3 Existing Platforms/Structures with Intake Ra tes Meeting Proposed Rule Criteria.................. B2-19 B2-3 Total New Oil and Gas Operations ............................................................................................... . B2-23 References .................................................................................................................... .................................... B2-24 

## C HAPTER 

## B3: E CONOMIC 

## I MPACT 

## A NALYSIS FOR THE 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## I NDUSTRY 

### Introduction.......................................................................................................................................................... B3-1 B3-1 MODU Anal yses .............................................................................................................................. B3-2 B3-1.1 Aggregate National After-tax Co mpliance Cost Analysis ......................................................... B3-2 B3-1.2 Vessel-Level Comp liance Costs ................................................................................................ B3 -3 B3-1.3 Impact Analysis ................................................................................................................ ......... B3-4 B3-2 Economic Impact Analysis for Oil and Gas Production Platforms .................................................. B3-9 B3-2.1 Aggregate National After-tax Compliance Costs .................................................................... B3-10 B3-2.2 Platform-Level Compliance Costs ........................................................................................... B3-11 B3-2.3 Impact Analysis ....................................................................................................................... B3-12 B3-3 Total Costs and Impacts Among All Affected Oil and Gas Industry Entities................................ B3-16 B3-4 Total Costs to Government Entities and Social Costs of the 316(b) Phase III Rulemaking .......... B3-16 B3-4.1 Total Costs to Government Entities ......................................................................................... B3-1 6 B3-4.2 Total Social Costs ............................................................................................................. ....... B3-17 References .................................................................................................................... .................................... B3-18 

# P ART 

# C: E CONOMIC 

# A NALYSIS FOR 

# P HASE 

# III E XISTING 

# F ACILITIES 

## C HAPTER 

## C1: S UMMARY OF 

## C OST 

## C ATEGORIES AND 

## K EY 

## A NALYSIS 

## E LEMENTS 

### Introduction.......................................................................................................................................................... C1-1 C1-1 Cost Categories................................................................................................................ ................. C1-1 C1-1.1 Costs of Installing and Operating Compliance Technology ...................................................... C1-1 C1-1.2 Net Income Loss from Inst allation Downtime........................................................................... C1-2 C1-1.3 Administrative Costs for Complying Facilities ......................................................................... C1-3 C1-1.4 Administrative Costs for Permitting Authorities and the Federal Government......................... C1-9 C1-2 Key Elements of the Economic Analys is For Phase III Existing Facilities ................................... C1-10 C1-2.1 Compliance Schedule............................................................................................................ ... C1-10 C1-2.2 Adjusting Monetary Values to a Common Time Period of Analysis ...................................... C1-11 C1-2.3 Discounting and Annualization – Costs to Society or Social Costs......................................... C1-12 C1-2.4 Discounting and Annualization – Costs to Complying Facilities ............................................ C1-14 References .................................................................................................................... .................................... C1-17 

## C HAPTER 

## C2: P ROFILE OF 

## M ANUFACTURERS 

### Introduction.......................................................................................................................................................... C2-1 

## C HAPTER 

## C2A: P APER AND 

## A LLIED 

## P RODUCTS 

## (SIC 26) Introduction....................................................................................................................................................... C2A-1 C2A-1 Summary Insights from this Profile ............................................................................................. . C2A-3 C2A-2 Domestic Production ............................................................................................................ ......... C2A-4 C2A-2.1 Output ......................................................................................................................... ............ C2A-5 C2A-2.2 Prices....................................................................................................................................... C2A-8 C2A-2.3 Number of facilities and firms ................................................................................................ C 2A-9 C2A-2.4 Employment and productivity............................................................................................... C2A-1 1

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 ii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### C2A-2.5 Capital expenditures ........................................................................................................... .. C2A-13 C2A-2.6 Capacity utilization ........................................................................................................... .... C2A-14 C2A-3 Structure and Competitiveness .................................................................................................. .. C2A-15 C2A-3.1 Firm size ............................................................................................................................... C2A-16 C2A-3.2 Concentration ratios ........................................................................................................... ... C2A-16 C2A-3.3 Foreign trade ......................................................................................................................... C2A-18 C2A-4 Financial Condition and Performance ......................................................................................... C2A -21 C2A-5 Facilities Operating Cooling Wate r Intake Structures................................................................. C2A-22 C2A-5.1 Waterbody and Cooling System Type .................................................................................. C2A-23 C2A-5.2 Facility Size .................................................................................................................. ........ C2A-24 C2A-5.3 Firm Size............................................................................................................................... C2A-26 References .................................................................................................................... ................................. C2A-28 

## C HAPTER 

## C2B: C HEMICALS AND 

## A LLIED 

## P RODUCTS 

## (SIC 28) Introduction........................................................................................................................................................C2B-1 C2B-1 Summary Insights from this Profile ............................................................................................. ..C2B-4 C2B-2 Domestic Production ............................................................................................................ ..........C2B-5 C2B-2.1 Output ......................................................................................................................... .............C2B-6 C2B-2.2 Prices........................................................................................................................................C2B-8 C2B-2.3 Number of Facilities and Firms .............................................................................................C2B- 10 C2B-2.4 Employment and Productivity ...............................................................................................C2B-1 2 C2B-2.5 Capital Expenditures........................................................................................................... ...C2B-14 C2B-2.6 Capacity Utilization ........................................................................................................... ....C2B-15 C2B-3 Structure and Competitiveness .................................................................................................. ...C2B-18 C2B-3.1 Firm Size................................................................................................................................C2B-18 C2B-3.2 Concentration Ratios........................................................................................................... ...C2B-19 C2B-3.3 Foreign Trade.................................................................................................................. .......C2B-21 C2B-4 Financial Condition and Performance ..........................................................................................C2B-26 C2B-5 Facilities Operating Cooling Wate r Intake Structures..................................................................C2B-28 C2B-5.1 Waterbody and Cooling System Type ...................................................................................C2B-29 C2B-5.2 Facility Size .................................................................................................................. .........C2B-31 C2B-5.3 Firm Size................................................................................................................................C2B-33 References .................................................................................................................... ..................................C2B-36 

## C HAPTER 

## C2C: P ETROLEUM 

## R EFINING 

## (SIC 2911) Introduction........................................................................................................................................................C2C-1 C2C-1 Summary Insights from this Profile ............................................................................................. ..C2C-2 C2C-2 Domestic Production ............................................................................................................ ..........C2C-3 C2C-2.1 Output ......................................................................................................................... .............C2C-4 C2C-2.2 Prices........................................................................................................................................C2C-7 C2C-2.3 Number of Facilities and Firms ...............................................................................................C2 C-7 C2C-2.4 Employment and Productivity .................................................................................................C2C -8 C2C-2.5 Capital Expenditures........................................................................................................... ...C2C-10 C2C-2.6 Capacity Utilization ........................................................................................................... ....C2C-11 C2C-3 Structure and Competitiveness .................................................................................................. ...C2C-12 C2C-3.1 Firm Size................................................................................................................................C2C-13 C2C-3.2 Concentration Ratios........................................................................................................... ...C2C-13 C2C-3.3 Foreign Trade.................................................................................................................. .......C2C-14 C2C-4 Financial Condition and Performance ..........................................................................................C2C-17

June 1, 2006 Internal Draft – Deliberative, Pred ecisional – Do not Quote, Cite, or Distribute iii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### C2C-5 Facilities Operating Cooling Wate r Intake Structures..................................................................C2C-18 C2C-5.1 Waterbody and Cooling System Type ...................................................................................C2C-19 C2C-5.2 Facility Size .................................................................................................................. .........C2C-20 C2C-5.3 Firm Size................................................................................................................................C2C-22 References .................................................................................................................... ..................................C2C-23 

## C HAPTER 

## C2D: S TEEL 

## (SIC 331) Introduction....................................................................................................................................................... C2D-1 C2D-1 Summary Insights from this Profile ............................................................................................. . C2D-3 C2D-2 Domestic Production ............................................................................................................ ......... C2D-4 C2D-2.1 Output ......................................................................................................................... ............ C2D-5 C2D-2.2 Employment and Productivity .............................................................................................. C2D-11 C2D-2.3 Capital Expenditures ........................................................................................................... .. C2D-13 C2D-2.4 Capacity Utilization ........................................................................................................... ... C2D-14 C2D-3 Structure and Competitiveness .................................................................................................. .. C2D-15 C2D-3.1 Firm Size............................................................................................................................... C2D-15 C2D-3.2 Concentration Ratios........................................................................................................... .. C2D-16 C2D-3.3 Foreign Trade.................................................................................................................. ...... C2D-17 C2D-4 Financial Condition and Performance ......................................................................................... C2D -19 C2D-5 Facilities Operating Cooling Wate r Intake Structures................................................................. C2D-21 C2D-5.1 Waterbody and Cooling System Type .................................................................................. C2D-22 C2D-5.2 Facility Size .................................................................................................................. ........ C2D-23 C2D-5.3 Firm Size............................................................................................................................... C2D-25 References .................................................................................................................... ................................. C2D-27 

## C HAPTER 

## C2E: A LUMINUM 

## (SIC 333/5) Introduction........................................................................................................................................................C2E-1 C2E-1 Summary Insights from this Profile ............................................................................................. ..C2E-2 C2E-2 Domestic Production ............................................................................................................ ..........C2E-3 C2E-2.1 Output ......................................................................................................................................C2E-4 C2E-2.2 Prices........................................................................................................................................C2E-7 C2E-2.3 Number of Facilities and Firms ...............................................................................................C2 E-8 C2E-2.4 Employment and Productivity ...............................................................................................C2E-1 0 C2E-2.5 Capital Expenditures ........................................................................................................... ...C2E-12 C2E-2.6 Capacity Utilization ........................................................................................................... ....C2E-13 C2E-3 Structure and Competitiveness .................................................................................................. ...C2E-14 C2E-3.1 Firm Size...................................................................................................................... ..........C2E-14 C2E-3.2 Concentration Ratios........................................................................................................... ...C2E-15 C2E-3.3 Foreign Trade.................................................................................................................. .......C2E-16 C2E-4 Financial Condition and Performance ..........................................................................................C2 E-19 C2E-5 Facilities Operating Cooling Wate r Intake Structures..................................................................C2E-21 C2E-5.1 Waterbody and Cooling System Type ...................................................................................C2E-22 C2E-5.2 Facility Size .................................................................................................................. .........C2E-23 C2E-5.3 Firm Size...................................................................................................................... ..........C2E-25 References .................................................................................................................... ..................................C2E-27 

## C HAPTER 

## C2F: F OOD AND 

## K INDRED 

## P RODUCTS 

## (SIC 20) Introduction........................................................................................................................................................ C2F-1 C2F-1 Summary Insights from this Profile ............................................................................................. .. C2F-3 C2F-2 Domestic Production ............................................................................................................ .......... C2F-4

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 iv§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### C2F -2.1 Output ...................................................................................................................................... C2F-4 C2F -2.2 Number of Facilities and Firms ............................................................................................... C2 F-8 C2F -2.3 Employment and Productivity ............................................................................................... C2F-1 0 C2F -2.4 Capital Expenditures........................................................................................................... ... C2F-12 C2F -2.5 Capacity Utilization ........................................................................................................... .... C2F-13 C2F-3 Structure and Competitiveness .................................................................................................. ... C2F-14 C2F -3.1 Firm and Facility Size......................................................................................................... ... C2F-15 C2F -3.2 Concentration Ratios........................................................................................................... ... C2F-16 C2F -3.3 Foreign trade .................................................................................................................. ........ C2F-17 C2F-4 Financial Condition and Performance .......................................................................................... C2 F-19 C2F-5 Facilities Operating Cooling Wate r Intake Structures.................................................................. C2F-23 C2F -5.1 Waterbody and Cooling System Type ................................................................................... C2F-24 C2F -5.2 Facility Size .................................................................................................................. ......... C2F-24 C2F -5.3 Firm Size...................................................................................................................... .......... C2F-26 References .................................................................................................................... .................................. C2F-28 

## C HAPTER 

## C2G: F ACILITIES IN 

## O THER 

## I NDUSTRIES 

## (V ARIOUS 

## SIC S 

## ) Introduction....................................................................................................................................................... C2G-1 C2G-1 Facilities Operating Cooling Wate r Intake Structures................................................................... C2G-2 C2G-1.1 Waterbody and Cooling System Types................................................................................... C2G-2 C2G-1.2 Facility Size .................................................................................................................. .......... C2G-3 C2G-1.3 Firm Size...................................................................................................................... ........... C2G-5 References .................................................................................................................... ................................... C2G-6 

## C HAPTER 

## C2 G LOSSARY 

### ..........................................................................................................................C2Glo s-1 

## C HAPTER 

## C3: E CONOMIC 

## I MPACT 

## A NALYSIS FOR 

## M ANUFACTURERS 

### Introduction.......................................................................................................................................................... C3-1 C3-1 Data Sources................................................................................................................... .................. C3-3 C3-2 Methodology .................................................................................................................................... C3-3 C3-2.1 Market-Level Impacts........................................................................................................... ..... C3-5 C3-2.2 Impact Measures ................................................................................................................ ........ C3-5 C3-3 Results ............................................................................................................................................ C3-15 C3-3.1 Baseline Closures.............................................................................................................. ....... C3-16 C3-3.2 Number of Facilities with Regulatory Requirements .............................................................. C3-16 C3-3.3 Post-Compliance Impacts ........................................................................................................ C3-17 C3-3.4 Compliance Costs ............................................................................................................... ..... C3-17 C3-3.5 Summary of Facility Impacts................................................................................................... C 3-18 C3-3.6 Firm Impacts ................................................................................................................... ......... C3-19 Glossary ...................................................................................................................... .................................. C3-21 Abbreviations ..................................................................................................................................................... C3-22 References .................................................................................................................... .................................... C3-23 Appendices to Chapter C3 ....................................................................................................... .......................... C3-24 

## A PPENDIX 

## C3A1: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Introduction..................................................................................................................................................... C3A1-1 C3A1-1 Number of Facilities with Regulatory Requirements .................................................................. C3A1-1 C3A1-2 Post-Compliance Closures ....................................................................................................... ... C3A1-2 C3A1-3 Moderate Impacts ............................................................................................................... ......... C3A1-2 C3A1-4 After-Tax Comp liance Costs..................................................................................................... .. C3A1-2

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute v§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### C3A1-5 Overview of Impacts ............................................................................................................ ....... C3A1-3 C3A1-6 Firm Impacts................................................................................................................... ............. C3A1-4 

## A PPENDIX 

## C3A2: C ALCULATION OF 

## I NSTALLATION 

## D OWNTIME 

## C OST 

### Introduction..................................................................................................................................................... C3A2-1 C3A2-1 Estimated Shut-Down Period for Installing Compliance Equipment.......................................... C3A2-1 C3A2-2 Calculating the Impact of Installation Downtime on Complying Facilities ................................ C3A2-2 C3A2-3 Calculating the Cost to Society of Installation Downtime .......................................................... C3A2-4 

## A PPENDIX 

## C3A3: C OST 

## P ASS 

## -T HROUGH 

## A NALYSIS 

### Introduction..................................................................................................................................................... C3A3-1 C3A3-1 The Choice of Firm-Specific versus S ector-Specific CPT Coefficients ..................................... C3A3-1 C3A3-2 Market Struct ure Analysis ...................................................................................................... ..... C3A3-3 C3A3-2.1 Industry Concentration......................................................................................................... . C3A3-4 C3A3-2.2 Import Competition............................................................................................................. .. C3A3-6 C3A3-2.3 Export Competition............................................................................................................. .. C3A3-7 C3A3-2.4 Long-Term Industry Growth................................................................................................. C3A3- 8 C3A3-2.5 Conclusions.................................................................................................................... ....... C3A3-9 References .................................................................................................................... ............................... C3A3-11 

## A PPENDIX 

## C3A4: A DJUSTING 

## B ASELINE 

## F ACILITY 

## C ASH 

## F LOW 

### Introduction..................................................................................................................................................... C3A4-1 C3A4-1 Background: Review of Overall Business Conditions ................................................................ C3A4-2 C3A4-2 Framing and Executing the Analysis........................................................................................... C3 A4-5 C3A4-2.1 Identifying the Financial Data Concept to Be Analyzed ...................................................... C3A4-5 C3A4-2.2 Selecting Appropriate Data................................................................................................... C3 A4-5 C3A4-2.3 Selecting Industry Groups and Firms for Use in the Analysis.............................................. C3A4-7 C3A4-2.4 Structuring the Analysis....................................................................................................... . C3A4-9 C3A4-3 Summary of Findings ............................................................................................................ .... C3A4-11 C3A4-3.1 Comparison of Findings for Proposed and Final Rule Analysis......................................... C3A4-17 C3A4-4 Developing an Adjustment Concept.......................................................................................... C3A4- 18 References .................................................................................................................... ............................... C3A4-21 

## A PPENDIX 

## C3A5: E STIMATING 

## C APITAL 

## O UTLAYS FOR 

## S ECTION 

## 316( B 

## ) P HASE 

## III M ANUFACTURING 

## S ECTORS 

## D ISCOUNTED 

## C ASH 

## F LOW 

## A NALYSES 

### C3A5-1 Analytic Concepts Underlying Anal ysis of Capital Outlays ....................................................... C3A5-2 C3A5-2 Specifying Variables for the Analysis ......................................................................................... C 3A5-4 C3A5-3 Selecting the Regression Analysis Dataset.................................................................................. C3A5 -7 C3A5-4 Specification of Models to be Tested .......................................................................................... C 3A5-9 C3A5-5 Model Validation............................................................................................................... ........ C3A5-13 Attachment C3A5.A: Bibliography of Litera ture Reviewed for this Analysis ............................................ C3A5-21 Attachment C3A5.B: Historical Variables Contained in the Value Line Investment Survey Dataset......... C3A5-22 

## A PPENDIX 

## C3A6: S UMMARY OF 

## M ODERATE 

## I MPACT 

## T HRESHOLD 

## V ALUES BY 

## I NDUSTRY 

### Introduction..................................................................................................................................................... C3A6-1 C3A6-1 Developing Threshold Values for Pre-Tax Return on Assets (PTRA)........................................ C3A6-2 C3A6-2 Developing Threshold Values for Inte rest Coverage Ratio (ICR) .............................................. C3A6-2 C3A6-3 Summary of Results ............................................................................................................. ....... C3A6-3 References .................................................................................................................... ................................. C3A6-5

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 vi§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



## A PPENDIX 

## C3A7: A NALYSIS OF 

## B ASELINE 

## C LOSURE 

## R ATES 

### Introduction..................................................................................................................................................... C3A7-1 C3A7-1 Annual Establishment Closures.................................................................................................. . C3A7-1 References .................................................................................................................... ................................. C3A7-2 

## A PPENDIX 

## C3A8: A NALYSIS OF 

## O THER 

## R EGULATIONS 

### Introduction..................................................................................................................................................... C3A8-1 C3A8-1 Methodology ............................................................................................................. .................. C3A8-3 C3A8-2 Results ......................................................................................................................................... C3A8-6 References .................................................................................................................... ................................. C3A8-7 

# P ART 

# D: A DDITIONAL 

# E CONOMIC 

# A NALYSES FOR 

# E XISTING AND 

# N EW 

# F ACILITIES 

## C HAPTER 

## D1: R EGULATORY 

## F LEXIBILITY 

## A NALYSIS 

### Introduction.......................................................................................................................................................... D1-1 D1-1 Analysis of New Offshore Oil a nd Gas Extraction Facilities........................................................... D1-2 D1-1.1 Small Entity Determination ..................................................................................................... .. D1-2 D1-1.2 Percentage of Small Entities Regulated ..................................................................................... D1-4 D1-1.3 Sales Test for Small Entities .................................................................................................. .... D1-4 D1-2 Analysis of Manufacturers ...................................................................................................... ......... D1-4 D1-2.1 Small Entity Determination ..................................................................................................... .. D1-5 D1-2.2 Percentage of Small Entities Regulated ................................................................................... D1-10 D1-2.3 Sales Test for Small Entities .................................................................................................. .. D1-10 D1-3 Summary of Regulatory Flexibility Analysis................................................................................. D1-1 0 References .................................................................................................................... .................................... D1-12 

## A PPENDIX 

## D1A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Introduction....................................................................................................................................................... D1A-1 D1A-1 Summary of Results ............................................................................................................. ......... D1A-1 

## C HAPTER 

## D2: UMRA A NALYSIS 

### Introduction.......................................................................................................................................................... D2-1 D2-1 Analysis of Impacts on Government Entities ................................................................................... D2 -2 D2-1.1 Compliance Costs for Govern ment-Owned Facilities ............................................................... D2-3 D2-1.2 Administrative Costs for New Offshore Oil and Gas Extraction Facilities ............................... D2-3 D2-1.3 Administrative Costs for Existing Facilities .............................................................................. D2-5 D2-1.4 Impacts on Small Governments ............................................................................................... D2-1 0 D2-2 Compliance Costs for the Private Sector........................................................................................ D2-10 D2-3 Summary of UMRA Analysis ....................................................................................................... . D2-10 References .................................................................................................................... .................................... D2-12 

## A PPENDIX 

## D2A: S UMMARY 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Introduction....................................................................................................................................................... D2A-1 D2A-1 Summary of Results ............................................................................................................. ......... D2A-1 

## C HAPTER 

## D3: O THER 

## A DMINISTRATIVE 

## R EQUIREMENTS 

### Introduction.......................................................................................................................................................... D3-1 D3-1 Executive Order 12866: Regulatory Planning and Review.............................................................. D3-1 D3-2 Paperwork Reduc tion Act of 1995 ................................................................................................... D3-1 D3-3 Executive Order 13132: Federalism ......................................................................................... ........ D3-2

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute vii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### D3-4 Executive Order 13175: Consultation and Coordi nation With Indian Tribal Governments ............ D3-3 D3-5 Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks ................................................................................................................... ................... D3-4 D3-6 Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use ........................................................................................................... ............... D3-4 D3-6.1 Existing Manufacturing Facilities....................................................................................... ....... D3-5 D3-6.2 New Offshore Oil and Gas Extraction Facilities ....................................................................... D3- 5 D3-7 National Technology Transfer and Advancement Act of 1995........................................................ D3-6 D3-8 Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations..................................................................................................... ...... D3-6 D3-9 Executive Order 13158: Mari ne Protected Areas............................................................................. D3-6 References .................................................................................................................... ...................................... D3-8 

# P ART 

# E: S OCIAL 

# C OSTS 

# , B ENEFITS 

# , AND 

# B ENEFIT 

# -C OST 

# A NALYSIS FOR 

# E XISTING AND 

# N EW 

# F ACILITIES 

## C HAPTER 

## E1: S UMMARY OF 

## S OCIAL 

## C OSTS 

### Introduction.......................................................................................................................................................... E1-1 E1-1 Costs of Compliance by Regulat ed Industry Segment ..................................................................... E1-2 E1-2 State and Federal Administrative Costs ......................................................................................... .. E1-4 E1-3 Total Social Cost .............................................................................................................. ................ E1-5 E1-4 Limitations and Uncertainties.................................................................................................. ....... E1-10 Glossary ...................................................................................................................... .................................. E1-11 References .................................................................................................................... .................................... E1-12 

## A PPENDIX 

## E1A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Introduction........................................................................................................................................................E1A-1 E1A-1 Costs of Compliance by Regulat ed Industry Segment ...................................................................E1A-1 E1A-2 State and Federal Administrative Costs ......................................................................................... E1A-2 E1A-3 Total Social Cost .............................................................................................................. ..............E1A-3 

## C HAPTER 

## E2: S UMMARY OF 

## B ENEFITS 

### Introduction.......................................................................................................................................................... E2-1 E2-1 Calculating Losses and Benefits................................................................................................ ....... E2-1 E2-2 Summary of Baseline Losses and E xpected Reductions in I&E ...................................................... E2-1 E2-3 Time Profile of Benefits ....................................................................................................... ............ E2-3 E2-4 Total Annualized Monetary Valu e of Losses and Benefits .............................................................. E2-9 References .................................................................................................................... .................................... E2-14 

## A PPENDIX 

## E2A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Introduction........................................................................................................................................................E2A-1 E2A-1 Summary of Expected Reductions in I&E .....................................................................................E2A-1 E2A-2 Time Profile of Benefits ....................................................................................................... ..........E2A-3 E2A-3 Total Annualized Monetary Value of Benefits.............................................................................E2A-12 

## C HAPTER 

## E3: C OMPARISON OF 

## B ENEFITS AND 

## S OCIAL 

## C OSTS 

### Introduction.......................................................................................................................................................... E3-1 E3-1 Comparison of Benefits and So cial Costs by Option ....................................................................... E3-1 E3-2 Incremental Analysis of Benefits and Social Costs.......................................................................... E3-6 E3-3 Break-Even Analysis of Pote ntial Non-Use Benefits....................................................................... E3-7

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 viii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents


### Glossary ...................................................................................................................... .................................. E3-11 References .................................................................................................................... .................................... E3-12 

## A PPENDIX 

## E3A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Introduction........................................................................................................................................................E3A-1 E3A-1 Comparison of Benefits and Social Costs by Option .....................................................................E3A -2 E3A-2 Incremental Analysis of Benefits and Social Costs........................................................................ E3A-8 E3A-3 Break-Even Analysis of Po tential Non-Use Benefits.....................................................................E3A -8 References .................................................................................................................... ..................................E3A-14

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute ix§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



# L IST OF 

# T ABLES



## C HAPTER 

## A1: I NTRODUCTION 

### Table A1-1: Performance Standards for the Regulatory Options Considered ..................................................... A1- 4 Table A1-2: Cooling Water Intake by Sector ..................................................................................... ................. A1-7 Table A1-3: Summary Economic Data for Major Industry Sectors Potentially Subject to §316(b) Regulation: Facilities, Employment, Value of Shipments, and Payroll............................................................... A1-7 Table A1-4: Estimated Cooling Water Intake by Sector and Analysis Option (Sample Weighted) - EPA SurveyA1-9 Table A1-5: Existing Manufacturers Facilities by Ap plicability Threshold and Waterbody Type ................... A1-10 Table A1-6: Phase III Existing Facility Counts, by Industry Segment and Option ........................................... A1-12 Table A1-7: Summary of Small Entity Impact Ratio Ranges For New OOGE Facilities ................................. A1-14 Table A1-8: Summary of UMRA Costs (millions, $2004)............................................................................ .... A1-15 Table A1-9: Social Cost for New Facilities (annualized, millions, $2004) ....................................................... A1-16 Table A1-10: Social Cost for Existing Facilities (annualized, millions, $2004) ............................................... A1 -17 Table A1-11: Total Social Cost for New and Existing Facilities (annualized, millions, $2004)....................... A1-18 Table A1-12: Summary of Benefits and Social Costs for Existing Facilities (millions, $2004) ....................... A1-19



## C HAPTER 

## B1: S UMMARY OF 

## C OST 

## C ATEGORIES AND 

## K EY 

## A NALYSIS 

## E LEMENTS FOR 

## N EW 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## F ACILITIES 

### Table B1-1: Technologies for Implementing 316(b) Requi rements for New Offshore Oil and Gas Extraction Facilities ........................................................................................................................................... B1-2 Table B1-2: Cost of Initial Post-Promulgation NPDES General Permit App lication Activities ......................... B1-5 Table B1-3: Cost of Subsequent NPDES General Pe rmit Application Activities (Per Facility, 2004$) ............. B1-6 Table B1-4: Cost of Monitoring Activities (Per Facility, 2004$) ................................................................ ........ B1-6 Table B1-5: Construction Cost Index ............................................................................................ ...................... B1-9 Table B1-6: GDP Deflator Series ................................................................................................ ........................ B1-9 

## C HAPTER 

## B2: P ROFILE OF THE 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## I NDUSTRY 

### Table B2-1: Owners of MODUs Currently Oper ating in GOM and Parent Company ........................................ B2-4 Table B2-2: Number of Exis ting MODUs and Parent Firms......................................................................... ..... B2-6 Table B2-3: NAICS Classificati on of MODU Parent Companies ..................................................................... . B2-7 Table B2-4: Financial Condition of MODU Parent Companies (2002-2005) .................................................... B2-8 Table B2-5: GOM Deepwater Platforms Constructed between 2003-2005t .................................................... B2-14 Table B2-6: Operators and Parent Compan ies of GOM Deepwater Structures................................................ B2-15 Table B2-7: Count of Firms by SIC and NAICS Code.............................................................................. ....... B2-16 Table B2-8: Financial Condition of Platform/S tructure Parent Companies (2002 – 2005) .............................. B2-17 Table B2-9: Number of Existing and Future Offshore O il and Gas Extraction Facilities Estimated or Assumed To Meet Final Phase III Rule Criteria over a 20-Year Analysis Time Frame ..................................... B2-23 

## C HAPTER 

## B3: E CONOMIC 

## I MPACT 

## A NALYSIS FOR THE 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## I NDUSTRY 

### Table B3-1: Total Aggregate National After-tax Compliance Costs for MODUs ($2004)................................. B3-3 Table B3-2: Per-Vessel Annualized Pre- Tax Cost of Compliance ($2004) ........................................................ B3- 4 Table B3-3: Revenue T est for MODU Owners ....................................................................................... ............ B3-9 Table B3-4: Total National Aggregate After-tax Compliance Costs for Platforms ($2004) ............................. B3-11 Table B3-5: Per-Platform Annualized Pre- Tax Cost of Compliance ($2004) ................................................... B3-12 Table B3-6: Revenue Test for Platform Owners................................................................................... ............. B3-15

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 x§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents


### Table B3-7: Total National Aggregate Annualized After-t ax Compliance Costs and Impacts for the Oil and Gas Industry ($2004) ............................................................................................................................. B3-16 Table B3-8: Total Costs to Government Entities ($2004) ......................................................................... ........ B3-16 Table B3-9: Total Social Costs of the Final Rulemaking for Oil and Gas Industries........................................ B3-17 

## C HAPTER 

## C1: S UMMARY OF 

## C OST 

## C ATEGORIES AND 

## K EY 

## A NALYSIS 

## E LEMENTS 

### Table C1-1: Estimated Average Down time for Technology Modules ................................................................ C1 -2 Table C1-2: Cost of Initial Post-Promulgati on NPDES Permit Application Activities ($2004) ......................... C1-6 Table C1-3: Cost of NPDES Repermit Application Activities a 

### ($2004) ............................................................. C1-8 Table C1-4: Cost of Annual Monitoring, Record Keeping, and Reporting Activities ($2004) ........................... C1-9 Table C1-5: Construction Cost Index ............................................................................................ .................... C1-11 Table C1-6: GDP Deflator Series ................................................................................................ ...................... C1-12 

## C HAPTER 

## C2A: P APER AND 

## A LLIED 

## P RODUCTS 

## (SIC 26) Table C2A-1: Phase III Facilities in the Paper and Allied Products Industry (SIC 26).................................... C2A-2 Table C2A-2: Relationship between SIC and NAICS Codes for the Paper and Allie d Products Industry (2002 a 

### )

.............................................................................................................................. ......................... C2A-3 Table C2A-3: U.S. Pulp and Paper Industry I ndustrial Production Index (Annual Averages)......................... C2A-8 Table C2A-4: Number of Facilities Owned by Firms in the Profiled Paper and Allied Products Segments.. C2A-10 Table C2A-5: Number of Firms in the Profile d Paper and Allied Pro ducts Segments................................... C2A-11 Table C2A-6: Productivity Trends for Profiled Pape r and Allied Products Se gments ($2005) ..................... C2A-13 Table C2A-7: Capital Expenditures for Profiled Pape r and Allied Products Segmen ts (millions, $2005)..... C2A-14 Table C2A-8: Number of Firms and Facilities by Size Ca tegory for Profiled Paper a nd Allied Products Segments in 2003 a 

### ........................................................................................................................................ C2A-16 Table C2A-9: Selected Ratios for Profiled Paper a nd Allied Products Segments, 1987, 1992, and 1997 ..... C2A-17 Table C2A-10: Trade Statistics for Profiled Paper and Allied Products Segmen ts (millions, $2005) ........... C2A-19 Table C2A-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Paper and Allied Products Segments....................................... C2A-23 Table C2A-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Paper and Allied Products Segments....................................... C2A-24 Table C2A-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Paper and Allied Products Segments....................................... C2A-24 Table C2A-14: Number of Facilities Estimated Subject to the 50 MGD All Option in Profiled Paper and Allied Products Segments by Firm Size ................................................................................................. C2A-26 Table C2A-15: Number of Facilities Estimated Subject to the 200 MGD All Option in Profiled Paper and Allied Products Segments by Firm Size ................................................................................................. C2A-27 Table C2A-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option in Profiled Paper and Allied Products Segments by Firm Size ...................................................................................... C2A- 27 

## C HAPTER 

## C2B: C HEMICALS AND 

## A LLIED 

## P RODUCTS 

## (SIC 28) Table C2B-1: Phase III Facilities in the Chemicals and Allied Products Industry (SIC 28) .............................C2B-2 Table C2B-2: Relationship between SIC and NAICS C odes for the Chemicals and Allied Products Industry (2002) .............................................................................................................................................C2B-4 Table C2B-3: Chemicals Industry Industrial Production Index (Annual Averages) .........................................C2B-8 Table C2B-4: Number of Facilities fo r Profiled Chemical Segmentsa............................................................C2 B-11 Table C2B-5: Number of Firms for Profiled Chemical Segmentsa .................................................................C2 B-12 Table C2B-6: Productivity Trends for Prof iled Chemical Segments ($2005) .................................................C2B-14 Table C2B-7: Capital Expenditures for Profiled Chemical Segments (in millions, $2005) ............................C2B-15 Table C2B-8: Number of Firms and Facilities by Firm Size Cate gory for Profiled Chemical Segments, 2003a ......................................................................................................................................................C2B-19

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute xi§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### Table C2B-9: Selected Ratios for SIC and NAICS Codes Within The Profiled Chemical Segments in 1987, 1992, and 1997a .....................................................................................................................................C2B-20 Table C2B-10: Trade Statistics for Profiled Chemical Segments.................................................................. ..C2B-23 Table C2B-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Chemical Segments ..................................................................C2B-30 Table C2B-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Chemical Segments ..................................................................C2B-30 Table C2B-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Chemical Segments ..................................................................C2B-31 Table C2B-14: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for Profiled Chemical Segments ......................................................................................................................C2B-34 Table C2B-15: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for Profiled Chemical Segments ......................................................................................................................C2B-34 Table C2B-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for Profiled Chemical Segments ......................................................................................................................C2B-35 

## C HAPTER 

## C2C: P ETROLEUM 

## R EFINING 

## (SIC 2911) Table C2C-1: Phase III Facilities in the Petroleum Refining Industry (SIC 29) ...............................................C2C -2 Table C2C-2: Relationship between SIC and NAICS Codes for the Petroleum Refining Industry (2002 a 

### )......C2C-2 Table C2C-3: U.S. Petroleum Refinery Product Production (million barrels per day)......................................C2C-5 Table C2C-4: Number of Firms and Facilities for Petroleum Refineries ..........................................................C 2C-8 Table C2C-5: Productivity Trends for Petroleum Refineries ($2005) .............................................................C 2C-10 Table C2C-6: Capital Expenditures for Petroleum Refineries ($2005) ...........................................................C2 C-11 Table C2C-7: Number of Firms and Establishments for Petroleum Refineries by Firm Employment Size Category, 2003 ..............................................................................................................................................C2C-13 Table C2C-8: Selected Ratios for Petroleum Refineries..................................................................................C2C-14 Table C2C-9: Foreign Trade Statisti cs for Petroleum Refining ($2005) .........................................................C2 C-15 Table C2C-10: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Petroleum Refining Segment..................................................................C2C-20 Table C2C-11: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Petroleum Refining Segment..................................................................C2C-20 Table C2C-12: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Petroleum Refining Segment..................................................................C2C-20 Table C2C-13: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Petroleum Refinery Segment .........................................................................................................................C2C-22 Table C2C-14: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Petroleum Refinery Segment..................................................................................................... ...C2C-22 Table C2C-15: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the Petroleum Refinery Segment..................................................................................................... ...C2C-22 

## C HAPTER 

## C2D: S TEEL 

## (SIC 331) Table C2D-1: Phase III Facilities in the Steel Industry (SIC 331).............................................................. ...... C2D-2 Table C2D-2: Relationships between SIC and NAI CS Codes for the Steel Industries (2002)......................... C2D-3 Table C2D-3: U.S. Steel Production by Type of Producer ......................................................................... ...... C2D-6 Table C2D-4: Number of Facilities in the Profiled Steel Industry Segments ................................................. C2D-1 0 Table C2D-5: Number of Firms in the Profiled Steel Industry Segments ...................................................... C2D-1 1 Table C2D-6: Productivity Trends for the Prof iled Steel Industry Segments ($2005) ................................... C2D-13 Table C2D-7: Capital Expenditures for the Profile d Steel Industry Segments (millions, $2005) .................. C2D-14

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 xii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents


### Table C2D-8: Number of Firms and Facilities by Employment Size Category in the Profiled Steel Industry Segments, 2003 a 

### .......................................................................................................................... C2D-1 6 Table C2D-9: Selected Ratios for th e Profiled Steel Industry Segments........................................................ C2 D-17 Table C2D-10: Import Penetration and Export De pendence: Steel Mill Products ($2005)............................ C2D-19 Table C2D-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Steel Industry Segments .......................................................... C2D-22 Table C2D-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Steel Industry Segments .......................................................... C2D-23 Table C2D-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Steel Industry Segments .......................................................... C2D-23 Table C2D-14: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Profiled Steel Segments ................................................................................................................. ........... C2D-25 Table C2D-15: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Profiled Steel Segments ................................................................................................................. ........... C2D-26 Table C2D-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the Profiled Steel Segments........................................................................................................ ....... C2D-26 

## C HAPTER 

## C2E: A LUMINUM 

## (SIC 333/5) Table C2E-1: Phase III Facilities in the Aluminum Industries (SIC 333/335) ..................................................C2E -1 Table C2E-2: Relationships between SIC and NAICS Codes for the Aluminum Industries (2002 a 

### )................C2E-2 Table C2E-3: U.S. Aluminum Production .......................................................................................... ...............C2E-5 Table C2E-4: Primary Aluminum Production - Number of Companies and Plants ..........................................C2E-8 Table C2E-5: Number of Facilities for Pr ofiled Aluminum Industry Segments ...............................................C2E-9 Table C2E-6: Number of Firms for Profiled Aluminum Industry Segments...................................................C2E-10 Table C2E-7: Productivity Trends for Pr ofiled Aluminum Segments ($2005) ...............................................C2E-12 Table C2E-8: Capital Expenditures for Prof iled Aluminum Segments (millions, $2005) ..............................C2E-13 Table C2E-9: Number of Firms and Facilities by Employment Size Category for the Profiled Aluminum Industry Segments, 2003 a 

### ...........................................................................................................................C2E- 15 Table C2E-10: Selected Ratios for the Profiled Aluminum Segments, 1987, 1992, and 1997 .......................C2E-16 Table C2E-11: Import Share and Export Dependence fo r the Profiled Aluminum Segments ($2005) ...........C2E-18 Table C2E-12: Trade Statistics for Aluminum and Semi-fabricated Aluminum Products..............................C2E-19 Table C2E-13: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Aluminum Segments ................................................................C2E-22 Table C2E-14: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Aluminum Segments ................................................................C2E-23 Table C2E-15: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Aluminum Segments ................................................................C2E-23 Table C2E-16 Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Profiled Aluminum Segments .............................................................................................................. ......C2E-25 Table C2E-17: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Profiled Aluminum Segments .............................................................................................................. ......C2E-25 Table C2E-18: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the Profiled Aluminum Segments ..................................................................................................... .C2E-26 

## C HAPTER 

## C2F: F OOD AND 

## K INDRED 

## P RODUCTS 

## (SIC 20) Table C2F-1: Phase III Facilities in the Food an d Kindred Products Industry (SIC 20) ................................... C2F-2 Table C2F-2: Relationship between SIC and NAICS Codes for the Food Manufacturing and Beverage Manufacturing Segments (2002 a 

### )................................................................................................... C2F-3 Table C2F-3: U.S. Food and Beverage Manufactur ing Industry Industrial Production Index .......................... C2F-7

June 1, 2006 Internal Draft – Deliberative, Predec isional – Do not Quote, Cite, or Distribute xiii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents


### Table C2F-4: Number of Facilities Owned by Firms in the Food and Beverage Manufacturing Segments ..... C2F-9 Table C2F-5: Number of Firms in the Food and Beverage Manufacturing Segments .................................... C2F-10 Table C2F-6: Productivity Trends for Food and Be verage Manufacturing Segments ($2005) ....................... C2F-12 Table C2F-7: Capital Expenditures for Food and Beve rage Manufacturing Segments (millions, $2005) ..... C2F-13 Table C2F-8: Number of Firms and Facilities by Size Ca tegory for Food and Beverage Manufacturing Segments, 2003 a 

### ............................................................................................................................................. C2F-16 Table C2F-9: Selected Concentration Ratios for Food Manufacturing and Beverage Manufacturing Segments, 1997 a 

### ............................................................................................................................................. C2F-17 Table C2F-10: Trade Statistics for Combined Fo od and Beverage Manufact uring Segments ........................ C2F-18 Table C2F-11: Number of Food and Kindred Products F acilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System.......................................................................................... C2F- 24 Table C2F-12: Number of Food and Kindred Products Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System.......................................................................................... C2F- 24 Table C2F-13: Number of Food and Kindred Products F acilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System..................................................................................... C2F-24 Table C2F-14: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Food and Kindred Products Industry...................................................................................................... ...... C2F-26 Table C2F-15: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Food and Kindred Products Industry...................................................................................................... ...... C2F-26 Table C2F-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the Food and Kindred Products Industry .................................................................................................. ... C2F-26 

## C HAPTER 

## C2G: F ACILITIES IN 

## O THER 

## I NDUSTRIES 

## (V ARIOUS 

## SIC S 

## ) Table C2G-1: Facilities in Other Industries by 2-digit SIC code Estimated Subjec t to Regulation Under the Primary Analysis Options ....................................................................................................... ...... C2G-2 Table C2G-2: Other Industries Facilities Estimated Subj ect to the 50 MGD All Option by Water Body and Cooling System Type ............................................................................................................ ........ C2G-3 Table C2G-3: Other Industries Facilities Estimated Subj ect to the 200 MGD All Option by Water Body and Cooling System Type ............................................................................................................ ........ C2G-3 Table C2G-4: Other Industries Facilities Estimated Subj ect to the 100 MGD CWB Option by Water Body and Cooling System Type ............................................................................................................ ........ C2G-3 Table C2G-5: Other Industries Facilities Estimated Subj ect to the 50 MGD All Option by Firm Size ........... C2G-5 Table C2G-6: Other Industries Facilities Estimated Subj ect to the 200 MGD All Option by Firm Size ......... C2G-5 Table C2G-7: Other Industries Facilities Estimated Subj ect to the 100 MGD CWB Option by Firm Size ..... C2G-5 

## C HAPTER 

## C3: E CONOMIC 

## I MPACT 

## A NALYSIS FOR 

## M ANUFACTURERS 

### Table C3-1: Summary of B aseline Closures by Sector............................................................................. ......... C3-16 Table C3-2: Number of Facilities with Regulator y Requirements by Sector and Option ................................. C3-17 Table C3-3: Total Annualized Facility Compliance Cost a 

### by Sector and Regulatory Option ........................... C3-18 Table C3-4: Regulatory Impacts for All Facilities by Option, National Estimates ........................................... C3-19 Table C3-5: Firm-Level After-Tax Annual Compliance Costs as a Percentage of Annual Revenue ................ C3-20 

## A PPENDIX 

## C3A1: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Table C3A1-1: Number of Facilities with Regulat ory Requirements by Sector and Option.......................... C3A1-1 Table C3A1-2: Number of Facilities Estimated as Post-Compliance Closures by Option............................. C3A1-2 Table C3A1-3: Number of Facilities Estimat ed as Moderate Impacts by Option .......................................... C3A1-2 Table C3A1-4: Total Annualized Facility a 

### After-Tax Compliance Cost by Option (millions, $2004) .......... C3A1-2 Table C3A1-5: Regulatory Impacts for All F acilities by Option, Nati onal Estimates.................................... C3A1-3 Table C3A1-6: Firm-level After-Tax Annual Complian ce Costs as a Percentage of Annual Revenue ......... C3A1-4

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 xiv§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



## A PPENDIX 

## C3A2: C ALCULATION OF 

## I NSTALLATION 

## D OWNTIME 

## C OST 

### Table C3A2-1: Estimated Average Cooling Water System Downtime by Technology Module ................... C3A2-2 

## A PPENDIX 

## C3A3: C OST 

## P ASS 

## -T HROUGH 

## A NALYSIS 

### Table C3A3-1: Proportion of Value of Shipments Poten tially Subject to Compliance-Related Costs Associated with the Phase III Regulation ($2004)......................................................................................... C 3A3-3 Table C3A3-2: Herfindahl-Hirschman Index for Four-Digit SIC .................................................................. C3 A3-5 Table C3A3-3: Herfindahl-Hir schman Index by Industry ........................................................................... ... C3A3-6 Table C3A3-4: Import Penetra tion by Industry ($2004)........................................................................... ...... C3A3-7 Table C3A3-5: Export Depe ndence by Industry ($2004) ............................................................................ ... C3A3-8 Table C3A3-6: Average Annual Growth Rates by Industry .......................................................................... . C3A3-9 

## A PPENDIX 

## C3A4: A DJUSTING 

## B ASELINE 

## F ACILITY 

## C ASH 

## F LOW 

### Table C3A4-1: Value Line Industry Groups Selected for Analysis................................................................ C 3A4-9 Table C3A4-2: Key Results from Analysis of After-Tax C ash Flow Trends by 316(b) Industry for 1992-2005 .......

.............................................................................................................................. ..................... C3A4-12 Table C3A4-3: Estimated Relationship Between Actual AT CF at Survey Period and Trend Predicted Values at Survey Period and End of Analysis Period ............................................................................... C3A4-16 Table C3A4-4: Comparison of Key Results from Analy ses for the Proposed and Final 316(b) Rule Analysis Periods ....................................................................................................................................... C3A4-18 Table C3A4-5: Using After-Tax Cash Flow Adjustment Factors in the Facility Closure Analysis ............. C3A4-20 

## A PPENDIX 

## C3A5: E STIMATING 

## C APITAL 

## O UTLAYS FOR 

## S ECTION 

## 316( B 

## ) P HASE 

## III M ANUFACTURING 

## S ECTORS 

## D ISCOUNTED 

## C ASH 

## F LOW 

## A NALYSES 

### Table C3A5-1: Summary of Factors Influencing Capital Outlays.................................................................. C 3A5-3 Table C3A5-2: Variables For Capital Expenditure Modeling Analysis ........................................................ C3A5- 6 Table C3A5-3: Number of Firm s by Industry Classifications ...................................................................... .. C3A5-9 Table C3A5-4: Time Series, Cross-Sectional Model Results ..................................................................... C3A5-12 Table C3A5-5: Estimation of Capital Outlays for Pha se III Sample Facilities: Median Facilities Selected by Revenue and ROA Percentiles .................................................................................................. C3 A5-14 

## A PPENDIX 

## C3A6: S UMMARY OF 

## M ODERATE 

## I MPACT 

## T HRESHOLD 

## V ALUES BY 

## I NDUSTRY 

### Table C3A6-1: Summary of Moderate Im pact Thresholds by Industry ......................................................... C3A6-4 

## A PPENDIX 

## C3A7: A NALYSIS OF 

## B ASELINE 

## C LOSURE 

## R ATES 

### Table C3A7-1: Predicted Baseline Closures and Annual Percentage of Closures for Primary Manufacturing Industries (1990-2002)......................................................................................................... ................... C3A7-1 

## A PPENDIX 

## C3A8: A NALYSIS OF 

## O THER 

## R EGULATIONS 

### Table C3A8-1: Regulations Potentially Affecting 316(b) Manufacturers ...................................................... C3A8- 2 Table C3A8-2: Per Facility Cost of Regulations that Affect 316(b) Industries a 

### ............................................. C3A8-5 

## C HAPTER 

## D1: R EGULATORY 

## F LEXIBILITY 

## A NALYSIS 

### Table D1-1: NAICS Classificati on of MODU Parent Companies..................................................................... . D1-3 Table D1-2: Unique 4-Digit Firm-Level SIC Codes and SBA Size Standards for Manufacturers a 

### .................... D1-7 Table D1-3: Number of Firms by Firm Sector a nd Size (assuming two different ownership cases) .................. D1-9 Table D1-4: Summary of Small Entity Impact Ratio Ranges by Sector........................................................... D1 -11 

## A PPENDIX 

## D1A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Table D1A-1: Summary of Small Entity Impact Ratio Ranges for Existing Facilities by Regulatory Segment (Facilities with DIF of at least 2 MGD)........................................................................................ ............ D1A-2

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute xv§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



## C HAPTER 

## D2: UMRA A NALYSIS 

### Table D2-1: Federal Government Costs for Permit Issu ance Activities (Per Facility Permitted under General Permits; $2004) ................................................................................................................ ................ D2-4 Table D2-2: Federal Government Costs for Annual Ac tivities (Per Facility Permitted under General Permits; $2004)............................................................................................................................................... D2-4 Table D2-3: - Annualized Government Ad ministrative Costs (millions, $2004) ................................................ D2-5 Table D2-4: Government Costs of Start-Up Activities (per Permitting Authority; $2004)................................ D2-6 Table D2-5: Government Permitting Costs (per Permit; $2004) ................................................................... ..... D2-7 Table D2-6: Government Costs of Verifica tion Study Review (per Permit; $2004) ........................................... D2-8 Table D2-7: Government Costs of Alternative Regulator y Requirements (per Permitti ng Authority; $2004) .. D2-8 Table D2-8: Government Costs for Annual Activities (per Permit; $2004) ....................................................... D 2-9 Table D2-9: Federal Government Permit Pr ogram Oversight Activities (per Permit; $2004) ........................... D2-9 Table D2-10: Summary of UMRA Costs (millions, $2004)........................................................................... ... D2-11 

## A PPENDIX 

## D2A: S UMMARY 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Table D2A-1: Summary of UMRA Costs for the I-only Everywhere option (millions, $2004) ...................... D2A-1 Table D2A-2: Summary of UMRA Costs for the I&E Like Phase II option (millions, $2004) ....................... D2A-2 Table D2A-3: Summary of UMRA Costs for th e I&E Everywhere option (millions, $2004) ......................... D2A-2 

## C HAPTER 

## E1: S UMMARY OF 

## S OCIAL 

## C OSTS 

### Table E1-1: Summary of Annualized Direct Co sts by Industry Segments (millions, $2004) ............................. E1-4 Table E1-2: Summary of Annualized G overnment Costs (millions, $2004) ....................................................... E1-4 Table E1-3: Summary of Annualized G overnment Costs (millions, $2004) ....................................................... E1-5 Table E1-4: Summary of Annualized Social Costs (millions, $2004) ............................................................... .. E1-6 Table E1-5: Summary of Annualized Social Costs (millions, $2004) ............................................................... .. E1-6 Table E1-6: Time Profile of Compliance Costs for th e 50 MGD All Waterbodies Option for Existing Facilities and the Final Rule for New OOGE Facilities (millions; $2004) ................................................................. E1 -7 Table E1-7: Time Profile of Compliance Costs for the 200 MGD for All Waterbodies Option for Existing Facilities and the Final Rule for New OOGE Facilities (millions; $2004).................................................. E1-8 Table E1-8: Time Profile of Compliance Costs for the 100 MGD for Certain Waterbodies Option for Existing Facilities and the Final Rule for New OOGE Facilities (millions; $2004).................................................. E1-9


## A PPENDIX 

## E1A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Table E1A-1: Summary of Annualized Direct Costs by Regulated Industry Segments................................... E1A-2 Table E1A-2: Summary of Annualized Government Cost s for Existing Facilities at 3% Discount Rate ........ E1A-2 Table E1A-3: Summary of Annualized Government Cost s for Existing Facilities at 7% Discount Rate ........ E1A-3 Table E1A-4: Summary of Annualized Social Costs for Existing Facilities at 3% Discount Rate .................. E1A-3 Table E1A-5: Summary of Annualized Social Costs for Existing Facilities at 7% Discount Rate .................. E1A-4 Table E1A-6: Time Profile of Compliance Costs for Existi ng Electric Generators with DIF of 2 to 50 MGD Under the I-only Everywhere Option (millions, $2004)................................................................................. ..... E1A-5 Table E1A-7: Time Profile of Compliance Costs for Existi ng Electric Generators with DIF of 2 to 50 MGD Under the I&E Like Phase II Option (millions, $2004)................................................................................. ...... E1A-6 Table E1A-8: Time Profile of Compliance Costs for Existi ng Electric Generators with DIF of 2 to 50 MGD Under the I&E Everywhere Option (millions, $2004).................................................................................... ..... E1A-7 Table E1A-9: Time Profile of Compliance Costs for Exis ting Manufacturers with DIF of 2 to 50 MGD Under the I-only Everywhere Option (millions, $2004)..................................................................................... ....... E1A-8 Table E1A-10: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 2 to 50 MGD Under the I&E Like Phase II Option (millions, $2004)................................................................................. ...... E1A-9

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 xvi§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents


### Table E1A-11: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 2 to 50 MGD Under the I&E Everywhere Option (millions, $2004).................................................................................... ... E1A-10 Table E1A-12: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 50 MGD or Greater Under the I-Only Everywhere Option (millions, $2004) ........................................................................ E1A -11 Table E1A-13: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 50 MGD or Greater Under the I&E Everywhere Option (millions, $2004)............................................................................ E1 A-13 

## C HAPTER 

## E2: S UMMARY OF 

## B ENEFITS 

### Table E2-1: Total Annual Baseline I&E Losses for Poten tial Phase III Existing Facilities by Region (thousands) ..................................................................................................................................................................... E2-2 Table E2-2: Expected Reduction in I&E for Ph ase III Existing Facilities by Option and Region ..................... E2-3 Table E2-3: Time Profile of Mean Monetary Value of Total Baseline I&E Losses (thousands; $2004) ............ E2-5 Table E2-4: Time Profile of Mean Total Use Benefi ts - Phase III Final Regulation (thousands; $2004) ........... E2-6 Table E2-5: Time Profile of Mean Total Use Bene fits - 200 MGD All Option (thousands; $2004).................. E2-7 Table E2-6: Time Profile of Mean Total Use Be nefits - 100 MGD CWB Option (thousands; $2004)............... E2-8 Table E2-7: Summary of Monetary Values of Baseline I&E Losses (thousands; $2004)................................. E2-10 Table E2-8: Summary of Monetized Benefits by Op tion (thousands; $2004; di scounted at 3%) ..................... E2-12 Table E2-9: Summary of Monetized Benefits by Op tion (thousands; $2004; di scounted at 7%) ..................... E2-13 

## A PPENDIX 

## E2A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Table E2A-1: Expected Reductions in I&E fo r Existing Phase III Facilities by Option ...................................E2A-1 Table E2A-2: Time Profile of Mean Total Use Benefi ts - “Electric Generators 2-50 MGD I-only Everywhere” Option (thousands; 2004$) a 

### ............................................................................................................E2A-4 Table E2A-3: Time Profile of Mean Total Use Benefi ts - “Electric Generators 2-50 MGD I&E like Phase II” Option (thousands; 2004$) a 

### ...........................................................................................................E2A-5 Table E2A-4: Time Profile of Mean Total Use Benefi ts - “Electric Generators 2-50 MGD I&E Everywhere” Option (thousands; 2004$) a 

### ............................................................................................................E2A-6 Table E2A-5: Time Profile of Mean Total Use Benefi ts - “Manufacturers 2-50 MGD I-only Everywhere” Option (thousands; 2004$) a 

### ........................................................................................................................E2A-7 Table E2A-6: Time Profile of Mean Total Use Bene fits - “Manufacturers 2-50 MGD I&E like Phase II” Option (thousands; 2004$) a 

### ........................................................................................................................E2A-8 Table E2A-7: Time Profile of Mean Total Use Bene fits - “Manufacturers 2-50 MGD I&E Everywhere” Option (thousands; 2004$) a 

### ........................................................................................................................E2A-9 Table E2A-8: Time Profile of Mean Total Use Benefi ts - “Manufacturers 50+ MGD I-only Everywhere” Option (thousands; 2004$) a 

### ......................................................................................................................E2A-10 Table E2A-9: Time Profile of Mean Total Use Bene fits - “Manufacturers 50+ MGD I&E Everywhere” Option (thousands; 2004$) a 

### ......................................................................................................................E2A-11 Table E2A-10: Summary of Monetized Benefits for Existing Phase III Facilities a 

### .........................................E2A-12 Table E2A-11: Summary of Monetized Benefits for Existing Phase III Facilities a 

### .........................................E2A-14 

## C HAPTER 

## E3: C OMPARISON OF 

## B ENEFITS AND 

## S OCIAL 

## C OSTS 

### Table E3-1: Number of Existing Phase III Facilities by Compliance Action a 

### ..................................................... E3-1 Table E3-2: Total Benefits, Social Costs, and Cost -Benefit Ratios for Existing Phase III Facilities by Option (millions; $2004) .............................................................................................................. ................ E3-3 Table E3-3: Cost-Benefit Ratios for Existing Phase III Fac ilities by Option and Region (discounted at 3%).... E3-4 Table E3-4: Cost-Benefit Ratios for Existing Phase III Fac ilities by Option and Region (discounted at 7%).... E3-4 Table E3-5: Time Profile of Benefits and Social Costs for Existing Phase III Facilities (millions; $2004)........ E3-5 Table E-6: Comparison of Break-Even Analysis by Regi ons for 316(b) Phase II and Phase III Regulations (2004$, discounted at 3%) a,b 

### .......................................................................................................................... E3-6 Table E3-7: Incremental Benefit-Cost Analysis for Existing Phase III Facilities (millions; $2004)................... E3-7

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute xvii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



### Table E3-8: Estimated Value of Non-U se Benefits Required for Total Benefits to Equal Total Social Costs for Existing Phase III Facilities - Break-Even Analysis ($2004)........................................................... E3-8 Table E3-9: Estimated Value of Non-U se Benefits Required for Total Benefits to Equal Total Social Costs for Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 3%) .......... E3-9 Table E3-10: Estimated Value of Non- Use Benefits Required for Total Benef its to Equal Total Social Costs for Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 7%) ........ E3-10


## A PPENDIX 

## E3A: S UMMARY OF 

## R ESULTS FOR 

## S UPPLEMENTAL 

## O PTIONS 

### Table E3A-1: Number of Existing Phase III Facilities by Compliance Action a 

### ................................................E3A-1 Table E3A-2: Total Benefits, Social Costs, and Net Benefits for Existing Phase III Facilities.........................E3A-2 Table E3A-3: Total Net Benefits for Existing Phase III Facilities by Option and Region ................................E3A-3 Table E3A-4: Total Net Benefits for Existing Phase III Facilities by Option and Region ................................E3A-4 Table E3A-5: Time Profile of Benefits and Costs fo r Existing Phase III Electric Generator 2-50 MGD Facilities (millions; 2004$) .............................................................................................................. ..............E3A-5 Table E3A-6: Time Profile of Benefits and Costs for Existing Phase III Manufacturer 2-50 MGD Facilities (millions; 2004$) .............................................................................................................. ..............E3A-6 Table E3A-7: Time Profile of Benefits and Cost s for Existing Phase III Manufacturer 50+ MGD Facilities (millions; 2004$) .............................................................................................................. ..............E3A-7 Table E3A-8: Incremental Benefit-Cost Analysis for Existing Phase III Facilities (millions; 2004$)..............E3A-8 Table E3A-9: Estimated Value of Non- Use Benefits Required for Total Benefits to Equal Total Social Cost for Existing Phase III Facilities - Break-Even Anal ysis (2004$, discounted at 3%) ...........................E3A-9 Table E3A-10: Estimated Value of Non-Use Benefits Require d for Total Benefits to Equal Total Social Cost for Existing Phase III Facilities - Break-Even Anal ysis (2004$, discounted at 7%) ...........................E3A-9 Table E3A-11: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Costs for Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 3%) ......E3A-10 Table E3A-12: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Costs for Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 7%) ......E3A-12

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 xviii§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



# L IST OF 

# F IGURES



## C HAPTER 

## C2A: P APER AND 

## A LLIED 

## P RODUCTS 

## (SIC 26) Figure C2A-1: Value of Shipments and Value Added for Profiled Paper and Allied Pr oducts Segments (millions, $2005)......................................................................................................................... ................... C2A-7 Figure C2A-2: Producer Price Indexes for Prof iled Paper and Allied Prod ucts Segments .............................. C2A-9 Figure C2A-3: Employment for Profiled Pa per and Allied Products Segments............................................. C2A-12 Figure C2A-4: Capacity Utilization Rate (Fourth Quarter) for Pulp and Paper Industry ............................... C2A-15 Figure C2A-5: Value of Imports and Exports for Pr ofiled Paper and Allied Pr oducts Segments .................. C2A-20 Figure C2A-6: Net Profit Margin and Return on Capital for Pulp and Paper Mills ....................................... C2A-22 Figure C2A-7: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for Profiled Paper and Allied Products Segments............................................................................. C2A-25 Figure C2A-8: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for Profiled Paper and Allied Products Segments............................................................................. C2A-25 Figure C2A-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for Profiled Paper and Allied Products Segments............................................................................. C2A-26 

## C HAPTER 

## C2B: C HEMICALS AND 

## A LLIED 

## P RODUCTS 

## (SIC 28) Figure C2B-1: Value of Shipments and Value Adde d for Profiled Chemicals Industry Segments...................C2B-7 Figure C2B-2: Producer Price Indexes for Pr ofiled Chemicals Industry Segments ........................................C2B-10 Figure C2B-3: Employment for Profiled Chemical Segments (000s) .............................................................C2B- 13 Figure C2B-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Chemical Segments........................C2B-17 Figure C2B-5: Value of Imports and Exports fo r Profiled Chemicals Industry Segments ..............................C2B-25 Figure C2B-6: Net Profit Margin and Return in Total Capital for the Chemical Industry ..............................C2B-28 Figure C2B-7: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for Profiled Chemicals Industry Segments ........................................................................................C2B -32 Figure C2B-8: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for Profiled Chemicals Industry Segments ........................................................................................C2B -32 Figure C2B-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for Profiled Chemicals Industry Segments ........................................................................................C2B -33 

## C HAPTER 

## C2C: P ETROLEUM 

## R EFINING 

## (SIC 2911) Figure C2C-1: Value of Shipments and Value Adde d for Petroleum Refineries (millions, $2005)..................C2C-6 Figure C2C-2: Producer Price I ndex for Petroleum Refineries .................................................................... .....C2C-7 Figure C2C-3: Employment for Petroleum Refineries .............................................................................. ........C2C-9 Figure C2C-4: Capacity Utilization Rates (Four th Quarter) for Petroleum Refineries ...................................C2C-12 Figure C2C-5: Value of Imports and Export s for Petroleum Refining (millions, $2005) ...............................C2C-16 Figure C2C-6: Net Profit Margin and Return on Total Capital for Petroleum Refining .................................C2C-18 Figure C2C-7: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the Petroleum Refinery Segment..................................................................................................... ...C2C-21 Figure C2C-8: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the Petroleum Refinery Segment..................................................................................................... ...C2C-21 Figure C2C-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for the Petroleum Refinery Segment..................................................................................................... ...C2C-22 

## C HAPTER 

## C2D: S TEEL 

## (SIC 331) Figure C2D-1: Value of Shipments and Value A dded for Profiled Steel Industry Segments .......................... C2D-8 Figure C2D-2: Producer Price Index fo r Profiled Steel Industry Segments ..................................................... C2D -9

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute xix§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents


### Figure C2D-3: Employment for Profiled Steel Industry Segments ................................................................ C2 D-12 Figure C2D-4: Capacity Utilization Rates (Fourth Qu arter) for Profiled Steel Industry Segments ............... C2D-15 Figure C2D-5: Net Profit Margin and Return on Total Capital for the Iron and Steel Industry ..................... C2D-21 Figure C2D-6: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for Profiled Steel Industry Segments ............................................................................................... . C2D-24 Figure C2D-7: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for Profiled Steel Industry Segments ............................................................................................... . C2D-24 Figure C2D-8: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for Profiled Steel Industry Segments ............................................................................................... . C2D-25 

## C HAPTER 

## C2E: A LUMINUM 

## (SIC 333/5) Figure C2E-1: Value of Shipments and Value Added for Profiled Aluminum Industry Segments (millions, $2005)C2E-6 Figure C2E-2: Producer Price Indexes for Profiled Aluminum Industry Segments ..........................................C2E-8 Figure C2E-3: Employment for Profiled Aluminum Industry Segments ........................................................C2E-11 Figure C2E-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Aluminum Segments......................C2E-14 Figure C2E-5: Net Profit Margin and Return on Total Capital for the Aluminum Industry ...........................C2E-21 Figure C2E-6: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the Profiled Aluminum Segments ..................................................................................................... .C2E-24 Figure C2E-7: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for the Profiled Aluminum Segments ..................................................................................................... .C2E-24 Figure C2E-8: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for the Profiled Aluminum Segments ..................................................................................................... .C2E-25 

## C HAPTER 

## C2F: F OOD AND 

## K INDRED 

## P RODUCTS 

## (SIC 20) Figure C2F-1: Value of Shipments for Food Manufactur ing and Beverage Manufact uring Segments (millions, $2005)............................................................................................................................................. C2F-5 Figure C2F-2: Value Added for Food Manufacturing and Beverage Manufacturing Se gments (millions, $2005) ....

.............................................................................................................................. .......................... C2F-6 Figure C2F-3: Producer Price Indexes for Food Manuf acturing and Beverage Manufacturing Segments ....... C2F-8 Figure C2F-4: Employment for Food Manufacturi ng and Beverage Manufacturing Segments...................... C2F-11 Figure C2F-5: Capacity Utilization for Food Manufacturing and Beverage and Tobacco Manufacturing a 

### .... C2F-14 Figure C2F-6: Value of Imports and Exports for Food Manufacturing and Beverage Manufacturing Segments (millions, $2005) .............................................................................................................. ............ C2F-19 Figure C2F-7: Net Profit Margin for F ood and Beverage Manufacturers ....................................................... C2F-2 1 Figure C2F-8: Return on Total Capital for Food and Beverage Manufacturers .............................................. C2F-22 Figure C2F-9: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the Profiled Food Manufacturing and Beverage Segments ................................................................ C2F-25 Figure C2F-10: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for the Profiled Food Manufacturing and Beverage Segments ................................................................ C2F-25 Figure C2F-11: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for the Profiled Food Manufacturing an d Beverage Segments .......................................................... C2F-26 

## C HAPTER 

## C2G: F ACILITIES IN 

## O THER 

## I NDUSTRIES 

## (V ARIOUS 

## SIC S 

## ) Figure C2G-1: Other Industries Facilities Estimated Subject to the 50 MGD All Option by Employment Size

.............................................................................................................................. ......................... C2G-4 Figure C2G-2: Other Industries Facilities Estimated Subject to the 200 MGD All Option by Employment Size

.............................................................................................................................. ......................... C2G-4 Figure C2G-3: Other Industries Facilities Estimated Subj ect to the 100 MGD CWB Option by Employment Size ..

.............................................................................................................................. ......................... C2G-5

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 xx§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents



## A PPENDIX 

## C3A4: A DJUSTING 

## B ASELINE 

## F ACILITY 

## C ASH 

## F LOW 

### Figure C3A4-1: Growth in Real Domestic Product, 1985-2005..................................................................... C 3A4-3 Figure C3A4-2: Capacity Utilization in Manufacturing Industries, 1985-2005 ............................................. C3A4-4 Figure C3A4-3: Growth in Indus trial Production, 1985-2005...................................................................... .. C3A4-4 Figure C3A4-4: ATCF Index vs. Trend............................................................................................ ............ C3A4-12 

## A PPENDIX 

## C3A5: E STIMATING 

## C APITAL 

## O UTLAYS FOR 

## S ECTION 

## 316( B 

## ) P HASE 

## III M ANUFACTURING 

## S ECTORS 

## D ISCOUNTED 

## C ASH 

## F LOW 

## A NALYSES 

### Figure C3A5-1: Comparison of Estimated Capital Ou tlays to Reported Depreciation for Phase III Survey Facilities in the Paper and A llied Products Sector .................................................................... C3A5-16 Figure C3A5-2: Comparison of Estimated Capital Ou tlays to Reported Depreciation for Phase III Survey Facilities in the Chemicals and Allied Products Sector............................................................. C3A5-17 Figure C3A5-3: Comparison of Estimated Capital Ou tlays to Reported Depreciation for Phase III Survey Facilities in the Petroleum and Coal Products Sector................................................................ C3A5-18 Figure C3A5-4: Comparison of Estimated Capital Ou tlays to Reported Depreciation for Phase III Survey Facilities in the Primary Meta l Industries Sector ...................................................................... C3A5-19 Figure C3A5-5: Comparison of Estimated Capital Ou tlays to Reported Depreciation for Phase III Survey Facilities in the Food and Kindred Products Sector .................................................................. C3A5-20

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute xxi§ 316(b) Final Rule: Phase III – Econom ic Analysis Tabl e of Contents


# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 xxii§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction 

# Chapter A1: Introduction

C HAPTER 

## C ONTENTS 

## I NTRODUCTION Introduction............................................................ A1-1 

### EPA is promulgating regulations implementing section 316(b) of the Clean Water Act (CWA). This regulation is A1-1 Overview of Potentially Regulated Sectors and Facilities .................................................... A1-1 

### the third in a series of rulemaking actions under CWA section 316(b), addressing the environmental impacts of A1-1.1 New Offshore Oil and Gas Extraction 

### cooling water intake structures (CWIS). The Final Section Facilities ........................................... A1-1 

### 316(b) Regulation for Phase III Facilities establishes A1-1.2 Existing Phase III Facilities and Sectors 

### national performance requirements for the location, design, .......................................................... A1-2 

### construction, and capacity of CWIS for new offshore oil A1-2 Summary of the Fi nal Rule ..................... A1-10 

### and gas extraction facilities. Although several regulatory A1-2.1 New Offshore Oil and Gas Extraction 

### options were considered for promulgation for existing Facilities ......................................... A1-10 

### manufacturing facilities, EPA has decided that Phase III A1-2.2 Existing Fac ilities ........................... A1-11 

### existing facilities should conti nue to have section 316(b) A1-3 Summary of Economic Analysis Results A1-11 

### limits established on a case-by-case, best professional A1-4 Organization of the EA Report ............... A1-19 

### judgment basis. References............................................................ A1-21 

### This Economic and Benefits Analysis for the Final Section 316(b) Phase III Existing Facilities Rule report (hereinafter “Economic Analysis” or “EA”) presents the economic analysis of the final regulation, as it applies to new oil and gas extraction facilities, as well as several regulatory altern atives that EPA considered in the development of a potential regulation for existing Phase III manufacturing facilities.


## A1-1 O VERVIEW OF 

## P OTENTIALLY 

## R EGULATED 

## S ECTORS AND 

## F ACILITIES 

### Setting aside those facilities covered by the Phase II Fi nal Regulation, the facilities potentially subject to regulation under Phase III consisted of facilities that employ a cooling water intake structure and are designed to withdraw two million gallons per day or more from wate rs of the United States and that fall in two general categories: 1. New Offshore Oil and Ga s Extraction Facilities ; and 2. Existing Facilities , which include Electric Power Producing Facilities with DIF of less than 50 MGD, Manufacturing and Other Industries Facilities (“Manufacturers”). In the documents for the Phase III proposed regulation, these facilities were coll ectively described as the “potential Phase III facilities.”
A1-1.1 New Offshore Oil and Gas Extraction Facilities In developing the Final Section 316(b) Regulation for Phase III Facilities, EPA analyzed the proposed regulations’ applicability to new offshore oil and gas ex traction facilities (abbreviated as “new OOGE facilities”), seafood processing vessels, and offshore liquid natural gas (LNG) terminals. EPA’s analysis of these facilities is discussed in Part C: Economic Analysis for Phase III Ne w Offshore Oil and Gas Extraction Facilities of this EA and in the Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule (U.S. EPA, 2006b).

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute A1- 1§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### The Phase III final regulation applies to only the new offshore oil and gas extraction facilities category of these additional categories listed above. EPA estimates that 124 new offshore oil and gas extraction facilities will be subject to the final regulation. All of these facilities will be located off the coast of California, Alaska, or the Gulf of Mexico, henceforth referred to as “Coastal Waterbodies.” A1-1.2 Existing Phase II I Facilities and Sectors A1-1.2.1 Regulatory Options Considered EPA considered requirements for Phase III existing faciliti es to meet performance standards similar to those required in the final Phase II rule, including an 80-9 5% reduction in impingement mortality and a 60-90% reduction in entrainment. In the final Phase III rule, howev er, EPA determined that uniform national standards are not the most effective way to address cooling water in take structures at existing Phase III facilities. Phase III existing facilities continue to be subject to permit conditions implementing section 316(b) of the Clean Water Act set by the permit director on a case-by-case basis, using BPJ. The performance standards presented at proposal were in tended to reflect the best technology available for minimizing adverse environmental impacts determined on a national categori cal basis. The type of performance standard applicable to a particular facility (i.e., reductions in impingement only or impingement and entrainment) would have varied based on several factors, including the facility’s location (i.e., source waterbody) and the proportion of the waterbody withdrawn. Impingement reductions were require d at all facilities subject to the performance standards. Entrainment reductions are require d at facilities 1) located on an estuary, tidal river, ocean, or one of the Great Lakes, or 2) located on a fresh water river and withdrawing greater than 5% of the mean annual flow of the waterbody. At proposal, facilities located on lakes or reservoirs may not disrupt the thermal stratification of the waterbody, except in cases where the disr uption is beneficial to the management of fisheries. EPA proposed three possible options for defining which existing Manufacturing Facilities would be subject to uniform national requirements, based on design intake flow threshold and source waterbody type: The facility has a total design intake flow of 50 million gallons per day (MGD) or more, and withdraws from any waterbody; the facility has a total design intake flow of 200 MGD or more , and withdraws from any waterbody; or the facility has a total design intake flow of 100 MGD or more and wit hdraws water specifically from an ocean, estuary, tidal river, or one of the Great Lakes. These are Options 5, 9, and 8 respectively in Table A1-1, below. In addition, EPA considered a number of options (specifically Options 2, 3, 4, and 7 below) that would have established different performance standards for certain gr oups or subcategories of Phase III existing facilities. Under these options, EPA would have applied the proposed performance st andards and compliance alternatives (i.e., the Phase II requirements) to the higher threshold fac ilities, apply the less-stringent requirements as specified below to the middle flow threshold category, and would apply BPJ below the lower threshold. The regulatory options as well as other options considered are described in detail below: Option 1: Facilities with a design intake flow of 20 MGD or greater would be subject to the performance standards discussed above. Under this option, section 316(b) permit conditions for Phase III facilities with a design intake flow of less than 20 MGD would be established on a case-by-case, BPJ, basis. Option 2: Facilities with a design intake flow of 50 MGD or greater, as well as facilities with a design intake flow between 20 and 50 MGD (20 MGD inclusive), when lo cated on estuaries, oceans, or the Great Lakes would be subject to the performance standards. Facilities wi th a design intake flow between 20 and 50 MGD (20 MGD inclusive) that withdraw from freshwater rivers and la kes would have to meet the performance standards for impingement mortality only and not for entrainment. U nder this option, section 316(b) requirements for Phase III facilities with a design intake flow of less than 20 MGD would be established on a case-by-case, BPJ, basis.

A1-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Option 3: Facilities with a design intake flow of 50 MGD or greater would be subject to the performance standards. Facilities with a design intake flow between 20 and 50 MGD (20 MGD inclusive) would have to meet the performance standards for impingement mortality only and not for entrainment. Under this option, section 316(b) requirements for Phase III facilities with a design intake flow of less than 20 MGD would be established on a case-by-case, BPJ, basis. Option 4: Facilities with a design intake flow of 50 MGD or greater, as well as facilities with a DIF between 20 and 50 MGD (20 MGD inclusive), when located on estuaries, oceans, or the Great Lakes would be subject to the performance standards. Facilities that withdraw from fresh water rivers and lakes and all facilities with a design intake flow of less than 20 MGD would have requirements established on a case-by-case, BPJ, basis. Option 5: Facilities with a design intake flow of 50 MGD or greater would be subject to the performance standards. Under this option, section 316(b) requirement s for Phase III facilities with a design intake flow of less than 50 MGD would be established on a case-by-case, BPJ, basis. Option 6: Facilities with a design intake flow of greater than 2 MGD would be subject to the performance standards. Under this option, section 316(b) requirement s for Phase III facilities with a design intake flow of 2 MGD or less would be established on a case-by-case, BPJ, basis. Option 7: Facilities with a design intake flow of 50 MGD or greater would be subject to the performance standards. Facilities with a design intake flow between 30 and 50 MGD (30 MGD inclusive) would have to meet the performance standards for impingement mortality only and not for entrainment. Under this option, section 316(b) requirements for Phase III facilities with a design intake flow of less than 30 MGD would be established on a case-by-case, BPJ, basis. Option 8: Facilities with a design intake flow of 200 MGD or greater would be subject to the performance standards. Under this option, section 316(b) requirement s for Phase III facilities with a design intake flow of less than 200 MGD would be established on a case-by-case, BPJ, basis. Option 9: Facilities with a design intake flow of 100 MGD or greater and located on oceans, estuaries, and the Great Lakes would be subject to the performance sta ndards. Under this regulatory option, section 316(b) requirements for Phase III facilities with a design intake fl ow of less than 100 MGD would be established on a case-by-case, BPJ, basis. Table A1-1 summarizes the application of performance sta ndards under each of the proposed options considered for Phase III existing facilities (Options 5, 8, and 9) as well as the other options considered:

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute A1- 3§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Table A1-1: Performance Standards for the Regulatory Options Considered
Option Minimum Design Intake Flow Defining Fa cilities as Existing Phase III Facilities > 2 MGD 20 MGD 30 MGD 50 MGD 100 MGD 200 MGD 1 BPJ I&E

2 BPJ Freshwater rivers and lakes: I only All other waterbodies: I&E I&E
3 BPJ I only I&E

4 BPJ Estuaries, oceans, Great Lakes: I&E All other waterbodies: BPJ I&E

5 BPJ I&E 6 I&E 7 BPJ I only I&E 8 BPJ I&E
9 BPJ Estuaries, oceans, Great Lakes: I&E All other waterbodies: BPJ Key:

BPJ - Best Professional Judgment I&E - 80-95% reduction in impingement mortalit y and a 60-90% reduction in entrainment, where applicable I only - 80-95% reduction in impingement mortality Estuaries - incl udes tidal rivers and streams Lakes - includes lakes and reservoirs


### None of the regulatory options for Phase III existing facilities (Options 5, 8, and 9) that were presented at proposal would have covered electric generators not al ready covered by the Phase II rule, as that rule addresses electric power generators with DIF of 50 MGD or more. Therefore, EPA focused its analysis for the final regulation for Existing Facilities on the Manufacturers segment and did not give further consideration to electric generators. As a result, in presenting analyses fo r the Existing Facilities, this document focuses on the Manufacturing and Other Industries (“Manufactur ers”) category of existing facilities. The EA, including the discussion in the remainder of this section, does present information on the more comprehensive set of potential Phase III existing facilities and the regulatory options that would have applied to them. However, the information for existing facilities be low the 50 MGD applicability threshold is considerably more limited in scope than the information for facilities with a DIF of at least 50 MGD since the smaller flow facilities do not fall within the applicability thresholds for th e regulatory options that were presented at proposal. The discussions for existing facilities in the remainder of this document focus on the three regulatory options comprising the regulatory proposal (i.e., Options 5, 8, and 9). In the remainder of this document, these three options are referred to as follows: 1. Option 5, which would have applied to existing Manufacturers se gment facilities with a total design intake flow of 50 MGD or more and located on any source waterbody type is referred to as the “50 MGD All Option”

. 2. Option 8, which would applied to existing Manufacturers segment facilities with a total design intake flow of 200 MGD or more and located on any source waterbody type is referred to as the “200 MGD All Option”

. 3. Option 9, which would applied to existing Manufacturers segment facilities with a total design intake flow of 100 MGD or more and located on certain source waterbody types (i.e., an ocean, estuary, tidal

A1-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### river/stream or one of the Great Lakes) is referred to as the “100 MGD Certain Water Bodies Option”
or “100 MGD CWB Option”

. In addition to these three regulatory an alysis options, this document also pr esents information on the other options that EPA analyzed in development of the Phase III proposal and the final regulation (i.e., Options 2, 3, 4 and 7, also referred to as the “Supplemental Options”). The in formation for the supplemental options is presented in appendices to the relevant chapters in this EA report. EPA also proposed not to prom ulgate a national categorical rule, and instead continue to rely on case-by-case, b est professional judgment to establish 316(b) limits for Phase III facilities. The remainder of this section provides an overview of the existing Phase III sectors and facilities that were analyzed for this rulemaking. Chapter C2: Profile of Manufacturers presents more detailed information on these Manufacturers sectors and facilities. 1



### A1-1.2.2 Sector Information Based on past section 316(b) rulemakings, EPA’s effl uent guidelines program, a nd the 1982 Census of Manufactures, EPA identified two major industry segments of existing facilities for analysis in developing this regulation: (1) steam electric generators; and (2) manufact uring industries with substantial cooling water use. Steam electric generators are the largest industrial users of cooling wate r. The condensers that support the steam turbines in these facilities require substantial amounts of c ooling water. EPA estimates that steam electric utility power producers (SIC Codes 4911 and 4931) and steam electric nonutility power producers (SIC Major Group 49) account for approximately 92.5% of total coolin g water intake in the United States (U.S. EPA, 2001). Beyond steam electric generators, facilities in other industry segments use cooling water in their production processes (e.g., to cool equipment, for heat quenching, etc.). As described in th e EA for the Phase III Proposed Regulation, EPA used information from the 1982 Census of Manufactures to identify four major manufacturing sectors showing substantial cooling water use: (1) Paper and Allied Products (SIC Major Group 26); (2) Chemicals and Allied Products (SIC Major Group 28); (3 ) Petroleum and Coal Products (SIC Major Group 29); (4) Primary Metals Industries (SIC Major Group 33). For its analyses in support of the proposed rule, EPA later divided the Primary Metal Industries (SIC 33) into a Steel sector (SIC 331) and an Aluminum sector (SIC 333/335), based on the business and other operational differe nces in these two major industries. EPA referred to these five industries – Paper, Chemicals, Petroleum, Aluminum, and Steel – as the “Primary Manufacturing Industries” in the documentation for the proposed regulation. As shown in Table A1-2 , following page, together with electric power producers, these industries account for a pproximately 99% of the tota l cooling water intake in the United States. EPA focused its initial data gathering and regulation development analyses for the manufacturers segment of the 316(b) Phase III regulation on these industries. A key data source for EPA’s analysis for the 316(b) Phase III regulation is the detailed questionnaire issued to a sample of facilities potentially subject to regulation under Phase III. Based on responses to a screener survey, EPA targeted the detailed questionnaire to facilities believe d to be in the electric power industry and the Primary Manufacturing Industries. As discussed in the EA for the proposed Phase III regulation and further elaborated on in the November 2005 Notice of Data Availability (NODA), EPA received survey questionnaires from facilities with business operations in industries other than the Prim ary Manufacturing Industries. EPA originally believed these facilities to be non-utility electric power generators; however, inspection of their responses indicated that the facilities were better understood as cool ing water-dependent facilities whose principal operations lie in businesses other than the electric power industry or the Primar y Manufacturing Industries listed above. These surveys

1 

### The EA for the proposed regulation includes a detailed profile for Electric Power Producers. For the reasons just stated, this profile was not updated for the EA for the final Phase III regulation.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute A1- 5§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### included 12 questionnaires from facilities in the Food and Kindred Products industry and 10 additional questionnaires from facilities in a range of other manufactur ing and non-manufacturing industries. In the EA for the proposed Phase III regulation, EPA referred to these additional industries as the “Other Industries” and the facilities as the “Other Industries facilities.” Because the questionnaire responses for these Other Industri es facilities were not received through the structured sample framework, EPA did not apply sample weight s to these facilities in the analyses for the proposed regulation, and treated them as “additional known facility” observations with a sample weight of one. Although EPA’s analyses for these Other Industries facilities were less precise than the analyses un dertaken for the Primary Manufacturing Industries, EPA concluded that its analys is for the Other Industries group provided a sufficient basis for regulation development. In particular, EPA’s re view of the engineering characteristics of cooling water intake and use in the Other Industries group indicated that cooling water intake and use in these industries do not differ materially from cooling water intake and use in the electric power industry and the Primary Manufacturing Industries. In addition, EPA specifically analyzed the economic impacts of evaluated options on the sample facilities in the Other Industries group. Finally, because the statistically valid survey group of six industries (i.e., for the five Primary Manufacturing Industries and Electr ic Generators) reflects 99% of total cooling water withdrawals, EPA concluded that fe w additional facilities in the Other I ndustries group would be potentially subject to Phase III regulation. Based on these consider ations, EPA concluded at Proposal that the Phase III regulation could be extended to all industries and wi thout imposing material economic/financial impact in industries beyond those on which EPA initially focused in developing the Phase III regulation. In the Federal Register notice for the proposed Phase III regulation, EPA sought comment on the analytic treatment and regulatory findings for these facilities. Following proposal, EPA undertook additional analyses of th ese facilities, and of the Food and Kindred Products industry, in particular, to confirm its regulatory anal ytic findings for the Other Industries facilities. These analyses, which are documented in the EA and in the public record for the final regulation, included: (1) comparative analysis of cooling water use and comp liance costs between the original set of Primary Manufacturing Industries and the 22 facilities in the Other Industries facilities set; (2) preparation of a detailed industry profile and assessment of busin ess conditions and outlook for the Fo od and Kindred Products industry; and (3) development of a cooling water usage-based multip lier for extrapolating results from its analysis of the Food and Kindred Products industry questionnaire facilities to the broader population of facilities in the industry. EPA sought comment on these analyses in the NODA. Based on the findings from these analyses, EPA made the fo llowing changes in its analysis for the Manufacturers category of facilities. First , EPA now groups the Food and Kindred Pr oducts industry within the previously defined Primary Manufacturing In dustries set of industries. As previously described, EPA received over half (12) of the 22 Other Industries questionnaires from facilities in th is industry and it is also the next largest user of cooling water, after the electric power industry and the original Primary Manufacturing Industries, as reported in the Census of Manufacturers reports of cooling water usage. The Primary Manufacturing Industries thus include the following industries: Paper, Chemicals, Petrol eum, Aluminum, Steel, and Food and Kindred Products. Second , EPA used the cooling water usage-based multiplier of 3.11, as documented at NODA, for estimating the industry-level costs and impacts of Phase III regulatory co mpliance for the Food and Kindred Products industry. Third , EPA includes a detailed industry profile for the F ood and Kindred Products industry in this EA. Table A1-2, below, documents the estimated cooling wate r usage in the electric power industry, the redefined Primary Manufacturing Industries (including Food a nd Kindred Products), and the remaining cooling waterreliant industry sectors (“Other Industries”). Together, the electric power industry and the Primary Manufacturing Industries account for approximately 99.6% of total estimated cooling water usage. This document refers to the Primary Manufacturing Industries and the remaining Other Industries collectively as “Manufacturers.”

A1-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Table A1-2: Cooling Water Intake by Sector Cooling Water Intake Flow b Sector a (SIC Code) Billion Gal./Yr. Percent of Total Cumulative Percent Steam Electric Utility Power Producers (49) 70,000 90.9% 90.9% Steam Electric Nonutility Power Producers (49) 1,172 1.5% 92.4% Chemicals and Allied Products (28) 2,797 3.6% 96.0% Primary Metals Industries (33) 1,312 1.7% 97.8% Petroleum and Coal Products (29) 590 0.8% 98.5% Paper and Allied Products (26) 534 0.7% 99.2% Food and Kindred Products (20) 272 0.4% 99.6% Additional 14 Categories c 335 0.4% 100.0%

a The table is based on reported primary SIC codes. b Data on cooling water use are from the 1982 Census of Ma nufactures, except for traditional steam electric utilities, which are from the Form EIA-767 database, and the steam electric nonutility power producer s, which are from the Form EIA-867 database. 1982 was the last year in which the Census of Manufactures reported cooling water use.

c 14 additional major industrial categories (maj or SIC codes) with effluent guidelines. Source: U.S. DOC, 1986; U.S. DOE, 1995; U.S. DOE, 1996.


### The six Primary Manufacturing facility sectors analyzed for the Phase III rulemaki ng comprise a substantial portion of all U.S. industries. As shown in Table A1-3, the six sectors combined account for over 64,000 facilities, over 3.6 million employees, more than $1.8 trilli on in value of shipments and almost $155 billion in payroll. They also account for over 42% of total U.S. manufacturing value of shipments and 27% of manufacturing employment. As shown in Table A1-4 ( see page 9), however, only a subset of facilities in these industry sectors would be subject to regulation under Phase III based on the applicability thresholds under each of the regulatory analysis options.

Table A1-3: Summary Economic Data for Major Industry Sectors Potentially Subject to §316(b) Regulation: Facilities, Employment, Value of Shipments, and Payroll Value of Number of a Sector (SIC) Facilities b Employment Shipments Payroll (millions, $2004) (millions, $2004) Paper & Allied Products (26) 561 137,044 70,505 8,121 Chemicals & Allied Products (28) 29,005 1,651,237 710,762 75,785 Petroleum & Coal Products (29) 2,262 96,673 312,885 7,017 Steel (331) 1,069 154,364 92,693 8,773 Aluminum (333,335) 590 63,538 31,471 2,943 Food & Kindred Products (20) 30,823 1,571,096 584,908 52,152 All §316(b) Sectors 64, 310 3,673,952 1,803,224 154,791 Total U.S. Manufacturing (NAICS 31 - 33) 350,828 13,404,292 4,265,784 569,414 §316(b) Manufacturing Sectors as a Percent of 18.3% 27.4% 42.3% 27.2% Total U.S. Manufacturing

a Data from 2004 Annual Survey of Manufacture s is available by NAICS code. Therefore, the following proxies we re used to gather data: Paper & Allied Products (26) = NAICS 3221; Chemicals & Allied Products (28) = NAICS 325 and 326; Petroleum & Coal Products (29) = NAICS 3241; Steel (331) = NAICS 3311 and 3312; Aluminum (333,5) = NAICS 3313; Food & Kindred Products (20) = NAICS 311 and 3121. b Number of facilities is not av ailable in the Annual Survey of Manufactures; data were collected from the 2002 Economic Census. Source: U.S. DOC, 2005; U.S. DOC, 2002.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute A1- 7§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### A1-1.2.3 Facilities and Cooling Water Usage EPA’s 2000 Section 316(b) Industry Survey collected cooling water information for 656 power producers (hereafter referred to as “Electric Generators”), 211 facilities in Primary Manufacturing Industries, and 13 additional known facilities in Other Industries determined to be potentially subject to regulation under Section 316(b). Industry-wide, these facilities represent 671 po wer producers, 575 facilities in Primary Manufacturing Industries, and 17 facilities in Other Industries. Detail s of cooling water usage and other information on these facilities follows:

f 

### The 671 Electric Generators withdraw 79,000 billion gallons of cooling water per year. Of the 671 power producers, 554 were covered under the final Phase II rule. These 554 facilities accounted for 90.9% of total cooling water flow for Phase II and potential Ph ase III Electric Generators and Manufacturers (see Table A1-4). The remaining 117 facilities were cons idered for potential regulation in Phase III. Based on the survey, the 117 potential Phase III facilities account for approximately 392 bi llion gallons of cooling water per year, or 0.5% of the estimated total flow for Phase II and potential Phase III Electric Generators and Manufacturers.

f 

### The 575 facilities in Primary Manufacturing Industries potentially subject to the final regulation withdraw 7,600 billion gallons of cooling water per year. The 17 additional known facilities in Other Industries withdraw 200 billion gallons of cooling water per year. Overall, the Manufacturing facilities potentially subject to Phase III regulation account for approximately 9.0% of total flow for Phase II and potential Phase III Electric Generators and Manufacturers. Table A1-4 presents summary information about the num ber of facilities and water intake for existing facilities by sector and analysis option.

A1-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA,Part A: Background InformationChapter A1: IntroductionTable A1-4: Estimated Cooling Water Intake by Sectorand Analysis Option (Sample Weighted) - EPA SurveyTotalRule50 MDG All 200 MGD AllofAnnualIntake(BGY)ofAnnualIntake(BGY)ofAnnualIntake(BGY)ofAnnualIntake(BGY)ofAnnualIntake(BGY)ofAnnualIntake(BGY)67179,10055478,700117 400- - - - - -Industries575 7,600575 7,600 1556,100 31 3,900 73 4,900Chemicals andAllied Products185 2,400185 2,400 572,000 7 1,100 28 1,600Steel 68 1,70068 1,700 261,600 13 1,200 19 1,400Aluminum 20 20020 200 4100 1 100 1 100Petroleum andCoal Products39 50039 500 17500 4 300 8 300Products225 2,400225 2,400 421,700 3 1,000 11 1,200Food andKindred Products37 40037 400 9300 3 100 6 200Additionalin OtherIndustries17 20017 200 7 200 2 100 4 1001,263 86,900 554 78,700 592 7,800 1616,200 33 3,900 77 5,000Subject to Phase IIPotentially Subject toPhase III RuleEstimated Subject to Phase III Final Rule Under the Regulatoryanalysis options forExisting Facilities100 MDG CWBSectorEst. No.FacilitiesFlowEst. No.FacilitiesFlowEst. No.FacilitiesFlowEst. No.FacilitiesFlowEst. No.FacilitiesFlowEst. No.FacilitiesFlowSteam ElectricPower ProducersPrimaryManufacturingPaper and AlliedKnown FacilitiesTotal SurveyedBGY = Billion Gallons per Year.aTotals may not sum due to independent rounding.Source: U.S. EPA Analysis, 2006.June 1, 2006Internal Draft – Deliberative, Predecisional – Do notQuote, Cite, or DistributeA1-9§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Two of the primary parameters considered by EPA in developing the Phase III regulation are the design intake flow (DIF) of the facilities and the type of waterbody from which a facility withdraws cooling water. As previously described, EPA presented three options at Proposal based on 50 MGD, 100 MGD, and 200 MGD applicability thresholds. The two main types of wate rbody are (1) “sensitive waterbodies,” which are generally considered of higher biological productivity and more sensitive to adverse environmental impact (including estuaries/tidal rivers, and oceans and Great Lakes) ; and (2) “inland waterbodies” (including freshwater rivers/streams and lakes/reservoirs). Of the thr ee regulatory options presented at Proposal, EPA further differentiated the 100 MGD or greater facilities based on waterbody type. Table A1-5 shows, by waterbody t ype and industry segment, the number of Manufacturers facilities potentially subject to national requirements under the three DIF app licability thresholds presented at Proposal, and the total of facilities potentially subject to a Phase III regulation – that is, with DIF of at least 2 MGD. EPA estimates that as many as 592 existing facilities in the Manufacturers segment (including 575 facilities in the Primary Manufacturing Industries and 17 known facilities in Other Industries), were potentially subject to regulation under Phase III, based on a 2 MGD DIF applicability threshold. EPA estimates that 161 of these facilities would be subject to regulation under the 50 MGD option. Of these 161 facilities, 49 are located on Sensitive Waterbodies and 112 are located on Inland Waterbodies. For the 100 MGD or greater facilities, 27 are located on Sensitive waterbodies. Under the 100 MGD option, only the 27 facilities on Sensitive Waterbodies would be subject to regulation. Lastly, under the 200 MGD option, EPA estimat es that 33 facilities would be subject to regulation, of which, 16 are located on Sensitive Waterbodies and 17 are located on Inland Waterbodies.

Table A1-5: Existing Manufacturers Facilities by Applicability Threshold and Waterbody Type

Industry Segment

Primary Manufacturing Industries 575 155 73 31 Other Industries 17 7 4 2 Total 592 161 77 33
Primary Manufacturing Industries Other Industries Total
Primary Manufacturing Industries Other Industries Total Subject to National Requiremen ts with DIF Applicability Threshold of Greater than or Equal to 2 MGD 50 MGD 100 MGD 200 MGD All Waterbodies

Sensitive Waterbodies (Coastal Waterbodies and Great Lakes) 92 45 24 14 5 4 3 2 97 49 27 16 Inland Waterbodies 482 109 49 17 12 3 1 0 494 112 50 17 Source: U.S. EPA, 2000; U.S. EPA Analysis, 2006.



## A1-2 S UMMARY OF THE 

## F INAL 

## R ULE


### A1-2.1 New Offshore Oil and Gas Extraction Facilities The Phase III final regulation applies to new offshore oil and gas extraction facilities. Under the final rule, EPA is promulgating the regulatory require ments presented at proposal: new offshore oil and gas extraction facilities that withdraw 2 MGD or more and meet other applicabilit y criteria are subject to requirements similar to those applicable to other new facilities in the Phase I (new facility) 316(b) regulation. These requirements address intake flow velocity, proportional flow restrictions, sp ecific impact concerns (e.g., threatened or endangered

A1-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### species; critical habitat; or migratory, sport, or commerc ial species), and information submission, monitoring, and recordkeeping. As described at proposal, available inform ation indicates that it is not feasible for offshore oil and gas extraction facilities to employ closed-cycle recirculating cooling systems to reduce cooling water flow levels because such facilities have neither th e physical space nor the technical capacity to install technologies such as cooling towers or other closed-cycle systems. Thus, the final regulation does not require new offshore oil and gas extraction facilities to reduce intake flow to a level co mmensurate with a closed-cycle recirculating cooling system or to use close-cycle recirculating cooling as a baseline for performance standards. A1-2.2 Existing Facilities EPA has chosen not to promulgate any of the regul atory options considered for the Phase III regulation for existing facilities. Instead, EPA has decided that Ph ase III existing facilities should continue to have section 316(b) limits established on a case-by-case, best professional judgment basis.


## A1-3 S UMMARY OF 

## E CONOMIC 

## A NALYSIS 

## R ESULTS 

### This section presents a brief summary of the main results of EPA’s economic analyses for the final rule. This summary includes results for the regulation of new oil and gas extraction facilities, and the results of the analysis of the regulatory analysis options for existing facilities. More detail on each analysis, including methodology and results, is provided in later chapters of this EA.

a. Number of Facilities Subject to National Categorical Requirements
 New Facilities For today’s final rule, EPA is promulgating a 2 MGD flow threshold for new offshore oil and gas extraction facilities, the same flow threshold applicable to ot her new facilities under Phase I. EPA’s analysis of new offshore oil and gas extraction facilities includes oil and gas production platforms/structures and mobile offshore drilling units (MODUs). EPA estimated the number and ch aracteristics of new offshore oil and gas extraction facilities based on data on existing offshore oil and g as extraction facilities collected through EPA’s 316(b) survey of offshore oil and gas extraction facilities and fro m other sources of publicly available information, such as the Minerals Management Service. EPA estimates that 21 new offshore oil and gas extracti on platforms and 103 new M ODUs would be subject to the national requirements of the final rule, assuming a 20-year period of construction from 2007 (the assumed effective date of the rule) to 2026.
 Existing Facilities EPA evaluated three regulatory options for existing fac ilities: 50 MGD or greater for All Waterbodies, 200 MGD for All Waterbodies, and 100 MGD for Certain Water bodies. These three options had the same national categorical requirements, but they differed with respect to the number of existing facilities that would be subject to these requirements. Specifically, the number of regulat ed facilities differs as a result of (1) the design intake flow (DIF) applicability thresholds of the regulatory analys is options; and (2) the type of waterbodies to which the options would apply. Table A1-6 on the following page presents, by industry segme nt and regulatory analysis option, (1) the number of existing facilities potentially subject to regulation under Phase III, (2) the estimated number of baseline closures, (3) the number of existing manufacturing facilities estimated to be subject to national categorical requirements under the three regulatory analysis options, and (4) the num ber of facilities estimated to install a technology to comply with each analysis option. Facilities that are not baseline closures and would not be subject to the

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A1-11§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### requirements under the regulatory analysis options would be (“Potentially Subject to Regulation” minus “Baseline Closure” minus “Subject to National Requirements – Total”) subject to permitting on a case-by-case, best professional judgment basis. As shown in Table A1-6, EPA estimates that as many as 592 Manufacturers facilities (including 575 facilities in the Primary Manufacturing Industries and 17 Other Industries facilities) were potentially subject to the Phase III final regulation for existing facilities, based on the 2 MGD DIF cutoff. Of these, EPA estimates that 77 Manufacturers would be baseline closures – i.e., they would be in severe financial distress independent of regulation. As a result, EPA estimates that 515 Manufactur ers financially viable facilities were potentially within the scope of a Phase III final regulation. Under the 50 MGD applicability threshold, EPA estimat es that 146 existing Manufacturers facilities would be subject to regulation under this option. 2 

### Of these, 111 are estimated to install a technology to comply with the potential regulation requirements. The 100 MGD and 200 MGD options would apply to smaller sets of facilities. The 200 MGD All option would apply to 31 facilities in th e Manufacturers segment, with 27 facilities estimated to install a technology. The 100 MGD CWB option would apply to the smallest number of manufacturing facilities (23), with 22 of these facilities estimated to install a technology.

Table A1-6: Phase III Existing Facility Co unts, by Industry Segment and Option

Industry Potentially Subject to Baseline Closure Subject to National Requirements , Excluding Baseline Closures 50 MGD All Option 200 MGD All Option 100 MGD CWB Option Regulation Total w/ Technology Total w/ Technology Total w/ Technology Primary Manufacturing 575 75 140 105 30 26 21 20 Industries Other Industries 17 2 6 6 1 1 2 2 Total a 592 77 146 111 31 27 23 22

a Individual numbers may not sum to totals due to independent rounding. Source: U.S. EPA Analysis, 2006.



### b. Economic Impacts
 New Facilities EPA conducted several types of economic impact analysis for the new offshore oil and gas extraction industry segment. These analyses include three analyses for pl atforms/structures (facility-level production value and closure analysis, facility-level barrier-to-entry analysis , and firm-level cost-to-revenue analysis) and three analyses for MODUs (facility-level closure analysis, facility-l evel barrier-to-entry analysis, and firm-level cost-torevenue analysis). These analyses found no economic impa ct on any new offshore oil and gas extraction facility that would be subject to regulation under the final Phase III rule or any firm projected to build a new offshore oil and gas extraction facility that would be subject to regulation under Phase III. For a detailed discussion of EPA’s economic impact analyses for new facilities, see Chapter B3: Economic Impact Analysis for the Offshore Oil and Gas Extraction Industry

.

2 

### This number of existing facilities (146 f acilities) estimated to be subject to the Ph ase III final regulation differs from the value (161 facilities) repo rted in Table A1-4 and Table A1-5 because it excludes baseline closures.

A1-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



###  Existing Facilities EPA identified a facility as a regulatory closure if it w ould have operated under base line conditions but would fall below an acceptable financial performance level under the proposed regulatory requirements. EPA’s analysis of regulatory closures is based on the estimated change in f acility after-tax cash flow (cash flow) as a result of the regulation and specifically examines whether the change in cash flow would be sufficient to cause the facility’s going concern business value to become negative. EPA cal culated the going concern value of each facility using a discounted cash flow framework in which cash flow is disc ounted at an estimated cost of capital. The definition of cash flow used in these analyses is after-tax free cas h flow available to all capital – equity and debt. Correspondingly, the cost of capital reflects the combined cost, after-tax, of equity and debt capital. For its analysis of economic/financial impacts, EPA u sed 7% as a real, after-tax cost of capital. EPA also identified facilities that would likely incur moderate financial impacts, but that would not be expected to close, under each of the regulatory analysis options. EPA established thresholds for two measures of financial performance and condition – interest c overage ratio and pre-tax return on assets – and compared the facilities’ performance before and after compliance under each option with these thresholds. EPA attributed incremental moderate impacts to the options if bot h financial ratios exceeded threshold va lues in the baseline (i.e., there were no moderate impacts in the baseline), but at least one fi nancial ratio fell below the threshold value in the postcompliance case.
EPA estimated that none of the facilities estimated to be subject to regulation under each option would close or incur employment losses as a result of implementation of the three options. EPA also found that none of these facilities would incur a moderate economic impact as a result of the regulatory analysis options. EPA also assessed whether firms owning regulated faciliti es might incur a material adverse impact, based in particular on the possibility of owning more than one re gulated facility. This analysis, which relied on a firmlevel cost-to-revenue test, found that no firms owning Manufacturing facilities would be materially affected under the options considered for existing facilities. For a detailed discussion of EPA’s economic impact analyses for existing facilities, see Chapter C3: Economic Impact Analysis for Manufacturers

.

c. Regulatory Flexibility Analysis
 New Facilities The Regulatory Flexibility Act (RFA) requires EPA to cons ider the economic impact that the final rule would have on small entities. In the new offshore oil and gas extraction industry segment, EPA estimates that one small entity, a new offshore oil and gas extraction platform, woul d be subject to the national requirements of the final rule. EPA estimates that this entity would incur annualized, after-tax compliance costs of less than 0.1% of annual revenue. Table A1-7 outlines the total number of small entities in the new offshore oil and gas extraction industry segment, the number of small entities potentially subject to final regulation under Phase III, and the estimated cost-to-revenue ratio that small entities would incur in complying with the final regulation. For a detailed discussion of these analyses, see Chapter D1: Regulatory Flexibility Analysis

.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A1-13§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Table A1-7: Summary of Small Entity Impa ct Ratio Ranges For New OOGE Facilities Number of Small Total Number of Entities Owning Percentage of Compliance Cost/Annual Revenues Small Entities Industry Facilities Subject to Small Entities Potentially Subject Regulation 0-1% 1-3% >3% to Regulation New OOGE Facilities 24 1 4.2% 1 - - Source: U.S. EPA Analysis, 2006.



###  Existing Facilities EPA estimates that no existing small entities in the Manuf acturers industry segments would be subject to national categorical requirements under each analysis option.
d. UMRA Analysis
 New Facilities
Under section 202 of the Unfunded Mandates Reform Ac t (UMRA), EPA generally must prepare a written statement, including a cost-benefit anal ysis, for proposed and final rules with “Federal mandates” that might result in expenditures by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. EPA’s UMRA analysis for the final rule found the following:

f 

### Final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized aftertax costs of compliance for the Final Regulation to be $1.9 million ($2004). All of these direct facility costs are incurred by the private sector (including 12 4 new offshore oil and gas extraction facilities). No facility owned by State and local governments is subject to the national requirements under the final rule. Additionally, State and local permitting authorities will not incur costs to administer the rule for new offshore oil and gas extraction facilities because these facilities are not under State jurisdiction. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is approximately $1.5 million in 2013.
 Existing Facilities EPA also conducted the UMRA analysis for the three optio ns for existing facilities. The results of these analyses combined with the actual costs of th e final rule are presented below:

f 

### 50 MGD for All Waterbodies option for existing facil ities and final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized after-tax costs of compliance for this option to be $32.8 million ($2004). All of these direct facility cost s are incurred by the private sector (including 146 manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by State and local governments is subject to the nationa l requirements under the final rule. Additionally, State and local permitting authorities are estimated to incur $0.6 million annually to administer the rule under this option, including labor costs to write permits and to conduct compliance monitoring and enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is appr oximately $132.1 million in 2011.

f 

### 200 MGD for All Waterbodies option for existing fac ilities and final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized after-tax costs of compliance for this option to be $17.9 million ($2004). All of these direct facility costs are incurred by the private sector (including 31 manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by

A1-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### State and local governments is subject to the na tional requirements under this evaluated option. Additionally, State and local permitting authorities are estimated to incur $0.2 million annually to administer this option, including labor costs to wr ite permits and to conduct compliance monitoring and enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is approximately $78 million in 2010.

f 

### 100 MGD for Certain Waterbodies option for existing facilities and final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized after-t ax costs of compliance for this option to be $13.0 million ($ 2004). All of these direct facility costs are incurred by the private sector (including 23 manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by State and local governments is subject to the na tional requirements under this evaluated option. Additionally, State and local permitting authorities are estimated to incur $0.2 million annually to administer this option, including labor costs to wr ite permits and to conduct compliance monitoring and enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is approximately $79 million in 2011.
Table A1-8 summarizes the total annualized cost and maxi mum one-year cost, by facility and government costs, for the final rule and regulatory analysis options. For a detailed discussion of these analyses, see Chapter D2: UMRA Analysis

.
Table A1-8: Summary of UMRA Costs (millions, $2004) Total Annualized Cost Maximum One-Year Cost
Sector Facility Government Facility Government Compliance Implementation Total Compliance Implementation Total Costs Costs Costs Costs Final Rule for New Facilities Government Sector (excl. Federal) n/a n/a n/a n/a n/a n/a
Private Sector $1.9 n/a $1.9 $1.5 n/a $1.5 50 MGD All Option for Existing Facilities / Final Rule for New Facilities Government Sector (excl. Federal) $0.0 $0.6 $0.6 $0.0 $2.3 $2.3
Private Sector $32.8 n/a $32.8 $132.1 n/a $132.1 200 MGD All Option for Existing Facilitie s / Final Rule for New Facilities Government Sector (excl. Federal) $0.0 $0.2 $0.2 $0.0 $0.8 $0.8
Private Sector $17.9 n/a $17.9 $77.9 n/a $77.9 100 MGD CWB for Existing Facilities / Final Rule for New Facilities Government Sector (excl. Federal) $0.0 $0.2 $0.2 $0.0 $1.1 $1.1
Private Sector $13.0 n/a $13.0 $79.5 n/a $79.5 Source: U.S. EPA Analysis, 2006.



### e. Energy Effects Executive Order 13211, (“Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001)) requires EPA to pr epare a Statement of Energy Effects when undertaking regulatory actions identified as “significant energy actions.” This rule is not a “significant energy action” as

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A1-15§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### defined in Executive Order 13211 because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy. EPA analyzed the potential for energy effects of the final rule for new offshore oil and gas extraction facilities as well as the potential effects of the options considered fo r existing facilities and found that it would not lead to adverse outcomes. From these analyses, EPA concludes that this rule would have minimal energy effects at a national and regional level. As a result, EPA did not prep are a Statement of Energy Effects. For more detail on the potential energy effects of the final regulation, see Chapter D3: Other Administrative Requirements , Section D3-7

. f. Social Costs
 New Facilities EPA calculated the social cost for regulated new offshor e oil and gas extraction facilities also using 3% and 7% discount rates. EPA estimated total annualized social costs of $3.8 million at a 3% rate and $3.2 million at a 7% rate. The largest component of social cost is the pr e-tax cost of regulatory compliance incurred by complying facilities; these costs include pilot study costs, one-time technology costs of complying with the rule, one-time costs of installation downtime, annual operating and maintenance costs, and pe rmitting costs (initial permit costs, annual monitoring costs, and permit reissuance costs). Soci al cost also includes implementation costs incurred by the Federal government. States are not involved in administering the permits for new offshore oil and gas extraction facilities since the offshore oil and gas industr y is permitted under Genera l Permits at the Regional EPA level (which is part of the Federal government). Table A1-9 presents the total social co st for new facilities under the final regulation by type of cost, using 3% and 7% discount rates.

Table A1-9: Social Cost for New Facilities (annualized, millions, $2004) 3% Discount Rate 7% Discount Rate Direct Compliance Cost 

### : MODUs $1.9 $1.7 Platforms/Structures $1.5 $1.2 Total Direct Compliance Cost a $3.4 $2.8 Federal Administrative Cost $0.4 $0.3 Total Social Cost for New Facilities a $3.8 $3.2

a Individual numbers may not sum to totals due to independent rounding. Source: U.S. EPA Analysis, 2006.



###  Existing Facilities EPA also calculated the social cost of the regulatory analysis options for existin g manufacturers using two discount rate values: 3% and 7%. At a 3% rate, EPA estimated total annualized social costs of $38.2 million for the 50 MGD All option, $19.5 million for the 200 MGD All option, and $14.6 million for the 100 MGD CWB option (all dollar values in $2004). At a 7% rate, these values are $39.0 million, $20.2 million, and $14.1 million, respectively. The largest component of social cost is the pre-tax cost of regulatory compliance incurred by complying facilities; these costs include pilot study costs, one-time technology costs of complying with the rule, one-time costs of installation downtime, annual operating and maintenance costs, and permitting costs (initial permit costs, annual monitoring costs, and permit reissuan ce costs). Social cost also includes implementation

A1-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### costs incurred by Federal and State governments. As d escribed above, EPA’s social cost estimates exclude the cost of facilities estimated to be baseline closures. Table A1-10 presents the total social cost for existing facilities under the regulatory analysis options by type of cost, using 3% and 7% discount rates. As shown in the table, direct compliance cost in the manufacturers segment accounts for the substantial majo rity of total social cost for existing facilities for each of the regulatory analysis options. EPA’s estimate of Federal and St ate government costs for administering each option is comparatively minor in relation to the estimated direct cost of regulatory compliance.

Table A1-10: Social Cost for Existi ng Facilities (annualized, millions, $2004) 50 MGD All Option 200 MGD All Option 100 MGD CWB Option 3% 7% 3% 7% 3% 7% Direct Compliance Cost: Manufacturers a $37.6 $38.3 $19.3 $20.0 $14.4 $13.9 Primary Manufacturing Industries $36.3 $37.1 $18.8 $19.5 $13.7 $13.3 Other Industries $1.3 $1.2 $0.5 $0.4 $0.7 $0.7 Total Direct Compliance Cost a $37.6 $38.3 $19.3 $19.9 $14.4 $13.9 State and Federal Ad ministrative Cost $0.6 $0.6 $0.2 $0.2 $0.2 $0.2 Total Social Cost for Existing Facilities a $38.2 $39.0 $19.5 $20.2 $14.6 $14.1

a Individual numbers may not sum to totals due to independent rounding. Source: U.S. EPA Analysis, 2006.



###  New and Existing Facilities Although EPA is promulgating final Ph ase III regulations only for new offshore oil and gas extraction facilities, EPA also considered the total social cost of including each regulatory analysis option for existing facilities in the final rule. Under the 50 MGD All option for existing f acilities and the final regulation for new offshore oil and gas extraction facilities, total annualized social cost s are $42.2 million and $42.3 million, using 3% and 7% discount rates, respectively. Under the 200 MGD All op tion for existing facilities and final rule for new offshore oil and gas extraction facilities, total annualized social costs are $23.4 million under both the 3% and 7% discount rates. Under the 100 MGD CWB option for existing faciliti es and the final rule for new offshore oil and gas extraction facilities, total annualized social costs are $18.5 million under the 3% disc ount rate, and $17.4 million under the 7% discount rate.
Table A1-11 summarizes the total so cial costs for new and existing facilities under the final rule and each regulatory analysis option. For details of EPA’s social cost analyses, see Chapter E1: Summary of Social Costs

.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A1-17§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Table A1-11: Total Social Co st for New and Existing Facilities (annualized, millions, $2004)
2 MGD New / 2 MGD New / 2 MGD New / 50 MGD All Existing 200 MGD All Existing 100 MGD CWB Existing

3% 7% 3% 7% 3% 7% Direct Compliance Cost: Existing Facilities $37.6 $38.3 $19.3 $20.0 $14.4 $13.9 New Facilities $3.5 $2.9 $3.5 $2.9 $3.5 $2.9 Total Direct Compliance Cost a $41.1 $41.2 $22.8 $22.9 $17.9 $16.8 State and Federal Ad ministrative Cost: Existing Facilities $0.6 $0.6 $0.2 $0.2 $0.2 $0.2 New Facilities $0.4 $0.3 $0.4 $0.3 $0.4 $0.3 Total State and Fede ral Administrative Cost a $1.1 $1.0 $0.6 $0.5 $0.6 $0.5
Total Social Cost a $42.2 $42.3 $23.4 $23.4 $18.5 $17.4

a Individual numbers may not sum to to tals due to independent rounding. Source: U.S. EPA Analysis, 2006.



### g. Benefit-Cost Analysis
 Existing Facilities The benefit-cost analysis compares total annualized use bene fits to total annualized pre-tax costs (social costs) for facilities that remain open in the baseline. Benefits a nd costs were discounted using both a 3% and 7% discount rate. The cost estimates include costs of compliance to facilities subject to regulation under the regulatory analysis options considered for the Phase III rule for ex isting facilties, as well as administrative costs incurred by State and local governments and by the Federal government. The benefits estimates incl ude monetized benefits to commercial and recreational fishing. Total monetizable benefits include only use benefits because non-use benefits were evaluated qualitatively. Table A1-12 summarizes the number of facilities potentially subject to regulation under the regulatory analysis options, the number of facilities estimated to install I&E technologies, total annualized benefits, total annualized costs, and net benefits. Because EPA was unable to estim ate benefits for the new offshore oil and gas extraction industry segment 3 

### , the benefit-cost analysis only includes existing facilities. As reported in Table A1-12, estimated costs exceed estimated use benefits under all three options for existing facilities. Under the 50 MGD All option, 146 facilities are estimated to be subject to the national categorical requirements. Of those facilities, 111 are estimated to install technologies to reduce impingeme nt and entrainment. Using a 3% discount rate, total costs would exceed total use benefits by $36.0 million; us ing a 7% discount rate, total costs would exceed total use benefits by $37.2 million. Under the 200 MGD All op tion, 31 facilities would be subject to the national categorical requirements, with 27 facilities estimated to re quire new technologies. This option yields total social costs in excess of total benefits of $18.0 million and $19. 0 million, discounted at 3% and 7%, respectively. Under the 100 MGD CWB option, 23 facilities would be subject to the national categorical requirements, and 22 are estimated to install technologies. Total social costs w ould exceed total use benefits by $12.7 million using a 3% discount rate, and $12.6 million using a 7% discount rate. For further discussion of the benefit-cost analysis, see Chapter E3: Comparison of Benefits and Social Costs.

3 

### EPA was unable to do so because this would require an estimation of where these new facilities would be built, since these are new facilities, such estimation was not feasible.

A1-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Table A1-12: Summary of Benefits and Social Costs for Existing Facilities (millions, $2004) Annualized Use Number of Number of Total Value of I&E Cost-Benefit Facilities Subject Facilities Installing Option Annualized Reductions Ratio to Option Technology Costs a (Mean) 3% Discount Rate 50 MGD All option 146 111 $2.3 $38.2 17.0 200 MGD All Option 31 27 $1.5 $19.5 13.0 100 MGD CWB Option 23 22 $1.9 $14.6 7.8 7% Discount Rate 50 MGD All option 146 111 $1.8 $39.0 21.7 200 MGD All Option 31 27 $1.2 $20.2 16.9 100 MGD CWB Option 23 22 $1.5 $14.1 9.5

a The total monetizable value of I&E reductions includes use benef its only. EPA evaluated non-use benefits only qualitatively. b Cost-benefit ratios are calc ulated by dividing total annual ized costs by total annual use be nefits. The ratios presented her e are based on the comparison of a substantially complete measure of social costs with an incomplete measure of benefits. Source: U.S. EPA Analysis, 2006.



## A1-4 O RGANIZATION OF THE 

## EA R EPORT 

### The EA assesses the costs, economic impacts, and benefit-co st relationships of the final regulation and the other regulatory options evaluated in its development. Th e EA consists of five parts, organized as follows: 

## Part A: Background Information Chapter A1: Introduction provides a brief discussion of the regulated industry sectors and facilities, summarizes the final rule and other evaluated options, and presents a summary of economic analysis results. Chapter A2: Need for the Regulation discusses the environmental impacts from operating CWIS and explains the need for this regulatory effort. 

## Part B: Economic Analysis for Phase III New Offshore Oil and Gas Ex traction Facilities Chapter B1: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas Extraction Facilities summarizes the cost categories included in the economic analyses for Phase III new facilities and describes certain elements of the analytic framework of the economic analyses of new offshore oil and gas extraction facilities. Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry presents a profile of existing offshore oil and gas production platforms and mobile offshore drilli ng units (MODUs) and charact erizes new facilities subject to the final Phase III requirements. The profile summariz es the existing facilities, their associated firms, and the financial conditions of those firms. The profile also pr ojects the number and type of new facilities estimated to begin operation over a twenty-year period. Chapter B3: Economic Impact Analysis for the Offshore Oil and Gas Extraction Industry presents an overview of the methodology used to estimate the economic imp acts potentially incurred by new offshore oil and gas extraction facilities under the final Phase III regulation and pr ovides the impact analysis results. The chapter assesses the potential impacts on MODUs, platforms, and fi rms, including a cost-to-revenue analysis at the facility and firm levels. The chapter also presents a barrier-to-entry analysis for new facilities. 

## Part C: Economic Analysis fo r Phase III Existing Facilities

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A1-19§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



### Chapter C1: Summary of Cost Categories and K ey Analysis Elements for Existing Facilities summarizes the cost categories included in the economic analyses for Phase III existing facilities and describes certain elements of the analytic framework that are common to the econo mic analyses of Manufacturers and Electric Generators. Chapter C2: Profile of Manufacturers presents profiles of the markets in which affected manufacturing facilities operate (SIC codes 26, 28, 29, 331, 333/335, and 20). Each manufacturing industry profile presents an outline of domestic production, discusses market structure and competitiveness, summarizes industry-wide financial performance and condition, and characterizes facilities potentially subject to regulation under Phase III. Chapter C3: Economic Impact Analysis for Manufacturers presents an overview of the methodology used to estimate the economic impacts incurred by Phase III manuf acturing facilities under the three options and provides the impact analysis results. The ch apter describes the analytic framework used to assess severe and moderate facility-level impacts associated with the regulatory analysis options. The chapter also includes a discussion of firm- and market-level impacts. 

## Part D: Additional Econ omic Analyses for New and Existing Facilities Chapter D1: Regulatory Flexibility Analysis presents EPA’s estimates of small entity impacts from this final rule and other evaluated options. Chapter D2: UMRA Analysis outlines the requirements for analysis under the Unfunded Mandates Reform Act and presents the results of the analysis for th is final regulation and other evaluated options. Chapter D3: Other Administrative Requirements presents additional analyses conducted in developing this final rule and other evaluated options. These analyses a ddress the requirements of Executive Orders and Acts applicable to this proposal. 

## Part E: Social Costs, Benefi ts, and Benefit-Cost An alysis for New and Existing Facilities Chapter E1: Summary of Social Costs presents the social costs of the final rule and other evaluated options, including time profiles of direct facility costs and administrative costs. Chapter E2: Summary of Benefits provides an overview of the regional studies used to support the benefits assessment and a summary of the analyses. The chapter also presents the results of each regional study for the regulatory analysis options considered for Phase III existing faciliti es. Finally, the chapter outlines the methodology used to extrapolate regional study results to develop national estimates of baseline losses from impingement and entrainment at in-scope facilities and presents monetized benefits. Chapter E3: Comparison of Benefits and Social Costs compares total benefits to total social costs at the national and regional levels for the regulatory analysis options considered for Phase III existing facilities. This chapter includes a discussion of net benefits, an incremental analys is of net benefits, cost/b enefit ratio, and a break-even analysis. Lets

A1-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



## R EFERENCES 

### Clean Water Act (CWA). 33 U.S.C. 1251 et seq.
U.S. Department of Commerce (U.S. DOC). 2005. Statistics for Industry Groups and Industries: 2004. Annual Survey of Manufactures . U.S. Census Bureau. December 2005.
U.S. Department of Commerce (U.S. DOC). 2002. 2002 Economic Census . U.S. Census Bureau.
U.S. Department of Commerce (U.S. DOC). 1986. 1982 Census of Manufactures. Subject Series: Water Use in Manufacturing. Bureau of the Census. March 1986.
U.S. Department of Energy (U.S. DOE). 1996. Form EIA-867 (1996). Annual Nonutility Power Producer Report.
U.S. Department of Energy (U.S. DOE). 1995. Form EIA-767 (1995). Steam-Electric Plant Operation and Design Report.
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Economic and Benefits Analysis for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-001. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-003. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2001. Economic Analysis of the Final Regulations Addressing Cooling Water Intake Structures for New Facilities . EPA-821-R-01-035. November 2001.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Section 316(b) Industry Survey. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures and Industry Short Technical Questionnaire: Phase II Cooling Water Intake Structures, January, 2000 (OMB Control Number 2040-0213). Industry Screener Questionnaire: Phase I Cooling Water Intake Structures , January, 1999 (OMB Control Number 2040-0203).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A1-21§ 316(b) Final Rule: Phase III – EA, Part A: Background Information Chapter A1: Introduction



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

A1-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Backgr ound Information Chapter A2: Need for the Regulation 

# Chapter A2: Considerations in Assessing the Need for Phase III Regulation

I NTRODUCTION 

### Many cooling water intake structures (CWIS) have been constructed on sensitive aquatic systems with capacities and designs that have potential to cause damage to the waterbodies from which they withdraw water. In fact, of the 709 existing facilities that were considered potentially within the scope of the 316(b ) Phase III regulation, only 67 indicated on EPA’s 2000 Section 316(b) Industry Survey that they have ever performed an impingement and entrainment (I&E) study (U.S. EPA, 2000). 1 

### In addition, EPA and the Bureau of Land Management’s Minerals Management Service (MMS) could only identify one case where the potential environmental impacts of the CWIS of a new oil and gas extraction facility were c onsidered (U.S. DOI, 2001). In a subsequent literature review, MMS did not find any information related to pot ential environmental impacts or I&E controls for any existing oil and gas extraction facilities (U.S. DOI, 2004). 

## C HAPTER 

## C ONTENTS
Introduction............................................................ A2-1 A2-1 Description of Environmental Impacts from CWIS ........................................................ A2-1 A2-2 Levels of Protection at Phase III Facilities A2-2 A2-2.1 Phase III New Facilities.................... A2-2 A2-2.2 Potential Phase III Existing FacilitiesA2-3 A2-3 Addressing Market Imperfections............. A2-3 References.............................................................. A2-4



### This chapter presents information that documents how EPA addressed the question of the need for regulation.


## A2-1 D ESCRIPTION OF 

## E NVIRONMENTAL 

## I MPACTS FROM 

## CWIS The withdrawal of cooling water by Phase III existing f acilities removes tens of billions of aquatic organisms from waters of the United States each year, including pl ankton (small aquatic animal s, including fish eggs and larvae), fish, crustaceans, shellfish, sea turtles, marine mammals, and many other forms of aquatic life. Most impacts are to early life stages of fish and shellfish. Aquatic organisms drawn into CWIS are either impinged on components of the intake structure or entrained in the cooling water system (CWS) itself. Rates of I&E depend on species characteristics, the envir onmental setting in which a facility is located, and the location, design, and capacity of the facility’s CWIS. In addition to direct losses of aquatic organisms from I&E, a number of indirect, ecosystem-level effects may also occur, including (1) disruption of aquatic food webs r esulting from the loss of impinged and entrained organisms that provide food for other species, (2) disruption of nutrient cycling and other biochemical processes, (3) alteration of species composition and overall levels of biodiversity, and (4) degrada tion of the overall aquatic environment. In addition to the impacts of a single CWIS on currents and other local habitat features, environmental degradation can result from the cumulative impact of multiple intake structures operating in the same watershed or intakes located within an area where in take effects interact with other environmental stressors.

1 

### This number is sample-weighted and includes manufacturi ng facilities and electric generators only. Facilities estimated to be baseline closures are excluded from this count and all analyses presented in this chapter. See Chapter C3 for additional information on EPA’s baseline closure analyses.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A2-1§ 316(b) Final Rule: Phase III – EA, Part A: Backgr ound Information Chapter A2: Need for the Regulation



## A2-2 L EVELS OF 

## P ROTECTION AT 

## P HASE 

## III F ACILITIES 

### Facilities subject to the Phase III final regulation use a wi de variety of cooling water intake technologies to maximize cooling system efficiency, minimize damage to their operating systems, and to reduce environmental impacts. The following subsections present data on t echnologies that have been identified as effective in protecting aquatic organisms from I&E. The first sub section presents information for the Phase III new facilities; the second subsection presents information for Phase III existing facilities.
A2-2.1 Phase III New Facilities In general, oil and gas extraction facilities have not co nsidered the potential environmental impacts of their CWISs. EPA and the Bureau of Land Management’s Minerals Management Service (MMS) could only identify one case where the environmental impacts of a fixed o ffshore oil and gas extraction facility’s CWIS were considered (U.S. DOE, 2001). Although plans for the Liberty Island Project in Beaufort Sea, Alaska, were put on hold in January 2002 (FR, 2002), BP Exploration (Alaska) In c. (BPXA) had plans to locate a vertical intake pipe for a seawater-treatment plant on the south side of Liberty Island, Beaufort Sea, Alaska. The project would have had the following specifications:

f 

### a vertical pipe with an opening of 8 feet by 5.67 feet, located approximately 7.5 feet below the mean lowwater level;

f 

### a continuous flush system discharge that pumps the seawater through the process-water system to prevent ice formation and blockage;

f 

### recirculation pipes located just inside the opening to he lp keep large fish, other animals, and debris out of the intake;

f 

### two vertically parallel screens (6 inches apart), located in the intake pipe above the intake opening, with a mesh size of 1 inch by 1/4 inch;

f 

### maximum water velocity of 0.29 feet per second at the first screen and 0.33 feet per second at the second screen (maximum velocities only during a few hours each week while testing the fire-control water system – at other times, considerably lower velocities); and

f 

### periodical removal, cleaning, and replacement of the screens. MMS stated in the Liberty Draft Environmental Impact St atement (which was prepared prior to BP’s decision to hold development plans) that the proposed seawater-intake structure would lik ely harm or kill some young-of-theyear arctic cisco during the summer migration period and some eggs and fry of othe r species in the immediate vicinity of the intake. However, MMS estimated that less than 1% of the arctic cisco in the Liberty area would likely be harmed or killed by the intake structure. Furt her, MMS concluded that the intake structure (1) would not have a measurable effect on young-of-the-year arctic ci sco in the migration corridor and (2) would not have a measurable effect on other fish populations because of th e wide distribution/low density of their eggs and fry. In general, the importance of controlli ng I&E at offshore oil and gas extraction facilities is highlighted by the fact that these structures provide an important fish habitat. For example, oil and gas platforms and artificial reefs undoubtedly serve as red snapper habitat, and they may ser ve as an important (but not obligate) link in the life history of both juvenile and adult red snapper (Gulf of Mexico Fishery Management Council, 1996). In general, five to 100 times more fish can be concentrated near o ffshore platforms than in the soft mud and clay habitats elsewhere in the Gulf of Mexico (Fury, 2002). As a result, 70% of all fishing trips in the Gulf of Mexico head for oil and natural gas platforms. Likewise, 30% of the 15 million fish caught by recreational fishermen every year off the coasts of Texas and Louisiana come from the waters around platforms.

A2-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part A: Backgr ound Information Chapter A2: Need for the Regulation



### A2-2.2 Potential Phase III Existing Facilities
EPA used information from its 2000 Se ction 316(b) Industry Survey to characterize the 709 existing facilities potentially subject to Phase III regulation (i.e., with DI F of at least 2 MGD) with respect to their CWS configuration, their CWIS technologies, and their cooling system location. These estimated 709 facilities include 592 Manufacturers facilities and 117 Electric Power Producer s. Closed-cycle cooling systems (e.g., systems employing cooling towers) are the most effective means of protecting organisms from I&E. Discussions with NPDES permitting authorities and utility officials identif ied fine mesh screens as an effective technology for minimizing entrainment. They can, however, increase im pingement. Another effective approach for minimizing Adverse Environmental Impact (AEI) associated with CWIS is to locate the intake structures in areas with low abundance of aquatic life, and to design the structures so that they do not provide attractive habitat for aquatic communities. However, this approach is of little utility for existing facilities where options for relocating intake structures are infeasible.


## A2-3 A DDRESSING 

## M ARKET 

## I MPERFECTIONS 

### Facilities withdraw cooling water from U.S. waters to s upport production activities, and, in the process impinge and entrain organisms without accountin g for the consequences of these actions on the ecosystem or other parties who do not directly participate in th e production process. The actions of these facilities impose harm or costs on the environment and on other pa rties (sometimes referred to as third parties ). These costs, however, are not recognized by the responsible entities in the conventi onal market-based accounting framework. Because the responsible entities do not account for these costs to the ecosystem and society, they are external to the market framework and the consequent productio n and pricing decisions of the respons ible entities. In addition, because no party is reimbursed for the adverse co nsequences of I&E, the externality is uncompensated

. Business decisions will yield a less than optimal allocati on of economic resources to production activities, and, as a result, a less than optimal mix and quantity of goods and services, when external co sts are not accounted for in the production and pricing decisions of the section 316(b) in dustries. In particular, the quantity of AEI caused by the business activities of the responsible business entities will exceed optimal levels and society will not maximize total possible welfare. Adverse distributio nal effects may be an additional consequence of the uncompensated environmental externalities. If the distri bution of I&E and ensuing AEI is not random among the U.S. population but instead is concentrated among certain population subgroups based on socio-economic or other demographic characteristics, then the uncompensated environmental externalities may produce undesirable transfers of economic welfare am ong subgroups of the population. Market imperfections are often the reason that governments consider regulatory actions against a business or group of businesses. Depending on the nature of th e AEI and potential costs for control technologies, governments may decide to address the market imperfec tion through a wide-ranging regulation or on a case-bycase basis.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute A2-3§ 316(b) Final Rule: Phase III – EA, Part A: Backgr ound Information Chapter A2: Need for the Regulation



## R EFERENCES 

### Federal Register (FR). 2002. Volume 67, number 99, pages 36020-26022. May 22, 2002. Fury, Sandra. ChevronTexaco. Statements before U.S. Commission on Ocean Policy. March 8, 2002. Gulf of Mexico Fishery Management Council. 1996. Reef Fish Stock Assessment Panel – Review of 1996 Analysis by Gallaway and Gazey. Pursuant to National Oceanic and Atmospheric Administration Award No. NA67FC0002.
U.S. Department of Interior (U.S. DOI). 2004. Minerals Management Service. Marine and Coastal Fishes Subject to Impingement by Cooling-Water Intake System s in the Northern Gulf of Mexico: An Annotated Bibliography , OCS Study, MMS 2003-040. August 2003.
U.S. Department of Interior (U.S. DOI). 2001. Minerals Management Service. Liberty Development and Production Plan Draft Environmental Impact Statement , OCS EIS/EA, MMS 2001-001. January 2001.
U.S. Environmental Protection Agency (U.S. EPA). 2 000. Section 316(b) Industry Survey. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures and Industry Short Technical Questionnaire: Phase II Cooling Water Intake Structures, January, 2000 (OMB Control Number 2040-0213). Industry Screener Questionnaire: Phase I Cooling Water Intake Struct ures, January, 1999 (OMB Control Number 2040-0203).

A2-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs 

# Chapter B1: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas Extraction Facilities

I NTRODUCTION 

### This chapter presents an overview of the cost categories and certain elements of the analytic framework that are common to the economic analyses of the two major industry segments covered by the final standards for new Offshore Oil and Gas Extraction facilities: mobile offshore drilling units (MODUs) and oil and gas production platforms or structures.


## B1-1 C OST 

## C ATEGORIES 

### In its analyses of the costs and economic impacts of the final rule on new oil and gas extraction facilities, EPA considered three categories of costs:

f 

### costs of installing and operating compliance technology,

f 

### administrative costs incurred by complying facilities, and

f 

### administrative costs incurred by permitting authorities. 

## C HAPTER 

## C ONTENTS
Introduction............................................................ B1-1 B1-1 Cost Catego ries ......................................... B1-1 B1-1.1 Cost of Installing and Operating Compliance Technology................... B1-2 B1-1.2 Administrative Costs for Complying Facilities ........................................... B1-3 B1-2 Key Elements of the Economic Analysis For New Offshore Oil and Gas Extraction Facilities .................................................................. B1-7 B1-2.1 Compliance Schedule ....................... B1-8 B1-2.2 Adjusting Monetary Values to a Common Time Period of Analysis ................... B1-8 B1-2.3 Discounting and Annualization – Costs to Society or Soci al Costs ..................... B1-9 B1-2.4 Discounting and Annualization – Costs to Complying Fac ilities ...................... B1-11 References............................................................ B1-13



### In contrast to the analysis conducted for the Manufactur ing industry segment (see also Chapter B1), EPA assumed that no downtime is associated with installing or ma intaining CWIS technologies for new offshore oil and gas extraction facilities, for two reasons. First, new faciliti es do not have to retrofit equipment; the equipment is built to specification and installed before the facility begins operations. Second, even the maintenance of CWISs should not result in downtime in the oil and gas industr y. MODUs are hauled out on a regular basis for other types of maintenance activities, and production platfo rms are shut in one to two times per year for other maintenance, making incremental downtime due to CWIS maintenance unlikely (see the Technical Development Document for the Final Section 316(b) Phase III Rule (hereafter referred to as the “Phase III Technical Development Document ”; U.S. EPA, 2006b). Subsection B1-1.1 provides an overview of the three cost categories included in the analysis for new offshore oil and gas extraction facilities, addressing those aspects of each category that are relevant to the oil and gas industry. Table B1-1 summarizes the type of new offshore oil and g as extraction facility assumed to be subject to Phase III regulation and the compliance technologies considered for each facility type. Subsection B1-1.2 presents information on administrative costs incurred by new oi l and gas facilities. Additional detail on the costs of installing and operating compliance technology is provided in the Phase III Technical Development Document

.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B1-1§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### B1-1.1 Cost of Installing and Operating Compliance Technology Oil and gas drilling and production facilities will need to implement technologies to reduce impingement mortality and/or entrainment. The choice of technol ogy varies depending on CWIS diameter and flow rate or diameter, or type of CWIS (e.g., sea chest or simple pipe). Note that for new MODUs, which EPA assumes will use sea chests, only impingement requirements will apply. EPA determined that entrainment controls on sea chests are not technically practicable (U.S. EPA, 2006b).

Table B1-1: Technologies for Implementing 316( b) Requirements for New Offshore Oil and Gas Extraction Facilities Category CWIS Type Technology Description Platform Simple Pipe or Caisson Stainless steel wedge wire screen - no air sparge cleaning Stainless steel wedge wire screen - with air sparge Platform Simple Pipe or Caisson cleaning Platform Simple Pipe or Caisson Platform Simple Pipe or Caisson Platform Simple Pipe or Caisson Jackup Simple Pipe or Caisson Jackup Simple Pipe or Caisson Jackup a Sea Chest Jackup a Sea Chest Jackup Submersible PumpsSubmersibles, SemiCuNi wedge wire screen - no air sparge cleaning CuNi wedge wire screen - with air sparge cleaning Stainless steel and CuNi velocity caps Cylindrical wedge wire screen over tower inlet Horizontal Flow Modifier Flat panel wedge wire screen over sea chest opening Horizontal Flow Diverter for Side Sea Chests Cylindrical wedge wire screen over suction pipe inlet
Submersibles and Drill Ships a Sea Chests Flat panel wedge wire screen over sea chest Submersibles, Semi- Sea Chests Horizontal flow diverter over side sea chest submersibles and Drill Ships a Drill Barges Simple Pipes Cylindrical wedge wire screen over simple pipes

a Drill Barges Simple Pipes Velocity Cap on the CWIS All semi-submersibles and drill ships and most jackups in EPA’s tec hnical database use sea chests. EPA determined that entrainment controls on sea ches ts are not technically practicab le. New MODUs, which are repres ented by typical existing MODUs , are assumed to use sea chests (see U.S. EPA, 2006b). Source: U.S. EPA, 2006b.


### EPA developed technology cost estimates for the final ru le based on the impingement mortality and entrainment reduction technologies (as appropriate) projected for each new oil and gas facility. Technology costs include capital costs and operating and maintenance (O&M) costs. The technology costs developed for the final rule analysis are engineering cost estimates, expressed in July 2002 dollars. These costs were converted to mid-year 2004 values for most applications (see Section B1-2.2 be low for a discussion of adjusting monetary values to a common time period of analysis). More detailed information on the compliance technologi es considered by EPA, on technology costs, and on EPA’s characterization of baseline technologies already in-place at new offshore oil and gas extraction facilities, is available in the Phase III Technical Development Document . In addition, Chapter B3: Economic Impact Analysis for the Offshore Oil and Gas Extraction Industry provides more detail on the engineering costs assumed for each of the different types of oil an d gas facilities analyzed in this report. EPA received no substantive comments on compliance costs or costing methodologies, so no changes have been made to these, other than to inflat e costs for the 2003 values presented at proposal to 2004 values in this final economic analysis report.

B1-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### B1-1.2 Administrative Cost s for Complying Facilities Compliance with the standards of the final rule requires new offshore oil and gas extraction facilities to carry out certain administrative functions. For Phase III existing fac ilities, these administrative functions, which help them determine their compliance requirements and provide the documentation needed for issuance of their new National Pollution Discharge Elimination System (NPDES) permits, fall on each facility individually. For new oil and gas facilities, however, General Permits apply. There are three General Permits (GPs) that will apply to new offshore oil and gas extraction facilities subject to Phase III regulation. The Region 6 General Permit appli es to the relatively active Western Gulf of Mexico (GOM) region; the Region 4 General Permit applies to th e currently relatively inactive Eastern GOM region, and the Region 10 General Permit (Cook Inlet permit) applies to Cook Inlet, Alaska. The GPs are expected to be rewritten to accommodate the requirements of section 316(b) following promulgation of the final rule and as each GP comes up for renewal at the end of its 5-year cycle. The current Region 6 permit was effective as of 2002, expire d in 2003, and was renewed in 2004. This renewal is for 3 years only, to allow for information from a produced water study to be incorporated more expeditiously. The next rounds of permitting, therefore, are assumed to 2007 and 2012. The Region 4 permit expired in 2003 and was renewed in 2004. The probable post-promulgati on GP renewal schedule is c onsidered to be 2009 and 2014. The proposed permit for Cook Inlet is currently in comment period. The likely renewal is therefore mid to late 2006. However, the permit expired in 2004. Assumi ng the 5-year schedule will still apply, regardless of this delay, the likely post-promulgation renewal sche dule for the Cook Inlet permit is 2009 and 2014. The 316(b) Phase III final rule is scheduled to be promulga ted in 2006, with the effective date assumed to be the beginning of 2007. Three years of environmental studies are assumed to be required prior to permitting under the section 316(b) rule. Thus, the first possible compliance date after the 2007 effective date would be 2010. However, the general permits may not be able to incorporate section 316(b) requirements during the 2007-2009 repermitting cycles. Therefore, EPA assumed that the oil and gas industries will be required to comply starting in 2012 (or 2014 in the case of Region 4 and 10 permits). Because the rule becomes effective in 2007, however , EPA is assuming, for both simplicity and to be conservative, that starting in 2007, new offshore oil and gas extraction facilities will have installed and will be operating relevant CWIS controls, since they will be rela tively inexpensive to install during construction. The pre-permitting studies are assumed to start in 2007 (for bot h Region 6 and Region 4) , but other permitting tasks will not begin until the year prior to when the GPs renewals are finalized (2012 or 2014), or the year prior to when the facility is assumed to come on line or be launched, whichever is later. Monitoring will begin only in the year the renewals are finalized or the year in which the facility comes on line or is launched, again, whichever is later. The timing assumptions for Region 6 and Region 4 permits may overstate costs, since costs are moved several years earlier in the analysis time frame than they would be if EPA assumed only those facilities constructed in 2012 or later incur compliance costs. The costs of co mpliance in this industry, however, are relatively small overall, so the numerical significance of any overestimation would be small. More specific details of the timing assumptions of costs incurred are provided in a memorandum to the Rulemaking record (ERG, 2004). Because new offshore oil and gas extraction facilities will be subject to Phase III regulation under these GPs, EPA assumes that certain administrative functions can be shared among new facilities. All MODUs and platforms expected to be built in the first five years before th e revised Region 6 General Pe rmit is issued (2012) are expected to share the initial costs of certain biological characterization studies that will be required by section 316(b) under the Region 6 GP. They are also assumed to share the cost of monitoring studies, which must be performed at a minimum for the first two years of the pe rmit and then at least once per year for each repermitting cycle. Only MODUs are assumed to share the costs of permitting studies under the Region 4 GP. Permitting

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B1-3§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### costs for platforms are assumed to be those incurred unde r the Region 6 permit. Should platforms with affected CWISs be constructed in Region 4 locations, permitting co sts will be similar to Region 6 permitting costs. Since it is not known which MODUs might operate in the E astern GOM, all MODUs constructed in 2007 and beyond are assumed to incur permitting costs under a Region 4 GP. This roughly doubles the permitting costs assigned to MODUs. The assumption may overstate total costs, sin ce not all MODUs might operate in the Eastern Gulf. Furthermore, there might be significant costs savings once a Region 6 permit application is completed, since much of the information required for both permits would most likely be identical. Only one Alaska project is anticipated, at most, over the period of analysis (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry ), so this project is expected to incur the entire cost of facility permitting. This project is assumed to go on line in th e year the Region 10 permit is finalized (2014). For this project, EPA assumes that the 3-year studies are performed in the three years prior to start-up (2011-2013).
The administrative functions associated with incorporating the 31 6(b) requirements into the applicable General Permits are either one-time requireme nts (compilation of information for the initial post-promulgation General Permits) or recurring requirements (compilation of inform ation for subsequent Gene ral Permit renewals; and monitoring, record keeping, and reporting). More de tailed information on the derivation of permitting activities and costs can be seen in U.S. EPA (2006a).
EPA received no substantive comments on the administrativ e costs of permitting activities, nor on the timing or cost sharing assumptions. All costs and methodologies ar e the same as those at proposal, although costs have been updated from the 2003 values used at proposal to the 2004 values in this final economic analysis report. B1-1.2.1 Initial Post-promulgat ion General Permit Application EPA assumes that the final rule will encourage firms to po ol their resources. Therefore, those firms that are planning to construct new platforms or MODUs to oper ate in the GOM within the first 5 years before the applicable General Permit is reissued with 316(b) re quirements in place are assumed to share certain prepermitting costs. EPA expects that these firms will hire a consultant to perform the more general information gathering tasks required of industry be fore facilities can be permitted under a GP and also to perform the two years of monitoring studies required in the first two y ears of the permit (monitoring costs are assumed shared by the number facilities permitted in the first or second year of the first permit cycle). Other activities are specific to each facility and it is assumed each facility will incur the cost of these activities individually. Some of the permitting activities, however, will not be incremental to existing requirements. Minerals Management Service (MMS) has finalized a rule (August 2005) that requires so me of the same information (Federal Register, 2005). (The MMS rule is, however, not applicable to Cook Inlet. ) All information submitte d will be consistent with Phase I, Track 1 requirements.
Activities and costs associated with the in itial permit renewal application include:

f 

### Start-up activities: reading and understanding the rule; mobilizing and planning; and training staff. This is a facility-specific activity.

f 

### Permit application activities: identifying source water physical data , velocity information, and cooling water intake structure data, including description of CWIS operations, flow distribution and water balance diagram, and drawings and maps to support CWIS descriptions, and maintaining copies of these records. These activities are assumed facility-specific, but several of the activities duplicate activities required by MMS. There are no incremental costs associated with duplicate activities.

f 

### Source waterbody flow and CWIS velocity flow information : Information used to demonstrate that the facility’s CWIS meets the proportional flow requireme nts. The CWIS velocity flow information and demonstration is assumed to be facility-specific, but none of these activities is incremental to MMS

B1-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006c § 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### requirements. The waterbody flow calculation activ ities are only those associated with compiling sitespecific information. Other waterbody characterization activities that can be sh ared are included in the biologic characterization study activities.

f 

### Design and construction technology plan: delineation of the hydrologic zone of influence for the CWIS, description of technologies to be implemented; the basis for technology selection; expected performance of the technology; and design calculations, drawings and estimates to support the technology description and performance. These activities are assumed fac ility-specific. Development of the narrative description of technologies is considered an MMS requ irement, so no costs are assumed incurred for this activity.

f 

### Source water baseline biological characterization data: characterization of the biological community in the region and operation of CWISs; list of species in region; identification and evaluation of primary period of reproduction, larval recrui tment, and period of peak meropl ankton abundance for relevant taxa; and description of the likely impact of CWISs on the biological community due to impingement and entrainment. This is considered a regional study to be conducted over a 3-year period by a contractor; costs are assumed to be shared among affected fac ilities, since the entire monitoring program is assumed to apply region-wide. Table B1-2 below lists the estimated costs per facility of each of the initial post-promulgation General Permit activities described above (permit costs for MODUs in the Eastern GOM are lower in some cases, since MODUs are assumed to use sea chests and are not required to meet entrainment requirements, eliminating any costs associated with entrainment studies).

Table B1-2: Cost of Initial Post-Promulgatio n NPDES General Permit Application Activities (Per Facility, 2004$) Activity Region 6 Region 4 Region 10 Start-up activities a $2,291 $2,291 $2,291 Permit application activities b $959 $959 $959 Source waterbody flow information a $1,470 $1,470 $1,470 CWIS velocity flow information f $0 $0 $0 Design and construction technology plan b $1,334 $1,185 $1,334 Biological characterization study c,e $64,574 $40,407 $297,695 Total Initial Post-Promulgation NPDES General Permit Application Cost d $70,627 $46,311 $303,748

a The costs for these activities are incurred in 2007 for facilities built in 2007 to 2011 in both Eastern and Western Gulf. Fo r Alaska, they occur in 2011. b The costs for these activities are incurre d in 2011 for facilities built in 2007 to 2012 for both Eastern and Western Gulf. F or Alaska, they occur in 2013. The costs for these activities are incurred during 2007-2009 in the Eastern and Western Gulf and are shared costs. For Alaska , these costs are incurred during 2011-2013. d Individual numbers may not add to total due to independent rounding.

e Shared study costs. f Measured as incremental to MMS requirements. Source: U.S. EPA, 2006a. See also ERG, 2004 and DCN 9-4000.


### B1-1.2.2 Subsequent NPDES General Permit Renewals Subsequent General Permit renewals w ill require collecting and submitting the same type of information required for the initial permit renewal application. EPA expects th at both the facility and the contractor can use some of the information from the initial studies. Building upon existin g information is expected to require less effort than

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B1-5§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### developing the data the first time, especially in situat ions where conditions have not changed. The shared recurring permit costs are assumed to be shared by all new offshore oil and gas extraction facilities built in the first 5-year cycle plus all new facilities built in the next 5-year cycle, etc., so as time goes on, shared costs are shared by more and more facilities (except Alaska, wher e only one project is assumed during the time frame of the analysis). As facilities go off line or are retired (after 30 years), fewer projects share in these studies.
Table B1-3 lists the estimated costs of each of the NP DES General Permit renewal activities subsequent to the first round. Since these numbers change slightly as faciliti es come on or off line, the costs shown are for the first repermitting cycle following the initial GP renewal.

Activity Region 6 Region 4 Region 10

a $732 $732 $732

a $194 $194 $194

a $416 $416 $416

a $0 $0 $0

a $834 $720 $834

a $12,162 $7594 $193,324 d $14,338 $9,656 $195,501

a

of permitting. Source:



### B1-1.2.3

f

f

f

f

Activity Region 6 Region 4 Region 10 $4,320 $1,949 $0 $2,699 $0 $45,723

a $1,037 $468 $6,393 $1,861 $840 $11,474 $9,917 $3,257 $63,661

a

Source: 

### Table B1-3: Cost of Subsequent NPDES General Perm it Application Activities (Per Facility, 2004$)

Start-up activities Permit application activities Source waterbody flow information CWIS velocity flow information Design and construction technology plan Biologic characterization study Total Recurring NPDES Permit Application Cost The costs for these activities are incurred during the year of the General Permit renewal. Shared costs shown are for the fir st permit renewal period after the initial permit (e.g., 2017); these costs change as the number of permitted facilities change. For sim plicity, all costs for repermitting are assumed to be incurred in one year, ra ther than spread over several years as was assumed for the ini tial round

U.S. EPA, 2006a. See also ERG, 2004 and DCN 9-4000.


### Annual monitoring, reco rd keeping, and reporting Annual monitoring, record keeping, and reporting activities and costs include: Biologic monitoring for impingement Biologic monitoring for entrainment Velocity monitoring Preparing and maintaining a yearly status report Table B1-4 on the following page outlin es the associated cost s of these activities.

Table B1-4: Cost of Monitoring Activities (Per Facility, 2004$)

Biologic monitoring for impingement Biologic monitoring for entrainment Velocity monitoring Preparing and maintaining yearly status report Total Monitoring Cost The costs for these activities are incurred during the first two years of the initial General Pe rmit renewal (i.e., 2012 or 20 14) and are shared. These costs are incurred for one year in each subseque nt permit renewal cycle. Shared costs shown are for the first p ermit cycle only (2012 or 2014); these costs change as the nu mber of permitted fac ilities changes over time. U.S. EPA, 2006a. See also ERG 2004.

B1-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### B1-1.2.4 Administrative Cost s for Permitting Authorities In addition, permitting authorities have to review the information provided by new offshore oil and gas extraction facilities and have to issue new general permits that refl ect the requirements of the final rule. These activities impose costs on the responsible governmental units. For more details on the specific costs and timing assumptions for federal administration of new offshore oil and gas extraction facilities, see Chapter D2: UMRA Analysis . These costs and assumptions are summarized briefly below. The requirements of section 316(b) are implemented th rough the National Pollutant Discharge Elimination System (NPDES) permit program. In the case of the oil and gas industry, NPDES permitting is consolidated under several General Permits, which are administered at the EPA regional level. Unlike the Phase III existing facilities discussed in Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities , no states are involved in these permitting activities. Thus, three Regions (Region 6, Region 4, and Region 10) are expected to be the only entities responsib le for permitting. Because states are not involved in permitting, there are no costs associated with Federal oversight as there are for state-administered NPDES permits. The three Regions will incur three types of cost s associated with implementing the requirements of the final rule on a per-facility basis, i.e., for each facility permitted under a GP: (1) start-up activities (considered not incremental to existing activities; $0 cost) , (2) activities as sociated with the initial General Permit containing the new section 316(b) requirements ($12,677 in each region) and subsequent permit re newals ($4,743 in each region), and (3) annual activities ($1,471 in each region). 1 

### The start up activities apply only once to each Region, but the remaining activities are incurred on a per-facility basis. For a detailed discussion of administrative costs for permitting authorities, see Chapter D2: UMRA Analysis , section D2-1.2.


## B1-2 K EY 

## E LEMENTS OF THE 

## E CONOMIC 

## A NALYSIS 

## F OR 

## N EW 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## F ACILITIES 

### The economic analysis of regulation of new offshore o il and gas extraction facilities addresses the cost to, and impact on, the affected industry segments and society generally. Although these analyses differ in important respects for the individual industry segments – particularly in terms of the analytic models and methods for assessing the economic/financial impact of the final rule on complying parties within the segments – several elements of the analysis have features common to all ne w offshore oil and gas extraction facilities. This section reviews the following key common elements:

f 

### Compliance Schedule

f 

### Adjusting Monetary Values to a Common Time Period of Analysis

f 

### Discounting and Annualization: Costs to Society or Social Costs

f 

### Discounting and Annualization: Costs to Complying Facilities EPA received no substantive comments on these timing or discounting assumptions. All such methodologies are the same as those at proposal, although inflation factors have been changed to compute 2004 values in this final economic analysis report.

1 

### The costs associated with implementing the requirements for new offshore oil and gas extraction facilities are documented in EPA’s Information Collection Request (U.S. EPA, 2004a).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B1-7§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### B1-2.1 Compliance Schedule For its analysis of the cost and impacts of the final rule , EPA developed a profile of the expected compliance year (year in which the new MODU or platform is launched or comes on line) for each of the types of facilities considered in the economic analysis. Unlike the analys is for the Phase III existing facilities, the compliance year is not necessarily the same year as the year in which the facility must comply with the General Permit, since EPA is assuming that CWIS controls are installed and are operating in new MODUs and platforms starting in 2007, even though the first General Permit is assumed to be re issued with 316(b) requirements in 2012. Developing an explicit profile of compliance years for new offshore o il and gas extraction facilities is important because the schedule of compliance years determines the timing of ou tlays by facilities and society in complying with the regulation, both for the initial outlays and for the ongoing profile of outlays in maintaining compliance with the regulation. This information is im portant in properly assessing the present value of the regulation’s costs to society. For the analysis, EPA initially assumed that firms planning to build facilities in the first permit cycle (Region 6 General Permit) (2012-2016) would co ntract to perform the studies necessar y for these facilities to be permitted starting in 2007. The Region 4 permit is assumed not to incorporate 316(b) requirements until 2014, but studies are started in 2007 as well. Starting in 2014, any new MODUs are assumed to incur the costs of the Region 4 permit as well as the Region 6 permit. No platforms/structures are assumed to incur costs of the Region 4 permit (they will incur the costs of one permit only, assumed to be issued under the Region 6 General Permit). The next group of facilities to be launched or come on line in the ne xt permit cycle (2017 or 2019) will need to be involved only in repermitting activities for the shared studies, and t hus, for the shared costs, would share repermitting costs with each other as well as with operations begun in the first 5-year cycle. These new operations will, however, incur initial permitting costs among those activities that are facility specific. The years in which facilities are expected to be completed are specifically spelled out, give n the number of facilities expected to be completed in each year (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry ). More information on specific timing assumptions can be seen in ERG (2004) and the 316(b) Oil and Gas Compliance Cost Model for the Final Rule (DCN 9-4000). B1-2.2 Adjusting Monetary Values to a Common Time Period of Analysis
The various economic information used in the cost and impact analyses was initially provided or estimated in dollars of different years. For example, facility financia l data obtained in the 316(b) survey for the oil and gas industry are for the years 2000, 2001, and 2002, while the technology costs of regulatory compliance were estimated in dollars of the year 2002. To support a c onsistent analysis using the se data that were initially developed in dollars of different years, EPA needed to bring the dollar values to a common analysis year. Generally, for this analysis, EPA adjusted all dollar valu es to constant dollars of the year 2004 (mid-year) using an appropriate inflation adjustment index. For adjusti ng compliance costs, EPA used the Construction Cost Index (CCI) published by the Engineering News-Record. Admini strative costs were updated as described in U.S. EPA (2006a).
B1-2.2.1 CCI EPA used the CCI to adjust complia nce cost estimates from 2002 to mid-year 2004. EPA judges the CCI as generally reflective of the cost of installing and operating process and tr eatment equipment such as will be required for compliance with Phase III regulation. Tabl e B1-5, below, shows CCI values for 2002, 2003, and 2004.

B1-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs

Year Value 

### Table B1-5: Construction Cost Index % Change 2002 6605 

### — 2003 6694 1.3% 2004 7115 6.3% Source: ENR, 2006.



### B1-2.2.2 GDP Deflator EPA used the GDP Deflator to adjust 316(b) survey financial data from 2000, 2001, and 2002 to 2003, but did not further adjust survey data to 2004. Financial survey data in 2003 dollars were used with engineering and permitting costs in 2003 dollars to compute vessel-level and platform-level impacts at proposal. Costs have not been changed since proposal (except to account for values in 2004 dollars), so impact results were not updated and are considered final for the purposes of this economic analysis of the final regulation. The deflators for adjusting the survey data are shown below in Table B1-6.

Table B1-6: GDP Deflator Series Year Value % Change 2000 100.0 2001 102.4 2.4% 2002 103.9 1.5% 2003 105.7 1.7% Source: U.S. BEA, 2004.


### B1-2.3 Discounting and Annualization – Costs to Society or Social Costs Discounting refers to the economic conve rsion of future costs (and benefits) to their present values, accounting for the fact that society tends to value fu ture costs or benefits less than comparable near-term costs or benefits. Discounting is important when the values of costs or be nefits occur over a multiple year period and may vary from year to year. Discounting is also important when the time profiles of costs and benefits are not the same – which is the case for the regulatory analysis of new oil and facilities. Discounting enables the accumulation of the cost and benefit values from multiple years at a specifie d point in time, accounting for the difference in how society values those costs and benefits depending on th e year in which the values are estimated to occur. For its analysis of the costs to society, or the social costs, of the final ru le for new offshore oil and gas extraction facilities, EPA first developed a profile of the costs expect ed to be incurred as a result of the regulation over the period of analysis. EPA defined the analysis period as follows. The analysis period begins in 2007 (5 years before the first of the General Permits is reissued w ith 316(b) requirements) and includes facilities constructed over the next 20 years – i.e., to 2026 – plus a period of 30 years in which each newly constructed facility is assumed to continue compliance. Thus, for the social cost analysis for Phase III new offshore oil and gas extraction facilities, the analysis period extends to 20 55 (see the 316(b) Oil and Gas Compliance Cost Model for the Final Rule, DCN 9-4000). In developing the time profile of costs, EPA assigned costs according to the following schedule:
B1-2.3.1 Direct Costs of Regulatory Compliance

f 

### Capital Costs of Compliance Technology: This cost is first incurred in the year that the facility begins operation. However, the equipment for complying with the regulation is expected to have a useful life of

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B1-9§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### 10 years, or a period shorter than the 30 years of compliance. Accordingly, following the first installation, facilities are assumed to reinstall, and re -incur the cost of, the compliance equipment at year 11 and year 21 of the facility-specific compliance period.

f 

### Compliance Technology Operation and Maintenance: This cost is assumed to occur in each year of a facility’s 30-year compliance year period.
B1-2.3.2 Administrative Costs Incurred by Complying Facilities

f 

### Biological Characterization Study: This is a three-year study required for all facilities, which is assumed to be shared by the affected facilities. The cost of this study is incurred over the years immediately following the effective date of the final rule or the years preceding the first post-promulgation GP (2007- 2009 for Eastern and Western Gulf, and 2011-2013 for Alaska).

f 

### Initial Permitting Cost . In addition to incurring a share of the cost of characterization studies, complying facilities will also incur an initial permitting cost, whic h is assigned to the year preceding the first year of a facility’s 30-year compliance period, or in 20 07 for facilities launched or coming on line in 2007 through 2011.

f 

### Repermitting Costs: As explained above, General Permits are renewed each five years during the period of compliance. Repermitting costs, both shared and f acility-specific, are assumed to recur at years 5, 10, 15, 20, and 25 of the General Permit cycles. Fo r new offshore oil and gas extraction facilities, EPA assumes that 30 years is the reasonable maximum lifetim e of these facilities; thus, no repermitting cost is incurred in the 30 th 

### year of facility operation.

f 

### Annual Monitoring, Record Keeping, and Reporting Activities: These costs are assumed to occur in the first two years of the initial permit and in each year of the permit renewal year. These costs begin in 2012 or 2014, depending on permit.
B1-2.3.3 Administrative Costs In curred by Permitting Authorities

f 

### One-time Start-up Costs: These costs are assumed to be nonincremental to existing costs of permitting in the three regions.

f 

### Permit Processing Costs: These costs are assigned to the years in which facilities apply for initial permits or renewal permits during the compliance period.

f 

### Annual Permit Administration Activities: The cost of these activities is assu med to occur in parallel with the annual permit-related activities by complying faciliti es and thus occurs in each year of a facility’s compliance period. EPA assigned costs by facility and governmental unit accord ing to this framework a nd then summed these costs on a year-by-year basis over the total time period of analys is. For the social cost analysis, these costs were tallied on a pre-tax basis, which differs from the treatment of cost s for the facility impact analysis as described below. These profiles of costs by year were then discounted to the assumed date the final rule would take effect, beginning of year 2007, at two values of the social di scount rate, 3% and 7%. These discount rate values reflect guidance from the Office of Management and Budget regulatory analysis guidance document, Circular A-4 (OMB, 2003). 2

2 

### See Chapter E1: Summary of Social Costs , for further discussion of the framewor k for analyzing the social costs of the 316(b) Phase III regulation.

B1-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### For more detailed information see ERG (2004) and the 316 (b) Oil and Gas Compliance Cost Model for the Final Rule (DCN 9-4000). EPA used the following formula to calculate the present value of the time stream of costs as of the beginning of 2007: 3



## Value Present = 

# ∑ Cost t 

## (1 + r ) t

− 2007 

### (B1-1)
t


### where:
Cost t 

### = Costs in year t r = Social discount rate (3% and 7%) t = Year in which cost is incurred (2007 to 2055) After calculating the present value of these cost streams, EPA calculated their consta nt annual equivalent value (annualized value) using the annualization formula presented below, again using the two values of the social discount rate, 3% and 7%. Although the analysis peri od extends from 2007 through 2055, a period of 49 years, inclusive, EPA annualized costs over 30 years, since 30 years is the assumed period of compliance. This same annualization concept and period of annu alization were also followed in the analysis of benefits, although for benefits the time horizon of analysis for calculating the present value is longer than for costs. Using a 30-year annualization period for both social costs and benefits a llows comparison of constant annual equivalent values of costs and benefits that have been calculated on a mathema tically consistent basis. The annualization formula is as follows:

( n
− 1) 

## r × (1 + r ) (B1-2) 

## Cost Annualized = x Cost of PV
n 

## (1 + r )

− 1

where: r = Social discount rate (3% and 7%) n = Annualization period, 30 years for the social cost analysis B1-2.4 Discounting and Annualization – Costs to Complying Facilities In general, EPA followed similar c oncepts and procedures in the discounting and annualization required for the analysis of costs to, and impacts on, complying facilities as those followed for the analysis of social costs. However, the analysis of costs to complying facilities diffe rs from that for costs to society in several important ways, which are described below.

f 

### Consideration of taxes. For understanding the impact of the regulation on complying facilities, the costs incurred by complying facilities are adjusted for taxes, as relevant, and calculated on an after-tax basis. The tax treatment of compliance outlays and income e ffects (e.g., from installation) shifts part of these costs to the tax-paying public and reduces the actual cost to private, tax-paying businesses. For this reason, the after-tax costs of compliance are a more meaningful measure than the pre-tax costs of the

Calculation of the present value assumes that the cost is incurred at the beginning of the year.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B1-11 3§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



### financial burden on complying facilities. In analyz ing and reporting the impact of compliance costs on private facilities, annualized costs are therefore calcula ted on an after-tax basis. Since most companies that operate MODUs or platforms are headquartered in states without corporate income taxes, EPA assumes a state tax rate of 0%. On the Federal level, EPA assumes that the highest marginal corporate tax rate applies. This rate is 35% (IRS, 2005), so post-tax costs will be 65% of the pre-tax costs. EPA does this because all platform and MODU owners that are like ly to operate in Alaska or the Gulf of Mexico are large corporations by SBA standards and/or all have earnings in most years that place them in the highest corporate tax bracket.

f 

### Calculation of present value and annualizatio n of costs at the year of compliance. In the social cost analysis, costs were summed on a present value basis at the beginning of 2007, the assumed date the final regulation would take effect. For the analysis of co sts to complying facilities, costs were calculated on a present value basis and annualized at the first year of compliance for each facility (assumed to be the year the facility is brought on line or launched). The calculation of annualized costs at the first year of compliance provides more accurate and meaningful in sight for assessing financial impact in relation to the baseline financial performance and conditions of th e complying facility than would be achieved if, for example, costs were further discounted – and reduced num erically – by bringing them to the year the rule will take effect. The aggregates of annualized cost over facilities for purposes of reporting total cost to complying facilities and total financial burden are likewise the sum of costs at the initial year of compliance for each facility, even though those years differ across facilities. Th ese costs are annualized and used to report the aggregate costs to industry. The costs used to determine impacts are derived somewhat differently and the method used to incorporat e them into the impact analysis varies by type of facility (MODU or platform) as explained in Chapter B3: Economic Impact Analysis for the Offshore Oil and Gas Extraction Industry

.
f 

### Use of discount rates in present valu e and annualization calculations. The discounting and annualization calculations for the complying facility co st calculations use the same formulas as used for the social cost calculations. However, the discount rate used in the facility cost calculations generally has a different interpretation than the rate used for th e social cost calculation (even though the numerical value of the rate may be the same). Instead of bei ng a social discount rate, the discount rate used for the present value and annualization calculations for complying facility costs represents a cost of capital to the individual complying facility, which may reasonably diffe r from the concept of the social discount rate. The social discount rate may be derived on several bases, including as an opportunity cost of capital to society or as a societal inter-temporal preference or indifference rate – i.e., the required rate of change over time in a value of consumption or outlay at whic h society would be indifferent to the time period in which the consumption or outlay occurs. The social discount rates based on these society-level concepts may reasonably differ from the cost of capital used for assessing costs and financial impacts to the complying firm.

B1-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



## R EFERENCES 

### Engineering News-Record (ENR). 2006. Construction Cost Index . Available at: http://enr.ecnext.com/freescripts/comsite2.pl?page=enr_docum ent&article=fecosu0603-cons tIndexHist. (Historical data requires subscription or purchase.) ERG. 2004. Cost Timing and Cost Sharing Assumptions for Industry Compliance Costs. Memorandum to the 316(b) Phase III Rulemaking Record. October 15, 2004. Federal Register. 2005. Vol. 70, No. 167, pl 51477-51519, August 30. Office of Management and Budget (OMB). 2003. Executive Office of the President. Circular A-4, To the Heads of Executive Agencies and Establishments; Subject: Regulatory Analysis. September 17, 2003.
U.S. Bureau of Economic Analysis (U.S. BEA). 2004. Gross Domestic Product. Table 1.1.9: Implicit Price Deflators for Gross Domestic Product (GDP) . Last Revised on February 27, 2004. Available at: http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid
U.S. Department of the Treasury. 2005. Internal Revenue Service (IRS). 2005 Instructions for Forms 1120 & 1120-A. pg. 16 (Federal tax rates).
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Information Collection Request for Cooling Water Intake Structures at Phase III Facilities (Final Rule) . ICR Number 2169.01. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-003. June 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B1-13§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilities B1: Summary of Costs



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

B1-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry 

# Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry

I NTRODUCTION 

### EPA’s final 316(b) cooling water intake rulemaking will affect new construction among offshore components of the oil and gas industry. The rule will affect new offshore oil and gas extraction facilities only, because EPA will not be regulating existing oil and gas facilities. This profile compiles and analyzes economic and financial data for several sectors of the offshore oil and gas extraction industry that may be affected by certain of the Phase I 316(b) requirements for new facilities that will be a part of requirements for new offshore oil and gas extraction facilities under Phase III. The profile characterizes the firms and facilities that currently exist to provide information on the characteristics of facilities that might be constructed in the future and the firms that are most likely to construct such facilities. Two key industry sectors are primarily associated with offshore oil and gas drilling and production, both of which might intake ambient cooling water from the surrounding oceans or navigable waterways for a wide variety of cooling needs. 

## C HAPTER 

## C ONTENTS
Introduction............................................................ B2-1 B2-1 Mobile Offshore Drilling Units (MODUs) B2-2 B2-1.1 Overview .......................................... B2-2 B2-1.2 Existing MODUs and Their Associated Firms................................................. B2-3 B2-1.3 Existing MODUs with Intake Rates Meeting Proposed Rule Criteria ..... B2-10 B2-2 Oil and Gas Production Platforms........... B2-12 B2-2.1 Overview ........................................ B2-12 B2-2.2 Existing Platforms/Structures and Their Associated Firms ............................ B2-13 B2-2.3 Existing Platforms/Structures with Intake Rates Meeting Proposed Rule Criteria ..... ........................................................ B2-19 B2-3 Total New Oil and Gas Operations ......... B2-23 References............................................................ B2-24



### The two major offshore oil and gas extraction industry users of CWIS are:

f 

### mobile offshore drilling units (MODUs)

f 

### offshore oil and gas production platforms EPA also investigated the liquid natural gas (LNG) re-g asification industry, but determined that only one new LNG facility recently completed has (or would have) cooli ng water intakes meeting the 316(b) requirement that 25% or more of total design intake flow be used fo r cooling water purposes (U.S. EPA, 2006). EPA proposes to apply Best Professional Judgment (BPJ) to this industry. Th is industry, therefore, is not discussed further in this report. See U.S. EPA (2006), however, for profile in formation on this industry (including some economic information) and a more complete discussion of EPA’s rationale for covering this industry using BPJ. The following sections provide a profile for MODUs and production platforms (Sections B2-1 and B2-2). Within each profile, a brief overview of the industry is provided, including a look at existing facilities and their associated firms, and the financial conditions of those firms (where firm financial data are publicly available). The existing facilities are then discussed in more detail to provide information for the financial modeling of new facilities. Also discussed are factors affecting the future of each of these two groups of CWIS users. Finally, EPA projects the numbers of new MODUs or platforms that might be constructed with CWIS flow rates greater than 2 MGD, greater than 20 MGD, and greater than 50 MGD during the construction portion of the time frame of this economic analysis (construction spans the years 2007 to 2026).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-1§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry



### Section C2-3 concludes this chapter with a summary of the estimated total number of new facilities in the offshore oil and gas extraction industry with at least 2 MGD intake rates by MGD flow rate category.


## B2-1 M OBILE 

## O FFSHORE 

## D RILLING 

## U NITS 

## (MODU S 

## )
B2-1.1 Overview Offshore drilling operations often use MODUs, which are vess els or other sea-going rigs that are used to transport drilling equipment to the offshore site and from which drilling operations can be undertaken. The MODUs of interest are active primarily in the State offshore waters of the Gulf of Mexico (GOM). MODUs operating close to shore in State waters tend to be small barges and s ubmersibles that do not use cooling water at the rates of concern (significantly less than 2 MGD) (U.S. EPA, 2006). MODUs provide nearly all of the exploration and delinea tion drilling in the offshore development of oil and gas resources. MODUs also provide developmental drilling services. In exploratory drilling, drilling is undertaken to determine whether oil and gas resources are available near existing fields or in areas where no resources have been previously found (wildcats). Once an explorator y well has identified the presence of potentially recoverable oil and gas resources, delineation drilling is undertaken. Delineation entails the drilling of additional wells to determine the extent and nature of the new field. These two types of drilling often occur at a distance from existing platforms and thus are us ually conducted from a mobile rig. Drilling of development wells can be done from either a pl atform or a MODU. The same types of mobile rigs used to drill exploratory and delineation wells can also be used to drill developmental wells. Once a field has been delineated and a decision is made to develop the fiel d, a platform is typically constructed and developmental drilling is initiated to construct wells for producing the field. A discussion of platform-based drilling is presented below in Section C2-2. MODUs encompass a variety of vessel or rig types. Th e two basic groups of MODUs are bottom-supported units and floating units. Bottom-supported units include submersibles and jackups. Floating units include inland barge rigs, drill ships, ship-shape d barges, and semi-submersibles. Bottom-supported drilling units are typically used when drilling occurs in shallow waters. Types of bottomsupported units include:

f 

### Submersibles–barge-mounted drilling rigs that are towed to the drill site and sunk to the bottom. These rigs may be either posted barge or bottle type. A posted barge rig consists of a barge hull that rests on the bottom, with steel posts that rise from the top of the hull and a deck built on top of the posts well above the water line. These are used in water depths no mo re than 30 to 35 feet. A bottle type submersible consists of several steel cylinders or bottles. When the bottles are flooded, the rig submerges and sinks to the bottom, and when water is removed, they rise to the surface. These rigs can be used in water depths up to 100 feet.

f 

### Jackup rigs–barge-mounted rigs with ex tendable legs that are retracted dur ing transport. At the drill site, the legs are extended to the seafloor. As the legs c ontinue to extend, the barge hull is lifted above the water. Jackup rigs, which can be used in waters up to 300 feet deep, can be categorized by their leg type: columnar leg and open-truss leg. Floating drilling units are typically used when drilling occurs in deep waters and at locations far from shore. Types of floating units include:

f 

### Semi-submersible–a type of floating drill unit th at can withstand rough seas with minimal rolling and pitching tendencies, thus they are used for drilling pr ojects in ultra-deep water Gulf regions. They are

B2-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry



### hull-mounted and float on the surface of the water when empty. At the drilling site, the hulls are flooded and sunk to a certain depth below the surface of the water. When the hulls are fully submerged, the unit is stable and not susceptible to wave motion due to its low center of gravity. The unit is moored with anchors to the seafloor. The two types of semi-submersible rigs are bottle-type (similar in concept to the bottle-type submersible) and column-stabilized.

f 

### Drill ships and ship-shaped barges–vessels that floa t on the surface of the water equipped with drilling rigs. These vessels maintain position above the drill site by anchors on the seafloor or the use of propellers mounted fore, aft, and on both sides of the vessel (dynamic positioning). Drill ships are the other major drilling rig used in ultra-deep Gulf wate rs. In these locations, drill ships typically operate using dynamic positioning. Drill ships and ship-shape d barges are susceptible to wave motion since they float on the surface of the water, and thus are not suitable for use in heavy seas. Of the five basic types of MODUS (submersibles, jac kups, semi-submersibles, drill ships, and drill barges), the drill ships, semi-submersibles, and jackups are the three types that typically intake over 2 MGD of cooling water, with drill ships having the highest intake rates. Amon g drill ships with known intake rates above 2 MGD, all intake more than 50 MGD. Jackups and semi-submersibles do not generally appear to intake more than 20 MGD, but many intake more than 2 MGD. Submersibles and drill barges generally have coo ling water intake below the 2 MGD cutoff. Drilling operations use cooling water for purposes such as cooli ng engines, compressors, winches, and pumps (U.S. EPA, 2006). B2-1.2 Existing MODUs and Their Associated Firms The final rule will not cover existing MODUs. Howeve r, EPA has updated the profile presented in the economic analysis report for the proposal (U.S. EPA, 2004) to provide the broadest illustration of the types of firms that might construct MODUs. Later in this chapter, only t hose firms considered the likeliest to build new MODUs with CWISs that will be regulated by the 316(b) Phase III rulemaking will be profiled, but this section presents information that will be used in the small business analysis in Chapter D1. EPA received no comments concerning the MODU profile presented at proposal, nor any substantive comments on EPA’s assessment of which types of MODUs, the numbers of MODUs, or the sp ecific firms considered likely to be affected by the rulemaking. Table B2-1 presents a listing of all firms operating in the Gu lf of Mexico (either active, with stacked rigs, with ready rigs, or with rigs under construction) as compiled by Rigzone (2006a), along with the parent company of the owner. These affiliations were determined primarily on the basis of Security and Exchange Commission (SEC) data. SEC maintains an online database (the Edgar Database), on which all filings of publicly held firms are available. The 10K annual reports and 8K reports are used the most to collect this information. The 10K annual reports to SEC generally list significant subsidiaries and are the source of income statement and balance sheet information for characterizing financial conditions at a firm. Subsidiary lists are used to confirm ownership relationships. The 8-K forms, in which significant changes to the firm must be announced, are often the source of information on mergers and acquisitions.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-3§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry

Table B2-1: Owners of MODUs Currently Operating in GOM and Parent Company
Listed Owner Parent Company Aban Lloyd Aban Group Atwood Oceanics Atwood Oceanics Axxis Drilling Axxis Drilling Blake Offshore Blake Offshore CNSPC China National Star Petroleum Co. Coastal Drilling Coastal Drilling Company Conoco ConocoPhillips Delta Seaboard American International Industries Devon Energy Devon Energy Corp. Diamond Offshore Diamond Offshore ENSCO ENSCO International, Inc. GlobalSantaFe GlobalSantaFe Helmerich & Payne Helmerich & Payne Hercules Offshore Parker Drilling Nabors Offshore Nabors Industries Noble Drilling Noble Corp. Parker Drilling Parker Drilling Perforadora Central Perforadora Central Pride International Pride International Rowan Rowan Companies Scorpion Offshore. Scorpion Offshore Songa Drilling AS. Songa Offshore Tetra Applied Technology Tetra Technologies Todco Todco Transocean Transocean, Inc Source: Rigzone, 2006a; SEC, 2006.


### The difference between this list and the list compiled for the proposal is that a number of small entities no longer appear on the list of operators. Five small or presume d small (those not filing with SEC) firms no longer appear to be operating in the GOM. These include Blue Dolphin, BSI drilling, Energy Equipment Resources, Newfield Exploration Co., and NR Marine. Only Blake Drilling and Workover (apparently affilia ted with Blake Offshore, which is the name that appears curren tly) remain on the list as an assumed sma ll firm for lack of financial data. Additionally, four foreign firms no longer appear on th e list. These are Caspian Drilling Co., Ocean Rig Asa, Cyprus Company, and Worships BV. New firms on the list in Table B2-1 include fi ve foreign firms, Aban Group, China National Star Petroleum Co., Perforadora Cent ral, Scorpion Offshore, and Songa Drilling AS; five large firms, Todco, ConocoPhillips, Helmerich & Payne, American International Industries, and Devon Energy; and two presumed small firms, Axxis Drilling and Coastal Drilling Company (for more information on how these size categories are defined, see below). Overall, more large and foreign firms and fewer small firms are now operating in the GOM. Table B2-2 presents a listing of the existing MODUs’ owners and the number of rigs they are currently operating in the GOM (as of 2006). These include MODUs that ma y have CWIS intake rates that do not exceed 2 MGD and include all types of MODUs regardless of whether they are likely types to have CWISs of this size. The table also shows the number of semi-submersibles, jackups, or drill ships owned. As discussed in the economic analysis for the proposal (U.S. EPA, 2004), these were noted to be the likeliest MODU types to have CWIS that exceed 2 MGD intake rates.

B2-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry



### Once firms that do not operate the key MODU types ar e removed from the analysis, only one small firm remains—Blake Offshore, which operates four jackups. The firms that own MODUs generally work as contractors to the oil and gas exploration and production industry. The provision of drilling and related services to U.S. and/or foreign offshore regions is the major focus of their business. Just a few firms hold most MODUs. At proposal, GlobalSantaFe, Transocean, Rowan Companies, Noble Corp. Parker Drilling, Pride International, ENSCO Interna tional, and Diamond Offshore operated 326 MODUs, 85% of the total MODUs in the analysis at that time. Currently, the leading MODU owners are again, GlobalSantaFe, Rowan Companies, Parker Drilling, Pride International, ENSCO, with Nabors Industries and Todco also coming in as top MODU owners. This group of firms owns 75 percent of the total MODUs listed, and 76 percent of the relevant types of MODUs. Compared to the number of rigs at proposal, the current count of rigs in the GOM has dropped from 384 to 298, a 22 percent decrease (see U.S. EPA, 2004). Although higher oil and gas prices in the last few years have increased interest in drilling in the GOM, MODUs are mobile, and inte rest in drilling has increased worldwide. The market for MODU services is worldwide, and foreign operatio ns can outbid the U.S., due to greater production expectations in more productive areas of the world. Ri g utilization, is not, however, at 100 percent capacity, so the fewer numbers of rigs in the GOM generally would not have constrained drilling. However, MMS has offered extensions to leasing agreements following the extensiv e damage to GOM platforms due to Hurricanes Katrina and Rita to ensure any potential for delayed drilling do not interfere with lease development (MMS, 2006a). 1

1 

### Lease activity automatically grants extensions to leases, but if activity is delayed due to rig unavailability or other circumstances beyond the lessee’s control, extensions can be otherwise granted.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-5§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry

Table B2-2: Number of Existing MODUs and Parent Firms 

### Number of Rigs of Types Company Number of Rigs Associated with CWIS Intake Rates > 2 MGD Aban Group 1 1 American International Industries 4 0 Atwood Oceanics 2 1 Axxis Drilling 4 0 Blake Drilling & Workover 4 4 China National Star Petroleum Co. 1 1 Coastal Drilling 3 0 ConocoPhillips 1 0 Devon Energy 1 0 Diamond Offshore 24 24 ENSCO International Inc 19 18 GlobalSantaFe 15 15 Helmerich & Payne 12 0 Nabors Industries 49 10 Noble Corp. 12 9 Parker Drilling 28 7 Perforadora Central 1 1 Pride International 23 12 Rowan Companies Inc 17 17 Scorpion Offshore 5 5 Songa Drilling AS 5 5 Tetra Technologies 8 0 Todco 48 18 Transocean Inc. 11 11 Total Number of Rigs 298 159 Source: Rigzone, 2006a; Table B2-1.


### The identification of corporate parent is critical to de termining which firms should be defined as small under SBA standards. SBA defines the size of the firm to be that of the firm at the highest level of organization. Generally, EPA characterized a firm at the higher level of organizati on if it was majority owned by the larger entity. This approach is consistent with SBA’s de finition of affiliation. Small firms that are affiliated (e.g., 51% owned) by firms defined as large by SBA’s standards (13CFR Part 121) are not considered small for the purposes of regulatory flexibility analysis (see Section D1 for more de tails). Affiliated firms can also be firms owned by the same owners or that have the same corporate officers as another firm. Another key piece of information needed for classifying firm s as small or large is what industry the firm belongs to. SBA defines small businesses differently for different types of industry and currently uses NAICS to classify industries. SEC still requires companies to report thei r SIC code, not the NAICS code. Crosswalks between NAICS and SIC, however, are available from Bureau of the Census (2006). Once the parent firms were identified as above and the proper NAICS identified based on the reported SIC code in the 10K reports and the NAICS crosswalk information, the revenue and employment (or other criteria, as appropriate) for these parent firms were determined and compared to the SBA definition of small based on their NAICS classification. Table B2-3 shows the SB A definitions for the industries identified.

B2-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006c § 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry



### It is assumed that all domestic firms that could not be identified as large are small businesses. Also, for the purposes of this analysis, MODU operators owned by forei gn firms are assumed to be large, even when data on employment could not be found, because SBA defines a small business as one “with a place of business in the United States, and which operates primarily in the United States or which makes a significant contribution to the economy” (13 CFR Part 121). Only large businesses in this industry would meet the latter criteria, and few, if any, foreign firms operate primarily in the United States. Table B2-3 presents the number of MODU parent compan ies that operate the MODUs of concern by NAICS and SIC code, where that information is available. Eight fi rms do not appear in these counts. Five foreign firms and three other firms, presumed small, had no information available on the SEC website. Note that no firms are positively identified as small out of the 24 total firms operating existing MODUs. The key firms of concern, however, constitute a smaller group of firms. The remainder of this profile focuses only on firms that currently operate types of MODUs that ha ve been identified as likely to have CWIS intake rates > 2MGD. The firms dropped from further analysis include two presumed small firms, Coastal Drilling, and Axxis Drilling, and five large firms, ConocoPhillips, Devon Energy, Helmerich & Payne, American International Industries, and Tetra Technologies.

Table B2-3: NAICS Classification of MODU Parent Companies
Total Number of SIC code NAICS code NAICS Description SBA Definition of Small Firms a Small Large
1311 211111 Crude Petroleum and Natural Gas Extraction 500 employees 0 1 2911 324110 Petroleum Refineries 1,500 0 1 2810 325110 Industrial Chemical Mfgs. 1,000 b 0 1 1381 213111 Drilling Oil and Gas Wells 500 employees 0 11 1389 213112 Support Activities for Oil and Gas Operations $6.5 million in revenues 0 1

6799 Several NAICS Various, related to misc. $6.5 million in revenues c 0 1 investment firms

a Does not include five foreign firms and three potentially smal l, unknown firm for which NAICS or SIC codes could not be locate d in publicly available data. b Specific NAICS not listed in SBA definitions; larges t employment definition from NAICS 325 used here. All three NAICS matched to SIC 6799 are listed $6.5 million in revenues. Source: SEC, 2006; 13 CFR Part 121, Census, 2006


### Table B2-4 presents the financial conditions at the parent firms listed in Table B2-2 with MODUs likely to have CWISs with intake rates >2MGD. A number of parent companies are privately held or are foreign and do not have financial information available on the SEC database, so information is not presented for these firms. The financial data shown are from 2002 thro ugh 2005. Data for 2004 represent the base year for the new offshore oil and gas extraction facility firm-level analysis in Ch apter B3. In 2004, the total assets of the MODU parent companies ranged from $498 million to $10.8 billion. The revenues ranged from $163 million to $2.6 billion. The three financial ratios calculated in the table are the return on assets, return on equity, and the profit margin. Each of these ratios calculates the ne t income as a ratio over the total assets, stockholder’s equity, and total revenues respectively, and is commonly used measures of fi nancial health in the oil and gas industry. The return on assets percentages ranged from –6.48% to 5.16%, and th e profit margin ranges from –12.50% to 13.70%. In 2004, five firms with financial data ha d negative net income. Note that 2005 was a much better year for most of the firms in this analysis, with only one firm reporting negative net income.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-7§ 316(b) Final Rule: Phase III – EA, Part B:Economic Analysis for New OOGE FacilitiesChapter B2: Profile of the OOGE IndustryTable B2-4: Financial Condition of MODU Parent Companies (2002-2005)FirmsYearof DataSizeTypeNo. ofEmployeesAssets($000)Equity($000)Revenues($000)Net Income($000)Returnon AssetsReturn onEquityProfitMarginAbanGroupLargeForeign20051,100$495,694362,137$176,156$26,0115.25%7.18%14.77%Atwood Oceanics20042003LargeDrilling1,100800$498,936$522,674$271,589$263,467$163,454$106,761$7,587$(12,802)1.52%-2.45%2.79%-4.86%4.64%-11.99%2002800$444,530$276,133$118,376$28,2856.36%10.24%23.89%Blake Drilling & WorkoverSmallaUnknownChinaNat’l.StarPetroleumLargeForeign20054,500$3,606,922$1,853,327$1,221,002$260,3377.22%14.05%21.32%Diamond Offshore20042003LargeDrilling4,2003,740$3.379.386$3,135,019$1,625,828$1,680,480$814,662$680,941($7,243)$(48,414)-0.21%-1.54%-0.45%-2.88%-0.89%-7.11%20023,766$3,256,308$1,807,514$752,561$62,5201.92%3.46%8.31%20053,6003,617,900$2,533,200$1,046,900$294,2008.13%11.61%28.10%ENSCO International, Inc20042003LargeDrilling3,6004,300$3,322,000$3,183,000$2,187,900$2,081,100$740,600$742,300($1,900)$108,300-0.06%3.40%-0.09%5.20%-0.26%14.59%20024,300$3,061,500$1,967,000$698,100$59,3001.94%3.01%8.49%20055,700$6,222,100$4,957,500$2,263,500$423,1006.80%8.53%18.69%GlobalSantaFe20042003LargeForeign7,1007,100$5,998,200$6,149,700$4,466,400$4,327,600$1,723,700$1,808,200$143,700$129,4002.40%2.10%3.22%2.99%8.34%7.16%20028,800$5,828,700$4,234,200$1,870,000$277,9004.77%6.56%14.86%200522,599$7,230,407$3,758,140$3,551,009$648,6958.97%17.26%18.27%Nabors Industries20042003LargeForeign19,77617,417$5,862,609$5,602,692$2,929,393$2,490,275$2,448,152$1,923,999$302,457$192,2285.16%3.43%10.32%7.72%12.35%9.99%200215,261$5,063,872$2,158,455$1,518,179$121,4892.40%5.63%8.00%20055,600$4,346,367$2,731,734$1,382,137$296,6966.83%10.86%21.47%Noble Corp.20042003LargeForeign5,3003,364$3,307,973$3,189,633$2,384,434$2,178,425$1,066,231$987,380$146,086$166,4164.42%5.22%6.13%7.64%13.70%16.85%20023,747$3,065,714$1,989,210$990,248$209,5036.83%10.53%21.16%20053,040$801,620$259,829$531,662$98,88312.34%38.06%18.60%Parker Drilling20042003LargeDrilling3,0142,920$726,590$847,632$148,917$192,803$376,525$338,653$(47,083)$(109,699)-6.48%-12.94%-31.62%-56.90%-12.50%-32.39%20022,898$953,325$300,626$385,714$(114,054)-11.96%-37.94%-29.57%PerforadoraCentralLargeForeignPride International2005LargeWell12,600$4,399,981$1,697,562$1,180,016($9,137)-0.21%-0.54%-0.77%B2-8Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or DistributeJune 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B:Economic Analysis for New OOGE FacilitiesChapter B2: Profile of the OOGE IndustryTable B2-4: Financial Condition of MODU Parent Companies (2002-2005)FirmsYearof DataSizeTypeNo. ofEmployeesAssets($000)Equity($000)Revenues($000)Net Income($000)Returnon AssetsReturn onEquityProfitMargin2004Service12,600$4,041,993$1,716,320$1,712,200$9,8390.24%0.57%0.57%200310,100$4,377,095$1,688,708$1,565,806($15,954)-0.36%-0.94%-1.02%20029,500$4,399,981$1,677,135$1,180,016($17,106)-0.39%-1.02%-1.45%20054,577$2,975,183$1,619,739$1,068,800$229,8007.72%14.19%21.50%Rowan Companies Inc20042003LargeDrilling4,3925,395$2,492,286$2,190,809$1,408,884$1,136,830$679,700$529,300($1,300)($7,800)-0.05%-0.36%-0.09%-0.69%-0.19%-1.47%20025,237$2,054,504$1,131,777$443,931$86,2784.20%7.62%19.44%20052,420$825,000$495,500$534,200$59,4007.20%11.99%11.12%Todco20042003LargeDrilling1,800$761,400$778,200$480,600$137,700$351,400$227,700($28,800)($286,200)-3.78%-36.78%-5.99%-207.84%-8.20%-125.69%2002$2,227,200$561,900$187,800($5,558.2)-0.25%-0.99%-2.96%20058,600$10,457,000$7,981,7002,891,700$715,6006.84%8.97%24.75%Transocean Inc.20042003LargeForeign10,10013,200$10,758,000$11,663,000$7,393,000$7,193,000$2,614,000$2,434,300$152,200$19,2001.41%0.16%2.06%0.27%5.82%0.79%200214,260$12,665,000$7,141,000$2,674,000($3,732,000)-29.47%-52.26%-139.57%aPresumed small due to lack of data.Note: 2002 values may not match those reported in the EA for the proposal (U.S. EPA, 2004) as firms may have restated their financials for a variety of reasons, including the Sarbanes-Oxley Actof 2002, which changed requirements for disclosing financial data.Source: Table C2-2; SEC, 2006; 2002-2005 10-K or 20-F reports.June 1, 2006Internal Draft – Deliberative, Predecisional – Do notQuote, Cite, or DistributeB2-9§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry



### B2-1.3 Existing MODUs with Intake Rates Meeting Proposed Rule Criteria B2-1.3.1 Overview of Existing MODUs as Models for New MODUs The following information remains unchanged from proposal . EPA received no comments that questioned EPA’s approach in applying information on existing MODUs to model new MODUs, including the number of MODUs likely to be built over the period of analysis that are expected to be affected by the final rule. To provide information on whether new MODUs might be subject to Phase III regulation, EPA investigated information obtained from a survey of MODUs undertaken for the Phase III rulemaking decision. Not all of the MODUs owned by the firms listed above meet the applicab ility standard (at least 2 MGD design intake flow) and other criteria of the proposed rule. EPA used a multi-st ep process to estimate the total number of existing MODUs that would be regulated under the proposed rule if th ey were newly constructed (i.e., CWISs with total design flow of at least 2 MGD or more or less than 25% of intake volume used for cooling water purposes). 2 

### The sampling frame used 384 MODUs as shown in Table B2-1 ). Among these 384 MODUs in this universe, EPA sampled 30 MODUs in the survey. The survey weights for all MODUs are thus 384 divided by 30, or 12.8. The following is the status of the economic survey respondents:

f 

### 23 respondents returned surveys

f 

### 8 respondents were determined to have CWISs that meet proposed rule criteria.

f 

### 15 respondents were determined to have CWISs that do not meet proposed rule criteria or were not operating in U.S. waters

f 

### 4 surveys were not returned from among a group of MODUs whose CWIS intake rates were known (based on voluntary data submitted during the 316(b) Phase I rulemaking)

f 

### 3 surveys were not returned among a group of MODUs whose CWIS intake rates were unknown. Based on the ratio of respondents whose intake rates meet Phase III rule criteria to total respondents (8/23), EPA assumed that among the three MODUs with unknown intake rates, one will have intake rates meeting the proposed rule’s criteria and two will have intake rates not meeting these criteria. Thus, the total number of MODUs in the economic survey sample whose intake rates are assumed to meet proposed rule criteria was estimated to be 13. Multiplying this number by the survey weight of 12.8 yielded an estimate of a total of 166 MODUs with intake rates meeting proposed rule criteria. Another six MODUs, originally thought to have intake rates of less than 2 MGD were determined to have intake rates greater than 2 MGD, and these were added to the estimate of MODUs with CWISs meeting Phase III rule criteria, for a total of 172 MODUs meeting the Phase III rule’s criteria – roughly half of the existing MODUs opera ting in U.S. waters (331 MODUs or about 52 %). EPA therefore assumed that approximately half of new MODUs built might meet Phase III rule criteria. Of the 172 MODUs meeting proposed rule criteria, EPA estimated th at all new semi-submersib les and jackups will have CWIS flow rates below 20 MGD, based on all surveyed semi-submersibles and jackups having rates below 20 MGD. EPA also estimated that all new drill ships will have rates above 50 MGD, based on all surveyed drill ships having intake rates of this size. For more information on the estimate of existing MODUs that might meet proposed rule criteria, see ERG, 2004a.

For simplicity, the text refers to operations that meet either of these criteria as not meeting Phase III rule criteria, even though the proposed rule does not apply to existing facilities..

B2- 10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 2§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



### B2-1.3.2 Current Drilling Activity and Trends Offshore drilling rigs are extremely capital intensive. Ther efore, once a company has invested in a rig, it is in their best interest to keep the rig in operation. Currently , the utilization of all rigs worldwide stands at about 95%, which is up significantly from 72% in 2003(Rigzone, 2006b; Drilling Contractor, 2003a). The Bureau of Land Management’s Minerals Mana gement Service (MMS) predicted that oil production in the Gulf of Mexico would be between 1.5 and 2.0 million barrels per day (bpd) by the end of 2005 and gas production would be between 11 and 17 billion cubic feet per day (bcfd) by the same time period. (Drilling Contractor, Nov/Dec 2001). However, actual figures for 2005 indicate that total oil productio n averaged about 1.1 million bpd and total gas production averaged about 7.6 bcfd, down from 1.6 million bpd a nd 12.4 bcfd in 2002 (MMS, 2006b). The lower than expected production figures are due in part to the signif icant production losses associated with Hurricanes Katrina and Rita. Deepwater explora tion and deep exploration in the shallow waters of the GOM continued to grow. MMS notes that the deepwater GOM is “the driving force in Gulf production and potential growth (MMS, 2006c). MMS recently announced 10 new discoveries in the deepwater Gulf ad also noted that 42 rigs were operating in this region in mid-March 2006 (MMS, 2006c). 2



### B2-1.3.3 Estimates of New MODUs To Be Constructed At proposal, EPA noted that the progress report published by Offshore magazine showed that the majority of offshore production investment in 2003 is in the refurbishment of old rigs, however some new rigs are being built. In 2003, the majority of new offshore construction comprise d jackup rigs. Surveys indicated that 14 jackups were completed in 2003, and that eight additional jackups were to be completed by 2005. Of the eight jackups to be completed, three were being built with a new Rowan Co mpanies design specifically in troduced for deep shelf drilling in the shallow water of the Gulf of Mexico (Offs hore, July 2003). The outlook of the offshore industry showed increased growth in deepwater drilling. Thre e companies were reported as having deepwater semisubmersibles completed by 2004. The projections predic ted that up to 67% of oil production and 27% of gas production will come from deepwater drilling by 2005. (Drilling Contractor, Nov/Dec 2001). EPA’s economic analysis report for the proposal (U.S. EPA, 2004) noted that jac kups and semi-submersibles were among the most frequent MODUs to have CWIS in take rates that would meet Phase III rule criteria. Therefore, EPA focused on these as an indication of how many MODUs might be built with CWIS intake rates of concern (U.S. EPA, 2004). Given that 22 jackups were expected to be completed over the time period of 2003- 2005 (three years) (Drilling Contractor, 2003b), EPA assumed at proposal that seven jackups might be built each year during the time frame of the economic analysis; of this group (based on the assumption that half of all new MODUs would meet Phase III rule criteria, discussed above ) EPA assumed four of these would be affected by the 316(b) requirements. EPA further assumed that about one semi-submersible will be built per year. To be conservative, EPA assumed each of these semi-submersibles would meet Phase III rule criteria. Drill ships may also be constructed during the time frame of the analys is, but there were very few drill ships operating in the GOM at proposal (six are currently operating in the GOM [Rigzone, 2006a]). Only 12 out of a total 384 MODUs operating in the GOM (3%) at proposal were drill ships. EPA conservatively assumes three drill ships might be constructed over the entire 20-year time frame of the analysis , all of which are assumed to meet final rule criteria. The other two types of MODUs (submersibles and barges) are seldom associated with CWIS intake rates meeting proposed rule criteria (U.S. EPA, 2004). EPA assumed no su bmersibles or barges with total design intake rates meeting proposed rule criteria will be built during the time frame of the an alysis. EPA assumed that half the jackups and semi-submersibles would be built with proposed technologies in place to control intake of aquatic species under a two MGD cutoff. The drill ships were assume d to be built with 50 MGD or greater intake rates,

2 

### ) Not all discoveries are developed, and many of these will most likely be developed as undersea completions. The vast majority of deepwater projects are undersea completions (MMS, 2006d

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-11§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry



### and the jackups and semi-submersibles we re assumed to be built with intakes having a total intake rate of less than 20 MGD, based on the intake rates of existing MODUs of these types in the survey. Since proposal, EPA has not changed the estimate of how many MODUs subject to the rulemaking will be constructed over the time frame of the analysis. EPA notes that more current information (Rigzone, 2006a ) indicates that 12 jackups slated for GOM operation are cu rrently under construction. No semi-submersibles or drill ships are currently listed as under construction in the GOM listing. Given that not all jackups currently under construction will be launched this year and given that no substantive comment s were received that disputed these estimates, EPA is continuing to assume that these num bers of jackups, semi-submersibles, and drill ships estimated to be built during the time frame of the analys is are reasonable. Should new MODUs constructed for foreign use be reconsidered for use in the GOM, costs fo r retrofitting will be the same as those estimated for new MODUs, since engineering cost estimates were based on retrofit costs (U.S. EPA, 2006) EPA did not estimate aggregate costs under this scenario, but impacts from such costs, should they be incurred, would be negligible, given the results of impact analyses. Firms owning fore ign-based MODUs are either the same ones analyzed in Chapter B3 or are likely to be similar firms, and forei gn-based vessels are similar to those analyzed in Chapter B3. EPA believes that, given the decline in numbe rs of MODUs operating in the GOM from 2002 to 2006 despite increased interest in drilling in the GOM sparked by high oil and gas prices, that significant numbers of new MODUs constructed for operation in fo reign locations will not be affected. At proposal, the firms with the largest numbers of MODUs of the type considered likely to have CWISs with intake rates >2 MGD were considered the likeliest to bu ild new MODUs. For this analysis of the final rule, two additional firms have been added to the group analyzed in Chapter B3, since these firms (Nabors and Atwood Oceanics) were noted to have jackups un der construction for Gulf drilling purposes.


## B2-2 O IL AND 

## G AS 

## P RODUCTION 

## P LATFORMS


### B2-2.1 Overview Oil and gas production operations generally take place on pl atforms or other structures. The primary areas of offshore oil and gas production activity are the GOM, California, and Alaska. In shallow offshore waters, platforms are the typical structure used to support th e resource extraction activities. These activities may involve drilling wells, producing oil and gas from wells, separating production streams, gathering and compressing gas, and working over older wells to increase production. Pl atforms often support buildings for crews, including in some cases, long-term living quarters. There are several different types of platforms, and non- platform structures used in the GOM. Seven major types of production systems are used in offshore oil and gas production.

f 

### The fixed platform is the most commonly used for shallow-water drilling. It is anchored directly into the seabed with a deck to support living quarters etc. While it is primarily used for shallow water drilling, it is economically feasible for depths up to 1,650 ft.

f 

### The compliant tower is a flexible tower and piled foundation with a conventional deck. The compliant tower differs from the fixed platform in that it can with stand large lateral forces. Therefore, it is effective at greater depths and is typically used in water depths between 1,500 and 3,000 ft.

f 

### The Seastar platform is a floating mini-tension leg plat form used for smaller deepwater reserves. It is used in water depths from 600 to 3,500 ft.

f 

### A floating production system (FPS) is a semi-submersib le with drilling and production equipment. The FPS can be dynamically positioned us ing rotating thrusters. The FPS is used at depths from 600 to 6,000 ft.

B2- 12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry

f 

### Another type of offshore platform is the Tension Leg platform (TLP). It is connected to he sea floor with tension tendons. TLPs are used up to depths of 6,000 ft.

f 

### The Spar platform consists of a large diameter cylin der supporting a deck and is used in water depths up to 3,000 ft.

f 

### The Subsea system can produce single or multiple wells using manifold pipeline systems. The Subsea system is used for production at depths greater than 7,000 ft. (U.S. EPA, 2000). In this system, all well completions are at the seafloor level, with piping l eading to production platforms in shallower water or nearby deepwater structures. B2-2.2 Existing Platforms/Struct ures and Their Associated Firms Because EPA determined that so few existing platforms would be likely to have CWISs with intake rates >2MGD at proposal (U.S. EPA, 2004) and because EPA received no substantive data indicating other key areas where new platforms that might install CWISs that meet the final rule criteria, EPA continues to determine that the deepwater Gulf and Alaska are the primary focus of analysis. 3 

### This profile of existing pl atforms and associated firms, therefore, focuses only on those two areas and on what st ructures have been constructed since proposal. Other areas with offshore oil and gas operations, i.e., shallow wate r Gulf and California, either have not been identified as likely to be sites where structures with CWISs affected by the final rule are located or are areas where no new construction is occurring (U.S. EPA, 2004). Furthermore, if any platforms were to be built in shallow waters with CWISs of the regulated size, the size and scope of the ope ration that would drive the need for a CWIS this size would indicate a very expensive operation similar to the scope and size of deepwater operations. The firms likely to be involved in such an operation would be similar to those that operate in the deepwater GOM. Because EPA located no information that indicated that such shallow water operations we re being built, and commenters did not provide data indicating that such operations are being or will be built, no costs were estimated for such operations. Therefore, the shallow water GOM and Calif ornia regions are not discussed further.
B2-2.2.1 Structures/Platforms/St ructures in the Deepwater GOM At proposal, EPA profiled all operations in the Federal GOM . Since the vast majority of shallow water projects were determined at that time to be highly unlikely to inst all CWISs that would meet final rule criteria, this extent of profiling is not continued in this final economic an alysis report. The discussion here focuses entirely on the deepwater GOM. Since proposal, a number of new structures have been built in the deepwater GOM. This new construction also brought in a number of new firms into the area. At proposal, 24 deepwater structures either had CWISs with intakes >2MGD or their intake rates were unknown. Be tween 2003 and 2006, a total of 11 new structures have been installed. The intake rates of CWISs on these stru ctures are unknown. As Table B2-5 shows, four structures were installed in 2003, seven structures were installed in 2004, and no structures were installed in 2005, for an average of three to four structures per year installe d. This average corresponds well to EPA’s estimate, at proposal, that about three structures would be added per year in the deepwater GOM.

3 

### One commenter indicated that deep ga s operation could be affected by the final rule, but provided EPA with no examples of any deep gas operations in shallow water where CW IS intake rates currently or are expected to exceed 2 MGD.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-13§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry

Table B2-5: GOM Deepwater Pla tforms Constructed between 2003-2005t Platform Name Year of Construction Owner Firm


### Gunnison 2003 Kerr-McGee Oil & Gas Corp. Magnolia 2004 ConocoPhillips Co. Red Hawk 2004 Kerr-McGee Oil & Gas Corp. Front Runner 2004 Murphy Exploration & Production Co.-USA Marco Polo 2004 Anadarko Petroleum Corp. Holstein 2004 BP Exploration & Production, Inc. Mad Dog 2004 BP Exploration & Production, Inc. Matterhorn 2003 Total E&P USA, Inc. Nakika 2003 BP Exploration & Production, Inc Medusa 2003 Murphy Exploration & Production Co.-USA Devils Tower 2004 Dominion Exploration & Production, Inc. Source: MMS, 2006d


### These platforms are operated by a number of firms of different sizes and types. The potentially affected firms can be divided into two basic categories. The first category c onsists of the major integrated oil companies, which are characterized by a high degree of vertical integrati on (i.e., their activities encompass both “upstream” activities— oil exploration, development, a nd production—and “downstream” activ ities—transportation, refining, and marketing). The second category of affected firms consis ts of independents engaged primarily in exploration, development, and production of o il and gas and not typically involved in downstream activities. Some independents are strictly producers of oil and gas, while others maintain some service operations, such as contract drilling and well servicing. The major integrated oil comp anies are generally larger than the indepe ndents. As a group, the majors typically produce more oil and gas, earn significantly more revenue and income, and have considerably more assets and greater financial resources than most independents. Fu rthermore, majors tend to be relatively homogeneous in terms of size and corporate structure. All majors are considered large firms under the Regulatory Flexibility Act (RFA) guidelines and generally are C corporations (i.e., th e corporation pays income taxes). Independents can vary greatly by size and corporate structure. Larger independents tend to be C corporations; small firms might also pay corporate taxes, but they also can be organi zed as S corporations (which elect to be taxed at the shareholder level rather than the corporate level under subchapter S of the Internal Revenue Code). Small firms also might be organized as limited partnerships, sole propr ietorships, etc., whose owners, not the firms, pay taxes. One change of note since proposal is the effect of th e 2005 Hurricanes Katrina and Rita on some of the deepwater structures. One deepwater structure is listed as destroyed by Hurricane Rita –Typhoon, owned by Chevron (CWIS intake rate unknown) (MMS, 2006e; ERG, 2004a). Chevron reports in their 2005 10-K report that they are assessing damage and weighing options for restarting operations (SEC, 2006). Katrina damaged four other structures in the deepwater GOM. These include Co gnac, Matterhorn, Mars, and Virgo (MMS, 2006e). Matterhorn (Total) is a new structure since proposal, w ith CWIS intake rate unknown. Cognac (Shell Offshore) was known to have CWIS intake rates <2 MGD, and Virgo (Total) has unknown rates (ERG, 2004a). Mars, the structure with the largest share of production of any such structure in the GOM, is known to have CWIS intake rates exceeding 2 MGD (ERG, 2004a). This structure is expected to be back in production in the latter half of 2006 (New York Times, 2006).- The proportions of majors and indepe ndents operating in the deepwater GOM have not changed significantly since proposal, and the platforms/structures existing at the tim e of proposal have not changed hands in the interim.

B2- 14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



### At proposal, the active firms in the deepwater included Ex xonMobil, Agip (now a subsidiary of Eni), El Paso Production, Shell Offshore, ConocoPhillips, Chevron, BP , and Total E&P (majors or integrated utilities) and Kerr-McGee and Amerada Hess (independents). The new est structures have added Murphy E&P, Anadarko Petroleum, and Dominion E&P to the firms operating in the deepwater. These new firms comprise one independent (Anadarko) and one gas/electric utility firm(Dominion), adding to the two independents (KerrMcGee and Amerada Hess) and one utility (El Paso) covered at proposal. All the remaining firms are considered majors, including the new deepwater operator, Murphy Oil. Table B2-6 summarizes the information, listing the firm s operating in the deepwater GOM and their parent company.

Table B2-6: Operators and Parent Companies of GOM Deepwater Structures Operator Company Parent Company Amerada Hess Corporation Amerada Hess Corporation Anadarko Petroleum Corp. Anadarko Petroleum Corp. BP Exploration & Production Inc BP PLC Chevron USA Inc Chevron Corp. ConocoPhillips Co. ConocoPhillips Co. Dominion Exploration & Production, Inc. Dominion Resources, Inc. El Paso Production GOM Inc El Paso Corp. Eni US Operating Co., Inc. Eni SpA Exxon Mobil Corporation Exxon Mobil Corporation Kerr-McGee Oil & Gas Corporation Kerr-McGee Corporation Murphy Exploration & Production Company - USA Murphy Oil Corporation Shell Offshore Inc Royal Dutch Shell plc Total E&P USA Inc Total SA Source: MMS, 2006d; SEC, 2006.


### It is important to note that companies may share owners hip of a platform. In general, the company listed as the operator in the MMS databases is the 100 percent owner or largest shareholder of the platform, but this is not always the case. The economic analyses in this report, however, make the simplifying assumption that only one firm owns a platform. In reality, several firms might share the impacts from regulatory costs to a platform. The same methodology used to identify small firms in the MODU profile (Section B2-1) is used for this profile. Table B2-7 lists the numbers of firms in the GOM by their NAICS definition. 4 

### Also listed is the SIC code, which is the identifier used in the 10K reports. In the tabl e, NAICS and SICs are mapped in the key industry sectors represented by firms operating in the GOM.

codes, however, the transition to the new system is still in progress. The North American Industry Classifica tion System (NAICS) supercedes the Stan dard Industrial Cl assification (SIC )

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-15 4§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE Facilitie s Chapter B2: Profile of the OOGE Industry

Small Large Table B2-7: Count of Firms by SIC and NAICS Code
GOM Number of Firms SIC code NAICS code NAICS Title SBA Size Standard

Crude Petroleum and Natural 1311 211111 500 employees 0 6 Gas Extraction 2911 324110 Petroleum Refineries 1,500 employees 0 

### 5 Fossil Fuel Electric Power 4911 221112 4.0 million megawatt hours 0 1 Generation Pipeline Transportation of 4922 486210 $6.5million in revenues 0 1 Natural Gas Note: Include 4 foreign firms for which NAICS or SIC codes were available on the SEC website.. Source: SEC, 2006, 13 CFR Part 121, Census, 2006


### As Table B2-7 shows, the predominant firm types opera ting in the GOM are those in the oil and gas extraction NAICS and the refineries NAICS. No firms were identified as small. All four foreign firms are also large.
Table B2-8 shows the firms consider ed potentially affected firms operati ng in the deepwater GOM and their relevant financial data spanning 2002 (the year of data used at proposal) through 2005, along with 2004 data, which is used to compare to complia nce costs in 2004 dollars in Chapter B3. These data include number of employees, assets, liabilities, and revenues, along with several ratios that provide a gene ral indication of financial health, where data are available in 10-K or 20-F reports in U.S. dollars. The ratios used to establish company financial status are profitability ratios, namely: return on assets, return on equity, and profit margin. As described earlier, these three financial indicat ors are calculated as the ratio of the net income to the total assets, stockholders’ equity, an d net sales respectively. While individually these ratios only tell a part of the financial stability of a company, when analyzed together, they give a much clearer picture of a company’s financial health. Table B2-8 also presents summary financial ratios. Among firms with data available in dollars, median return on assets for the group in 2004 is 8.31%, median return on equity is 19.77%, and median profit margin (net income/revenues) is 8.50%, according to 2004 financia l data. Among these 13 firm s, all reported positive net income for 2004. Most firms had sizeable increases in revenue between 2004 and 2005.

B2- 16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analysis for New OOGE FacilitiesB2: Profile of the OOGE IndustryTable B2-8: Financial Condition of Platform/Structure Parent Companies (2002 – 2005)FirmsYearofDataSizeTypeNo. ofEmployeesAssets(thousand)Equity(thousand)Revenues(thousand)Net Income(thousand)Returnon Assets(%)Returnon Equity(%)ProfitMargin(%)EniLargeForeign2005$19,115,000$6,286,000$22,747,000$1,242,0006.519.765.46Amerada HessCorporation20042003LargeMajor$16,312,000$13,983,000$5,597,000$5,340,000$16,733,000$14,311,000$977,000$643,0005.994.617.4612.045.844.492002$13,262,000$4,249,000$11,551,000$218,0001.645.131.8920053,300$22,588,000$11,051,000$7,100,000$2,466,00010.9222.3134.73AnadarkoPetroleum Corp.20042003LargeIndependent3,3003,500$20,192,000$20,543,000$9,285,000$8,599,000$6,079,000$5,113,000$1,601,000$1,287,0007.936.2617.2414.9726.3425.1720023,800$18,248,000$6,972,000$3,833,000$825,0004.5211.8321.522005NANANANANANANANABP plc20042003LargeMajor102,900103,700$205,648,000$186,576,000$86,435,000$80,292,000$285,059,000$232,571,000$17,090,000$12,941,0008.316.9419.7716.126.005.562002115,250$164,103,000$67,274,000$178,721,000$8,109,0004.9412.054.54200559,000$125,833,000$62,676,000$198,200,000$14,099,00011.222.57.11Chevron Corp20042003LargeMajor56,00061,533$93,208,000$81,470,000$45,230,000$36,295,000$155,300,000$121,277,000$13,328,000$7,230,00014.38.8729.4719.928.585.96200253,014$77,359,000$31,604,000$98,537,000$1,132,0001.463.581.15200535,600$106,999,000$52,731,000$179,442,000$13,529,00012.6425.667.54ConocoPhillipsCompany20042003LargeMajor35,800$92,861,000$82,455,000$38,943,000$30,853,000$135,076,000$104,246,000$8,129,000$4,735,0008.755.7420.8715.356.024.542002$76,836,000$32,328,000$56,748,000($295)0.00.00.0200517,400$52,660,000$10,397,000$18,041,000$1,033,0001.969.945.73DominionResources, Inc.20042003LargeOther$45,418,000$44,186,000$11,426,000$10,538,000$13,991,000$12,095,000$1,249,000$318,0002.750.7210.933.028.932.632002$39,996,000$10,213,000$10,218,000$1,362,0003.4113.3413.33200583,700$208,335,000$111,186,000$370,680,000$36,130,00017.3432.59.75ExxonMobilCorporation20042003LargeMajor85,90088,300$195,256,000$174,278,000$101,756,000$89,915,000$298,035,000$246,738,000$25,330,000$21,510,00012.9712.3424.8923.928.58.72200292,500$152,644,000$74,597,000$204,506,000$11,460,0007.5115.365.62005506$3,645,546$1,684,522$1,072,045$124,4133.417.5611.61Forest OilCorporation20042003SmallIndependent496458$3,112,505$2,693,548$1,472,147$1,185,798$912,898$657,178$56,417$56,3051.812.093.834.756.178.582002456$1,924,681$921,211$472,868$58,1153.026.3112.29June 1, 2006Internal Draft – Deliberative, Predecisional – Do notQuote, Cite, or DistributeB2-17§ 316(b) Final Rule: Phase III – EA, Part B:Economic Analysis for New OOGE FacilitiesChapter B2: Profile of the OOGE Industry2005 3,865$14,276,000$4,115,000$5,927,000 $3,211,00022.4978.03 54.182004 4,084$14,518,000$5,318,000$4,398,000$404,0002.787.6 9.19Kerr-McGeeLarge IndependentCorporation2003 3,915$10,250,000$2,636,000$3,289,000$219,00020024,470 $9,909,0002005 6,248$6,368,5112.148.31 6.66$2,536,000 $2,579,000($485,000) -4.89 -19.12 -18.81$3,460,990$11,877,151$846,45213.2924.46 7.132004 5,826$5,458,243 $2,649,156 $8,359,839$701,31512.8526.47 8.39Murphy OilLarge MajorCompany2003 4,789$4,712,647 $1,950,883 $5,164,657$294,1976.2415.08 5.720024,010$3,885,775 $1,593,553 $3,984,327$111,5082.8772.82005 109,000$223,646,000 $94,103,000 $306,731,000$25,688,00011.4927.30 8.372004Major,113,000$193,625,000 $90,545,000 $266,386,000$18,182,0009.3920.08 6.83Royal DutchShell2003LargeForeign119,000$169,766,000 $78,251,000 $198,362,000$12,313,0007.2515.74 6.212002111,000$153,320,000 $66,195,000 $163,453,000$9,656,0006.3014.59 5.91Total SALarge Foreign2005NA NA NA NA NANA NA NA2004 6,590$13,101,000$5,217,000$8,204,000 $1,346,00010.2725.8 16.41UnocalLarge Independent2003 6,700$11,798,000$4,009,000$6,512,000$831,00020026,615 $10,846,0002005 1,680$9,857,0007.0420.73 12.76$3,298,000 $5,273,000($67,000) -0.62 -2.03 -1.27$4,209,000$3,519,000 $1,152,00011.6927.37 32.742004 1,356$6,110,000$2,599,000$1,948,000 $508,0008.3119.55 26.08XTOLarge Independent2003 1,007$3,611,000$1,466,000$1,189,000 $288,2797.9819.66 24.252002867 $2,648,000 $908,000 $810,163 $186,059 7.03 20.49 22.97Note: 2002 values may not match those reported in the EA for the proposal (U.S. EPA, 2004) as firms may have restated their financials for a variety of reasons, including theSarbanes-Oxley Act of 2002, which changed requirements for disclosing financial dataSource: Table C2-2; SEC, 2006, 2002-2005 10-K or 20-F..B2-18Internal Draft – Deliberative,Predecisional – Do not Quote,Cite, or DistributeJune 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



### B2-2.2.2 Alaska Operations There are two major regions of oil and gas production in Alaska. The first, the North Slope region, operates generally from onshore locations or on gravel islands. Platforms are not used here. The second region, Cook Inlet, Alaska, is divided into two regions: Upper Cook Inlet, whic h is in State waters and is governed by the Coastal Oil and Gas effluent guidelin es; and Lower Cook Inlet, which is considered Federal OCS waters and is governed by the Offshore Oil and Gas Effluent Guidelines. This section refers primarily to Upper Cook Inlet. There are 16 platforms and 3 onshore production facilities in Cook Inlet, Alaska, of which two platforms have ceased operation and two platforms have suspended operati on. Five companies own the platforms: Forest Oil Corporation, Marathon Oil Corp., ConocoPhillips, XTO Ener gy, and Unocal Corp. Ma rathon owns the two outof-operation platforms and is not considered a potentially affected firm in Alaska. Unocal Corp. operates the majority of platforms in the Cook Inlet region, with 10 platforms and 2 onshore treatment facilities. Only one company operating in Cook Inlet waters, Forest Oil, is an independent and considered a small business. XTO is also an independent, but is a large business. The remain ing operators are all listed as majors, as is the operator (BP) of the Duck Island structure in the Beaufort Sea (North Slope) (not discussed further here). One firm in Alaska is listed under NAICS 324110 (SIC 2911), Petroleum Re fineries, and the three additional firms are listed as NAICS 211111 (SIC 1311), Crude Petroleum and Natural Gas Extraction. Financial data for these firms are also presented in Table B2-8. The Department of Fish and Game in Alaska developed a standard lease requirement for all water intake pumps to be fitted with a screened enclosure. The requirement fu rther States that the water intake at the surface of the screen enclosure should not exceed 0.1 feet per second. For the purposes of the regulatory analysis, therefore, any new platforms in the Cook Inlet or the North Slope regions are considered to be potentially affected by the 316(b) requirements for entrainment, but not impingement, sin ce the Alaska requirement meets or exceeds 316(b) Phase III impingement standards. B2-2.3 Existing Platforms/Structures with In take Rates Meeting Proposed Rule Criteria
B2-2.3.1 Overview of Existing Platforms/Structu res as Model for New Platforms/Structures Subject to Phase III Regulation The following information is unchanged from proposal. EPA received no comments pertaining to the use of existing platforms and models for new pl atforms subject to Phase III regulations. Very few existing platforms appear to have CWISs with inta ke rates that meet the proposed rule’s criteria. Most of the existing platforms with CWISs of this size are lo cated in the deep waters of GOM and in California and Alaska waters (Cook Inlet). Using the same approach as outlined for determining existing MODUs with CWIS intake rates meeting proposed rule criteria, EPA mak es the following estimates, using the survey conducted for the oil and gas sectors to support this rulemaking and vol untary data submitted by industry. See also ERG (2004b). At proposal, EPA stratified the survey in the GOM into three strata: deepwater, shallow large (20+ slot platforms), and shallow small (fewer than 20 slots). The survey universe of deepwater stru ctures was 24 (two structures were removed from the universe prior to the survey because their CWIS intake rates were known to be less than 2 MGD). For the survey, EPA sampled four facilities. There were no non-respondents. Only one of th e four reported data showing them to have CWIS intake rates meeting proposed rule criteria. Thus EPA estimated that six deepwater structures would have CWIS intake

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-19§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



### rates meeting proposed rule criteria (24 divided by 4 is a we ight of 6; with one respondent reporting an intake rate of 2 MGD or more, this produces an estimate of six total new structures meeting proposed rule criteria). However, earlier data (see ERG, 2004a) indicate that eight structures in the deepwater have CWIS intake rates meeting proposed rule criteria. EPA used the higher number of structures to estimate the proportion of existing structures with CWISs meeting the proposed rule criteria to total structures in the deepwater. Given eight structures meeting proposed rule criteria and 24 total structures, EPA believes that about 1/3 of deepwater structures to be built will be equipped with intakes m eeting the Phase III rule’s criteria. Only one existing deepwater structure had a total intake rate of over 20 MGD, and none had a total rate of over 50 MGD. All firms currently operating multi-well structures in the deepwater GOM with CWIS rates that meet criteria are large. For shallow water large platforms, EPA determined that 206 existing platform s were either known to have CWISs with intake rates meeting Phase III rule criteria or their intake rates were unknown (an additional 3 platforms were known to have CWIS intake rates less than 2 MGD and were dropped from the sampling frame). EPA sampled 33 platforms among the large platform group. Three of th ese were nonrespondents. No additional platforms with intake rates meeting Phase III rule criteria were dete cted using the survey. The nonrespondents were thus assumed also to have CWIS intake rates not meeting propo sed rule criteria. Four platforms, however, were known to have CWISs meeting proposed rule criteria based on earlier data (see ERG, 2004a). None of these were sampled. EPA therefore assumes only these four platforms have intake rates meeting proposed rule criteria. These platforms were owned by large firms (ExxonMobil and Marathon). Thus, EPA assumes that if any large platforms with CWIS intake rates meeting proposed rule criteria were to be built, large firms would build them. For shallow-water, small platforms, EPA determined that 2,194 platforms were in the universe of platforms in the Federal GOM at the time of proposal (U.S. EPA, 2004). The vast majority of these platforms had unknown CWIS intake rates. Four such platforms were identif ied prior to EPA’s Phase III Survey as having CWIS intake rates exceeding 2 MGD (ERG, 2004a). None of these was sa mpled. A total of 18 platforms with unknown CWIS intake rates were sampled (all res ponded), but EPA determined that none of the sampled platforms had total design flow rates meeting proposed rule criteria. Although th is is a very small sample, this finding is bolstered by EPA’s observations that platforms in State waters are unlik ely to have CWIS with intake rates totaling 2 MGD or more (ERG, 2004a). Platforms in State waters and small platforms in Federal waters are generally similar structures. EPA therefore assumed that only four small platforms located in the shallow water GOM have CWIS intakes meeting proposed rule criteria. These four pl atforms were owned by ExxonMobil and BP, thus no small firms were estimated likely to build platforms with greater than 2 MGD intake rates in shallow water. In the GOM, therefore, EPA estimated that a total of 16 existing platforms had CWIS intake rates meeting Phase III rule criteria. All were owned by large firms, and most operated in the deepwater regions (U.S. EPA, 2004). In California, EPA determined that 20 platforms either have CWIS intake rates totaling 2 MGD or more or their CWIS intake rates were unknown (13 platforms with know n intake rates were eliminated from the sampling frame because their total intake was less than 2 MGD). EPA sampled 3 of these 20 platforms. Only one was found to have an intake rate meeti ng proposed rule criteria. EPA thus assumed seven existing platforms in California had total intake rates meeting proposed rule criteri a (20 divided by 3 is a weight of 6.7, which yields 7 platforms weighted). A total of six platforms were known from earlier data (see ERG, 2004a) to have intakes rates meeting Phase III rule criteria, including the surveyed platform. Three had in take rates greater than 20 MGD but less than 50 MGD. Of the six platforms with flow data showing rates meeting Phase III rule criteria, three of these were owned by small businesses (Plains Exploration a nd Production/Arguello). The rest were owned by large businesses (Aera Energy, a joint venture be tween Shell and ExxonMob il, and ExxonMobil). In Alaska, EPA determined that 19 platforms/production f acilities were in the survey universe (one platform was known to have a total CWIS intake rate of less than 2 MGD and was dropped from the sampling frame). EPA sampled two platforms, but only one was determined to have a CWIS intake ra te meeting Phase III rule criteria.

B2-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



### EPA therefore estimated that there were 10 platforms in Alaska with intakes that met Phase III rule criteria (19/2 is a weight of 9.5). Five of these (all located in Cook In let) had CWIS data showing them to have CWISs meeting Phase III rule criteria (ERG, 2004a). Of these structures with known CWISs of this size, all were platforms owned by Unocal. Based on this, EPA might have assumed no small businesses currently operating would be affected in Alaska. However, a small firm constructe d the most recently built platform in Cook Inlet, Osprey (Osprey’s CWIS intake rates are unknown). To be conservative, EPA assumed that a small firm, much like Forest Oil (Osprey’s owner), might be the type of firm to build a new structure in Alaska and such a structure might have CWIS intake rates meeting Phase III criteria. However, it is also entirely likely that no such structures will be built within the time frame of the analysis. In summary, EPA identified 16 platforms in the GOM, 7 plat forms in California, and 10 platforms in Alaska, for a total of 33 existing platforms that met Phase III rule criteri a. Of these, three platforms or structures (one in the deepwater and two in California) had CWIS intake rates greater than 20 MGD, and one platform (California) had an intake rate greater than 30 MGD. No platforms ha d CWIS intake rates exceeding 50 MGD (U.S. EPA, 2004).
B2-2.3.2 Current Oil and Gas Production Levels and Trends In 2002, 567 million bbls of total oil and 4.5 million MM cf of total gas were produced in the GOM, while in 2005, 440 million bbls and 3.0 million MMcf were produced . Sixty one percent of all oil production and 28 percent of all gas production in the GOM came from deepwa ter wells in 2002, while in 2005, 70 percent of oil and 39 percent of gas came from deepwater wells, conti nuing the trend of deepwater regions providing a growing share of GOM production (MMS, 2006b). MMS has been using incentives such as royalty relief to promote drilling of deep gas wells in GOM for many years, adding a new royalty relief system for deep gas wells drilled from existing platforms to extend the life of platforms in the GOM (Federal Register, Vol. 69, No. 16, pg. 3492- 3514, January 26, 2004). In recent years, the drilling of such wells has increased and trends show a continuation of deep gas drilling and exploration in GOM. As technology advances and more deep gas wells are drilled, reserve estimates are being revised, as more gas is presume d recoverable. Deep gas wells in the GOM consist of deepwater drilling and deep shelf drillin g in shallow waters. At proposal, d eep shelf gas production had increased by 137 Bcf from 2000 to 2002. Approx imately 20% of all GOM exploration drilling was at well depths greater than 15,000 ft. at the end of 2003 (Dr illing Contractor, Jan./Feb. 2004). In 2004, MMS predicted that deep gas resources might total as much as 55 trillion cubic feet (Tcf) in the GOM (MMS, 2006f). Standard & Poor's annual Report Card of the Oil and Gas industry in 2003 predicted that oil prices would average approximately $19 per barrel, and that natural gas prices would average $3 per million Btu (MMBtu) (S&P, 2003). Prices have ballooned in recent years, with cu rrent oil futures hovering around $67/bbl and current gas futures at nearly $7/MMBtu (Bloomberg.com, 2006). DOE, in their most recent projection, however, predicts some moderation of these prices in the future. DOE exp ects that oil prices will drop to $46.90/bbl in 2014, and then rise to $46.90/bbl by 2030 (2004 dollars). Gas pr ices are expected to follow a similar trend, dropping to $4.46/Mcf in 2016, and then rising to $5.92/Mcf by 2030 (2004 dollars) (DOE, 2006). 4 

### The economic analysis of deepwater platforms employs long run wellhead oil and g as prices used by 316(b) survey respondents to project future platform financials. These prices are considerably lo wer than either current prices or future projections, so can be considered a very conservative estimate of prices and thus of revenues at deepwater platforms. According to DOE, demand for both oil and natural gas is projected to increase over time. U.S. demand for oil is expected to rise from about 20 million bpd in 2004 to a bout 30 million bpd in 2030, while demand for gas is expected to rise from 22.4 Tcf (total annual demand in 2004) to 26.9 Tcf (2030). The Gulf of Mexico is expected to continue to be a major source of both oil and gas. DOE projects that oil production will decline in the shallow water Gulf, going from 0.4 million bpd (2004) to 0.3 million bpd (2030), but deepwater oil will increase from 1.0

4 

### 1 Mcf ~ 1 MMBtu.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-21§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



### million bpd (2004) to 2.2 million bpd (2016) , then declining to 1.7 million bpd by 2030, for a total of 1.6 million bpd in 2004 rising to 2.0 million bpd by 2030 (DOE, 2006). G as production follows this same pattern in the Gulf. Shallow water Gulf production is expected to decline, going from 2.4 Tcf to 1.8 Tcf between 2004 and 2030, while deepwater Gulf production is expected to increase, going from 1.8 Tcf in 2004 to 3.2 Tcf in 2014, then declining to 2.1 Tcf in 2030 (DOE, 2006).
B2-2.3.3 Estimate of Platforms/Structures To Be Built That May Be Affected by the Proposal In the deepwater region, EPA determined at proposal, based on MMS data, that approximately 2 to 4 structures are built each year (see MMS, 2003; U.S. EPA 2004). EPA assumed that an average of three such deepwater structures are completed each year. EPA noted that out of 24 total structures in the deepwater as of 2003, 8 were estimated to meet Phase III rule criteri a, or about a third of the total. EPA thus assumed that one structure per year out of the three installed annually might have intakes meeting Phase III rule criteria. Because only one structure at proposal was identified as having a CWIS inta ke rate of greater than 20 MGD (and none had a CWIS intake rate of more than 30 MGD), EPA assumed that only one structure out of 10 would be built having a CWIS intake rate of 20 MGD or more. This would mean th at EPA estimated two structures would be built with these intake rates over the 20-year construction time frame. All of these structures are assumed to be constructed by larg e firms. To date (2006), only large firms have built structures in the deepwater GOM, ex cept for a few subsea completions, which have not been identified as associated with intake rates meeting Phase III rule criteria. This scenario is likely to continue, given the resources required to construct deepwater structures, the cost of which sometimes exceed $1 billion dollars (U.S. EPA, 2000). Among large (20+ slot) platforms, EPA determined that few, if any, such platforms might be built during the time frame of the analysis. In the EA for the proposal, EPA noted that no platforms of this size had been installed since 1998 (U.S. EPA, 2004). A recent download of MM S data (MMS, 2006g) indicates that no additional platforms of this size had been installed in the 2003-20 05 time frame. Given that so few of the existing platforms appear to resemble a new regulated project, EPA conti nues to assume no new platforms of this size and with CWIS meeting final rule criteria would be constructed. Among smaller platforms, EPA determined at proposal that they are unlikely to install CWIS of the size considered to meet proposed rule criteria. EPA con tinues to assume no new smaller platforms constructed in shallow water would be affected by the rulemaking. In Cook Inlet, Alaska, only one new platform has been c onstructed in recent years. Most new exploration and development in this region takes place from existing in frastructure or from onshore locations using directional drilling, in which wells are drilled bo th vertically and horizontally to reach potential reserves, sometimes thousands of feet from the top-hole locations. No definitiv e plans appear to be in place for any new platforms in State waters. In Federal waters, lo wer Cook Inlet is a source of potential activity, since MMS completed a lease bid in April 2004. No activity in this region was noted since that time, however. Given the long lead times between lease bid to ope ration, it may be relatively unlikely that th is lease bid will result in new platforms during the time frame of the analysis in either location. To be conservative, however, EPA assumes one such platform might be constructed in Upper Cook In let (State waters) and begins operati on during the time frame of analysis. In other Federal areas in the Alaska region, little new activity is underway BP has dropped plans for its Liberty project in the Beaufort Sea area (Fed eral Register, Vol. 67, No. 99 pp. 36020-36022). The only other activity that has taken place in recent years in Federal waters is an e xploratory well drilled in the B eaufort Sea in 2003. No further activity has been noted since that time (MMS, 2006 h). MMS has completed lease sa les in the Beaufort Sea in 2003 and 2005 (MMS 2006i), but the time frame for deve lopment, if any is undertaken, could be beyond the time frame of this analysis.

B2-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



## B2-3 T OTAL 

## N EW 

## O IL AND 

## G AS 

## O PERATIONS 

### Table B2-9 summarizes the number of existing MODUs and platforms that are estimated to meet the proposed rule’s criteria, had EPA decided to regulate existing oil and gas facilities, as well as new MODUs and platforms expected to be built over the 20-year analytical period that might be required to install control technologies. Also presented is an assessment of the number of fi rms involved that might be small businesses.

Table B2-9:

>20 MGD >50 MGD No. of Small Firms

Involved No. Built in 20-Year Period >2

MGD No. Built in 20-Year Period >20

MGD No. Built in 20-Year

Period >50 MGD No. of Small Firms

Involved MODUs 172 12 12 6 103 3 3 0 Deepwater Platforms (GOM) 8 1 0 0 20 2 0 0 20+ Slot Platforms (GOM) 4 0 0 0 0 0 0 0 Other GOM Platforms 4 0 0 0 0 0 0 0 California Platforms 7 3 0 1 0 0 0 0 10 0 0 1 1 0 0 1 Total 205 16 12 8 124 5 3 1

2004b. Number of Existing and Futu re Offshore Oil and Gas Extraction Facilities Estimated or Assumed To Meet Final Phase III Rule Criteria over a 20-Year Analysis Time Frame

Type of Oil and

Gas Facility Existing Facilities New Facilities

No. with >2 MGD

flows No. with

flows No. with

flows Potentially Potentially

Alaska Platforms
Source: U.S. EPA Analysis, 2006. See the 316(b) Oil and Gas Co mpliance Cost Model for the Final Rule, DCN 9-4000 and ERG,

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-23§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



## R EFERENCES 

### Bloomberg.com. 2006. Energy Prices. Downloaded April 9. Bureau of Census 2006. 1997 NAICS United States Structure, Including Relationship to 1987 U.S. SIC http://www.census.gov/epcd/www/naics.html. Drilling Contractor. 2003a. Deepwater success results in higher drilling activity . November/December Drilling Contractor. 2003b. Large jackups are most notable of newbuilt rigs. November/December. Drilling Contractor. 2001. MMS: GOM deepwater activity, production to grow. November/December ERG. 2004a. Non-CBI In-Scope Facility Database. Spreadsheet Submitted to the 316(b) Phase III Rulemaking Record. DCN 7-3505. ERG 2004b. Calculation of Weights for Engineering Cost Estimates. Memorandum to the 316(b) Phase III Rulemaking Record. September 24, 2004. ERG. 2004c. Expanded Universe of MODUs and Platfo rms. Spreadsheet Submitted to the 316(b) Phase III Rulemaking Record. DCN 7-4022. MMS. 2003. Deepwater production summary by year. www.gomr.mms.gov/homepg/offshore/deepwatr /summary.asp downloaded 10/10/2003. MMS. 2006a. Notice to Lessees and Operators of Federal Oil and Gas Leases in the Outer Continental Shelf, Gulf of Mexico OCS Region. NTL. No. 2006-G02. February 10. MMS. 2006b. Production Data by Year. Downloaded from MMS.gov, April 4. MMS. 2006c. Deepwater Keeps Gulf Strong. Ne ws Release. Release No. 3482. March 21, 2006. MMS. 2006d. Gulf of Mexico Permanent Deepwater Structures. Downloaded from MMS.gov, March 1. MMS. 2006e. Table 1—Platforms Destroyed by Hurricane Katrina; Table 2—Platforms Damaged by Hurricane Katrina; Table 4—Platforms Destroyed by Hurricane Rita; Table 5—Platforms Damaged by Hurricane Rita. Downloaded from MMS.gov, April 4. MMS. 2006f. Secretary Norton Unveils New Incentives to Boost Domestic Natura l Gas Production, Save Americans $570 Million a Year. The News Room. Releas e #3022, dated January 23, 2004. Downloaded from MMS.gov, April 4. MMS. 2006g. Structures date_sort.xls. From Platform Structures file. Downloaded at http://www.gomr.mms.gov/homepg/pubinfo/freeasci/platform/freeplat.html . April 4. MMS. 2006h. Alaska OCS Region—Minerals Manageme nt Service: Beaufort Sea Exploration Wells. Downloaded from MMS.gov, April 4. MMS. 2006i. List of Alaska Region Lease Sales. Downloaded from MMS.gov. April 4. New York Times. 2006. Fixing Up Offshore U.S. Oil Rigs. March 1.
Offshore. 2003. Upgrades target deep gas and deepwater . Offshore Magazine. July 2003.

B2-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



### Rigzone. 2006a. Offshore Rig Search Results. Region N. America—U.S. GOM. Downloaded from Rigzone.com, April 4. Rigzone. 2006b. Worldwide Offshore Rig Utiliza tion. Downloaded from Rigzone.com, April 4. SEC. 2006. Security and Exchange Commission Edgar Database of Corporate Filings. http://www.sec.gov/edgar/searchedgar/companysearch.html. S&P (Standard and Poors). 2003. Industry Report Card: Oil and Gas. January, 17, 2003.
U.S. Department of Energy (DOE). 2006. Annual Ener gy Outlook, 2006. Energy Information Administration.
U.S. Environmental Protection Agency (U.S. EPA) 2000. Economic Analysis of Final Effluent Limitations Guidelines and Standards for Synthetic -Based Drilling Fluids and Other Non-Aqueous Drilling Fluids in the Oil and Gas Extraction Point Source Category . EPA-821-B-98-020. December 2000.
U.S. Environmental Protection Agency (U.S. EPA). 2004. Economic Analysis for Proposed Phase III Facilities. EPA-821-R-04-016. November.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-003. June 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B2-25§ 316(b) Final Rule: Phase III – EA, Part B: Economic Anal ysis for New OOGE Facilities B2: Profile of th e OOGE Industry



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

B2-26 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y 

# Chapter B3: Economic Impact Analysis for the Offshore Oil and Gas Extraction Industry

I NTRODUCTION 

### The Final Section 316(b) Rule for Phase III Facilities will potentially affect any new MODUs and oil and gas production structures that use CWISs with daily design combined intakes totaling at least 2 MGD (and at least 25% of water used for cooling wa ter purposes). This regulatory structure is the similar to that applied to new facilities under the Section 316(b) Phase I regulation. This economic impact analysis is divided into four sections. Section B3-1 presents the analysis of the 316(b) rulemaking on MODUs, Section B3-2 presents the analysis of offshore oil and gas production platforms, Section B3-3 summarizes the costs and impacts on both MODUs and platforms and provides totals for the combined industry subgroups, and Section B3-4 presents costs to the Federal government and total social costs. The first two sections each discuss the aggregate national after-tax compliance cost estimates for new MODUs and platforms (as well as briefly summarizing what these costs would be had existing MODUs and platforms been covered by the final rule). These sections also present vessel-level or platform-level pre- and after-tax compliance costs, and discuss impacts, both at the vessel/platform level and at the firm level. The vessel/platform level impacts are assessed using two approaches. The first approach uses the existing facilities 

## C HAPTER 

## C ONTENTS
Introducti on .......................................................... B3-1 B3-1 MODU Analyses....................................... B3-2 B3-1.1 Aggregate National After-tax Compliance Cost Analys is.................................... B3-2 B3-1.2 Vessel-Level Compliance Costs ....... B3-3 B3-1.3 Impact Analysis ................................ B3-4 B3-2 Economic Impact Analysis for Oil and Gas Production Platforms................................. B3-9 B3-2.1 Aggregate National After-tax Compliance Costs ............................................... B3-10 B3-2.2 Platform-Level Compliance Costs.. B3-11 B3-2.3 Impact Analysis .............................. B3-12 B3-3 Total Costs and Imp acts Among All Affected Oil and Gas In dustry Entities ............................ ........................................................ B3-16 B3-4 Total Costs to Government Entities and Social Costs of the 316(b) Phase III Rulemaking ........ ........................................................ B3-16 B3-4.1 Total Costs to Government Entities.......... ........................................................ B3-16 B3-4.2 Total Social Costs........................... B3-17 References ........................................................ B3-18



### that might represent new facilities and applies a cash-flow/net income-based analysis. The second approach is a standard barrier-to-entry analysis that investigates the present value of initial permitting costs (discounted to the assumed year of compliance) plus initial one-time capital/inst allation costs as a percentage of the cost to construct a new MODU or platform. The firm-level analysis uses fi rm revenues at firms that are the likeliest to construct new facilities. EPA applies a pre-tax and after-tax a nnualized cost of compliance (incorporating permitting, monitoring, capital/installation, and O&M costs) for each MODU/platform the fi rm is expected to build over the period of analysis. For the comparison of annualized co sts of compliance with annual revenue, EPA assumed that all of a firm's new MODUs or platforms/structures would be constructed in one year. This assumption maximizes the potential impact of compliance cost in relation to revenue. If EPA instead assumed a firm would spread construction over more than one year, the ratio of complian ce cost to revenue would be less in any single year and the likelihood of finding economic impacts would diminish. In this way, the assumption that all compliance costs are incurred in the same year is highly conservative. With no firm-level impacts found under this conservative assumption, then there will also be no impacts under othe r, possibly more likely, scenarios in which costs are

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-1§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### incurred over several years. The ratio of these costs to revenues is then cal culated and assessed as to whether this ratio might indicate the potential for firm-level impacts. The methodologies used in each analysis are presented fi rst in each section, followed by a discussion of the analytic results.
No substantive comments were received on the costs or im pacts estimated at proposal. Costs, therefore, have only been updated to reflect 2004 values. Impacts on individual platforms and vessels were not rerun, since these impacts are based on survey data that were updated to reflect 2003 dollar values at proposal for comparison with engineering and permitting costs that reflect the same y ear dollars. Since these costs remain the same in 2003 dollars, impacts remain unchanged from proposal and are considered final for the purposes of this economic analysis report.


## B3-1 MODU A NALYSES 

### B3-1.1 Aggregate National After-tax Compliance Cost Analysis A number of costs must be considered in calculating the aggregate national after-tax compliance costs, each with distinct timing considerations. Permitting costs are incu rred by facilities, but these costs are incurred by facilities to come under one of three General Permits. EPA as sumes costs of studies needed to incorporate permit requirements under the General Permits can be shared. EPA further assumes that all permitting costs would be grouped into three general permit regions. These regions ar e Eastern Gulf of Mexico, Western Gulf of Mexico, and Alaska. Other permit activities are facility-specific and will fall on each facility affected. The timing of permitting costs is complex and was discussed in Chapter B1: Summary of Cost Categories and Key Analysis Elements for New Offshore O il and Gas Extraction Facilities . More information can also be found in U.S. EPA (2006a) and ERG (2004a). EPA assumes that four jackups and 1 semi-submersible will be built each year over the time frame of the analysis. EPA also assumes that three drill ships will be built, launc hed in 2012, 2017, and 2022 for a total of 103 MODUs over the 20-year period of construction. Permitting costs, therefore, apply to 80 jackups, 20 semi-submersibles and 3 drill ships. See Chapter B2: Profile of the Offs hore Oil and Gas Extraction Industry

. Pre-tax costs of installing and operating control technologies and for various permitting activities are input to a spreadsheet in the year in which they are assumed to be incurred. Capital costs are assumed to be incurred every 10 years, and repermitting costs occur every 5 years. Each MODU is assumed to operate over a 30-year compliance period 1 

### . Costs are discounted to the year of comp liance, assumed to be the year the MODU is launched, and summed to produce the present value of cost s in the year of compliance. These costs are then annualized over 30 years. See Chapter B1: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas Extraction Facilities for more details on the cost discounting methodology. To create after-tax costs, EPA assumes that the highest margin al corporate tax rate applies. This rate is 35% (IRS, 2005), so after-tax costs would be 65% of the pre-tax co sts. EPA does this because all MODU owners that are likely to build MODUs are large corporations by SBA st andards and all have earnings in most years that place them in the highest corporate tax bracket. Table B3-1 summarizes the national aggregate after-tax co mpliance costs for MODUs. As the table shows, these costs are $1.9 million per year over the time frame of the analysis in 2004 dollars. See ERG (2004a) for a detailed description of how these costs were calculated (note, however, the costs shown in this reference are the

1 

### The 30 year compliance period does not reflect the anticipated operational life of the MODU, rather it is the period of analysis for assessing long-term costs and benefits.

B3-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### 2003 dollar values). See also the 316(b) Oil and Gas Compliance Cost Model for the Final Rulemaking, DCN 9- 4000 (hereinafter, Compliance Cost Model for Final. Had existing MODUs been covered by the final rule, the to tal national cost of the rule would have included an additional $3.6 million per year in 2003 dollars (ERG, 2004b).

Table B3-1: Total Aggregate National After-tax Compliance Costs for MODUs ($2004)
Type of Cost Present Value (year of compliance) Annualized Cost of Compliance Permitting $7,270,132 $547,546 Capital/Installation Semi-submersibles $634,915 $47,818 Jackups $15,277,346 $1,150,604 Drill ships $813,165 $61,243 Total $16,725.426 $1,259,665 Monitoring $1,370,001 $103,181 O&M $0 $0 Total $25,365,559 $1,910,392 Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.



### B3-1.2 Vessel-Level Compliance Costs This section addresses costs to each of the three types of new vessels. Again, permitting and monitoring costs are from U.S. EPA (2006a), and capital/installation costs ar e from U.S. EPA (2006b). Weighted average costs reported in the TDD (U.S. EPA, 2006b) and derived for existing facilities are calculated and applied to new facilities as presented in a spreadsheet located in the rulemaking record (DCN 7-4030) and in the Compliance Cost Model for Final, DCN 9-4000. Pre-tax costs per vessel are used in the firm-level analysis. After-tax per facility costs are also presented. After-tax costs are used for comparison to pre-tax costs and are used in the firmlevel analysis, but are not used directly as shown in the vessel impact analysis. 1 

### Additional details on how these costs are calculated are presented in ERG (2004a). B3-1.2.1 Pre-Tax Cost of Comp liance for Representative Vessels
The costs shown in Table B3-2 reflect the costs assigned to each vessel, by type of vessel. The representative vessels are those launched in 2007 (jackups and semi-submersibles) and 2012 (drill ship) for the purposes of timing assumptions. All costs are discounted to the year of compliance, which is the same as the assumed year of launching. This date may be prior to the date actual compliance is required for some vessels. Those constructed in 2007-2012 or 2014 (depending on location) are ass umed to install and operate compliance equipment immediately when they are constructed, even though pe rmit requirements may not be in place at that time (see Chapter B1: Summary of Cost Categories and Key Analysi s Elements for New Offshore Oil and Gas Extraction Facilities for more details). The present value costs are calcula ted by inputting each cost into the year that it is

In the impact analysis, after-tax costs are applied to existing MODUs, but thes e are calculated in a more exact way, since the existing MODUs have known marginal tax rates, and a depreciation schedule is used to more precisely calculate the after-tax cost impact on cash flow; see Section B3-1 below an d ERG, 2004c). Also note that neither survey data nor compliance costs were updated from 2003 to 2004 for the impact modeling, since the costs did not change from proposal except for adjusting for inflation. All vessel-level modeling results from proposal, theref ore, are considered final.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-3 1§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### assumed to be incurred, which includes additional capita l costs in years 11 and 21 after initial construction, repermitting costs every 5 years, and monitoring costs in the appropriate years. The costs are taken out over 30 years, discounted to the year of compliance at the re commended OMB discount rate of 7%, and then summed. The present value cost is then annualized using a 30 -year time frame assumption and 7% discount rate. Chapter B1: Summary of Cost Categories and Key Analysis Elemen ts for New Offshore Oil and Gas Extraction Facilities also discusses this process, as does ERG (2004a). Table B3-2 presents the costs of compliance on an annual basis for the three types of MODUs. As the table shows, these costs range from $15,307 to $39,106 per year depending on type of vessel. These costs are small in comparison to revenues associated with drilling even one exploration well in the deepwater GOM. The construction of these types of wells cost oil and gas production companies at least $25 million to $30 million per well (U.S. EPA, 2000). A large portion of this outlay is pa id to the operator of the MODU that drills the well. These costs are also small in comparison to typical M ODU day rates, which can range from $50,000 to $180,000 per day (Rigzone, 2006a).

Table B3-2: Per-Vessel Annualized Pre-Tax Cost of Compliance ($2004) Type of Cost Present Value (year of compliance) Annualized Cost of Compliance Permitting Semi-submersibles $129,990 $9,790 Jackups $129,990 $9,790 Drill ships $68,188 $5,136 Capital/Installation Semi-submersibles $48,840 $3,678 Jackups $293,795 $22,127 Drill ships $417,008 $31,407 Monitoring Semi-submersibles $24,405 $1,838 Jackups $24,405 $1,838 Drill ships $34,046 $2,564 O&M $0 $0 Total Semi-submersibles $203,235 $15,307 Jackups $448,191 $33,755 Drill ships $519,242 $39,106 Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.



### B3-1.2.2 After-tax Costs After-tax costs are presented here for comparison purposes. After-tax costs are assumed to be lower than the pretax costs by the top marginal corporate tax rate of 35%. Thus the costs calculated are 65% of the pre-tax costs inTable B3-2 above. The annual after-tax, annualized, per-vessel compliance costs are $9,949 for semisubmersibles, $21,941 for jackups, and $25,419 for drill ships, based on the pre-tax costs presented above. B3-1.3 Impact Analysis EPA has not rerun the impact analysis at the vessel level from proposal. Other than for inflation, all costs remain the same as those at proposal. EPA considers the impact results from proposal, therefore, to be final.

B3-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### The impact analysis is conducted at two levels: vessel-l evel and firm-level. Although the financial condition of new vessels cannot be known, the financial conditions of a few, representative existing vessels are reflected in EPA’s 316(b) survey of MODUs. EPA received eight economic surveys from three semi-submersibles, three jackups, and two drill ships. The financial informatio n from these representative vessels is used for a general assessment of how well these vessels would do financially if costs of the final regulation applied. The representative vessels are thus a proxy for new sources subject to Phase III regulation. This analysis provides an alternative assessment of the potential for barrier to entry. The second vessel-level analysis is a more typical barrie r-to-entry analysis conducted by EPA for new entities, which looks at the present value of the initial permitting co sts (including those associated with start-up activities, pre-permitting studies and initial permit application activities) , discounted to the applicable compliance year, plus the initial one-time capital/installation costs of required control equipment and compares these costs to the baseline construction costs for each type of MODU. EPA uses an initial permit cost stream represented by MODUs expected to be constructed in 2007 (jackups a nd semi-submersibles) or 2012 (drill ships). See the Compliance Cost Model (DCN 7-4018) that was prepared at proposal. The firm-level analysis is a revenue test, comparing th e revenues of firms likely to construct MODUs with the annualized compliance costs for representative new vessels, assuming each firm identified as potentially affected builds a share of the new MODUs exp ected to be constructed over the time frame of the analysis. For the comparison of annualized costs of compliance with a nnual revenue, EPA assumed that all of a firm's new MODUs would be constructed in one year. This assumption maximizes the potential impact of compliance cost in relation to revenue. If EPA instead assumed a firm would spread construction over more than one year, the ratio of compliance cost to revenue would be less in any single year and the likelihood of finding economic impacts would diminish. In this way, the assumption that all compliance costs are incu rred in the same year is highly conservative. With no firm-level impacts found unde r this conservative assumption, then there will also be no impacts under other, possibly more likely, scenarios in which costs are incurred over several years. EPA uses the annualized cost stream for MODUs constructed in 2007 (or the cost stream for a drill ship constructed in 2012, the first year post-compliance in which a drill ship is assumed to be constructed) to represent the annualized costs to each potentially affected firm. EPA uses both the pre-tax and after-tax compliance costs for comparison with revenues. B3-1.3.1 Vessel Impact Analysis Using Survey Vessels To calculate the impact of today’s rule on new MODUs, EPA used two models – a cash flow/net income model, which computes the estimated present value of after ta x cash flow/net income fo r representative MODUs (based on survey data) over a 30-year operating period for each ne w facility, and a post-tax cost calculation model, which estimates the present value after-tax costs of compliance using engineering and permitting cost inputs. These two models are used to analyze the effect of after-tax costs on after-tax vessel cash flow or net income. For additional details on these models, see ERG (2004c) and DCN 7-4020. Using data provided by surveyed MODU operators, EPA used both the reported after-tax net income and a calculated cash flow figure for each survey MODU. EPA calculated cash flow using after-tax net income and adding depreciation, depletion, and amortization (DD& A) back into net income, since DD&A are not cash expenses. EPA used cash flow as an upper bound estimate of available cash and after-tax net income as a lower bound estimate. EPA was only able to undertake financial analysis for those MODUs with a positive net income or cash flow for the three years of financial informa tion provided in the survey. EPA assumes that any MODU whose cash flow or net income is negative over the three years of financial data ava ilability is unlikely to be a viable operation in the baseline and cannot be analyzed with respect to compliance costs.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-5§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### EPA used the cash flow/net income over the three year s of data collected to create a moving cycle of cash flow/net income over the period of analysis. The years of data collected were 2000, 2001, and 2002, with 2002 generally being a poorer year for the industry as a whole. In this way, EPA was able to represent industry financials in both good and bad years. The 3-year cycl e provides a means for projecting the volatile oil and gas business over each facility’s 30-year operati ng period, which is expected to incl ude major swings in the prices of oil and gas, the driving force behind the level of operations, pricing, and thus the fi nancial performance of newly constructed vessels. EPA assumed that cash flow/net income will be flat on average over the 30 years of analysis and thus does not apply any factors to increase or decr ease cash flow or net income over the years of analysis within those cyclical movements. The cash flow/net in come figures from the survey, th erefore, repeat every three years for 30 years. EPA then computes the present valu e of that stream of cash flow/net income figures and compares it to the present value of after-tax compliance costs for the preferred option. EPA used the capital, O&M, and permitting costs to calcula te the present value of the after-tax annualized cost of compliance with the regulatory requirements. Each cost is accounted for in the year in which it is assumed to be incurred. EPA made the simplifying assumption that th e existing MODUs would represent new MODUs that are launched in 2007. Since EPA assumes MODUs launched in th is year install and operate compliance equipment at that time (even though they do not become permitted fo r compliance with 316(b) requirements until the date of the first applicable General Permit renewal), EPA considers the date of launching the “compliance year.” The first costs to be incurred are the Region 6 and Regi on 4 pre-permitting costs (the shared study costs) and the capital costs of installation and incremental O&M costs (O&M costs are estimated to be $0 for all MODUs). Costs for permit application activities occur in 2011 for th e Region 6 permit and in 2013 for the Region 4 permit. Only MODUs are assumed to be perm itted under the Region 4 permit, since relatively little production activity is currently underway in the Eastern Gulf. 2 

### Monitoring costs begin to be incurred in 2012. Repermitting costs enter in 2017, and every 5 years thereafter. EPA estimated capital costs for each MODU for which a financial survey response was received (with one exception), as well as many other MODUs for which financial data were not obtained (all were used to calculate the average costs of compliance for new facilities). In this analysis, however, only the costs for the eight MODUs with economic survey in formation were used for developing the costs for this impact analysis. EPA’s post-tax compliance cost model determined the ma rginal tax rate of the owner company based on the firm’s average taxable earnings over the three years of su rvey data (which were put on a mid-year 2003 basis to match the engineering costs, which were also set to 2003 dollars) and used the modified accelerated cost recovery system (MACRS) to calculate depreciation on the capital ou tlay. Depreciation was then used to compute a “tax shield” on the investment (for more information on EPA’ s post-tax cost calculation model, see ERG [2004c] and DCN 7-4020). The post-tax cost calculation model calcul ates the present value of after-tax compliance costs. The present value output from the post-tax cost calculation m odel is then input to the cash flow/net income model and used to compare with the present value of cash flow/net income of the vessel as discussed above. If the present value of baseline after-tax cash flow or net inco me minus the present value of after-tax compliance costs is greater than $0, EPA assumes that the MODU would be able to continue to operate post-compliance. If the cash flow value becomes negative, EPA assumes the M ODU would no longer continue to operate. If the net income value becomes negative, EPA assumes the longer-term viability of the vessel is potentially jeopardized. In either case, such a MODU would be counted as a potentia l “regulatory closure.” This analysis is considered an alternative assessment of the potential for barrier to entry.

Permitting costs to platforms are assumed to be associated with the Western Gulf Permit; use of this assumption avoids potentially understating the magnitude of shared costs to MODUs in Region 4.

B3-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 2§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### Although many of EPA’s analyses investigate whether costs of compliance can be passed through to customers, this analysis makes an assumption that costs cannot be passed through. Because existing MODUs will not have to meet the requirements of the rulemaking, and new MODUs must compete with these existing MODUs, it is unlikely that new MODUs would be able to pass through any compliance costs. Assuming zero cost pass-through provides a realistic estimate of potential economic impacts to new MODUs. Due to confidential business information (CBI) constraints, EPA is not able to provide detailed impact results on a MODU-specific level. Detailed results are provided in the CBI portion of the Rulemaking Record (ERG, 2004c, CBI version, and DCN 7-4020). The general findings of the closure analysis are that no new MODUs will be regulatory closures, based on an assumption that finances for new MODUs might look like those for existing MODUs, as a result of the incremental costs of compliance with the preferred option using either a cash flow or net income approach. B3-1.3.2 Barrier to Entry Analysis (Vessel-Level) EPA used the incremental capital/installation costs and th e net present value of permitting costs of compliance for MODUs, as discussed above, using the co st streams associated with vessels launched in 2007 (jackups and semisubmersibles) and 2012 (drill ships), discounted to the compliance year. The sum of these costs (capital and permitting) was then compared to the costs of constr ucting new MODUs. If these compliance costs comprised a small fraction of construction costs, EPA assumed that co mpliance costs would not have a major impact on future MODUs and would not have an effect on a decision to build additional MODUs. EPA estimated the incremental capital costs to install CWIS s that meet the requirements of 316(b) Phase I, Track 1. These costs are $27,643 for semi-submersibles, $166,2 90 for jackups, and $236,028 for drill ships. The present value of a share of the permit costs is $102,429 for each vessel except those for drill ships, which are $25,673 (because they are assumed not be involved in the in itial study cost sharing due to their much later assumed launch dates). The total incremental initial investment costs, therefore, are $130,072 for semisubmersibles, $268,718 for j ackups, and $261,702 for drill ships). Accord ing to Rigzone (2006b), the cost of new MODUs planned to be built in the next few years averages $385 million for semi-submersibles, $130 million for jackups, and $525 million for drill ships. Incremental present value of permitting costs plus capital/installation costs are therefore estimated to range from 0.03% to 0.21% of construction costs, regardless of type of MODU. Because this is only a tiny fraction of total costs of construction (and a tiny fract ion of contingency, which typically ranges from 10% to 20% of capital/installation costs), EPA believes that these costs will not have a material effect on decisions to build new MODUs. One commenter was concerned about the potential for barriers to trade due to compliance co sts. The results of the barrier to entry analysis indicate that costs are minuscule relative to cons truction costs, so foreign companies wishing to construct new MODUs that meet the requirem ents of the final rule will not be dissuaded from doing so. Furthermore, should foreign firms wish to relocated MODUs built after the effective date of the rule to U.S. waters, the costs to retrofit controls should not have an impact on this decision. The costs calculated in U.S. EPA (2006b) and presented here are derived assuming controls must be retrofitted. The vessel-level and firm level impact analyses indicate negligible impacts, as does this ba rrier to entry analysis. EPA, therefore, has determined that no barriers to trade will exist as a result of the final 316(b) rulemaking. B3-1.3.3 Firm-Level Analysis To determine the impact of the final rule on firms, EPA uses a revenue test, which compares the annualized pretax and after-tax costs of compliance (calculated for each representative MODU as discussed above), with 2004 revenues reported by all firms determined likely to build new MODUs meeting the final rule’s criteria. Because nearly all of these firms (other than foreign-owned) ar e publicly owned, EPA relied on the revenue data reported

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-7§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### in Chapter B2: Profile of the Offsho re Oil and Gas Extraction Industry , which was compiled from corporate 10K reports downloaded from SEC’s Edgar Da tabase. EPA determined the number of MODUs likely to be built byeach firm under the final rule. Only those firms that were identified as currently owning jackups, semisubmersibles, and drill ships that will meet the final ru le’s criteria if newly constructed or those actively constructing MODUs at this time are considered likely to construct the estimated 103 new MODUs that will be affected by the final rulemaking (see also Chapter B2: Profile of the Offsho re Oil and Gas Extraction Industry ). 2 

### EPA then assigned a number of potentially in-scope MODUs to be built by each of the firms and used the average per-MODU compliance costs multiplied by the number of these potentially in-scope MODUs to calculate the total compliance costs that might be faced by these firms. To calculate costs to revenues, EPA uses the pre-tax and after-tax costs shown in Table B3-2 for the firms identified as likely to construct new MODUs meeting the fina l rule’s criteria. Each firm is assumed to build 9 jackups or semi-submersibles over the time frame of the analysis (about one every other year), except for GlobalSantaFe and Transocean, which are assumed to build 18 jackups and one drill ship or two drill ships, respectively. 3 

### The total number of new MODUs estimated to be built is divided equally amongst the firms. However, GlobalSantaFe and Transocean own a dispropor tionately large share of existing MODUs. So EPA expects their share of new MODUs to be approximately tw ice that of the other firms. For the comparison of annualized costs of compliance with annual revenue, EPA assumed that all of a firm's new MODUs estimated to be constructed by these firms are launched in one year . This assumption maximizes the potential impact of compliance cost in relation to revenue. If EPA instead assumed a firm would spread construction over more than one year, the ratio of compliance cost to revenue would be less in any single year and the likelihood of finding economic impacts would diminish. In this way, the assumption that all compliance cost s are incurred in the same year is highly conservative. With no firm-level impa cts found under this conservative assumption, then there will also be no impacts under other, possibly more likely, scen arios in which costs are incurred over several years. EPA uses the higher cost of a jackup rig to represent the cost of compliance for both jackups and semisubmersibles for simplicity. Table B3-3 shows all of the MODU owners that are considered likely to build an in-scope MODU. As the table shows, annualized pre-tax costs per firm range from $0.3 to $0.7 million. The ratio of pre-tax costs to revenues ranges from 0.01% to 0.19% and after-tax costs to revenue range from 0.01% to 0.12%. Given that the highest ratio seen is 0.19 percent, EPA concludes that firm-level impacts will be minimal. Furthermore, even if these costs applied to other firms (among those that own j ackups or semi-submersibles with unknown CWIS intake rates that are considered unlikely to build new MODU s subject to Phase III regulation), impacts on any firm would still be estimated to be much less than 1 percent. 4

2 

### Two firms have been added to the list of likely MODU constructors since proposal, based on information showing that they are in the process of constructing new MODUs. These are Nabors and Atwood Oceanics (Rigzone, 2006c). Nabors is larger in revenues than the other firms, and Atwood Oceanics is smaller. Two other firms are currently building MODUs, One, Perforadora Mexico, does not have financial data readily available, but is assumed to have revenues in the range of those shown in Table B3-3. The other, Scorpion, is a new firm, organized in April of 2005. This foreign firm is currently building 5 jackups and has no revenues to report at this time. With 5 MODUs in operation and assuming only 90 days per year of operation for each MODU (that is, a 25 percent utilization rate when the average for the GOM is currently at 85 percent [Rigzone, 2006d]) at an average $100,000/day, this would imply a revenue stream of about $45 million per year. If it is further assumed that this firm builds as many as 9 MODUs in one year, the impact of the final rule will still be less than 1 percent of revenues.
3 

### The number of MODUs per firm was changed from proposal to accommodate a higher numb er of firms identified as constructing MODUs (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry).
4 

### At proposal, there were several firms owning jackups or semi-submersibles that did not submit voluntary technical data, so EPA was not able to determine whether they own MODUs that might meet the final rule’s criteria were they to be newly

B3-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### These costs reflect the assumption that all new jackups w ould be built with sea chests and, therefore, these vessels will not be required to meet entrainment controls. Howe ver, jackups on rare occasions use straight pipes. If jackups are not built with sea chests, the costs to comply with both impingement and entrainment controls would result in the annualized per-vessel compliance costs to rise from $33,755 to about $40,800. 5 

### Under this scenario, the costs to revenue ratios shown in Table B3-3 woul d be at most 0.2 percent (see DCN 7-4030 and DCN 7- 4018).

Table B3-3: Revenue Test for MODU Owners

Name No. of Likely Inscope Rigs >2 MGD Built in One Year 2004 Revenues ($millions) Annualized Pre-Tax Costs

per Firm ($millions) Costs to Revenues (%) Annualized After-tax Costs per

Firm ($millions

2004) Costs to Revenues (%)

Diamond Offshore 9 $815 $0.3 0.04% $0.2 0.02% ENSCO 9 $741 $0.3 0.04% $0.2 0.03% GlobalSantaFe 19 $1,724 $0.6 0.04% $0.4 0.02% Noble 9 $1,351 $0.3 0.02% $0.2 0.01% Pride 9 $1,712 $0.3 0.02% $0.2 0.01% Rowan 9 $679 $0.3 0.04% $0.2 0.03% Transocean 20 $2,614 $0.7 0.03% $0.4 0.02% Nabors 9 $2,448 $0.3 0.01% $0.2 0.01% Atwood Oceanics 9 $163 $0.3 0.19% $0.2 0.12% Total/Avg. ~103 $12,247 $3.5 0.03% $2.2 0.02% Source: SEC, 2006; U.S. EPA An alysis, 2006. See Compliance Cost Model for Final, DCN 9-4000.



## B3-2 E CONOMIC 

## I MPACT 

## A NALYSIS FOR 

## O IL AND 

## G AS 

## P RODUCTION 

## P LATFORMS 

### This section presents the aggregate national after-tax co mpliance costs for new oil and gas production platforms that will be built in scope. It also presents platform-l evel compliance costs (in after-tax and pre-tax terms). Impacts on platforms are then presented in two sections. The first section uses a model of a new platform to determine the potential for any effect on production. Th e second section uses an approach for identifying barriers to entry for all platforms likely to be built in sc ope and for assessing impacts on those platforms for which information was not sufficient to create a de tailed economic model. As discussed in Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry , only 20 in-scope deepwater pl atforms and one in-scope Alaska

constructed. These firms were Atwood Oceanics, Caspian Drilling Co., Energy Equipment Resources, Nabors Industries, Newfield Exploration, Ocean Rig ASA, Pa rker Drilling, Tetra Technologies, and Workships BV (note that several of these firms are no longer on Rigzone’s list of current operators [Rigzone, 2006c]). Most of these firms, however, own only one or two such MODUs and are considered far more likely to purchase MODUs from the firms included in this analysis than to build their own (several of these MODUs ha ve clearly been purchased from GlobalSan taFe, for example). As noted earlier, however, Noble and Atwood Oceanics are constructing new MODUs and have been added to the analysis. Had others of these firms been included in the analysis, however, EPA’s finding s would not have changed. Atwood Oceanics is considered representative of the smaller (yet still large by SBA standards) MODU operators who might construct MODUs subject to the rule.
5 

### Based on the average inflation factor for permits and construction costs of about 4.5% from 2003 to 2004 (per-vessel compliance costs for jackups were estimated to rise from $32,295 in 2003 dollars to $33,755 in 2004 dollars, while costs for jackups with entrainment controls were estimated to be $39,063 in 2003 dollars).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-9§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### platform are expected to be constructed over the 20 year construction time frame of the analysis under the final rule. B3-2.1 Aggregate National After-tax Compliance Costs The methodology for calculating the aggregate national after-t ax compliance costs are iden tical to that used for calculating these same costs for MODUs, a lthough the costs incurred are different. Costs are input in each year in which they occur over the 30-year time frame of the an alysis, including recurring capital replacement costs, repermitting costs, and O&M. The costs in each year are discounted to the compliance year (assumed the year the platform comes on line) and summed to calculate the presen t value of the cost stream. These present value costs are then annualized. For more details on timing assump tions and annualized and present value cost calculations,
see Chapter B1: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas Extraction Facilities and ERG (2004a). To create after-tax costs, EPA assumes that the highest margin al corporate tax rate applies. This rate is 35 percent (IRS, 2005), so after-tax costs will be 65 percent of the pre- tax costs. EPA does this because all platform owners that are likely to build in-scope platforms are large cor porations by SBA standards and/or have earnings that place them in the highest corporate tax bracket (including the one small corporation considered likely to build an Alaska platform). Table B3-4 summarizes the national aggregate after-tax compliance costs for production platforms. As the table shows, these costs are $1.3 million per year over the time frame of the analysis. See ERG (2004a) for a detailed description of how these costs were calculated. Also see DCN 9-4000. Had existing platforms been covered by the final rule, the total national cost of the rule would have included an additional $4.5 million per year in 2003 dollars (ERG, 2004b).

B3-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### Table B3-4: Total National Aggregate A fter-tax Compliance Costs for Platforms ($2004) Type of Cost Present Value (to year of compliance) Annualized Cost of Compliance Permitting Deepwater $859,982 $64,769 Alaska $483,126 $36,386 Total $1,343,109 $101,155 Capital/Installation Deepwater $5,556,764 $418,504 Alaska $414,536 $31,221 Total $5,971,300 $449,725 Monitoring Deepwater $188,497 $14,197 Alaska $191,478 $14,421 Total $379,975 $28,618 O&M Deepwater $8,187,952 $616,671 Alaska $1,458,124 $109,818 Total $9,646,076 $726,488 Total Compliance Costs Deepwater $14,793,195 $1,114,141 Alaska $2,547,264 $191,846 Total National Compliance Costs $17,340,460 $1,305,986 Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.


### B3-2.2 Platform-Level Compliance Costs This section addresses costs to each of the two types of platforms (deepwater and Alaska). Again, permitting and monitoring costs are from U.S. EPA (2006a), and capital/installation and O&M costs are from U.S. EPA (2006b), with the weighted average of the capital and O&M costs applied to new platforms/structures as calculated in DCN 7-4030. Pre-tax costs per platform are used in the firm-l evel analysis, along with after-tax costs. After-tax costs are used for comparison to pre-tax costs but are not used directly in the platform impact analysis. 5 

### See ERG (2004a) for more detail on how these costs were calculated. Also see DCN 9-4000. B3-2.2.1 Pre-Tax Cost of Complia nce for Representative Platforms
The costs shown in Table B3-5 reflect the estimated costs incurred by each plat form, by type of platform. Costs are derived as above for computing national aggregate costs, but these costs are for a representative deepwater platform that comes on line in 2007 (year of compliance is assumed to be 2007) and the representative Cook Inlet platform coming on line in 2014 (year of compliance). Costs (which are incurred over the full time frame of the analysis, including recurring capital replacement and reperm itting costs) are discounted to the applicable year of compliance and annualized over 30 years at 7 percent.

In the impact analysis, costs are input in the year in which they are assumed to be incurred, and the financial model internally calculates the tax shield on these costs given depreciation schedules; see Section B3-2.3a below and ERG [2004d]).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-11 5§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### Table B3-5 presents the costs of compliance on an annual basis for the two types of platforms. As the table shows, these costs are $87,141 or $295, 147 depending on type of platform.

Table B3-5: Per-Platform Annualized Pre-Tax Cost of Compliance ($2004) Type of Cost Present Value (Year of Compliance) Annualized Cost of Compliance Permitting share Deepwater $81,586 $6,145 Alaska $743,271 $55,979 Capital/Installation Deepwater $427,443 $32,193 Alaska $637,748 $48,032 Monitoring share Deepwater $18,164 $1,368 Alaska $294,582 $22,186 O&M Deepwater $629,842 $47,436 Alaska $2,243,267 $168,950 Total Deepwater $1,157,035 $87,141 Alaska $3,918,868 $295,147 Source: U.S. EPA Analysis, 2006. See the Co mpliance Cost Model for Final, DCN 9-4000.



### B3-2.2.2 After-tax Costs fo r Representative Platforms After-tax costs are presented here for comparison purposes. After-tax costs are assumed to be lower than the pretax costs by the top marginal corporate tax rate of 35 percent (IRS, 2005). Thus the costs calculated are 65 percent of the pre tax costs in Table B3-5 above. The annual after-tax per-platform compliance costs ar e $56,642 for deepwater platforms and $191,846 for the Alaska platform, based on the pre-tax costs shown above in Table B3-5. B3-2.3 Impact Analysis The impact analysis for oil and gas production platforms is divided into two types: platform-level and firm-level. The platform-level analyses include two approaches to dete rmining the potential for impacts. Because costs were not changed from proposal, except to adjust for inflation, the impact analysis on platforms were not rerun. EPA considers the results of the impact analysis at proposal as final. Although the financial condition of new platforms cannot be known, the financia l conditions of a few, representative existing platforms are reflected in EPA’s 316(b) survey of production platforms. EPA received economic surveys from one deepwater platform and one Al aska platform with CWIS intake rates meeting the final rule’s requirements. The financial information from the deepwater platform is used for a general assessment of how well new deepwater platforms would do financially if the final rule’s costs applied. The Alaska platform that was surveyed, however, is a very old structure and is at the end of its productive life, thus has a production profile completely different from what would be expected of a new operation. Furthermore, new platforms constructed in Cook Inlet are far likelier to look like th e Osprey platform, which is a departure from the older technology represented by the other Cook Inlet platforms. The Osprey platform was designed to operate as a

B3-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### MODU until a productive reservoir was located, at whic h point the MODU was designed to convert to a stationary production platform. This design allowed Osprey to be built at a significantly lower cost than the traditional fixed platforms located in the inlet. EPA does not have sufficient financial information at this time to model an Osprey-type platform. For these reasons, the pot ential for impact on a new Alaska platform is assessed only in the second platform-level analysis, described below. The second platform-level analysis is a more typical barri er-to-entry analysis used for new entities. It uses the present value of initial permitting costs (discounted to the year of compliance) plus the capital/installation costs and compares these costs to the construction costs for each type of platform. This is a typical barrier-to-entry analysis, which assesses incremental start-up costs associat ed with compliance to baseline start-up costs. The firm-level analysis is a revenue test, comparing th e revenues of firms likely to construct platforms whose CWISs meet the final rule’s criteria with the annualized compliance costs for each platform, assuming each firm considered likely to build a regulated platform in th e deepwater builds four platforms/structures over the time frame of the analysis. For the comparison of annuali zed costs of compliance with annual revenue, EPA assumed that the firms bring all platforms on line in one year. This assumption maximizes the potential impact of compliance cost in relation to revenue. If EPA instead assumed a firm would spread construction over more than one year, the ratio of compliance cost to revenue would be less in any single year and the likelihood of finding economic impacts would diminish. In this way, the assumption that all compliance cost s are incurred in the same year is highly conservative. With no firm-level impa cts found under this conservative assumption, then there will also be no impacts under other, possibly more likely, scen arios in which costs are incurred over several years. One small firm is assumed the likeliest to build one platfo rm in Alaska during the time frame of the analysis, and this firm is assigned the cost of the one Alaska platform assumed to be constructed during the analysis period. B3-2.3.1 Platform Impact Analysis Using Survey Platforms Oil and gas production platforms are modeled somewhat di fferently than most other Phase III entities. Because the surveyed deepwater platform was a relatively new struct ure in 2002 (the first year of survey data provided), the model is built using survey data to represent new, later-built structures. Generally, the model can show production extending as far out as 30 years. Calculations, such as the after-tax costs of compliance that are computed outside of the model platform framework (presented earlier in this Chapter), use a 5 or 10-year time frame over which to a nnualize costs. The platform model operates somewhat differently. Pre-tax costs are input into the model in the year in which they occur (including costs incurred in preproduction years). The model calculates after-tax costs, which are then annualized over the modeled production life, which could be shorter than 30 years. For this reason, repermitting costs are input into the model every five years and capital costs for CWISs are input every 10 years, until the model shows the platform is uneconomical to operate. EPA has developed a model deepwater oil and gas pr oduction platform based on information obtained from EPA’s survey and from other sources of publicly availabl e information, such as that from MMS. ERG (2004d; non-CBI version) contains additional details on the me thodology, non-CBI data, and assumptions on which the model is based and how the model was constructed. EPA has used the same basic approach a number of times for analyzing impacts of effluent guidelines on oil and gas facilities (see, for example, U.S. EPA, 2000). Usually, the only differences are the input variables, such as production ra tes, that are used to model individual platforms. For specific details on the values of variables defined by survey information and the detailed impact results, see ERG (2004d; CBI version).
The model is based on both a cash flow and net income a pproach. The projected net revenues are compared to operating costs at each year for each model project. Ne t revenues (after subtracting royalties and severance,

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-13§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### which are payments to the lease owner and a State, if re levant) are based on an assumed price of oil, current and projected production of oil and gas, well production declin e rates, and severance and royalty rates. Operating costs are based on a calculated cost per barrel of oil equi valent (BOE) produced. The model runs for 30 years or is assumed to shut in when operating costs exceed revenues. That is, the economic model can calculate differing lifetimes according to project characteristics. The mode l then calculates the lifetime of the project, total production and the net present value of the operation (net in come of the operation over the life of the project in terms of today’s dollars), which includes the net operati ng earnings, taxes, expenditures on drilling, other capital expenditures, etc. A positive net present value means that the project is a good investment. In this case the return is greater than the discount rate, which represents the opportunity cost of capital. If the net present value is negative, it means that money would ha ve been better invested elsewhere. The model is run twice–with and without the change du e to the 316(b) Phase III requirements. The incremental cost to retrofit I&E equipment is input into a capital expenditure line (which is used in both the cash flow and net income calculations), and additional O&M and permitting cost s are input to the cash flow section of the model. The post-compliance results (including production, project lif e, and net present value of income) are compared to those calculated under baseline assumptions. There are two ways the increased costs can have an imp act on a platform. First, any increase in operating costs might raise total operating costs enough to cause the operating costs to exceed net revenues earlier than in the baseline. If the platform life is reduced, there will be a concomitant loss of production. Second, any increase in costs, whether operating, capital or permitting, could al so drive the net present value of a marginal operation negative. The decision in this case would be to not deve lop the project rather than build the project with I&E controls in place, since the project would not be consid ered a good investment. If the platform has a positive net present value under baseline conditions but a negative net present value in the post-c ompliance scenario, EPA notes an impact on the platform and estimates the production lost as a result. Due to issues with CBI, the detailed results of the pl atform-specific impacts are not reported here. See ERG (2004d; CBI version) in the CBI portion of the Rulemaking Record for detailed information on impacts. However, EPA determined that there will be no impacts on deepwater oil and gas deve lopment or production due to the final rule’s costs based on model results. Impacts on net present value of projects are expected to be very small. B3-2.3.2 Barrier to Entry Analysis (Platform Level) EPA uses the incremental capital costs and present valu e of initial permitting costs for compliance for new deepwater and Alaska platforms to comp are to the costs of construction of new platforms, identical to the approach used to measure impacts on MODU owners. If the initial investment costs of compliance are a small fraction of baseline construction costs, EPA assumes that compliance costs would not have a major impact on future platforms and would not have an effect on a deci sion to build additional oil and gas production platforms. Costs for constructing deepwater platforms are estimated to range at least from $114 million to $2.3 billion (see U.S. EPA, 2000). Forest Oil (Forest Oil, 2002) reports that the 2002 capital outlay for the Osprey platform in Cook Inlet was $120 million (which does not include exploration, delineation, or additional costs to continue to develop the platform). For deepwater platforms, EPA estimates that a platform coming on line in 2007 will incur costs of $306,323 (deepwater) and $708,058 (Alaska) in capita l/installation costs plus the present value cost of the initial round of permitting costs. The ratio of incrementa l compliance costs to construction costs ranges from 0.01 percent to 0.3 percent for deepwater project s and 0.6 percent for an Alaska project.

B3-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### B3-2.3.3 Firm Level Impacts
The firms that are considered affect ed are those identified as currently having platforms or structures in the deepwater that meet the final rule’s criteria. In Alaska, Fo rest Oil is selected as the likeliest type of firm to build an Alaska platform during the time frame of the analysis. All the firms considered likely to build a new platform/structure subject to the final rule have publicly available data on 2005 revenues. Each firm is expected to bring on line two affected platforms over the period of analysis, except for Forest Oil, in Alaska, where only one structure is expected to be built over the period of analysis. The count of platforms per firm in the Gulf has changed from proposal, since 6 additional firms were iden tified as having constructed deepwater platforms in the intervening years (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry). For the comparison of annualized costs of compliance with annual revenue, EPA assumed both platforms are brought on line in the same year. This assumption maximizes the potential impact of compliance cost in relation to revenue. If EPA instead assumed a firm would spread construction over mo re than one year, the ratio of compliance cost to revenue would be less in any single year and the likelihood of finding economic impacts would diminish. In this way, the assumption that all compliance costs are incurred in the same year is highly conservative. With no firmlevel impacts found under this conservative assumption, then there will also be no impacts under other, possibly more likely, scenarios in which costs are incurred over sev eral years. The costs of compliance are calculated as the cost stream over the compliance lifetime of a represen tative deepwater platform constructed in 2007 and an Alaska platform constructed in 2014, discounted to the year of compliance and annualized (the same approach used for judging impacts on MODU owne rs). These costs are then compared to firm-level revenues in a revenue test. Both pre-tax costs, reported in Table B3-5 above, and after-tax costs are used to compare to revenues. Table B3-6 presents the affected firms in both regions of concern (deepwater and Alaska), their annual revenues, their annualized pre-tax costs of compliance applied to all potentially affected structures they might construct, and the ratio of their compliance costs to revenues. As the table shows, costs to revenues are 0.032 percent or less for all affected firms.

Table B3-6: Revenue Test for Platform Owners

Name No. of Platforms 2004 Revenues ($millions) Pre-Tax PV Costs ($millions

2004) Pre-Tax Costs to Revenues After-tax Initial Investment Costs ($millions 2004) After-tax Costs to Revenues
Amerada Hess 2 $16,733 $0.2 0.001% $0.1 0.001% BP 2 $285,059 $0.2 <0.001% $0.1 <0.001% ChevronTexaco 2 $150,865 $0.2 <0.001% $0.1 <0.001% ExxonMobil 2 $291,252 $0.2 <0.001% $0.1 <0.001% Forest Oil 1 $913 $0.3 0.032% $0.2 0.021% Royal Dutch/Shell 2 $266,386 $0.2 <0.001% $0.1 <0.001% Murphy Oil 2 $8,299 $0.2 0.002% $0.1 0.001% Kerr-McGee 2 $4,398 $0.2 0.004% $0.1 0.003% Anadarko 2 $6,079 $0.2 0.003% $0.1 0.002% Total S.A. 2 $115,540 a $0.2 <0.001% $0.1 <0.001% ConocoPhillips 2 $135,076 $0.2 <0.001% $0.1 <0.001% Dominion 2 $13,991 $0.2 0.001% $0.1 0.001% Total 24 $1,264,636 $2.2 <0.001% $1.4 <0.001%

a Converted from Euros to dollars using value from 12/31/ 2004 obtained at XE.com, Interactive Currency Table. Source: SEC, 2006; U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-15§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



## B3-3 T OTAL 

## C OSTS AND 

## I MPACTS 

## A MONG 

## A LL 

## A FFECTED 

## O IL AND 

## G AS 

## I NDUSTRY 

## E NTITIES 

### Table B3-7 summarizes the total costs and impacts associated with the 316(b) Phase III Rulemaking on the oil and gas industry. As the table shows, impacts on new MODUs and platforms and their associated firms are expected to be minimal. Aggregate national after-tax compliance costs are also show n in the table. These costs total $1.9 million per year for MODUs and $1.3 million per year for platforms, whic h is $3.2 million per year over all affected new oil and gas operations estimated to be construc ted over the period of the analysis.

Table B3-7: Total National Aggregate Annualized A fter-tax Compliance Costs and Impacts for the Oil and Gas Industry ($2004) O&G Facility Annualized After-tax Compliance Costs (in $millions, discounted to year of compliance) Facility Impacts Firm Impacts
MODUs $1.9 0 0 Platforms $1.3 0 0 Total a $3.2 0 0

a Totals may not sum due to independent rounding. Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.



## B3-4 T OTAL 

## C OSTS TO 

## G OVERNMENT 

## E NTITIES AND 

## S OCIAL 

## C OSTS OF THE 

## 316( B 

## ) P HASE 

## III R ULEMAKING


### B3-4.1 Total Costs to Government Entities The costs in Table B3-8 reflect those costs to Region 6, Region 4 and Region 10 to administer the costs of the three General Permits as well as to maintain these permits over time as the number of permittees increases or decreases. The details of individual cost items and timing assumptions can be seen in Chapter D2: UMRA Analysis. Costs are arrayed over the time frame of the analysis and discounted at either 3% or 7% to 2007.
Table B3-8: Total Costs to Government Entities ($2004) Government Entity Present Value Cost (2007) Annualized Cost 3% Discount Rate EPA Region 6 $4,807,900 $238,151 EPA Region 4 $3,903,492 $193,353 EPA Region 10 $41,987 $2,080 Total government cost $8,753,379 $433,583 7% Discount Rate EPA Region 6 $2,465,458 $185,684 EPA Region 4 $1,944,024 $146,413 EPA Region 10 $23,272 $1,753 Total government cost $4,432,755 $333,850 Source: U.S. EPA 2006a; U.S. EPA Anal ysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.

B3-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



### B3-4.2 Total Social Costs The total costs to government entities, plus the total pre-ta x cost to industry are used as an approximation of total social cost. There is no lost production of oil and gas calculated and no closures or firm failures are estimated. Thus no social costs associated with employment dislocations are incurred. A small deadweight cost to society of lost production due to forces other th an supply and demand, such as taxes on monopolies, may occur, but this is not calculated. Consumer and producer surplus losses are also not calculated, but they are captured in the total pre-tax cost to industry. Table B3-9 presents the total social costs associated with the 316(b) requirements under the final rule. The annualized social costs of the rule associated with the affected oil and gas industries under the final rule is approximately $3.8 million using the 3 percent social disc ount rate suggested by OMB and $3.2 million per year using OMB’s 7 percent discount rate.

Table B3-9: Total Social Costs of the Fi nal Rulemaking for Oil and Gas Industries (in millions, $2004) Cost Item Present Value Cost (2007) Annualized Costs 3 % Discount Rate MODU compliance costs $39.3 $1.9 Platform compliance costs $29.5 $1.5 Total pre-tax compliance costs $68.8 $3.4 Government cost $8.8 $0.4 Total social costs $77.6 $3.8 7 % Discount Rate MODU compliance costs $22.4 $1.7 Platform compliance costs $15.4 $1.2 Total pre-tax compliance costs $37.8 $2.8 Government costs $4.4 $0.3 Total social costs $42.3 $3.2 Note: Totals may not sum due to independent rounding. Source: EPA Analysis, 2006. See the Complia nce Cost Model for Final DCN 9-4000.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute B3-17§ 316(b) Final Rule: Phase III – EA, Part B: Economic Analys is for New OOGE Facilities B3: Economic Impact for the OOGE Industr y



## R EFERENCES



### ERG. 2004a. Cost Timing and Cost Sharing Assumptions for Industry Compliance Costs. Memorandum to the 316(b) Phase III Rulemaking Record. September 24, 2004. ERG. 2004b. Costs for Existing Oil and Gas Faciliti es Had These Been Regulated Under 316(b) Phase III. Memorandum to the 316(b) Phase III Rulemaking Record. September 24, 2004. ERG. 2004c. MODU Cost and Impact Calculations. Memorandum to the 316(b) Phase III Rulemaking Record (Non-CBI version) and CBI Rulemaking Record (CBI version). September 24, 2004. ERG. 2004d. Detailed Methodology and Results for Oil and Gas Production Platforms. Memorandum to the 316(b) Phase III Rulemaking Record (Non-CBI version) and CBI Rulemaking Record (CBI version). October 7, 2004. Forest Oil. 2002. Presentation on Forest Oil Corporati on given at Banc of America Securities Energy and Power Conference. June 2002 Available at http://www.forestoil.com/downloads/pr esentation_bancofamerica_jun_2002.pdf. Rigzone. 2006a. Offshore Rig Day Rates. Availabl e at http//www.rigzone.com/data/dayrates. March 22. Rigzone. 2006b. Weekly Offshore Rig Review: Build It and They Will Come. Available at http://www.rigzone.come/news/article .asp?a_id=29334, February 6. Rigzone. 2006c. Offshore Rig Search Results. Available at http://www.rigzone.com/data/results.asp?sortF ield=0&sortDir=1&P=4&Rig_Name=&RWD_Max=- 1&RWD_Min=-1&Region_ID=2&Rig_Type_ID=-1&Manager _ID=-1&Rig_Status_ID=- 1&Operator_ID=-1. March 17. Rigzone. 2006d. Offshore Rig Utilization by Region. Available at http://www.rigzone.com/data/utilization_region.asp. March 23. SEC. 2006. Security and Exchange Commission Edgar Database of Corporate Filings. http://www.sec.gov/edgar.shtml
U.S. Department of the Treasury. 2005. Internal Revenue Service (IRS). 2005 Instructions for Forms 1120 & 1120-A. pg. 16 (Federal tax rates).
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Information Collection Request for Cooling Water Intake Structures at Phase III Facilities (Final Rule) . ICR Number 2169.01. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-003. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Economic Analysis of Final Effluent Limitations Guidelines and Standards for Synthetic -Based Drilling Fluids and Other Non-Aqueous Drilling Fluids in the Oil and Gas Extraction Point Source Category . EPA-821-B-00-012. December 2000. XE.com. 2006. Interactive Currency Table. Available at http://www.xe.com/ict/ . Downloaded May 12, 2005.

B3-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs 

# Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities

I NTRODUCTION 

### This chapter presents an overview of the cost categories and certain elements of the analytic framework that are common to the economic analyses of the industry segments analyzed for existing facilities.


## C1-1 C OST 

## C ATEGORIES 

### In its analyses of the costs and economic impacts of the regulatory analysis options considered for the final rule for Phase III existing facilities, EPA considered four categories of costs: 1. Costs of installing and operating compliance technology, 2. Net income loss from installation downtime, 3. Administrative costs incurred by complying facilities, and 4. Administrative costs incurred by permitting authorities. The following discussion provides an overview of each of these cost categories. Additional detail on the costs of installing and operating compliance technology and the net income loss from installation downtime is provided in the Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule (hereafter referred to as the “Phase III Technical Development Document ”; U.S. EPA, 2006b) and Chapter C3: Economic Impact Analysis for Manufacturer

. 

## C HAPTER 

## C ONTENTS
Introduction............................................................ C1-1 C1-1 Cost Catego ries ......................................... C1-1 C1-1.1 Costs of Installing and Operating Compliance Technology................... C1-1 C1-1.2 Net Income Loss from Installation Downtime ......................................... C1-2 C1-1.3 Administrative Costs for Complying Facilities ........................................... C1-3 C1-1.4 Administrative Costs for Permitting Authorities and the Federal Government .......................................................... C1-9 C1-2 Key Elements of the Economic Analysis For Phase III Existing Facilities .................... C1-10 C1-2.1 Compliance Schedule ..................... C1-10 C1-2.2 Adjusting Monetary Values to a Common Time Period of Analysis ................. C1-11 C1-2.3 Discounting and Annualization – Costs to Society or Social Costs ................... C1-12 C1-2.4 Discounting and Annualization – Costs to Complying Fac ilities ...................... C1-14 References............................................................ C1-17



### This chapter addresses cost components relevant for the regulatory analysis options as well as the supplementary options analyzed for existing facilities. As a result, some of the concepts ar e not relevant to the three regulatory analysis options for existing facilities, which do not regulate Electric Generators. C1-1.1 Costs of Installing and Operating Compliance Technology Depending on the option under considera tion, facilities with a DIF that meets or exceeds that option’s respective applicability threshold (i.e., 50 MGD, 100 MGD or 200 MGD) that are not currently in compliance with the performance standards for Phase III existing facilities would need to implement technologies to reduce impingement mortality and/or entrainment. The specifi c technologies projected by EPA for the analyzed facilities depend on the performance standard ea ch facility would need to meet (based on the waterbody type, design intake

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### flow, and annual intake flow as a percent of source waterbody mean annual flow) and the facility’s baseline technologies in-place. A list of the technologies considered for this analysis is provided in Table C1-1 below. EPA developed technology cost estimates for the regulator y analysis options based on the impingement mortality and entrainment reduction technologies projected for each potential existing Phase III facility. Technology costs include capital costs and operating and maintenance (O&M) costs. The annual O&M cost estimates used in the cost modules are the net O&M costs, which are defined as the difference between the estimated baseline O&M costs and the incremental compliance O&M costs. O&M co sts are further differentiate d into fixed and variable O&M costs. Fixed O&M costs do not vary with the leve l of production (i.e., they are incurred even when a business unit is periodically shut down). EPA assumes any periodic maintenance tasks (e.g., changing screens, changing nets, or inspection/cleaning by divers) are perfo rmed regardless of plant operation, and therefore are considered fixed costs. Variable O&M costs do vary with the level of productio n and are allocable based on estimated intake operating time (e.g., annual labor estim ates for passive screens include increased labor for several weeks during high debris episodes). The actual fi xed and variable portions of O&M costs for each facility may vary depending on the mix of baseline and compliance technologies. The technology costs developed for the regulatory analysis options are engin eering cost estimates, expressed in mid-2004 dollars (see Section C1-2.2 below for a discussion of adjusting monetary va lues to a common time period of analysis). More detailed information on the compliance technologi es considered by EPA, on technology costs, and on EPA’s characterization of baseline technologies already in-place at potential Phase III existing facilities is available in the Phase III Technical Development Document (U.S. EPA, 2006b).
C1-1.2 Net Income Loss from Installation Downtime Installation of some of the compliance technologies considered for potential Phase III existing facilities would require a one-time, temporary downtime of the facility’s cooling water intake system. Table C1-1, below, lists the estimated durations of net system downtime, in weeks, for each of the compliance technology modules considered for compliance with the final standards. The lower end of the range is used at lower flow rates. For a more complete discussion of facility downtime estimates, see Chapter 5 of the Phase III Technical Development Document (U.S. EPA, 2006b, DCN 9-0004).

Table C1-1: Estimated Average Downtime for Technology Modules Description Net Downtime (Weeks) Fish handling and return system 0 Fine mesh traveling screens with fish handling and return 0 New larger intake structure with fine mesh, handling and return 0 - 2 Passive fine mesh screens with 1.75 mm mesh size at shoreline 7 - 9 Fish barrier net 0 Relocate intake to submerged offshore with passi ve fine mesh screen with 1.75 mm mesh size 7 - 9 Velocity cap at inlet of offshore submerged 0 Passive fine mesh screen with 1.75 mm me sh size at inlet of offshore submerged 0 Double-entry, single-exit with fine mesh and fish handling and return 0 Passive fine mesh screens with 0.75 mm mesh size at shoreline 7 - 9 Relocate intake to submerged offshore with passi ve fine mesh screen with 0.75 mm mesh size 0 Passive fine mesh screen at inlet of offshore submerged with 0.75 mm mesh size 7 - 9 Source: U.S. EPA Analysis, 2006.


### The “net” downtime duration accounts for any expected annual period of cooling water system downtime for regular maintenance and repair – the net downtime is the number of weeks the cooling water system would need

C1-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### to be out of service above and beyond any regular ma intenance downtime period. EPA assumed that facilities would minimize the disruption to their operations by making the required technology upgrades during these periods of scheduled maintenance. Scheduled mainte nance periods can range from several weeks to several months, depending on the type of facility and the specific maintenance requirements. 1 

### Therefore, by scheduling the technology upgrades during maintenance periods, fac ilities could minimize the net impact of their system changes. For the purposes of analyzing the regulatory analysis options, the Agency assumed that the typical scheduled annual maintenance downtime would be four weeks. During the downtime period, the facility’s cooling-water de pendent operations would most likely be halted, with a potential loss of revenue and income from those operations. Accordingly, a key element of the cost to facilities in complying with the standards set forth under each anal ysis option for Phase III existi ng facilities is the loss in income from installation downtime. In the facility impact analyses, EPA accounted for the cost of installation downtime as the loss in pre-tax income in the facility’ s affected business operations. The cost of installation downtime is accounted for as a loss in revenue offset by a reduction in variable costs in the affected business operation plus any increase in operating costs due to tempor ary removal of the cooling water intake system from service. The cost and impact analysis discussion for potentially regulated manufacturing industry segments provides additional detail on the calculation of the cost of installation downtime (see Chapter C3).
C1-1.3 Administrative Cost s for Complying Facilities Compliance with the standards set forth under each anal ysis option requires Phase III existing facilities to carry out certain administrative functions, which help them determine their compliance requirements and provide the documentation needed for issuance of their new Natio nal Pollution Discharge Elimination System (NPDES) permits. These administrative functions are either one-time requirements (compilation of information for the initial post-promulgation NPDES permit) or recurring requirements (compilation of information for subsequent NPDES permit renewals; and monitoring , record keeping, and reporting).

a. Initial post-promulgation NPDES permit application The regulatory analysis options requi re Phase III existing facilities to submit information regarding the location, construction, design, and capacity of their existing or proposed cooling water intake structures, technologies, and operational measures, as part of their initial post-promulgation NPDES permit applications. Some of these activities would be required under the current case-by-case cooling water intake structure (CWIS) permitting procedures, regardless of the potential standards for Ph ase III existing facilities, but are still included in EPA’s compliance cost estimate; therefore, the permitting costs presented in this economic analysis may be overestimated. EPA took this approach, however, because there is no way to identify which of these requirements may otherwise be required. Activities and costs associated with the initial permit renewal application include:

f 

### Start-up activities: reading and understanding the rule; mobiliz ing and planning; and training staff.

f 

### Permit application activities: developing a statement of the compliance option selected; developing drawings that show the physical characteristics of th e source water; developing a description of the CWIS configuration and location; developing a facility water balance diagram; developing a narrative of CWIS and cooling water system (CWS) operational char acteristics; performing engineering calculations; submitting materials for review by the Director; and keeping records.

. 1 

### For a discussion of scheduled maintenance outages, see the Phase III Technical Development Document

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### In addition, the initial permit renewal application wo uld require some facilities to conduct a comprehensive demonstration study. 2 

### The comprehensive demonstration study is a broad set of activities meant to: (1) characterize the source water baseline in the vicinity of the intake structure(s); (2) characterize operation of the cooling water intake(s); and (3) confirm that the tec hnology(ies), operational measures, and restoration measures proposed and/or implemented at the CWIS meet the app licable performance standards. The following activities are associated with the comprehe nsive demonstration study portion of the initial permit application:

f 

### Proposal for collection of information for comprehensive de monstration study: describing historical studies that would be used; describing the proposed and/or implemented technologies, operational measures, and restoration measures to be evaluate d; developing a source water sampling plan; submitting data and the plan for review; revising the plan based on State review; and keeping records;

f 

### Source waterbody flow information : gathering information to characterize flow (for freshwater rivers/streams only); developing a description of the thermal stratification of the waterbody (for lakes/reservoirs only); performing engineering cal culations; submitting data for review; and keeping records;

f 

### Design and construction technology plan: delineating hydraulic zone of influence; developing narrative descriptions of technologies; performing engineeri ng calculations; submitting the plan for review; and keeping records;

f 

### Impingement mortality and/or entrainment characterization study: performing biological sampling; performing impingement and entrainment monitoring; conducting laboratory an alyses; profiling source water biota; identifying critical species; developing a description of additional stresses; developing a report based on study results; revising the report based on State review; and keeping records;

f 

### Verification monitoring plan: developing a narrative description of the frequency of monitoring, parameters to be monitored, and the basis for dete rmining the parameters and frequency and duration of monitoring; submitting data and a plan for review; re vising the plan based on State review; and keeping records. Finally, Phase III existing facilities would have to submit a plan that describes the installation, operation, and maintenance, of the technology(ies) proposed and/or implemented at the CWIS(s):

f 

### Technology installation and operation plan: developing an installation and maintenance schedule; describing the proposed monitoring parameters; lis ting the technology effi cacy assessment activities; developing a schedule and methodology for efficacy assessment activities; submitting plan for review; and keeping records. Table C1-2, following pages, lists the estimated maximu m costs of each of the initial post-promulgation NPDES permit application activities described above. The specifi c activities that a facility would have to undertake depend on the facility’s source water body type, propor tional flow thresholds, and its baseline technologies inplace. Certain activities are expected to be more costly for marine facilities than for freshwater facilities. 3 

### Some activities would be required of all facilities, while othe r activities would be required only if the facility exceeds the capacity utilization rate or proportional flow thresholds. Facility administrative cost estimates were developed for the activities that facilities were e xpected to perform under the three regulatory analysis options considered. Hourly burden estimates for each activity are based on the anticipated effort to perform these activities under

2

3 

### For more information on the Comprehensive Demonstration Study, please refer to EPA’s Information Collection Request (U.S. EPA, 2006a). For permitting requirements, marine facilities incl ude those withdrawing from the Great Lakes.

C1-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### normal conditions. For a more extensive discussion of th e estimated administrative burden and costs associated with the regulatory analysis options, see the suppor ting statement for the EPA ICR (DCN 9-2730). The table shows that certain Phase III existing facilities w ould only have to carry out a minimal set of permitting requirements (i.e., start-up activities and permit applicati on activities). Facilities with such minimal requirements include (1) facilities that have recirculating systems in the baseline and (2) facilities that already have or are required to install certain pre-approved technologies (including cylindrical wedgewire screens) and that only have to comply with impingement requirements. Freshwater facilities that would have to meet both impingement and entrainment standards and that already have or are require d to install a pre-approved technology have to develop a technology installation and opera tion plan and a verification monitoring plan in addition to the minimal activities. The maximum initial permitting cost is estimated to be approximately $974,000 for a facility that would have to meet both impingement and entrainment standard s and that withdraws from a marine waterbody.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs

c Activity

- ments )PreI-only E-only I&E I-only E-only I&E

b $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 Permit application

a $11,000 $11,000 $11,000 $11,000 $11,000 $11,000 $11,000 $11,000

comprehensive b $0 $0 $14,000 $14,000 $14,000 $14,000 $14,000 $14,000

a $0 $0 $4,000 $4,000 $4,000 $0 $0 $0

a $0 $0 $3,000 $3,000 $4,000 $3,000 $3,000 $4,000 Impingement mortality $0 $0 $350,000 $405,000 $508,000 $631,000 $738,000 $933,000

c

a $0 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000

plan a $0 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000

$13,000 $22,000 $393,000 $448,000 $552,000 $670,000 $777,000 $974,000 d

a
b

d

;

I&E: Source: 

### Table C1-2: Cost of Initial Post-Promulgation NPDES Permit Application Activities ($2004) Estimated Cost per Permit

Minimal Require Freshwater Marine (incl. Great Lakes
Appr. with I&E Start-up activities

activities Proposal for collection of information for demonstration study Source waterbody flow information Design and construction technology plan

and/or entrainment characterization study Technology installation and operation plan $3,000 Verification monitoring $7,000
Total Initial PostPromulgation NPDES Permit Application Cost The costs for these activities are incurred during the year prior to the permit application. The costs for these activities are incurred during one year, three years prior to the permit application. The costs for these activities are incurred during the three years prior to the permit application. Individual numbers may not add to total due to independent rounding. Key to permitting types: Minimal requirements: Has recirculating systems in the baseline or already has or is required to install a pre-approved technology and only has to comply with impingement requirements. Pre-appr. with I&E: Already has or is required to install a pre-approved technology and has to comply with impingement and entrainment requirements. I-only: Only has to comply with impingement requirements. E-only: Only has to comply with entrainment requirements. Has to comply with both impingement and entrainment requirements. U.S. EPA, 2006a.


### Another potential cost associated with the initial NPDES permit is pilot studies of compliance technologies. Facilities carry out pilot studies to de termine if the compliance technology w ould function properly when installed and operated. EPA assumed that any facility with both I&E requirements would consider doing a pilot study, except if (1) the technology is sufficiently inexpensive to install ($500,000 or less) or (2) the technology is such that a scaled down version is infeasible. EPA further assu med that a pilot study would cost either $162,000 or 10% of technology installation costs, whichever is gr eater. Activities associated with pilot studies include:

f 

### Deploying the pilot technology: installing an intake pipe separate fr om the facility’s actual cooling water system, but in the vicinity of the operating CWIS; in stalling the proposed techno logy to feed into the separate intake pipe; and pumping water through th e intake pipe under various pumping scenarios and seasonal conditions;

C1-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs

f 

### Monitoring efforts: collecting five samples over a 24 hour period, every two weeks for six months;

f 

### Evaluation of data: analyzing the data; summarizing the results; and using this information to evaluate the effectiveness of the technology. In addition to the activities described above, some facilities would be expected to conduct a site-specific determination of Best Technology Available (BTA). Sin ce activities associated with site-specific determinations are voluntary and would only be conducted if the facilities expected th em to be less expensive than complying with the requirements for Phase III existing facilities, EPA di d not include site-specific determination costs in its compliance cost estimates.
b. Subsequent NPDES permit renewals Each facility would have to apply for NPDES permit re newal every five years. Subsequent permit renewal applications would require collecting and submitting the sa me type of information required for the initial permit renewal application. EPA expects that facilities ca n use some of the information from the initial permit application. Building upon existing information is expected to require less effort than developing the data the first time, especially in situations wh ere conditions have not changed. Table C1-3 lists the maximum estimated costs of each of the NPDES repermit application activities. The specific activities that a facility would have to undertake depend on the facility’s source water body type, proportional flow thresholds, and its baseline technologies in-place. Certain activities are expected to be more costly for marine facilities than for freshwater f acilities. Some activities would be required of all facilities, while other activities would be required only if the facility exceeds the capacity utilization rate or proportional flow thresholds. The maximum repermitting cost is estimated to be approximately $331,000 for a facility that would have to meet both impingement and entrainment sta ndards and that withdraws from a marine waterbody.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs

a 

### ($2004)

Activity

- ments )PreI-only E-only I&E I-only E-only I&E
$1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 Permit application $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000

comprehensive $0 $0 $4,000 $4,000 $4,000 $4,000 $4,000 $4,000

$0 $0 $1,000 $1,000 $1,000 $0 $0 $0
$0 $0 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 Impingement mortality $0 $0 $137,000 $168,000 $171,000 $251,000 $312,000 $316,000

$0 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000

b $8,000 $9,000 $153,000 $184,000 $187,000 $266,000 $326,000 $331,000

a
b

I&E: Source: 

### Table C1-3: Cost of NPDES Repermit Application Activities Estimated Cost per Permit

Minimal Require Freshwater Marine (incl. Great Lakes
Appr. with I&E Start-up activities

activities Proposal for collection of information for demonstration study Source waterbody flow information Design and construction technology plan

and/or entrainment characterization study Technology installation and operation plan $2,000
Total Initial PostPromulgation NPDES Permit Application Cost The costs for these activities are incurred during the year prior to the permit application. Individual numbers may not add to total due to independent rounding. Key to permitting types: Minimal requirements: Has recirculating systems in the baseline; or already has or is required to install a pre-approved techn ology and only has to comply with impingement requirements. Pre-appr. with I&E: Already has or is required to install a pre-approved technology and has to comply with impingement and entrainment requirements. I-only: Only has to comply with impingement requirements. E-only: Only has to comply with entrainment requirements. Has to comply with both impingement and entrainment requirements. U.S. EPA, 2006a.



### c. Annual monitoring, record keeping, and reporting Annual monitoring, record keeping, and reporting activities and costs include:

f 

### Biological monitoring for impingement: collecting monthly samples for at least two years after the initial permit issuance; analyzing samples; performing statistical analyses; and keeping records;

f 

### Biological monitoring for entrainment: collecting biweekly samples during the primary period of reproduction, larval recruitment, and peak abundance for at least two years after the initial permit issuance; handling and preparing samples; conductin g laboratory analyses; performing statistical analyses, and keeping records;

f 

### Bi-annual status report activities: reporting on inspection and maintenance activities; detailing biological monitoring results; compiling and submitting the re port; and keeping records; (these activities are conducted every two years, instead of annually);

C1-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs

f 

### Verification study: conducting technology performance monito ring; performing statistical analyses; submitting monitoring results and stud y analysis; and keeping records;
Table C1-4 lists the estimated costs of each of the mon itoring, record keeping, a nd reporting activities described above. Certain activities would be more costly for mari ne facilities than for freshwa ter facilities. The maximum annual cost is estimated to be approximately $82,000 for a facility that would have to meet both impingement and entrainment standards and that withdraws from a marine waterbody.

) Activity PreI-only E-only I&E I-only E-only I&E ments Biological monitoring $0 $0 $19,000 $0 $19,000 $24,000 $0 $24,000 for impingement Biological monitoring $0 $39,000 $0 $39,000 $39,000 $0 $49,000 $49,000
$0 $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 a Total Annual Monitoring, Record $0 $48,000 $28,000 $48,000 $67,000 $33,000 $58,000 $82,000 Cost

a $0 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000

a

b

;

I&E: Source: 

### Table C1-4: Cost of Annual Monitoring, Reco rd Keeping, and Reporting Activities ($2004) Estimated Cost per Permit Freshwater Marine (incl. Great Lakes MinimalRequireAppr. with I&E

for entrainment Bi-annual status report activities

Keeping, and Reporting
Verification study This is a cost that is incurred once every two years. Ther efore, only half of the total report cost of approximately $17,000 is accounted for in this annual framework. This is a one-time cost incurred during the year of compliance. Key to permitting types: Minimal requirements: Has recirculating systems in the baseline or already has or is required to install a pre-approved technology and only has to comply with impingement requirements. Pre-appr. with I&E: Already has or is required to install a pre-approved technology and has to comply with impingement and entrainment requirements. I-only: Only has to comply with impingement requirements. E-only: Only has to comply with entrainment requirements. Has to comply with both impingement and entrainment requirements. U.S. EPA, 2006a.


### C1-1.4 Administrative Costs for Permitting Authorities and the Federal Government In addition, permitting authorities woul d have to review the information provided by Phase III existing facilities and would have to issue new NPDES permits that refl ect the requirements of each potential option. These activities would impose costs on the responsible governmental entity. The requirements of section 316(b) are implemented th rough the National Pollutant Discharge Elimination System (NPDES) permit program. Forty-five States and one Territory currently have NPDES permitting authority under section 402(c) of the Clean Water Act (C WA). EPA estimates that States and Territories would incur three types of costs associated with implementing the requirements of each potential option: (1) start-up

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### activities, (2) permitting activities associated with the initial NPDES permit containing the new section 316(b) requirements and subsequent permit renewals, and (3) annual activities. 4 

### Start-up costs would be incurred only once by each of the 46 permitting authorities. Permitting costs and annual activities would be incurred for every permit. The incr emental administrative burden on States would depend on the extent of each State’s current practices for regulati ng cooling water intake structures (CWIS). States that currently require relatively modest analysis, monitoring , and reporting of impacts from CWIS in NPDES permits may require more permitting resources to implement th e standards for Phase III existing facilities than are required under their current programs. Conversely, Stat es that currently require very detailed analysis may require fewer permitting resources to implement a potentia l rule than required under their current programs. In addition to costs to permitting authorities, the Federal government would likely incur costs to review those parts of NPDES permits associated with the compliance re quirements of a potential rule and to ensure that the permitting authorities implement a potential rule properly.
For a detailed discussion of administrative costs for permitting authorities and th e Federal government see Chapter D2: UMRA Analysis , section D2-1.2.


## C1-2 K EY 

## E LEMENTS OF THE 

## E CONOMIC 

## A NALYSIS 

## F OR 

## P HASE 

## III E XISTING 

## F ACILITIES 

### The economic analysis conducted in analyzing the potential requirements for Phase III existing facilities addresses the cost to, and impact on, the affected industry segments and society generally. Although these analyses differ in important respects for the individual indus try segments – particularly in terms of the analytic models and methods for assessing the economic/financial impact on complying parties within the segments – several elements of the analysis have features common to all Phase III existing facilities. This section reviews the following key common elements:

f 

### Compliance Schedule
f 

### Adjusting Monetary Values to a Common Time Period of Analysis
f 

### Discounting and Annualization: Costs to Society or Social Costs
f 

### Discounting and Annualization: Costs to Complying Facilities C1-2.1 Compliance Schedule For its analysis of the cost and impacts of the regul atory analysis options, EPA developed a profile of the expected compliance year for each of the sample faciliti es considered in the economi c analysis. The estimated compliance years of facilities are important for two reasons:

f 

### First, the compliance years determine the timing of out lays by facilities and society in complying with the regulation, both for the initial outlays and for the ongoing profile of outlays in maintaining compliance with the regulation. This information is important in properly assessing the present value of the regulation’s costs to society.

f 

### Second, the profile of compliance is likewise important in understanding the tim e profile, and thus present value, of benefits achieved by compliance with th e regulation. Explicit analysis of the compliance schedule is particularly important for the benefits analysis because the regulation’s benefits are not achieved instantly upon facilities’ reaching compliance, but build up over a period of several years.

4 

### The costs associated with implementing the requirements for Phase III existing facilities are documented in EPA’s Information Collection Request (U.S. EPA, 2006a).

C1-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### Accordingly, EPA also used the compliance schedule developed for the cost and impact analysis in developing the time profile of benefits. EPA initially assumed that facilities would comply with each options respective requirements during the year their first post-promulgation NPDES permit is issued (based on a 5-year permit cycle, this would be 2007 to 2011). However, since some of the permitting requirements need to be performed over a three-year period prior to compliance, facilities that would be renewing NPDES perm its within the first three years after promulgation of the final Phase III rule (2007 to 2009) would not comply until their second post-promulgation NPDES permit is issued (2012 to 2014). From these assumptions, EPA est imates that all facilities would come into compliance between 2010 and 2014. Following research on when sample facilities’ current NPDES permits would expire and thus need to be renewed, EPA developed an explicit compliance schedule for all Phase III existing facilities in the analysis. C1-2.2 Adjusting Monetary Values to a Common Time Period of Analysis
The various economic information used in the cost and impact analyses was initially provided or estimated in dollars of different years. For example, facility financial data obtained in the Detailed Questionnaire for Manufacturers are for the years 1996, 1997, and 1998, while the technology costs of regulatory compliance were estimated in dollars of the year 2002. To support a c onsistent analysis using the se data that were initially developed in dollars of different years, EPA needed to br ing the dollar values to a common analysis year. For this analysis, EPA adjusted all dollar values to constant dolla rs of the year 2004 (average or mid-year, depending on data availability) using an appropriate inflation adjustment index. For adju sting compliance costs, EPA used the Construction Cost Index (CCI ) published by the Engineering News-Record. For financial statement information, EPA used the Gross Domestic Product Implicit Price Deflator (GDP Deflator ) to bring dollar values to mid-year 2004. In some instances, EPA used the Producer Price Index series for a specific industry to adjust values to a common analysis year.

a. CCI EPA used the CCI to adjust complianc e cost estimates from July 2002 to mid-year 2004. EPA judges the CCI as generally reflective of the cost of installing and operating process and tr eatment equipment such as would be required for compliance with the options considered for this regulation. Table C1-5 shows CCI values for midyear 2002, 2003 and 2004.

Table C1-5: Construction Cost Index Year Value % Change 2002 6605 2003 6694 1.3% 2004 7115 6.3% Source: ENR, 2006.



### b. GDP Deflator EPA used the GDP Deflator to adjust 316(b) survey financial data from 1996-1998 to 2004. The GDP Deflator is a quarterly series that measures the implicit change in prices, over time, of the bundle of goods and services comprising gross domestic product. Table C1-6 shows GDP Deflator values from 1996 to mid-year 2004. From 1998 to 2004, the total change in the deflator series was approximately 13.0% (109.0/96.5).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### Table C1-6: GDP Deflator Series Year Value 1996 93.847 % Change

1997 95.410 1.7% 1998 96.468 1.1% 1999 97.862 1.4% 2000 99.997 2.2% 2001 102.399 2.4% 2002 104.185 1.7% 2003 106.298 2.0% 2004 Q2 108.987 2.5% Source: U.S. DOC, 2006.


### C1-2.3 Discounting and Annualization – Costs to Society or Social Costs Discounting refers to the economic conve rsion of future costs (and benefits) to their present values, accounting for the fact that society tends to value fu ture costs or benefits less than comparable near-term costs or benefits. Discounting is important when the values of costs or be nefits occur over a multiple year period and may vary from year to year. Discounting is also important when the time profiles of costs and benefits are not the same – which is the case for the regulatory analysis of Phase III existing facilities. Discounting enables the accumulation of the cost and benefit values from multiple years to a si ngle point in time, accounting for the difference in how society values those costs and benefits depending on the year in which the valu es are estimated to occur. To estimate the social costs of options considered in developing potential requirements for Phase III existing facilities, EPA first developed a profile, over the period of analysis, of the compliance costs associated with each of the regulatory analysis op tions. EPA defined the period of analysis as starting with the assumed date that a rule would take effect, beginning of year 2007, and extending th rough the latest year in which any affected facility is assumed to reach compliance (2014) plus a period of 30 years in which facilities are assumed to continue compliance. Thus, for the social cost analysis for Pha se III existing facilities, the analysis period extends to 2043. In developing the time profile of costs, EPA assigned costs according to the following schedule:
 Direct Costs of Regulatory Compliance

f 

### Capital Costs of Compliance Technology: This cost is first incurred in the year that the facility’s first post-promulgation permit is issued. However, the equipment for complying with the regulation is expected to have a useful life of 10 years, or a period shorter than the 30 years of compliance. Accordingly, following the first installation, facilities are assumed to reinstall, and re-incur the cost of, the compliance equipment at year 11 and year 21 of the facility-specific compliance period.

f 

### Cost of Installation Downtime: This cost is incurred in the year that the facility installs the technology. Although the compliance technology must be reinstalled at a 10-year interval over the analysis period, the engineering analysis of compliance requirements indicates that facilities would not need to incur additional installation downtime for reinstalla tion of the compliance technology equipment.

f 

### Compliance Technology Operation and Maintenance: This cost is assumed to occur in each year of a facility’s 30-year compliance period.

f 

### Pilot Study: Pilot study costs are incurred one year before the facility’s first post-promulgation permit is issued.

C1-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



###  Administrative Costs Incurred by Complying Facilities

f 

### Impingement Mortality and Entrainment Characterization Study: All facilities conduct this two- or three-year study except those that already have recirc ulating systems in the baseline and those that already have or are installing a pre-approved technology. Th e cost of this study is incurred over the years immediately preceding the facility’s first post-promulgation permit, but not including the first year of compliance. Facilities withdrawing from a marine wate rbody (including the Great Lakes) are required to do a three-year study; facilities withdrawing from a freshwater body are required to do a two-year study.

f 

### Initial Permitting Cost: In addition to incurring the cost of characterization studies, complying facilities would also incur an initial permitting cost, which is assigned to the first year of a facility’s 30-year compliance period.

f 

### Repermitting Costs: As explained above, facilities would need to renew their NPDES permits each five years during the period of compliance. Repermitting cost s are assumed to recur at years 5, 10, 15, 20, and 25 of a facility’s 30-year compliance year period. If a facility were to continue compliance beyond the assumed 30-year compliance period, it would incur an a dditional round of repermitting costs in year 30 of the compliance period. However, these costs woul d be incurred to support compliance in years beyond the 30 th 

### year of compliance, and were therefore not accounted for in this analysis.

f 

### Annual Monitoring, Record Keeping, and Reporting Activities: This cost is assumed to occur in each year of the 30-year compliance year period.
 Administrative Costs Incurred by Permitting Authorities

f 

### One-time Start-up Costs: This cost is assigned to the year the rule would take effect (2007).

f 

### Permit Processing Costs: These costs are assigned to the years in which facilities apply for initial permits or renewal permits during the compliance period.

f 

### Annual Permit Administration Activities: The cost of these activities is assu med to occur in parallel with the annual permit-related activities by complying faciliti es and thus occurs in each year of a facility’s compliance period.
 Administrative Costs Incurred by the Federal Government

f 

### Permit Review: The Federal government is assumed to review the first permit for each Phase III existing facility that would include the new 316(b) requirement s specified under each regulatory analysis option. Federal administrative costs would therefore be incurred between 2010 and 2014. For each option analyzed, EPA assigned costs by facility and governmental unit according to this framework and then summed these costs on a year-by-y ear basis over the total time period of analysis. For the social cost analysis, these costs were tallied on a pre-tax basis, whic h differs from the treatment of costs for the facility impact analysis as described below. These profiles of co sts by year were then discounted to the assumed date the final rule would take effect, beginni ng of year 2007, at two values of the social discount rate, 3% and 7%. These discount rate values reflect guidance from the Office of Management and Budget regulatory analysis guidance document, Circular A-4 (OMB, 2003). 5

5 

### See Chapter E1: Summary of Social Costs , for further discussion of the framewor k for analyzing the social costs of the 316(b) Phase III regulation.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### EPA used the following formula to calculate the present value of the time stream of costs as of the beginning of 2007 6 

### :



## Value Present = 

# ∑ Cost t 

## (1 + r ) t

− 2007 

### (C1-1)
t


### where:
Cost t 

### = Costs in year r = Social discount rate (3% and 7%) t = Year in which cost is incurred (2007 to 2043) After calculating the present value (PV) of these cost stre ams, EPA calculated their c onstant annual equivalent value (annualized value) using the annualization formula pr esented below, again using the two values of the social discount rate, 3% and 7%. Although the analysis peri od extends from 2007 through 2043, a period of 37 years, EPA annualized costs over 30 years, since 30 years is the assumed period of compliance. This same annualization concept and period of annu alization were also followed in the analysis of benefits, although for benefits the time horizon of analysis for calculating the present value is longer than for costs because the measurable benefits will not occur immediately after the control technologies are put into place. Using a 30-year annualization period for both social costs and benefits a llows comparison of constant annual equivalent values of costs and benefits that have been calculated on a mathema tically consistent basis. The annualization formula is as follows:

( n
− 1) 

## r × (1 + r ) (C1-2) 

## Cost Annualized = x Cost of PV
n 

## (1 + r )

− 1

where: r = Social discount rate (3% and 7%) n = Annualization period, 30 years for the social cost analysis C1-2.4 Discounting and Annualization – Costs to Complying Facilities In general, EPA followed similar c oncepts and procedures in the discounting and annualization required for the analysis of costs to, and impacts on, complying facilities as those followed for the analysis of social costs. However, the analysis of costs to complying facilities diffe rs from that for costs to society in several important ways, which are described below.

f 

### Consideration of taxes. For understanding the impact of the regulation on complying facilities, the costs incurred by complying facilities are adjusted for taxes, as relevant, and calculated on an after-tax basis. The tax treatment of compliance outlays and income effects (e.g., from installation downtime) shifts part of these costs to the tax-paying public and reduces the actual cost to private, tax-paying businesses. For this reason, the after-tax costs of compliance are a more meaningful measure of the financial burden on complying facilities than the pre-tax costs. In anal yzing and reporting the impact of compliance costs on private facilities, annualized costs are ther efore calculated on an after-tax basis.

6 

### Calculation of the present value assumes that the cost is incurred at the beginning of the year.

C1-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs

f 

### Use of discount rates in present va lue and annualization calculations. The discount rate used in the facility cost calculations generally has a different inte rpretation than the rate u sed for the social cost calculation (even though, in some instances, the numerical value of the rate may be the same). Instead of being a social discount rate, the discount rate used for the present value and annualization calculations for complying facility costs represents a cost of capital to the individual complying facility, which may reasonably differ from the concept of the social discount rate. The social discount rate may be derived on several bases, including: (1) as an opportunity cost of capital to society or (2) as a societal inter-temporal preference or indifference rate – i.e., the required rate of change over time in a value of consumption or outlay, at which society would be indifferent to the time period in which the consumption or outlay occurs. The discount rates based on these society-level concepts may reasonably differ from the cost of capital used for assessing costs and financ ial impacts to the complying firm.

f 

### Calculation of present value and annualiza tion of costs at the year of compliance. In the social cost analysis, costs incurred over 30 years were summed on a present value basis at the beginning of 2007, the assumed date the potential regulation would take effect. The present value was then annualized over 30 years. The analysis of costs to complying facilities differs in two respects: (1) Costs were calculated on a present value basis and annualized at the first year of co mpliance for each facility , rather than at the beginning of 2007. The calculation of annualized costs at the first year of compliance provides more accurate and meaningful insight for assessing financial impact in relation to the baseline financial performance and conditions of the complying facility th an would be achieved if, for example, costs were further discounted – and reduced numerically – by bringi ng them to the year the rule would take effect. (2) Each non-annually recurring cost component was only accounted for once , rather than repeated at each occurrence over the 30-year period. EPA accounted for the recurring nature of these costs (e.g., technology costs are assumed to recur every 10 years) through the annualization period (see bullet below). The resulting aggregates of annualized cost over f acilities, for purposes of reporting total cost to complying facilities and total financial burden, are the sum of costs at the initial year of compliance for each facility, even though those years differ across fac ilities. EPA used the following formula to calculate the present value of the time stream of costs as of the beginning of each facility’s compliance year: 7


## Cost t x , 

### (C1-3) 

## Value Present = 

# ∑ ( 1 + r 

# ) t

− Year Compliance x t 

### where:
Cost x,t 

### = Costs incurred by facility x in year t r = Discount rate (7%) t = Year in which cost is incurred (2007 to 2018) 8 

### Compliance Year x 

### = Estimated compliance year of facility x.

f 

### Annualization period. The present value estimates of the one-time or non-annually recurring costs were then annualized over the relevant period for which the outlay is expected to produce compliance value. The capital outlays for compliance equipment installati on were annualized over the expected useful life of the compliance equipment, 10 years. The income loss from installation downtime was annualized over

7 

### Calculation of the present value assumes that the cost is incurred at the beginning of the year. 8 

### The first compliance year is 2010. A facility with a 2010 compliance year and a 3-year study requirement would incur its first costs in 2007. The last compliance year is 2014. A facility with a 2014 compliance year would incur the costs of it s last non-annual recurring cost component, repermitting, five years after compliance, in 2018.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



### the facility’s 30-year compliance period. Although comp liance equipment would need to be reinstalled at 10-year intervals during the compliance period, the engineering analysis indicates that reinstallation would not require additional downtime. Thus, the re levant period for annualization of the income loss from installation downtime is the full 30 years of co mpliance assumed for this analysis. The pre-permit study costs and other initial permitting costs were also annualized over the 30-year compliance period while repermitting costs were annualized over 5 years, the interval at which these costs occur. All annualized cost values, which were developed on a consistent discounting and annualization basis, can then be summed with annually recurring costs (e.g., a nnual operating and maintenance expense) to yield a total annualized cost to complying facilities. The annualization formula is as follows:

( n
− 1) 

## r × (1 + r ) (C1-4) 

## Cost Annualized = x Cost of PV
n 

## (1 + r )

− 1
where: r = Discount rate (7%) n = Annualization period (10 years for compliance equipment; 30 years for installation downtime and initial permitting costs; 5 years for repermitting costs) See Chapter C3 for additional detail on the present value and annualization concepts and procedures used in the specific analyses for existing manufacturing facilities.

C1-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



## R EFERENCES 

### Engineering News-Record (ENR). 2006. Construction Cost Index . Available at: http://enr.ecnext.com/freescripts/comsite2.pl?page=enr_docum ent&article=fecosu0603-cons tIndexHist. (Historical data requires subscription or purchase.)
Federation of Tax Administ rators (FTA). 2006. Range of State Corporate Income Tax Rates (for tax year 2005)

. http://www.taxadmin.org/fta/rate/corp_inc.html, accessed January 20, 2006. Office of Management and Budget (OMB). 2003. Executive Office of the President. Circular A-4, To the Heads of Executive Agencies and Establishments; Subject: Regulatory Analysis. September 17, 2003.
U.S. Department of Commerce (U.S. DOC). 2006. Bur eau of Economic Analysis (BEA). Gross Domestic Product. Table 1.1.9: Implicit Price Deflators for Gross Domestic Product (GDP) . Release December 12, 2005. Available at: http://www.econs tats.com/gdp/gdp__q4.htm.
U.S. Department of the Treasury. 2005. Internal Revenue Service (IRS). 2005 Instructions for Forms 1120 & 1120-A. pg. 16 (Federal tax rates).
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Information Collection Request for Cooling Water Intake Structures at Phase III Facilities (Final Rule) . ICR Number 2169.01. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-003. June 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C1-17§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities C1: Summary of Costs



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C1-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2: Profile of Manufacturers 

# Chapter C2: Profile of Manufacturers

I NTRODUCTION 

### Using information from the 1982 Census of Manufactures, effluent guideline development materials, and subsequent research on industries since Proposal, EPA identified five 2-digit SIC-code manufacturing industries that would likely be subject to regulation under section 316(b). After the electric power industry, these industries – Paper and Allied Products (SIC 26), Chemicals and Allied Products (SIC 

## C HAPTER 

## C ONTENTS
C2A ) C2C C2D C2E C2F ( C2G Paper and Allied Products (SIC26) .........C2A-1 C2B Chemicals and Allied Products (SIC 28 C2B-1 Petroleum Refining (SIC 2911) ..............C2C-1 Steel (SIC 331)........................................C2D-1 Aluminum (SIC 333/5) ........................... C2E-1 Food and Kindred Pro ducts SIC 20)...... C2F-1 Other Industries.......................................C2G-1 Glossary .......................................................... C2Glos-1 

### 28), Petroleum Refining (SIC 2911), Primary Metal Industries (SIC 33), and Food and Kindred Products (SIC 20) – are most reliant on cooling water for their operations. Facilities in other industries also use cooling water and c ould therefore be subject to section 316(b) regulations; however, based on the 1982 Census of Manufactures data and engineering-based insight into industrial use of cooling water, the cooling water intake flow of these remaining industries is small relative to that of the power industry and the five selected industries. Therefore, this Profile of Manufacturers focuses on the manufacturing groups listed above. In its review of these industries, EPA divided the Primary Metal Industries (SIC 33) into Steel (SIC 331) and Aluminum (SIC 333/335) based on the business and other operational differences in these two major segments. The resulting six manufacturing indu stries – (1) Paper and Allied Products, (2) Chemicals and Allied Products, (3) Petroleum and Coal Products, (4) Steel, (5) Aluminum, and (6) Food and Kindred Products – comprise the “Primary Manufacturing Industries,” as referred to in this prof ile and elsewhere in this Economic Analysis report. A key data source for EPA’s analysis for the 316(b) Phase III regulation is the detailed questionnaire issued to a sample of facilities identified as potentially subject to the Phase III regulation. Based on responses to a screener survey, EPA targeted the detailed questionnaire to f acilities believed to be in the major cooling water-use industries, including the electric power industry, listed above. EPA received a number of responses from facilities with business operations in industries other than the manufacturing industries listed above. EPA originally believed these facilities to be non-utility electric power generators; however, inspection of their responses indicated that the facilities were better understood as cooling water-dependent facilities whose principal operations lie in businesses other than the electric power industry or manufacturing indus tries listed above. This profile includes information for these faciliti es, referred to as “Other Industries.” The remainder of this chapter is divided into seven sections:

f 

### C2A: Paper and Allied Products (SIC 26),
f 

### C2B: Chemicals and Allied Products (SIC 28),
f 

### C2C: Petroleum and Coal Products (SIC 29),
f 

### C2D: Steel (SIC 331),
f 

### C2E: Aluminum (SIC 333/335),
f 

### C2F: Food and Kindred Products (SIC 20), and
f 

### C2G: Other Industries. Each industry section, except for “Other Industries,” is di vided into the following five subsections: (1) summary insights from this profile, (2) domestic production, (3) st ructure and competitiveness, (4) financial condition and

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2: Profile of Manufacturers



### performance, and (5) facilities potentially subject to th e Phase III regulation. The “Other Industries” section contains only summary information for those facilities for which questionnaire responses were received; this section does not include the industry specific discussions si nce the “Other Industry” facilities are in a variety of different industries, which, as noted above, rely to a mu ch less substantial degree on cooling water to support their operations. This profile uses the Standard Industrial Classification (S IC) system as the primary framework for analyzing and reporting information about the industries analyzed fo r the section 316(b) Phase III regulation. However, the more recent data were often reported in the North Am erican Industry Classification System (NAICS), which the U.S. Census Bureau adopted in 1997 for economic re porting. Where necessary, EPA converted information reported in the NAICS framework to the SI C framework using the 1997 Economic Census Bridge Between NAICS and SIC . In most instances, these translations are st raightforward; however, for some segments, the translation may introduce inconsistencies in data serie s at the point of changeover from the SIC to the NAICS frameworks.

C2-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products 

# Chapter C2A: Paper and Allied Products (SIC 26)

I NTRODUCTION


### EPA’s Detailed Industry Questionnaire , hereafter referred to as DQ, identified five 4-digit SIC codes in the Paper and Allied Products industry (SIC 26) with at least one existing facility that operates a CWIS, holds a NPDES permit, and withdraws equal to or greater than two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes. (Facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). For each of the five SIC codes, Table C2A-1, following page, provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnaire respondents (weighted to represent a national total of facilities that hold a NPDES permit and operate cooling water intake structures), the number of facilities estimated to be potentially subject to Phase III regulation based on the minimum withdrawal threshold of 2 MGD, and the number of facilities estimated to be subject to regulation under each analysis option. 

## C HAPTER 

## C ONTENTS 

## :
Introduction..........................................................C2A-1 C2A-1 Summary Insights from this Profile ........C2A-3 C2A-2 Domestic Production...............................C2A-4 C2A-2.1 Output.............................................C2A-5 C2A-2.2 Prices ..............................................C2A-8 C2A-2.3 Number of facilities and firms........C2A-9 C2A-2.4 Employment and productivity ......C2A-11 C2A-2.5 Capital expend itures .....................C2A-13 C2A-2.6 Capacity utiliz ation.......................C2A-14 C2A-3 Structure and Competitiveness..............C2A-15 C2A-3.1 Firm size .......................................C2A-16 C2A-3.2 Concentration ratios......................C2A-16 C2A-3.3 Foreign trade.................................C2A-18 C2A-4 Financial Condition and Performance...C2A-21 C2A-5 Facilities Operating Cooling Water Intake Structures ..............................................C2A-22 C2A-5.1 Waterbody and Cooling System Type...... ...................................................C2A-23 C2A-5.2 Facility Si ze..................................C2A-24 C2A-5.3 Firm Size ......................................C2A-26 References..........................................................C2A-28

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers

SIC SIC Total a

Regulated b to 50 MGD All

Option to 200 MGD All

Option 100 MGD CWB Option 2611 Pulp Mills 60 41 14 1 4

2621 Paper Mills 290 133 13 2 5

2631 Paperboard Mills

products. 190 52 13 0 1

Total 540 225 39 3 10

2676

Products 4 2 2 0 0

2679 Converted Paperboard Products, Not Elsewhere 19 3 0 0 0

23 5 2 0 0

563 230 41 3

a b Source: 10 

### Table C2A-1: Phase III Facilities in the Paper and Allied Products Industry (SIC 26)

Description Important Products Manufactured Number of Phase III Facilities Potentially

Facilities Subject Subject Subject to

Pulp from wood or from other materials, such as rags, linters, wastepaper, and straw; integrated logging and pulp mill operations if primarily shipping pulp. Paper from wood pulp and other fiber pulp, converted paper products; integrated operations of producing pulp and manufacturing paper if primarily shipping paper or paper products. Paperboard, including paperboard coated on the paperboard machine, from wood pulp and other fiber pulp; and converted paperboard products; integrated operations of producing pulp and manufacturing paperboard if primarily shipping paperboard or paperboard

Other Paper and Allied Products Segments Sanitary Paper Sanitary paper products from purchased paper, such as facial tissues and handkerchiefs, table na pkins, toilet paper, towels, disposable diapers, and sanitary napkins and tampons.
Paper and Laminated building paper, cigarette paper, confetti, pressed and molded pulp cups and dishes, paper doilies, egg cartons, egg case filler flats, papier-mache, filter paper, foil board, gift wrap paper, wallpaper, etc.

Classified Total Other Total Paper and Allied Products (SIC 26) Total SIC Code 26 Number of weighted detailed questionnaire survey respondents. Individual numbers may not add up due to independent rounding. Executive Office of the President, 1987; U.S. EPA 2000; U. S. EPA analysis, 2006.


### As shown in Table C2A-1, EPA estimates that out of the total of 563 facilities with a NPDES permit and operating cooling water intake structures in the Paper and Allied Products Industry (S IC 26), 41 (or 7.3%) would be subject to the 50 MGD All option, 3 (or 0.5%) would be subject to the 200 MGD All option, and 10 (or 1.8%) would be subject to the 100 MGD CWB option. EPA also estimated the percentage of total production that occurs at facilities estimated to be subject to regulation under each analysis option. Total value of shipments for the Paper And Allied Products industr y from the 2004 Annual Survey of Manufactures is $81.9 billion. Value of shipments, a measure of the dollar value of production, w as selected for the basis of this estimate. Because the DQ did not collect value of shipments data, these data we re not available for Phase III facilities. Total revenue, as

C2A-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### reported on the DQ, was used as a close approximation for value of shipments for these facilities. EPA estimated the total revenue of facilities in the paper industry expect ed to be subject to regul ation under the 50 MGD, 200 MGD and 100 MGD regulatory analysis options to be about $19.1 billion, $1.2 billion, and $4.2 billion, respectively. Therefore, EPA estimates that the percentage of total production in the paper industry that occurs at facilities estimated to be subject to regulation under the 50 MGD, 200 MGD, and 100 MGD options is 23%, 1% and 5%, respectively. The responses to the Detailed Industry Questionnaire i ndicate that three segments account for most of the potential Phase III facilities in the Paper and Allied Products industry: (1) Pulp Mills (SIC 2611), (2) Paper Mills (SIC 2621), and (3) Paperboard Mills (SIC 2631). The remainder of this profile therefore focuses on these three industry segments. Table C2A-2 provides the cross-walk between SIC codes a nd NAICS codes for the profiled paper SIC codes. The table shows that both Pulp Mills and Paperboard Mills have a one-to-one relationship to their NAICS codes. Paper Mills correspond to two NAICS codes (322121 and 322122). NAICS 322121, classified as Paper (except newsprint) Mills, represents a large portion of SIC co de 2621 (93 percent based on value of shipments).

Table C2A-2: Relationship between SIC and NAICS Codes for the Paper and Allied Products Industry (2002 a 

### )
SIC Code SIC Description NAICS Code NAICS Description Establishments Value of Shipments

($000) Employment

2611 Pulp mills 322110 Pulp mills 31 3,650,916 8,043

2621 Paper mills 322121 Paper (except newsprint) mills (pt) 306 42,198,838 96,204
322122 21 2,964,916 6,367 2631 322130 203 21,216,677 48,005

a Source: Newsprint mills Paperboard mills Pape rboard mills Industry data for relevant NAICS codes from the 2002 Economic Census. U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.



## C2A-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of pulp and paper firms to absorb compliance costs under each analysis option without material adverse economic/financial effects. The industry’s ability to withstand compliance costs is primarily influenced by th e following two factors: (1) the extent to which the industry may be expected to shift compliance costs to its customers through price increases and (2) the financial health of the industry and its general business outlook.
 Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, th e pulp and paper industry is relatively unconcentrated, which would suggest that firms in this industry may f ace difficulty in passing through to customers a significant portion of their compliance-related costs. The domestic pulp industry also faces significant competitive pressures from abroad, further curtailing the potential of firms in th is industry to pass through to customers a significant portion of their compliance-related costs. The domestic Paper Mills and Paperboard Mills segments do not face as significant foreign competitive pressures, and, based on this factor, would have more latitude in passing through to customers any increase in production costs r esulting from regulatory compliance. However, foreign pressure is likely to increase as capacity in foreign countri es, particularly China, continues to grow and exert pressure on the domestic market. As discussed above, give n the proportion of total value of shipments in the

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### industry estimated to be subject to regulation under each analysis option,EPA belie ves that the theoretical threshold for justifying the use of industry-wide CPT ra tes in the impact analysis of existing Phase III pulp and paper facilities has not been met. For these reasons, in its analysis of regulatory impacts for the pulp and paper industry, EPA assumed that complying firms would be unabl e to pass compliance costs th rough to customers: i.e., complying facilities must absorb all compliance costs at the time of compliance (see following sections and Appendix 3, Cost Pass-Through Analysis , to Chapter C3: Economic Impact Analysis for Manufacturers , for further information).
 Financial Health and General Business Outlook Over the past decade, the pulp and paper industry, like other U.S. manufacturing industries, has experienced a range of economic/financial conditions, including substantial challenges. In the early 1990s, general economic weakness diminished financial performance in the domestic pulp and paper industry. Domestic market conditions were erratic in the 1990s, with financial perform ance peaking mid-decade, before declining again as overproduction caused a glut of product and decreasing pr ices. Going into 2000, the industry’s financial performance had started to improve, but the subsequent recession and global economic downturn, coupled with continuing overproduction, led to dec lining financial results through 2003. Financial performance in 2004 and 2005, however, showed significant improvement. Going forw ard, the industry continues to face increased foreign competition, global and domestic overc apacity, and difficulty adapting to ch anging business conditions (McNutt, Cenatempo & Kinstrey, 2004). At the same time, with the ongoing improvement in U.S. economic conditions, the pulp and paper industry appears poised to achieve st ronger financial performance in 2006 and later years. This should position firms to better withstand additional regulatory compliance costs without imposing significant financial impacts.


## C2A-2 D OMESTIC 

## P RODUCTION 

### The paper and allied products industry is one of the top ten U.S. manufacturing industries, and among the top five segments in sales of nondurable goods. Growth in the pa per industry is closely tied to overall gross domestic product (GDP) growth. Although the domestic market c onsumes over 90 percent of to tal U.S. paper and allied products industry output, exports have taken on an increasingly important role, and growth in a number of keyforeign paper and paperboard markets are a key factor in the health and expansion of the U.S. industry (McGrawHill, 2000). The industry is considered mature, with grow th slower than that of the GDP, and U.S. producers have actively sought growth opportunities in overseas mark ets. Although exports still represent a small share of domestic shipments, they exert an important marginal influence on capacity utilization. Prices and industry profits, which are sensitive to capacity utilization, have th erefore become increasingly sensitive to trends in global markets. The industry experienced relatively stable production and sales during the 1990s, but saw more volatile capacity utilization, profitability, and prices (Ince, 1999). With the slowing of the U.S. economy in 2000, and the onset of recession in 2001, the resulting drop in demand and prices put pressure on companies in the industry to eliminate excess capacity. Through aggressive consolidation and streamlining of thei r operations, facilities sought to lower ex penses through elimination of older and less cost efficient operations. In 2002, paper companies eliminated three million tons of capacity, with similar reductions expected in 2003 (Value Line, 2003b). The U.S. Paper and Allied Products industry has a worldw ide reputation as a high quality, high volume, and lowcost producer. The industry benefits from many key ope rating advantages, including a large domestic market; the world’s highest per capita consumption; a modern manufactur ing infrastructure; adequate raw material, water, and energy resources; a highly skilled labor force; and an e fficient transportation and distribution network (Stanley, 2000). U.S. producers face growing competition from ne w facilities constructed overseas, however (McGrawHill, 2000).

C2A-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### The industry is a major energy user, second only to the ch emicals and metals industries. However, 56 percent of total energy used in 1998-99 was sel f-generated (McGraw-Hill, 2000). The use of renewable resources (biomass, black liquor, hydroelectric, etc.) for energy production has increased from 40 percent of total industry energy consumption in 1972 to 56 percent in 2000, and is currently estimated to account for about 60 percent of consumption in 2004 (Paper Age, 2004a). C2A-2.1 Output The paper and allied products industry has experienced continued globalization and cyclical patterns in production and earnings over the last two decades. Capital investme nts in the 1980s resulted in significant overcapacity. U.S. producers experienced record sales in 1995. In 1 996, lower domestic and foreign demand, coupled with declining prices, caused the industry’s total shipments to d ecline by 2.2 percent. More recently, three consecutive years of increasing demand and slowly increasing prices le d to better industry performance at the end of the 1990s. During these years, domestic producers controlled ope rating rates to allow drawdown of high inventories and to achieve higher capacity utilization. U.S. producers have also placed a greater emphasis on foreign markets both through export sales and investments in overseas facilities (McGraw-Hill, 2000). The paper products industry recorded improved sales and stronger earnings in 1999 and early 2000, but began to experience declines in sales in the second half of 2000, reflecting reduced pa per and packaging demand due to the slowdown in the U.S. economy and a growth in imports (S&P, 2001). Most products were characterized by weak demand, reduced production and price reductions in 2001, due to continui ng reductions in domestic demand (Paperloop Inc., 2001). Annual sales in the U.S. in 2001 dropped 1.5%, while earnings at the top 31 U.S. corporations fell by nearly 75%, partly due to a decrease in prices of up to 15% (Paun et al. 2004). Capacity for U.S. paper and paperboard declined annually from 2001 to 2003 , in contrast to annual increases in capacity for the previous two decades. Capacity declined 1.9% in 2001, 1.3% in 2002, and 0.4% in 2003, and is expected to remain unchanged from 2004 to 2006 due to increased foreign competition, mature domestic markets, and competition from other media (Paper Age, 2004b). Over capacity has been a problem within the industry. As the world economy began to slow in the early 2000s, demand in the U.S. and abroad waned, forcing producers to limit production to prevent oversupply and keep pricing le vels from dropping further (S &P, 2004b). In addition to production downtime, many older, less efficient, single mill operations were permanently closed. In 2001, pulp production decreased 7.3% to 53 million tons, while pape r and paperboard production decreased 5.5% to 81 million tons (Paun et al. 2004). For 2004, paper industry demand and prices were expected to remain at 2003 levels or increase slightly. As the economy continues to improve, demand should pick up, w ith better financial perform ance expected in 2006 and beyond, as long as the industry continues careful management of production levels and control of inventories. In addition, the weakened dollar should help to impr ove performance in export markets (S&P, 2004a). These improving conditions should better position firms to manage any increase in production costs resulting from regulatory compliance. Figure C2A-1 shows the trend in constant value of shipments and value added for the three profiled segments. 1 

### Value of shipments and value added, two common measures of manufacturing output, provide insight into an industry’s overall economic health and outlook. Va lue of shipments is the sum of receipts from the sale of outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors. Value added measures the value of production activity in a particular industry and is calculated as the difference between the value of shipments and the value of inputs used to make the products sold.

1 

### Terms highlighted in bold and italic font are further explained in the glossary.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### The trends over time in value of shipments and va lue added show that the Paper and Allied Products has performed erratically over the 1987-2004 period, with swings in shipments and value added generally following the performance trend of the aggregate U.S. economy. Of the three profiled industry segments, the Paperboard Mills segment recorded an overall incr ease in the total value of shipments during the 18-year analysis period, whereas both Paper Mills and Pulp Mills recorded real declines in shipments over th e same period. All three industries recorded real declines in value added over the 18-year period.

C2A-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### Segments (millions, $2005)

0198719881989199019911992199319941995199619971998199920002001200220032004 ( ( ) ( ( ) (

Value Added

0198719881989199019911992199319941995199619971998199920002001200220032004 ( ( ( ) ( ) )

Note:

Source: 

### Figure C2A-1: Value of Shipments and Value Added for Profiled Paper and Allied Products

Value of Shipments

10,000 20,000 30,000 40,000 50,000 60,000

P ap er M ills N A ICS t o SI C) P a pe r M ills SI C 2621) P ap erbo ard M ills (N A ICS t o SI C P a pe r boar d M ills SI C 2631) P ulp M ills N A I CS t o SIC P ulp M ills SI C 2611)

5,00 0 10 ,0 00 15 ,0 00 20 ,0 00 25 ,0 00 30 ,0 00

P ap er M ills N AICS t o SIC) P aper M ills SIC 2621) P aperboard M ills NAICS t o SIC P aperboard M ills SIC 263 1) P ulp M ills (NAICS t o SIC P ulp M ills (SIC 2 6 1 1

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classificatio n System (NAICS). For this analysis, EP A converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### Table C2A-3 provides the Federal Reserve System’s inde x of industrial production for the profiled pulp and paper segments, which shows trends in production between 1989 and 2005. This index more closely reflects total output in physical terms, whereas value of shipments and value added reflect the economic value of production. The production index is expressed as a percentage of output in the base year, 2000. Pulp Mill industry production increased sharply between 2001 and 2002 and has been rising continuously since then (see Table C2A-9). In total, the industry experienced a 26.3 percent increase in production over 1989 to 2005. The Paper Mills industry, on the other hand, saw a continuous d ecrease in production between 2000 and 20 03, followed by a slight increase in 2004 and 2005. Overall, however, production decreased by 13.9 percent over 1989 to 2005. Paperboard Mill production has fluctuated slightly in recent years, but the industry recorded an overall 4.8 percent increase in production over the 1989 to 2005 time period.

Year a

2002=100 Change b

2002=100 Change c

2002=100 Change 1989 84.1 110.9 93.4 1990 84.0 -0.1% 108.6 -2.1% 93.8 0.4% 1991 85.3 1.6% 105.1 -3.3% 92.9 -1.0% 1992 89.7 5.2% 103.8 -1.2% 97.1 4.4% 1993 75.4 -16.0% 103.2 -0.6% 99.1 2.1% 1994 79.8 5.9% 109.0 5.6% 104.8 5.8% 1995 85.8 7.5% 112.7 3.4% 108.7 3.7% 1996 78.7 -8.3% 106.0 -5.9% 103.5 -4.8% 1997 78.3 -0.4% 105.0 -1.0% 106.2 2.6% 1998 80.4 2.7% 105.5 0.5% 107.2 1.0% 1999 81.0 0.7% 110.4 4.7% 108.6 1.3% 2000 80.1 -1.1% 109.4 -0.9% 105.1 -3.2% 2001 81.6 1.9% 101.3 -7.5% 101.3 -3.6% 2002 100.0 22.5% 100.0 -1.2% 99.9 -1.4% 2003 100.7 0.7% 92.1 -7.9% 97.1 -2.8% 2004 105.1 4.5% 95.3 3.5% 99.3 2.3% 2005 d 106.2 1.0% 95.5 0.3% 97.9 -1.5%

1989-2005 Average Annual Growth Rate 26.3%

1.5% -13.9%

-0.9% 4.8%

0.3%

a NAICS 32211. b NAICS 32212.

c NAICS 32213. d Source: 

### Table C2A-3: U.S. Pulp and Paper Industry Industrial Production Index (Annual Averages) Pulp Mills Index Percent Paper Mills Index Percent Paperboard Mills Index Percent

Total Percent Change

Average through 9 months of 2005. Economagic, 2006.



### C2A-2.2 Prices
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and indicates the overall trend of product pricing, a nd thus supply-demand conditions, within a segment. As shown in Figure C2A-2, price levels in the U.S. pa per industry closely reflect domestic and foreign demand, and industry capacity and operating rates, which determin e supply (S&P, 2001). Prices tend to be volatile due to

C2A-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### mismatches between short-term supply and demand. The industry is very cap ital intensive, and development of new capacity requires several years. Prices therefore tend to increase when demand and capacity utilization rise, and drop sharply when demand softens or when new capac ity comes on line. In the past, producers have been reluctant to cut production when de mand declines because fixed capital costs are a substantial portion of total manufacturing costs; this reluctance has occasionally caused persistent oversupply. During the recent economic slowdown, however, producers appeared more willing to cut output to prevent sharp reductions in prices (Ince, 1999; S&P, 2001). The paper industry suffered from low prices throughout th e early 1990s. The depressed prices resulted from the paper boom of the late 1980s. Prices recovered in the mi d 1990s before declining again in the latter part of the decade. Entering 2000, prices in the paper industry reversed course and rose, before experiencing declines in 2001 and 2002, as prices for most paper grades dropped between 5 and 15 percent (V alue Line, 2003b). Faced with substantial declines in demand during those years, producers cut production, endured downtime, and closed less efficient facilities to prevent majo r price declines for paper products (S&P, 2001). Prices started to level off near the end of 2002, and proceeded to rise during 2003 th rough 2005. As demonstrated in Figure C2A-2, prices have continued to increase st eadily through 2004 and 2005.



### Figure C2A-2: Producer Price Indexes for Pr ofiled Paper and Allied Products Segments

100 110 120 130 140 150 160 170 180 190 200 2101987198819891990199119921993199419951996199719981999200020012002200320042005 

### 322130) 

### (



### ( Paperboard Mills (NAICS
Paper Mills NAICS 32212)
Pulp Mills NAICS 322110)

Source: BLS, 2006.



### C2A-2.3 Number of facilities and firms The Statistics of U.S. Businesses reports that the numbe r of facilities and firms in the Pulp Mills segment decreased by 17.4 and 12.5 percent, respectively, between 1990 and 2003. One of the reasons for this decline has been the increase in the number of mills that produce de-i nked recycled market pulp and thus displace demand for virgin pulp mill product. These are secondary fiber processi ng plants that use recovered paper and paperboard as their sole source of raw material. Producers of de-i nked market pulp have experienced strong demand over the past several years in both U.S. and foreign markets. As a result, U.S. de-inked recycled market pulp capacity

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### more than doubled between 1994 and 1998 (McGraw-Hill, 2000). Since 1994, the secondary fiber share of total papermaking fiber production has increased steadily, reaching 37 percent in 1999 (McGraw-Hill, 2000). In contrast, the number of facilities and firms in the Pa per Mills and Paperboard Mills segments declined. While the number of facilities in the Paper Mills indust ry decreased by 12.2 percen t between 1990 and 2003, the number of firms in the industry rose slightly. In contrast, the number of both facilities and firms in the Paperboard Mills industry declined by 2.2 and 11.8 per cent, respectively. Overcapacity in the 1990s limited the construction of new facilities. In 199 8 and 1999, 577,000 and 2.5 million tons of paper and paperboard capacity were removed from the capacity base. Over the same period, more than one million tons of pulp capacity were removed (Pponline, 1999). In 2001and 2002, 8.2 million to ns of capacity closed, mostly in containerboard, market pulp, and print and writing papers. (Paper Age, 2004c). Table C2A-4 and Table C2A-5 present the number of facilities and firms for the three profiled pa per and allied products segme nts between 1990 and 2003.

Table C2A-4: Number of Facilities Owned by Firms in the Profiled Paper and Allied Products Segments Pulp Mills Paper Mills Paperboard Mills Year Number of Percent Number of Percent Number of Percent Facilities Change Facilities Change Facilities Change 1990 46 327 226 1991 53 15.2% 349 6.7% 228 0.9% 1992 44 -17.0% 324 -7.2% 222 -2.6% 1993 46 4.5% 306 -5.6% 217 -2.3% 1994 52 13.0% 316 3.3% 218 0.5% 1995 53 1.9% 317 0.3% 219 0.5% 1996 62 17.0% 344 8.5% 228 4.1% 1997 41 -33.9% 259 -24.7% 214 -6.1% 1998 a 44 7.3% 235 -9.4% 232 8.4% 1999 a 45 2.3% 242 3.2% 233 0.4% 2000 a 48 6.7% 240 -1.0% 238 2.1% 2001 a 51 6.3% 238 -0.8% 247 3.8% 2002 a 44 -13.7% 271 14.0% 231 -6.5% 2003 a 38 -13.6% 287 5.9% 221 -4.3% Total Percent Change -17.4% -12.2% -2.2% 1990-2003 Average Annual -1.5% -1.0% -0.2% Growth Rate

a Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2003.

C2A-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### Table C2A-5: Number of Firms in the Profiled Paper and Allied Products Segments

Year Firms Change Firms Change Firms Change 1990 31 158 102 1991 37 19.4% 186 17.7% 102 0.0% 1992 29 -21.6% 161 -13.4% 95 -6.9% 1993 32 10.3% 153 -5.0% 99 4.2% 1994 37 15.6% 163 6.5% 96 -3.0% 1995 32 -13.5% 163 0.0% 93 -3.1% 1996 43 34.4% 186 14.1% 101 8.6% 1997 27 -37.2% 131 -29.6% 85 -15.8% 1998 a 32 18.5% 124 -5.3% 95 11.8% 1999 a 33 3.1% 133 7.2% 95 0.0% 2000 a 36 9.1% 134 0.7% 105 10.5% 2001 a 40 11.1% 140 4.6% 116 10.5% 2002 a 27 -32.5% 174 23.9% 107 -7.8% 2003 a 27 0.0% 162 -6.7% 90 -15.9

1990-2003

Growth Rate -12.9%

-1.1% 2.5%

0.2% -11.8%

-1.0%

a

. Source: Pulp Mills Number of Percent Paper Number of Mills Percent Paperboard Mills Number of Percent

Total Percent Change
Average Annual
Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. SBA, 1989-2003.


### C2A-2.4 Employment and productivity The U.S. paper industry is among the most modern in th e world. It has a highly skilled labor force and is characterized by large capital expenditures, which ha ve been largely aimed at productivity improvements. Employment in the three profiled paper industry segments re mained relatively constant from 1987 through the mid 1990s. Since then, employment at Pulp Mills h as dropped considerably, decreasing by 46 percent; Paper Mills have also seen a substantial reduc tion in the workforce of close to 48 percent. Employment in Paperboard Mills fell the least over this period, but still declined by over 24 percent. Part of this employment loss is attributable to firms closing older and higher cost facilities (McNutt, Cenatempo & Kinstrey, 2004). Figure C2A-3 presents employment for the three pr ofiled paper segments between 1987 and 2004.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers

0198719881989199019911992199319941995199619971998199920002001200220032004 ( )
(
( ) ( )
( )
(

Note:

Source: 

### Figure C2A-3: Employment for Profiled Paper and Allied Products Segments

20,000 40,000 60,000 80,000 100,000 120,000 140,000

P ap er M ills N A IC S t o SI C
P ap er M ills SIC 2621)
P ap er b o ar d M ills N A IC S t o SI C P ap er b o ar d M ills SIC 2 6 3 1
P u lp M ills N A IC S t o SI C
P u lp M ills SIC 2611)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classificatio n System (NAICS). For this analysis, EP A converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### Table C2A-6 on the following page presents the ch ange in value added per labor hour, a measure of labor productivity , for each of the profiled industry segments between 1987 and 2004. The table shows that labor productivity in the Pulp Mills segment has been relati vely volatile, posting several double-digit gains and losses between 1987 and 2004. These changes were primarily dr iven by fluctuations in value added and production levels. Overall, productivity in Pulp Mills increased by only 1.1 percent dur ing this period, while increasing by 61 and 32 percent in the Paper Mills and Paperboard Mills, respectively.

C2A-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### Table C2A-6: Productivity Trends for Prof iled Paper and Allied Products Segments ($2005) Pulp Mills Paper Mills Paperboard Mills Value Value Value Year Value Added Prod. Hrs. Added/Hour Value Added Prod. Hrs. Added/Hour Value Added Prod. Hrs. Added/Hour ($ mil) (mil) $/hr Percent Change ($ mil) (mil) $/hr Percent Change ($ mil) (mil) $/hr Percent Change 1987 3,494 24 146 21,593 213 102 10,591 89 120 1988 4,616 24 193 32.1% 24,982 215 116 14.4% 13,003 91 143 19.7% 1989 5,621 25 221 14.6% 24,405 214 114 -1.8% 12,557 89 141 -1.7% 1990 4,694 28 169 -23.4% 22,808 211 108 -5.0% 11,161 91 123 -12.4% 1991 3,248 28 118 -30.6% 20,592 212 97 -10.4% 9,635 87 111 -9.7% 1992 3,315 26 126 7.1% 19,269 215 90 -7.8% 10,636 88 120 8.0% 1993 2,170 23 94 -25.5% 18,408 212 87 -3.2% 9,546 90 106 -11.8% 1994 2,600 22 119 26.9% 18,727 206 91 5.1% 10,782 94 115 8.5% 1995 4,767 23 211 76.9% 27,347 201 136 49.3% 15,403 98 158 37.2% 1996 2,629 24 110 -47.8% 22,514 197 114 -16.1% 11,533 95 122 -23.0% 1997 a 1,771 13 137 24.7% 22,365 182 123 7.9% 10,623 93 114 -6.1% 1998 a 1,631 12 131 -4.4% 22,352 173 129 4.9% 11,749 90 130 14.2% 1999 a 1,653 12 141 7.7% 22,389 167 134 3.8% 11,947 86 139 6.6% 2000 a 2,048 12 172 22.0% 23,200 155 149 11.4% 13,356 86 155 11.4% 2001 a 1,547 12 129 -25.0% 20,856 145 143 -4.0% 12,075 83 145 -6.4% 2002 a 1,869 13 142 10.0% 20,980 129 163 13.8% 11,642 78 149 2.8% 2003 a 1,751 13 132 -7.2% 19,397 125 155 -4.9% 10,772 74 145 -2.9% 2004 a 1,921 13 148 12.1% 19,503 119 164 5.6% 10,625 67 158 9.3%
-45.0% -45.6% 1.1% -9.7% 61.4% 0.3% -24.1% 32.1% 1987-2004
-3.5% -3.5% 0.1% -0.6% -3.4% 2.9% 0.0% -1.6% 1.7% Growth Rate

a

. Source: Total % Change -44. 1% Average Annual
Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2A-2.5 Capital expenditures The paper and allied products industry is a highly capital intensive industry. Capital-intensive industries are characterized by a large value of capital e quipment per dollar value of production. New capital expenditures are needed to modernize, expand, and replace existing capac ity. Consistently high levels of capital expenditures have made the U.S. paper industry one of the most modern industries in the world (Stanley, 2000). The total level of capital expenditures for the pulp, paper, and paperboard industries was $2.7 billion in 2004 (in $2005). The Paper Mills and Paperboard Mills segments accounted for approximately 93 percent of that spending (see Table C2A-7). Most of the spending is for production impr ovements (through existing machine upgrades, retrofits, or new installed equipment), environmental concerns, a nd increased recycling (McGraw Hill, 2000). The total capital expenditure for 2004 is consid erably less, in real terms, than what was spent in the early 1990s, as producers became wary of adding too much capacity that might lead to oversupply and depressed prices. The Department of Commerce estimate s that environmental spending accounted for about 14 percent of all capital outlays made by the U.S. paper industry since the 1980s, and the Cluster Rule promulgated in 1998 is expected to require increased environmental expenditures (S&P, 2001).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### Table C2A-7: Capital Expenditures for Profiled Pa per and Allied Products Segments (millions, $2005) Pulp Mills Paper Mills Paperboard Mills Year Capital Percent Capital Percent Capital Percent Expenditures Change Expenditures Change Expenditures Change 1987 354 4,237 1,183 1988 458 29.3% 4,887 15.3% 2,248 89.9% 1989 994 117.1% 7,473 52.9% 2,359 5.0% 1990 1,448 45.6% 5,877 -21.4% 4,090 73.3% 1991 1,316 -9.1% 4,829 -17.8% 2,857 -30.1% 1992 1,002 -23.8% 3,779 -21.8% 2,648 -7.3% 1993 540 -46.1% 3,632 -3.9% 2,084 -21.3% 1994 392 -27.5% 3,991 9.9% 2,169 4.1% 1995 562 43.6% 3,341 -16.3% 2,546 17.4% 1996 834 48.3% 3,754 12.3% 2,819 10.7% 1997 a 405 -51.4% 3,407 -9.2% 1,897 -32.7% 1998 a 483 19.3% 3,632 6.6% 1,620 -14.6% 1999 a 214 -55.8% 2,694 -25.8% 1,458 -10.0% 2000 a 265 24.2% 2,878 6.8% 1,330 -8.8% 2001 a 211 -20.4% 2,702 -6.1% 1,127 -15.2% 2002 a 203 -3.9% 2,272 -15.9% 878 -22.1% 2003 a 192 -5.5% 2,212 -2.6% 807 -8.1% 2004 a 192 -0.1% 1,591 -28.1% 956 18.5% Total Percent Change 1987- 2004 a -45.9% -62.5% -19.2% Average Annual -3.5% -5.6% -1.2% Growth Rate

a Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2A-2.6 Capacity utilization Capacity utilization measures actual output as a percentage of total potential output given the available capacity. Capacity utilization provides insight into the exte nt of excess or insufficient capacity in an industry, and into the likelihood of investment in new capacity. Accord ing to the U.S. Industry and Trade Outlook, a utilization rate in the range of 92 to 96 percent is necessary for th e Pulp Mills segment to remain productive and profitable (McGraw-Hill, 2000). As shown in Figure C2A-4, capacity utilization fluctuated sharply in all three profiled segments over the analysis period. Capacity utilization increased between 1989 and 199 4, and then fell sharply in 1995. This sharp drop resulted from an effort to reduce inventories, which ha d begun rising in 1995 in response to low demand and oversupply (McGraw-Hill, 2000). As inventories were sold off and global economic activity strengthened, capacity utilization began to rise again in 1996, peaked in 1997, and again declined in 1998 due to reduced demand from the Asian market (S&P, 2001). With the global economic slowdown starting in 2000, paper producers were forced to implement production cutb acks and downtime to prevent oversupply from further depressing prices. As a result, utilization rates fell farthe r in 2000 and 2001 to values below those observed in the prior decade. At the same time, overall capacity cont racted as companies permanen tly closed less efficient facilities. By 2004, capacity utilization in the Paperboard Mill and Pulp Mill industries had returned to its 1990

C2A-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### level, while Paper Mill capacity utilization increased betw een 2001 and 2002 and has remained relatively constant over 2003 to 2004. The industry is expected to continue consolidating, which should aid profitability in the long run (S&P, 2004b).

75 80 85 90 95 1001989199019911992199319941995199619971998199920002001200220032004 

### ( ) ( 2631) ( )

(

( )

(

Note:

Source: 

### Figure C2A-4: Capacity Utilization Rate (Fourth Quarter) for Pulp and Paper Industry

P aperboard Mills NAICS to SIC P aperboard Mills SIC
P ulp Mills NAICS t o SIC
P ulp Mills SIC 2611)
P aper Mills NAICS t o SIC
P aper Mills SIC 2621)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classificatio n System (NAICS). For this analysis, EP A converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. U.S. DOC, 1989-2004.



## C2A-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### Paper and allied products companies range in size from large corporations having billions of dollars of sales, to small producers with revenue a fraction of the size of the large producers. Because a ll paper and allied products companies use the same base materials in their production, most manufactur e more than one product. To escape the extreme price volatility of commodity markets, many smaller manufacturers have differentiated their products by offering value-added grades. The smaller markets for value-added products make this avenue less available to the larger firms (S&P, 2001). The paper industry has conso lidated through mergers and acquisitions and has closed older mills over the last few years, as a way to improve profits in a mature industry. About six percent of North American containerboard capacity was shut down (most on a permanent basis) in late 1998 and early 1999. Companies have been reluctant to invest in any major new capacity, which might resu lt in excess capacity (S&P, 2001). In 1999, new capacity additions in the paper and allied products industry were at their lowest level of the past ten years; this caution in adding to capacity is expected to continue (Pponline. com, 2000). Another problem for the industry is the increasing capacity being brought online in foreign countri es, which could result in higher U.S. import levels and increased competition for U.S. products in export markets (S&P, 2004a). Major recent mergers include International Paper’s ac quisition of Champion International in 2000 and Union Camp in 1999, Georgia-Pacific’s takeover of Fort Jam es Corp. (itself a 1997 combination of James River and

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### Fort Howard), Weyerhaeuser’s acquisition of Willamette I ndustries Inc., the merger of Mead and Westvaco, and Temple-Inland’s takeover of Gaylor d Container (S&P, 2001, 2004b).
C2A-3.1 Firm size For SIC codes 2611, 2621, and 2631, the Small Business Administration defines a small firm as having fewer than 750 employees. The size categories reported in th e Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size classifications, therefore preventing pr ecise use of the SBA size threshold in conjunction with SUSB data. The SUSB data presented in Table C2 A-8 show the following size distribution in 2003:

f 

### 15 of 27 (56 percent) firms in the Pulp Mills segment had less than 500 employees. Therefore, at least 56 percent of firms were classified as small. These small firms owned 15 facilities, or 39 percent of all facilities in the segment.

f 

### 117 of 162 (72 percent) firms in the Paper Mills segment had less than 500 employees. These small firms owned 124, or 43.2 percent of all Paper Mills.

f 

### 54 of 90 (60 percent) firms in the Paperboard Mills segment had less than 500 employees. Therefore, at least 66 percent of paperboard mills were classified as small. These firms owned 56, or 25 percent of all Paperboard Mills.
An unknown number of the firms with more than 50 0 employees have less than 750 employees, and would therefore also be classified as small firms. Table C2A- 8 below shows the distribution of firms and facilities for each profiled segment by employment size of the parent firm.

Table C2A-8: Number of Firms and Facilities by Size Category for Profiled Paper and Allied Products Segments in 2003 a
Employment Size Category Pulp Mills
No. of Firms No. of Facilities Paper Mills
No. of Firms No. of Facilities Paperboard Mills
No. of Firms No. of Facilities
0-19 9 9 46 46 17 18
20-99 2 2 27 28 22 23
100-499 4 4 44 50 15 15

500+ 12 23 45 163 36 165

Total 27 38 162 287 90 221

a Before 1998, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2003.



### C2A-3.2 Concentration ratios Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely related to entry barriers, with more con centrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the ma rket share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total

C2A-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### value of shipments. The higher the concentration ratio, th e less competition there is in the industry, other things being equal. 3 

### An industry with a CR4 of more than 50 percen t is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the in dustry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, th e HHI of this industry would be equal to 4,600 (602 + 302
+ 102). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s gu idelines for evaluating mergers, markets in which the HHI is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated. Table C2A-9 shows that Pulp Mills have an HHI of 1,106, Paper Mills have an HHI of 467, and Paperboard Mills have an HHI of 485. At these HHI levels, all three industry segments appear relatively unconcentrated. With the majority of the firms in this industry having small ma rket shares, this suggests limited potential for passing through to customers any increase in productio n costs resulting from regulatory compliance.
The concentration ratios for the thr ee segments remained relatively stab le between 1987 and 1997. The Pulp Mills segment has the highest concentration of the three segments, with a CR4 of 59 percent and a HHI of 1,106 in 1997. Recent mergers and acquisitio ns have led to an increase in concen tration in the Paper and Paperboard segments. In the late 1990s, the top five U.S. firms controlled 38 percent of production capacity, with higher concentrations in individual product lines due to targeted consolidation and specialization (Ince, 1999). In 2001, only four firms had greater than 11 percent of the market, with none having a share greater than 17 percent. More than half of the firms in the paper industry had market sh ares under 2 percent (Paun et al. 2004). The Paper Mills and Paperboard Mills segments also account for most of th e production of their primary products. The Pulp Mills segment accounts for a lower percentage of all pulp shipme nts, with pulp also commonly produced by integrated Paper and Paperboard Mills.

SIC (S) or NAICS (N) Code Year Total

of Firms Concentration Ratios 4 Firm (CR4) 8 Firm (CR8) 20 Firm (CR20) 50 Firm (CR50)
S 2611 1987 1992 26 29 44% 48% 69% 75% 99% 100% 98% 100% 743 858 

### Table C2A-9: Selected Ratios for Profiled Paper and Allied Products Segm ents, 1987, 1992, and 1997

Number Herfindahl-Hirschman Index

N 322110 1997 24 59% 86% 100% 100% 1,106

S 2621 1987 1992 122 127 33% 29% 50% 49% 78% 94% 77% 94% 432 392 1997 139 34% 55% 80% 94% 467
S 2631 1987 1992 91 89 32% 31% 51% 52% 77% 97% 80% 97% 431 438 1997 81 34% 53% 82% 98% 485

a The Source:

N 32212

N 322130 1997 Census of Manufactures is the most recent concentration ratio data available. U.S. DOC, 1987, 1992, 1997, and 2002.



### Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the extent of competition in an industry.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-17 3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### C2A-3.3 Foreign trade This profile uses two measures of foreign competition: export dependence and import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total import s divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefor e be at a relative disadvant age in their ability to passthrough costs because foreign producers would not incu r costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. ma nufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulation-induced increases in producti on costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadvant age in potentially recovering compliance costs through price increases since export sales are presumed subject to substantial co mpetition from foreign producers. Table C2A-10 presents trade statistics for the Pulp Mills, and Paper and Paperboard M ills segments. Imports and exports play a much larger role in the Pulp Mills segment than for the other two segments. Import penetration and export dependence levels for the Pulp Mills segment were an estimated 73 and 76 percent, respectively, in 2002. The Paper and Paperboard Mills segments import pene tration and export depend ence ratios were 16 and 9 percent, respectively, in 2002. For Pulp Mills, the large share of domestic produc tion that is exported and domestic consumption served by imports implies the industry faces significant foreign competition, limiting the industry’s ability to pass through to customers any increase in production costs resulting from regulatory compliance. For Paper and Paperboard Mills, both measures of foreign competition are well below the U.S. manufacturing averages estimated for 2001. Given just these measures, it would be reasonable to assume that this segment does not face significant foreign competitive pressu res, and would have more latitude in passing through to customers any increase in production costs resulting from regulatory compliance. However, foreign pressure is likely to increase as capacity in foreign countries, particular ly China, continues to grow and exert pressure on the domestic market (McNutt, Cenatempo & Kinstrey, 2004). In addition, as noted above, the HHI of the Paper and Paperboard segments is 392 and 438 respectively, sugges ting firms in these segments have small market shares, which would curtail their ability to pass through any increase in production costs.

C2A-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### Table C2A-10: Trade Statistics for Profiled Pap er and Allied Products Segments (millions, $2005) Implied Year Value of Imports Value of Exports Value of Shipments Domestic Consumption a Import Penetration b Export Dependence c Pulp Mills 1989 4,354 5,199 9,157 8,312 52% 57% 1990 3,917 4,518 8,572 7,972 49% 53% 1991 2,844 3,877 7,075 6,042 47% 55% 1992 2,731 4,200 7,093 5,624 49% 59% 1993 2,370 3,148 5,432 4,653 51% 58% 1994 2,838 3,669 5,996 5,165 55% 61% 1995 4,558 5,718 8,428 7,268 63% 68% 1996 3,107 4,011 6,579 5,675 55% 61% 1997 d 3,022 3,822 3,835 3,035 100% 100% 1998 d 2,780 3,224 3,638 3,194 87% 89% 1999 d 2,915 3,222 3,567 3,260 89% 90% 2000 d 3,702 3,987 4,150 3,865 96% 96% 2001 d 2,862 3,118 3,546 3,290 87% 88% 2002 d 2,510 3,000 3,928 3,439 73% 76% Total Percent Change 1989-2002 -42.3% -42.3% -57.1% -58.6% Average Annual Growth Rate -4% -4% -6% -7% Paper and Paperboard Mills 1989 10,488 4,301 73,791 79,978 13.1% 5.8% 1990 10,126 4,739 70,403 75,791 13.4% 6.7% 1991 9,164 5,385 64,199 67,979 13.5% 8.4% 1992 8,706 5,532 63,496 66,669 13.1% 8.7% 1993 9,120 5,315 61,226 65,032 14.0% 8.7% 1994 9,114 5,978 66,303 69,440 13.1% 9.0% 1995 12,412 7,835 84,774 89,351 13.9% 9.2% 1996 10,892 7,572 71,477 74,796 14.6% 10.6% 1997 d 10,583 7,690 67,339 70,232 15.1% 11.4% 1998 d 11,421 7,251 67,476 71,645 15.9% 10.7% 1999 d 11,565 6,927 67,631 72,269 16.0% 10.2% 2000 d 12,554 7,509 69,912 74,957 16.7% 10.7% 2001 d 11,795 6,562 63,362 68,595 17.2% 10.4% 2002 d 10,762 5,209 59,897 65,450 16% 9% Total Percent Change 1989-2002 2.6% 21.1% -18.8% -18.2% Average Annual 0.2% 1.5% -1.6% -1.5% Growth Rate

a Calculated by EPA as shipments + imports - exports. b Calculated by EPA as imports divided by implie d domestic consumption. Calculated by EPA as expor ts divided by shipments. d Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. DOC, 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-19

c§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### As shown in Figure C2A-1, the value of imports and exports peaked in the mid-1990s, before dropping and rebounding in 2000. As expected, values of both dropped again in 2001 and 2002, as the global economy fell into recession.

(millions, $2005)

019891990199119921993199419951996199719981999200020012002 ) ) ) ) 

### Figure C2A-5: Value of Imports and Exports fo r Profiled Paper and Allied Products Segments

Pulp Mills

1,000 2,000 3,000 4,000 5,000 6,000 7,000

E x p o rt s (N A I CS t o SI C E x p o rt s (SIC 2 6 1 1 I m p o rt s (N A I CS t o SI C I m p o rt s (SIC 2 6 1 1

Paper and Paperboard Mills

14,000
12,000
10,000

8,000
6,000
4,000
2,000

0 Im p o rts (NAICS to SIC) Im port s (SIC 2621 , 2631) E xport s (NAICS t o SIC) E xport s (SIC 2621 , 2631)20022001200019991998199719961995199419931992199119901989

Source: U.S. DOC, 2006. a Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

.

C2A-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



## C2A-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### Financial performance in the paper and allied products industry is closely linked to macroeconomic cycles, both in the domestic market and those of key foreign trade pa rtners, and the resulting levels of demand. Many pulp producers, for example, were not very profitable duri ng most of the 1990s as chronic oversupply, cyclical demand, rapidly fluctuating operating rates, sharp invent ory swings, and uneven world demand plagued the global pulp market for more than a decade (Stanley, 2000). Net Profit Margin is calculated as after-tax income before nonr ecurring gains and losses as a percentage of sales or revenue, and measures profitability, as reflected in th e conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fl uctuations in profit margin stem from several factors, including: variations in aggregate economic conditions (including international and U.S. conditions), variations in industry-specific market conditi ons (e.g., short-term cap acity expansion resulting in overcapacity), or changes in the pricin g and availability of inputs to the in dustry’s production processes (e.g., the cost of energy to the pulp and paper process). The exte nt to which these fluctuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. va riable cost structure of the industry’s operations. In a capital intensive industry such as the pulp and paper indus try, the relatively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative affect on profit margin. Return on Total Capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). As such, the retu rn on total capital provides insight in to the profitability of a business’ assets independent of financial structure and is thus a “purer” i ndicator of asset profitability than return on equity. In the same way as described for net profit margin , the firms in an industry, and the in dustry collectively, must generate over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital

. Figure C2A-6 below shows trends in net profit margins and return on total capital for th e pulp and paper industry between 1992 and 2005. The table show s considerable volatility in the trend. Profitability was low between 1988 and 1993, reflecting oversupply in world markets and d ecreasing shipments from U.S. producers (McGraw-Hill, 2000). By the mid-1990s, financial performance impr oved as demand rebounded. Financial performance weakened again in 2000 through 2003, reflecting slower growth in both the U.S. and the world economy. Coupled with overproduction in the U.S. and global markets, these factors led to deteriorating financial performance in these years. Industry analysts anticipat ed stronger financial perform ance for the pulp and paper industry for 2004 (Value Line, 2004). As expected, bot h net profit margins and return on capital improved in both 2004 and 2005. With continued improvement in the U.S. economy, the outlook for the industry should be stronger in subsequent years.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers

14%

12%

10%

4% 6% 8% -

-

2%

0%19921993199419951996199719981999200020012002200320042005

Source: 

### Figure C2A-6: Net Profit Margin and Retu rn on Capital for Pulp and Paper Mills

Return on Cap ital Pulp & Pap er M ills Net Profit M argin Pulp & Pap er M ills

Value Line, 2003a; Value Line, 2006.



## C2A-5 F ACILITIES 

## O PERATING 

## C OOLING 

## W ATER 

## I NTAKE 

## S TRUCTURES 

### Point source facilities that use or propose to use a cooli ng water intake structure that withdraws cooling water directly from a surface waterbody of the United States are potentially subject to Section 316(b) of the Clean Water Act. In 1982, the paper and allied pr oducts industry withdrew 534 billion gallo ns of cooling water, accounting for approximately 0.7 percent of total in dustrial cooling water intake in the United States. The industry ranked 5 th 

### in industrial cooling water use, behind the electric power ge neration industry, and the chemical, primary metals, and petroleum industries (1982 Census of Manufactures). This section provides information for facilities in the prof iled paper and allied products segments within the scope of the regulatory options. For each analysis option, existi ng facilities that meet all of the following conditions are potentially subject to regulation:

f 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supplier who has a coo ling water intake structure; or their cooling water intake structure(s) withdraw(s) cooling water from wa ters of the United States, and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;

f 

### Have a National Pollutant Discharge Elimination Syst em (NPDES) permit or are required to obtain one; and

f 

### Meet the applicability criteria for the specific regulator y analysis option in terms of design intake flow and source waterbody type (i.e., 50 MGD for All Wate rbodies, 100 MGD for Certain Waterbodies, or 200 MGD for All Waterbodies). The regulatory analysis options also cover substantial add itions or modifications to operations undertaken at such facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the Phase III regulation based on a minimum applicability thr eshold of 2 MGD, this section focuses only on the facilities nationwide in the profiled pape r and allied products segments that are within the scope of the regulatory

C2A-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### options (see Table C2A-1, above for additional information on the broader set of facilities potentially subject to Phase III regulation). 5


### C2A-5.1 Waterbody and Cooling System Type Table C2A-11, Table C2A-12, and Table C2A-13 report the distribution of Phase III facilities within the scope of the regulatory analysis options in the profiled paper a nd allied products segments by type of waterbody and cooling system under each primary analysis option. The tables show that most of the facilities have either a oncethrough system or employ a combination of a once-through and closed system.

Table C2A-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Paper and Allied Products Segments Recirculating Combination Once-Through Other Waterbody Type Total No. % of Total No. % of Total No. % of Total No. % of Total Pulp Mills 2 100% 6 100% 4 73% 1 100% 13 0 0% 0 0% 2 27% 0 0% 2 Total a 2 11% 6 38% 6 42% 1 8% 15

/

Total a 0 0 0 0 0% 0% 0% 0% 0 5 1 6 0% 81% 19% 46% 1 4 2 7 16% 61% 23% 54% 0 0 0 0 0% 0% 0% 0% 1 9 3 13 Paperboard Mills 0 20% 3 100% 5 100% 2 38% 9 0 0% 0 0% 0 0% 3 62% 3 Total a 0 17% 3 22% 5 41% 4 36% 12

/ 0 2 0 0 0% 100% 0% 0% 0 13 1 0 0% 92% 8% 0% 1 14 2 2 6% 76% 9% 9% 0 3 3 0 0% 51% 49% 22% 1 32 6 2 Total a 2 4% 14 36% 18 46% 6 14% 40

a Source: Freshwater River/ Stream Great Lake

Paper Mills Estuary Tidal River Freshwater River/ Stream Lake/ Reservoir

Freshwater River/ Stream Lake/ Reservoir

Total for Profiled Paper and Allied Products Industries Estuary Tidal River Freshwater River/ Stream Lake/ Reservoir Great Lake
Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.



### EPA applied sample weights to the sampled facilities to account for non-sampled facilitie s and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industry Survey, please refer to the Information Collection Request (U.S. EPA, 2000).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-23 5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



### Table C2A-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Paper and Allied Products Segments Recirculating Combination Once-Through Other Waterbody Type Total No. % of Total No. % of Total No. % of Total No. % of Total Pulp Mills 0 0% 1 100% 0 0% 0 0% 1 Total a 0 0% 1 100% 0 0% 0 0% 1

0 0% 0 0% 2 100% 0 0% 2 Total a 0 0% 0 0% 2 100% 0 0% 2 Paperboard Mills Total a 0 0% 0 0% 0 0% 0 0%

0 0% 1 100% 2 100% 0 0% 3 Total a 0 0% 1 41% 2 59% 0 0% 3

a Source:

Combination Other Total No. No. No. No.

0 0% 1 100% 0 0% 1 100% 2 0 0% 0 0% 2 100% 0 0% 2 Total a 0 0% 1 29% 2 42% 1 29% 4

0 0% 2 100% 4 100% 0 0% 6 Total a 0 0% 2 27% 4 73% 0 0% 6 Paperboard Mills 0 0% 0 0% 1 100% 0 0% 1 Total a 0 0% 0 0% 1 100% 0 0% 1

0 0% 3 100% 6 77% 1 100% 10 0 0% 0 0% 2 23% 0 0% 2 Total a 0 0% 3 25% 7 65% 1 10% 11

a Source:



### C2A-5.2 1

Freshwater River/ Stream

Paper Mills Freshwater River/ Stream

Total for Profiled Paper and Allied Products Industries Freshwater River/ Stream
Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Table C2A-13: Number of Facilities Estimated Su bject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Paper and Allied Products Segments Recirculating Once-Through Waterbody Type % of Total % of Total % of Total % of Total Pulp Mills Freshwater River/ Stream Great Lake

Paper Mills Freshwater River/ Stream

Freshwater River/ Stream

Total for Profiled Paper and Allied Products Industries Freshwater River/ Stream Great Lake
Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.


### Facility Size All of the pulp and paper facilities analyzed are relativ ely large, with no facilities employing fewer than 100 people. Figure C2A-7, Figure C2A-8, and Figure C2A- 9 show the number of facilities in the profiled pulp and paper segments by employment size category for each primary analysis option.

C2A-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products

13

12 14

10

0 0 0 0 0 0 1 00 0 7 6 7 7

0 2 4 6 8 lp Mills ( ills ( ) ills ( )

Source:

0 0 0 0 0 0 0 0 0 0 2

0 1

0 0 0 0 0 1 1 1 1 1 2 2

<100 >=1000 )

Source: 

### Figure C2A-7: Number of Facilities Estimated within Scope of the 50 MGD All Option by Employment Size for Profiled Pap er and Allied Products Segments

<100 100-249 250-499 500-999 >=1000 Pu SIC 2611) Paper M SIC 2621 Paperboard M SIC 2631

U.S. EPA, 2000; U. S. EPA analysis, 2006. 

### Figure C2A-8: Number of Facilities Estimated within Scope of the 200 MGD All Option by Employment Size for Profiled Pap er and Allied Products Segments

100-249 250-499 500-999 Pulp Mills (SIC 2611 Paper M ills (SIC 2621) Paperboard M ills (SIC 2631)

U.S. EPA, 2000; U. S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-25§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers

0 0 0 0 0 0 0 0 0 0 3

1 4

3

0 0 1 1 2 2 3 3 4 4

<100 >=1000 Pulp Mills ( ( (

Source:



### C2A-5.3

Allied Products Segments by Firm Size

SIC Code SIC Description Number Large Number Small Total

2611 Pulp Mills 15 100% 0 0% 15 2621 Paper Mills 13 100% 0 0% 13 2631 Paperboard Mills 12 100% 0 0% 12 Total 40 100% 0 0% 40 Source: 

### Figure C2A-9: Number of Facilities Estimated within Scope of the 100 MGD CWB Option by Employment Size for Profiled Pap er and Allied Products Segments

100-249 250-499 500-999 SIC 2611) Paper Mills SIC 2621) Paperboard Mills SIC 2631)

U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Firm Size EPA used the Small Business Administration (SBA) small entity size standards to determine the number of facilities in the three profiled paper segments that are owned by small firms. Firms in this industry are considered small if they employ fewer than 750 people. As shown in Table C2A-14, Table C2A-15, and Table C2 A-16, large firms own all of the facilities estimated subject to regulation in this industry under the three regulatory analysis options.

Table C2A-14: Number of Facilities Estimated Subject to the 50 MGD All Option in Profiled Paper and

% of SIC % of SIC

U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.

C2A-26 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### Allied Products Segments by Firm Size

SIC Code SIC Description Number Large Number Small Total

2611 Pulp Mills 1 100% 0 0% 1 2621 Paper Mills 2 100% 0 0% 2 2631 Paperboard Mills 0 0% 0 0% 0 Total 3 100% 0 0% 3 Source:

SIC Code SIC Description Number Large Number Small Total

2611 Pulp Mills 4 100% 0 0% 4 2621 Paper Mills 6 100% 0 0% 6 2631 Paperboard Mills 1 100% 0 0% 1 Total 11 100% 0 0% 11 Source: 

### Table C2A-15: Number of Facilities Estimated Subject to the 200 MGD All Option in Profiled Paper and

% of SIC % of SIC

U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.


### Table C2A-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option in Profiled Paper and Allied Products Segments by Firm Size

% of SIC % of SIC

U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-27§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



## R EFERENCES 

### Bureau of Labor Statistics (BLS). 2006. Producer Price Index . Industry Data Series: PCU322110-Pulp Mills; PCU32212-Paper Mills; PCU322130-Paper board Mills. Available at: http://www.bls.gov/ppi/home.htm. Downloaded February 1, 2006. Dun and Bradstreet (D&B). 2001. Data ex tracted from D&B Webspectrum August 2001. Economagic. 2006. Industrial Production: Industry Subtotals, Individual Series, and Special Aggregates. Seasonably Adjusted. Data Series: Pulp Mills, Pa per Mills, and Paperboard Mills. Available at: http://www.economagic.com/frbg17.htm#IPMarket. Downloaded February 2, 2006. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual. Ince, Peter J. 1999. “Global cycle ch anges the rules for U.S. pulp and paper.” PIMA’s North American Papermaker. December. v. 81, issue 12, p. 37. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry & Trade Outlook ‘00. McNutt, Jim, Dan Cenatempo and Bob Kinstrey. 2004. “Sta te of the North American Pulp and Paper Industry.” Presented at the Center for Paper Business and Industry Studies at Tappi Paper Summit, Atlanta, GA, May 3, 2004. Available at: http://www.cpbis.gatech.edu/secure/pro tocols/general/docs/031107State_of _the_NA_PandP_Industry_Article.pdf Paper Age. 2004a. “The more thi ngs change.” January/February. Vol. 120 No. 1. Available at: http://www.paperage.com/issues/ja n_feb2004/01_2004pa trick.html Paper Age. 2004b. “Continued capacity declines seen in pape r industry survey.” Feb. 27, 2004. Available at: http://www.paperage.com/2004news /02_27_2004capacity_survey.html Paper Age. 2004c. “The year ahead.” January/Feb ruary. Vol. 120 No. 1. Available at: http://www.paperage.com/issues /jan_feb2004/01_2004price.html Paperloop Inc. 2001. “Market Report: United States 3Q 2001.” Paun, D., Srivastava, V., Garth, J., Scott, E., Black, K., Dodd, A., Nguyen, L., Ganguly, I., Rice, J. & Seok, H.D. 2004. A financial review of the North American paper industry. Tappi Journal . Vol.3(1). January 2004. Available at: http://www.tappi.org/index.asp ?rc=1&pid=28430&ch=1 &jp=&bhcd2=1084195150 Pponline.com. 2000. “U.S. pulp and paper industry poised for cyclical upswing.” January 11, 2000. Pponline.com. 1999. “U.S. pulp, paper, board capacity growth ‘ultra slow’.” December 9, 1999. Standard & Poor’s (S&P). 2004a. Stock Reports - International Paper. February 21, 2004. Standard & Poor’s (S&P). 2004b. Stock Reports - Longview Fibre. February 21, 2004. Standard & Poor’s (S&P). 2001. Industry Surveys - Paper & Forest Products. April 12, 2001. Stanley, G.L. 2000. “Economic data for pulp and paper industry shows an encouraging future.” TAPPI Journal 83(1):pp. 27-32.

C2A-28 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Paper and Allied Products



### U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration. Industry, Trade, and the Economy: Data and Analysis . Data by NAICS and SIC. Available at: http://www.ita.doc.gov/td/industry/otea/industry_sector/tabl es_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bu reau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1987, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge Between NAICS and SIC.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards . Available at: http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses . Available at: http://www.sba.gov/advo/research/data.html. Downloaded February 4, 2006.
Value Line. 2006. Value Line 3.0 Investment Analyzer

. Value Line. 2004. Paper & Forest Products Industry . January 9, 2004.
Value Line. 2003a. Value Line Investment Survey.
Value Line. 2003b. Paper & Forest Products Industry. April 11, 2003.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2A-29§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C2A-30 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts 

# Chapter C2B: Chemicals and Allied Products (SIC 28)

I NTRODUCTION


### EPA’s Detailed Industry Questionnaire , hereafter referred to as the DQ, identified thirt een 4-digit SIC codes in the Chemical and Allied Products Industry (SIC 28) with at least one existing facility that operates a CWIS, holds a NPDES permit, and withdraws e qual to or greater than two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes. (Facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). For each of the fifteen SIC codes, Table C2B-1, following page, provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnaire respondents (weighted to represent a national total of facilities that hold a NPDES permit and operate cooling water intake structures), the number of facilities estimated to be potentially subject to Phase III regulation based on the minimum withdrawal threshold of 2 MGD, and the number of facilities estimated to be subject to regulation under the three regulatory analysis options. 

## C HAPTER 

## C ONTENTS 

## :
Introductio n..........................................................C2B-1 C2B-1 Summary Insights from this Profile ........C2B-5 C2B-2 Domestic Produ ction...............................C2B-5 C2B-2.1 Output.............................................C2B-6 C2B-2.2 Prices ..............................................C2B-8 C2B-2.3 Number of Facilities and Firms ....C2B-10 C2B-2.4 Employment and Productivity ......C2B-12 C2B-2.5 Capital Expenditures ....................C2B-14 C2B-2.6 Capacity Utiliz ation......................C2B-15 C2B-3 Structure and Competitiveness..............C2B-18 C2B-3.1 Firm Size ......................................C2B-18 C2B-3.2 Concentration Ratios ....................C2B-19 C2B-3.3 Foreign Trade ...............................C2B-21 C2B-4 Financial Condition and Performance...C2B-26 C2B-5 Facilities Operating Cooling Water Intake Structures ..............................................C2B-28 C2B-5.1 Waterbody and Cooling System Type...... ...................................................C2B-29 C2B-5.2 Facility Si ze..................................C2B-31 C2B-5.3 Firm Size ......................................C2B-33 References..........................................................C2B-36

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

a

SIC SIC Description Total Regulated b to 50 MGD

All to 200 MGD

All to 100 MGD CWB Option Option Option

c Inorganic Chemicals (SIC 281) 2812 28 20 16 3 11

2813 Industrial Gases 110 4 4 0 0

2816 26 9 0 0 0

2819 271 30 6 0 1

Total Inorganic Chemicals 435 64 26 3 12

2821 Plastics Material and 305 19 11 0 4

Nonvulcanizable

Organic Chemicals (SIC 286) d 2865 Crudes and

Pigments organic pigments 59 9 4 0 4

2869

; 364 52 12 3 4

423 61 17 3 8

2823 Fibers cuprammonium process 7 1 1 0 0

2824 36 13 0 0 0

2833 and Botanical Products 33 2 2 0 2

2834 91 4 0 0 0 

### Table C2B-1: Phase III Facilities in the Chemicals and Allied Products Industry (SIC 28) Number of Phase III facilities

Important Products Manufactured Potentially

Facilities Subject Subject Subject

Alkalies and Chlorine Alkalies, caustic soda, chlorine, and soda ash Industrial ga ses (including organic) for sale in compressed, liquid, and solid forms Inorganic Pigments Black pigments, except carbon black, white pigments, and color pigments Industrial Inorganic Chemicals, Not Miscellaneous other industrial inorganic chemicals Elsewhere Classified

Plastics Material and Resins (SIC 282)
Synthetic Resins, and Cellulose plastics materials; phenolic and other tar acid resins; urea and melamine resins; vinyl resins; styrene resins; alkyd Elastomers resins; acrylic resins; polyethylene resins; polypropylene resins; rosin modified resins; coumarone-indene and petroleum polymer resins; miscellaneous resins
Cyclic Organic
Intermediates, and Organic Dyes and Aromatic chemicals, such as benzene, toluene, mixed xylenes naphthalene, synthetic organic dy es, and synthetic

Industrial Organic Chemicals, Not Elsewhere Classified Aliphatic and other acyclic organic chemicals; solvents; polyhydric alcohols; synthetic perfume and flavoring materials; rubber processing chem icals; plasticizers; synthetic tanning agents chemical warfare gases; and esters, amines, etc. Total Organic Chemicals Other Chemical Segments Cellulosic Manmade Cellulose acetate and regenerated cellulose such as rayon by the viscose or
Manmade Organic Fibers, Except Cellulosic Regenerated proteins, and polymers or copolymers of such components as vinyl chloride, vinylidene chloride, linear esters, vinyl alcohols, acrylonitrile, ethylenes, amides, and related polymeric materials Medicinal Chemicals Agar-agar and similar products of natural origin, endocrine products, manufacturing or isolating basic vi tamins, and isolating active medicinal principals such as alkaloids from botanical drugs and herbs Pharmaceutical Intended for final consumption, such as ampoules, tablets, capsules, vials,

C2B-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

c a

SIC SIC Description Total Regulated b to 50 MGD

All to 200 MGD

All to 100 MGD CWB Option Option Option Preparations and suspensions 2873 Nitrogenous 60 9 0 0 0

mixtures 2899 ; 162 4 0 0 0

389 34 3 0 2

1,552 178 56 6 26

a b

d

Source: 

### Table C2B-1: Phase III Facilities in the Chemicals and Allied Products Industry (SIC 28) Number of Phase III facilities

Important Products Manufactured Potentially

Facilities Subject Subject Subject

ointments, me dicinal powders, solutions,

Fertilizers Ammonia fertilizer compounds and anhydrous ammonia, nitric acid, ammonium nitrate, ammonium sulfate and nitrogen solutions, urea, and natural organic fertilizers (except compost) and

Chemicals and Chemical Preparations, Not Elsewhere Classified Fatty acids; essential oils; gelatin (except vegetable); sizes; bluing laundry sours; writing and stamp pad ink; industrial compounds; metal, oil, and water treating compounds; waterproofing compounds; and chemical supplies for foundries Total Other Total Chemicals and Allied Products (SIC 28) Total SIC Code 28 Number of weighted detailed questionnaire survey respondents. Individual numbers may not add up due to independent rounding. SIC code 281 is officially titled “Industr ial Inorganic Chemicals.” However, to av oid confusion with SIC code 2819, “Industria l Inorganic Chemicals, Not Elsewhere Classified,” this profile refers to SIC code 281 as the “Inorganic Chemicals segment.” SIC code 286 is officially titled “Industr ial Organic Chemicals.” However, to avoi d confusion with SIC code 2869, “Industrial Organic Chemicals, Not Elsewhere Classified,” this profile refers to SIC code 286 as the “Organic Chemicals segment.” Executive Office of the President, 1987; U.S. EPA 2000; U. S. EPA analysis, 2006.


### As shown in Table C2B-1, EPA estimates that, out of the total of 1,552 facilities with a NPDES permit and operating cooling water intake structures in the Chemi cals and Allied Products Industry (SIC 28), 56 (or 4%) would be subject to regulation under the 50 MGD All option, 6 (or 0.3%) would be subject to regulation under the 200 MGD All option, and 26 (or 1.7%) would be subject to regulation under the 100 MGD CWB option. EPA also estimated the percentage of total production that o ccurs at facilities estimated to be subject to regulation under each regulatory analysis option. Total value of sh ipments for the Chemicals and Allied Products Industry from the 2004 Annual Survey of Manufactures is $357.7 billi on. Value of shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because the DQ did not collect value of shipments data, these data were not available for Phase III facilities. Total revenue, as reported on the DQ, was used as a close approximation for value of shipments for these facilities. EPA estimated the total revenue of facilities expected to be subject to regulation under the 50 MGD, 200 MGD and 100 MGD regulatory analysis options to be $30.2 billion, $13.8 billion, and $22.3 billion. Therefore, EPA estim ates that the percentage of total production in the paper industry that occurs at facilities estimated to be subject to regulation under the 50 MGD, 200 MGD, and 100 MGD options is 8%, 4% and 6%, respectively.. The responses to the Detailed Questionnaire indicate th at three chemical segments account for 95% of the chemicals industry potential Phase III facilities: (1) Inorganic Chemicals (including SIC codes 2812, 2813, 2816, and 2819); (2) Plastics Material and Resins (SIC code 2821); and (3) Organic Chemicals (including SIC codes 2865 and 2869). This profile therefore provides detailed information for these three industry groups.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-2 on the following page provides the cross-wa lk between SIC codes and NAICS codes for the profiled chemical SIC codes. The table shows that alkalies an d chlorine (SIC 2812), industrial gases (SIC 2813), Plastics Material and Synthetic Resins, and Nonvulcanizable El astomers (SIC 2821) have one-to-one relationships to NAICS codes. The other SIC codes in the three profile d chemical segments correspond to two or more NAICS codes.

Table C2B-2: Relationship between SIC and NAICS Co des for the Chemicals and Allied Products Industry (2002)
SIC Code SIC Description NAICS Code NAICS Description Establishments Value of Shipments

($000) Employment
Inorganic Chemicals (SIC 281) 2812 Alkalies and Chlorine 325181 Alkalies and chlorine 41 2,809,496 6,253 manufacturing 2813 Industrial Gases 325120 Industrial gas manufacturing (pt) 572 5,864,978 10,654 2816 Inorganic Pigments 325131 Inorganic dye and pigment 81 3,522,308 7,233

325182 manufacturing ( 25 1,033,515 1,665 2819 Industrial Inorganic 325131

325188 manufacturing (
manufacturing ( 81

631 3,522,308

16,084,006 7,233

47,474 pt) Carbon black manufacturing (pt)
Chemicals, Not Elsewhere Classified Inorganic dye and pigment pt) All other basic inorganic chemical pt) 325998 All other miscellaneous chemical 1188 13,404,657 36,348 product and preparation manufacturing (pt) 331311 10 830,110 1,554

2821

Nonvulcanizable 325211 manufacturing 690 46,825,479 67,171

Organic Chemicals (SIC 286) 2865 Crudes and 325110 325132

325192 manufacturing
manufacturing 56 123

37 21,084,070 2,816,169
4,935,751 9,380 7,647
6,528

2869 325110 325120 56 572 21,084,070 5,864,978 9,380 10,654 Alumina refining Plastics Material and Resins (SIC 282) Plastics Material and Synthetic Resins, and

Elastomers Plastics material and resin

Cyclic Organic
Intermediates, and Organic Dyes and Pigments Petrochemical manufacturing (pt) Synthetic organic dye and pigment
Cyclic crude and intermediate
Industrial Organic Chemicals, Not Elsewhere Classified Petrochemical manufacturing (pt) Industrial gas manufacturing (pt) 325188 All other basic inorganic chemical 631 16,084,006 47,474 manufacturing (pt) 325193 Ethyl alcohol manufacturing 72 2,288,305 2,265 325199 manufacturing ( 685 48,290,302 77,995

a Source: All other basic organic chemical pt) Industry data for relevant NAICS codes from the 2002 Economic Census. U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.

C2B-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



## C2B-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of chemicals firms to absorb compliance costs under each primary analysis option without material adverse economic/financial effects. The industry’s ability to withstand compliance costs is primarily influenced by two factors: (1) the extent to which the industry may be expected to shift compliance costs to its customers through price increases, and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, the chemicals industry has a variable level of concentration, with some industry segments exhibiting relatively low concentration while others show somewhat higher concentration. Regardless of the domestic concentration level and its implications for market power, the U.S. chemicals industry faces increasing competitive pressure fro m abroad, which substantially limits any apparent ability of firms to pass a significant portion of their complia nce-related costs through to customers. In addition, the relatively low share of total industry output that is estimated subject to the regulation under each analysis option also diminishes a firms’ ability to shift compliance costs to customers. For these reasons, in its analysis of regulatory impacts for the chemicals industry, EPA assu med that complying firms would be unable to pass compliance costs through to customers; i.e., complying facilities must absorb all co mpliance costs (see following sections and Appendix 3, Cost Pass-Through Analysis , to Chapter C3: Economic Impact Analysis for Manufacturers , for further information).
Financial Health and General Business Outlook Over the past decade, the chemicals industry, like other U.S. manufacturing industries, has experienced a range of economic/financial conditions and a numb er of substantial challenges. In the early 1990s, the domestic chemicals industry was affected by reduced U.S. demand as the ec onomy entered a recessionary period. Although domestic market conditions improved by mid-decade, an oversupply of crude oil, weakness in Asian markets, along with other domestic factors, dealt a serious blow to refine rs in 1998. More recently, as the U.S. economy began recovery from its economic weakness, the domestic chemi cals industry is showing signs of recovery with continuous improvements in demand levels and financial performance dur ing 2003 to 2005. Although the industry weathered difficult periods over the past few years, the strengthening of the industry’s financial condition and general business outlook suggest improved ability to withstand additional regulatory compliance costs without a material financial impact.


## C2B-2 D OMESTIC 

## P RODUCTION 

### The U.S. chemical and allied products industry includes a large number of companies that, in total, produce more than 70,000 different chemical products . These products range from commodity materials used in other industries to finished consumer products such as soaps and detergents . The industry accounts for nearly 12 percent of U.S. manufacturing value added, and produces approximately two percent of total national gross domestic product (McGraw-Hill, 2000). Raw materials containing hydrocarbons such as oil, na tural gas, and coal are primary feedstocks for the production of organic chemicals. Inorganic chemicals are chemicals that do not contain carbon but are produced from other gases and minerals (McGraw-Hill, 2000). The chemicals and allied products industry is highly ener gy intensive, accounting for seven percent of total U.S. energy consumption. Just over 50 percent of the indust ry’s energy consumption is used as feedstock in the production of chemical products. Th e remainder is used to power pr oduction processes. Oil accounts for approximately 42 percent of total energy consumption by the industry. For some products, e.g., petrochemicals,

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### energy costs account for up to 85 percent of total pro duction costs. Overall, total energy costs represent seven percent of the value of chemical industry shipments (S&P, 2001). C2B-2.1 Output Figure C2B-1 shows constant dollar value of shipments and value added for the three profiled segments between 1987 and 2004 1 

### . Value of shipments and value added are two common measures of manufacturing output. Change in these values over time provides insight into the overall economic health and outlook for an industry. Value of shipments is the sum of receipts ea rned from the sale of outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors. Value added, defined as the difference between the value of shipments and the value of inputs u sed to make the products sold, measures the value of production activity in a particular industry. The Organic Chemicals segment experienced a decrease in both value of shipments and value added between 1988 and 1993, followed by volatility through 1998. The mid 1990s were marked by increased competition in the global market for petrochemicals, which comprise the majority of organic chemical products. The increased competition stems from the considerable capacity expans ions for these products seen in developing nations. (McGraw-Hill, 2000). Value of shipments for the segment increased through 2000, while value added remained flat. Both value of shipments and value added declined in 2001 as the segment faced decreased demand due to the economic slowdown, but have risen significantly and continuously since that year. In 2004, both value of shipments and value added were higher than duri ng any other year in the time period analyzed. The Plastics Material and Resins and Inorganic Chemi cals segments remained somewhat more stable over the period between 1987 and 2004. In the early 1990s, domestic producers benefited from the relatively weak dollar, which made U.S. products more competitive in the global market. During the later part of the 1990s, the strength of the U.S. economy bolstered domestic end-use markets, o ffsetting the effect of reduced U.S. export sales, which resulted from increased global competition and a strengthen ed dollar (McGraw-Hill, 2000). The global economic slowdown that began in 2000 led to decreased production, in particular, of chemical goods that are used in the production processes of other industries, notably steel, apparel, textiles, forest products, and technology. During 2002 to 2004, the values of shipments and value added of the Plastics Material and Resins segment increased significantly, reaching maximum levels observed in the analyzed time period by 2004. The value of shipments and value added of the Inorganic Chemicals segment, on the other hand, has remained relatively stable since 2000. In the early 2000s, the industry struggled to maintain ear nings against the global economic decline. Currently, the industry continues to face high raw material and energy co sts, as well as an increase in competition from abroad. Although the U.S. economy has improved recently, the chem ical industry has lagged in increasing growth of sales and earnings. This may change in the future, as the American Chemistry Council reported that the chemical industry should experience positive growth only slightly lower than GDP in 2004 (C&EN, 2003c). Recent increases in the value of shipments and value added i ndicate improved performance. This should better position firms to incur costs associated with regulatory compliance.

1 

### Terms highlighted in bold and italic font are further explained in the glossary.

C2B-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### (millions, $2005)198719881989199019911992199319941995199619971998199920002001200220032004 ( ) ( )

( )

( ) ( ) ( )

Value Added

0198719881989199019911992199319941995199619971998199920002001200220032004 )

)

(

) ( ) ( )

a

. Source:



### Figure C2B-1: Value of Shipments and Value A dded for Profiled Chemicals Industry Segments

Value of Shipments

20,0 0 0 30,0 0 0 40,0 0 0 50,0 0 0 60,0 0 0 70,0 0 0 80,0 0 0 90,0 0 0 1 00,0 0 0 1 10,0 0 0 1 20,0 0 0

O r ga n ic Ch em ic als N A I CS t o SI C O r ga n ic Ch em ic als SI C 28 65 , 28 69 P last ics M at erial an d Resin s NAICS t o SI C P last ics M at erial an d Resin s SI C 2 821 In or ga nic Ch em icals N A I CS t o SI C In or ga nic Ch em icals SI C 28 12 , 28 13 , 28 16 , 28 19

5 , 0 0 0 1 0 ,0 0 0 1 5 ,0 0 0 2 0 ,0 0 0 2 5 ,0 0 0 3 0 ,0 0 0 3 5 ,0 0 0 4 0 ,0 0 0 4 5 ,0 0 0

O r ga n ic Ch em ic als (N A I C S t o SI C O r ga n ic Ch em ic als (SI C 2 8 6 5 , 2 8 6 9 P last ics M a t e ria l an d R e sin s N A I CS t o SI C) P last ics M a t e ria l an d R e sin s (SIC 2 8 2 1 In o r ga n ic C h em ic a ls N A I CS t o SI C In o r ga n ic C h em ic a ls SIC 2 8 1 2 , 2 8 1 3 , 2 8 1 6 , 2 8 1 9

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### Table C2B-3 provides the Federal Reserve System’s index of industrial production for the three profiled segments, which shows trends in production since 1989. This index reflects total output in physical terms,

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### whereas value of shipments and value added reflects the va lue of output in economic terms. Table C2B-3 shows varying trends in the three segments since 1989, but shar p declines in production in all three segments in 2000 or 2001. These declines were caused by the marked slowdow n in the U.S. economy, which affected demand in major chemical-using segments such as steel, apparel, textiles, forest products, and the technology sectors (Chemical Marketing Reporter, 2001). Production continued to decline through 2001 and has fluctu ated annually since that year. In 2002, production increased somewhat before dipping again in 2003. The decline was followed by gains in 2004, and yet more declines in 2005. Between 1989 and 2005, the Basic Inorganic Chemicals and Organi c Chemicals segments saw overall production declines of 5.3 and 3.3 percent, respec tively, while the Plastics Materials and Resins segment saw an overall 28.5 percent production increase.

Table C2B-3: Chemicals Industry Industrial Production Index (Annual Averages) Basic Inorganic Chemicals a Plastics Material and Resins b Organic Chemicals c Year Index Percent Index Percent Index Percent 2002=100 Change 2002=100 Change 2002=100 Change 1989 101.3 74.3 102.4 1990 103.8 2.4% 75.0 1.0% 108.9 6.4% 1991 99.3 -4.3% 72.1 -3.8% 103.8 -4.7% 1992 100.9 1.6% 78.4 8.7% 104.4 0.6% 1993 97.9 -3.0% 76.9 -1.9% 99.4 -4.8% 1994 103.2 5.5% 87.8 14.1% 94.1 -5.4% 1995 102.5 -0.7% 88.5 0.8% 95.0 1.0% 1996 102.0 -0.5% 85.7 -3.2% 95.4 0.4% 1997 113.4 11.2% 94.3 10.1% 97.4 2.1% 1998 103.8 -8.5% 102.0 8.2% 101.4 4.1% 1999 111.6 7.5% 105.9 3.8% 103.1 1.7% 2000 110.3 -1.2% 105.1 -0.8% 95.7 -7.1% 2001 95.1 -13.7% 95.4 -9.2% 91.7 -4.2% 2002 100.0 5.1% 100.0 4.9% 100.0 9.0% 2003 98.4 -1.6% 94.9 -5.1% 98.7 -1.3% 2004 105.9 7.5% 100.8 6.2% 100.7 2.1% 2005 d 96.0 -4.0% 95.4 -4.6 99.0 -1.0 Total Percent Change 1989-2005 -5.3% 28.5% -3.3% Average Annual -0.3% 1.6% -0.2% Growth Rate

a Includes NAICS 32512-8. b Includes NAICS 325211. Includes NAICS 32511,9. d Value for Plastics Materials and Resins through 11 months of 2005. Source: Economagic, 2006.



### C2B-2.2 Prices
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and indicates the overall trend of product pricing, a nd thus supply-demand conditions, within a segment.

C2B-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006

c§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Figure C2B-2 shows the producer price index for the profile d chemical segments. Selling prices for the products of the Organic and Inorganic Chemicals segments incr eased from 1987 to 1989 and remained stable through 1994. Between 1994 and 1995, prices increased sharply, foll owed by a period of relatively stable prices through 1999. The sharp price rises for Organic Chemicals and Plas tics Material and Resins in 2000 resulted in part from increases in the price of natural gas, which is the feedst ock for 70 percent of U.S. ethylene production. High natural gas prices put U.S. organic chemicals and, to a lesser extent, plastic resin producers at a disadvantage relative to foreign producers who rely on naphta and gas oil as a feedstock. Natural gas prices declined, however, in 2001 easing pressure on U.S. producers (Chemical Mark eting Reporter, 2001). Price increases for Plastics Material and Resins also reflected a shift by U.S. producers away from production of commodity resins to specialty and higher-value-added produc ts (McGraw-Hill, 2000). Prices for Plastics Material and Resins followed a trend similar to the other two chemical industry segme nts but with larger fluctuations (see Figure C2B-2). (C&EN, 2003c). Prices for all three chemical segments d eclined slightly in 2002 before rising steeply through 2003 to 2005. 2 

### Chemical and plastics prices fluctuate in large part as a result of varying energy prices. Basic petrochemicals, which comprise the majority of organic chemical pr oducts, depend heavily on energy commodities as inputs to the production process – energy input costs may account for up to 85 percent of total product costs. The prices of natural gas and oil therefore influence the production costs and the selling price for these products. High basic petrochemical prices affect prices for chemical intermedia tes and final end products, including organic chemicals and plastics. Another factor influencing prices for commodity chemical products is the cyclical nature of market supply and demand conditions. The Plastics, Organic Chemicals, a nd Inorganic Chemicals segments are characterized by large capacity additions that can lead to fluctuations in prices in response to imbalances in supply and demand.

2 

### Note that data 2004 and 2005 price data were only ava ilable for the Plastics Materials and Resins and Inorganic Chemicals segments.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts1987198819891990199119921993199419951996199719981999200020012002200320042005 (

)

Note:

Source: 

### Figure C2B-2: Producer Price Indexes fo r Profiled Chemicals Industry Segments

6 0 . 0 7 0 . 0 8 0 . 0 9 0 . 0 1 0 0 . 0 1 1 0 . 0 1 2 0 . 0 1 3 0 . 0 1 4 0 . 0 1 5 0 . 0

P la st ic s M a t e r ia l a n d R e s in s SI C 2 8 2 1 ) I n o r g a n ic C h e m ic a ls ( SI C 2 8 1 2 , 2 8 1 3 , 2 8 1 6 , 2 8 1 9 O r g a n ic C h e m ic a ls ( SI C 2 8 6 5 , 2 8 6 9 )

For Inorganic Chemicals and Organi c Chemicals, data presented are the average of PPI values for the corresponding SIC/NAICS codes of the industry segments. Data for 2004 and 2005 was collected by corresponding NAICS code(s) and appended to SIC code data for Pl astics Materials and Resins and Inorganic Chemicals after conver ting all data to a common base year. Data comparability issues between SIC code and NAICS code data did no t allow the same me thodology for Organic Chemicals. Therefore, SIC code data fo r Organic Chemicals is presented through 2003, after adjusting to the same base year (12/03) as the other industry segments. BLS, 2006.



### C2B-2.3 Number of Facilities and Firms According to the Statistics of U.S. Businesses, the num ber of facilities in the Inorganic Chemicals segment remained relatively stable between 1989 and 1997, follow ed by four consecutive year s of decreases in the number of facilities. Although the number of facilities increased slightly in 2003, the Inorganic Chemicals segment experienced an overall 13.7 percent decline in the numb er of facilities over the 1990 to 2003 time period. The other two segments saw overall increases in the number of facilities over the 1989 to 2003 time period, though the Organic Chemicals segment saw declines in 1999 through 2002. The Plastics Material and Resins segment saw significant increases in the number of facilities reported between 1993 and 1996, reflecting growth in the demand for plastics in a number of end-uses (McGraw-Hill, 2000). Table C2B-4 shows the downward trend in the number of facilities producing inorganic chemical products following a peak in 1991. The decrease is partly attributable to the consolidation within the Inorganic Chemicals segment (S&P, 2001).

C2B-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-4: Number of Facilities for Profiled Chemical Segments a

Year Inorganic Chemicals
Change al and Resins
Change Organic Chemicals
Change 1990 1,421 517 837 1991 1,508 6.1% 529 2.3% 851 1.7% 1992 1,466 -2.8% 460 -13.0% 888 4.3% 1993 1,476 0.7% 502 9.1% 908 2.3% 1994 1,460 -1.1% 499 -0.6% 902 -0.7% 1995 1,425 -2.4% 558 11.8% 907 0.6% 1996 1,396 -2.0% 630 12.9% 868 -4.3% 1997 1,414 1.3% 593 -5.9% 945 8.9% 1998 b 1,310 -7.3% 565 -4.7% 1,093 15.6% 1999 b 1,309 -0.1% 586 3.7% 1,076 -1.5% 2000 b 1,300 -0.7% 597 1.9% 1,072 -0.4% 2001 b 1,266 -2.6% 621 4.0% 1,064 -0.7% 2002 b 1,182 -6.6% 695 11.9% 1,052 -1.2% 2003 b 1,227 3.7% 802 15.4% 1,074 2.1%

1990-2003

Rate -13.7%

-1.1% 55.1%

3.4% 28.3%

1.9%

a

b (

. Source: Number of Facilities Percent Plastics Materi Number of Facilities Percent Number of Facilities Percent

Total Percent Change
Average Annual Growth

The Statistics of U.S. Business is deri ved from Census County Business Patterns data, and reports so mewhat different numbers o f firms and facilities than other Census data sources. Before 1998, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System NAICS). For this analysis, EPA convert ed the NAICS classification data to the S IC code classifications usi ng the 1997 Economic Census Bridge Between NAICS and SIC U.S. SBA, 1989-2003.



### The trend in the number of firms between 1989 and 2003 is similar to the nu mber of facilities. The number of firms in the Inorganic Chemicals segme nt peaked in 1992, and then declined continuously during 1993 to 2002, before increasing slightly in 2003. The Organic Chem icals segment showed more volatility before peaking in 1998 with 710 firms. The number of firms in this segment declined slightly over 1999 to 2002, before reaching a new high of 717 firms in 2003. The number of firms in the Plastics Material and Resins segment increased substantially between 1993 and 1996, from 284 to 403 firms, before decreasing in the next two years. Starting in 1999, the Plastics Material and Resins segment showed five years of positive growth in the number of firms. Table C2B-5 on the following page shows the number of fi rms in the three profiled chemical segments between 1990 and 2003.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-5: Number of Firms for Profiled Chemical Segments a Inorganic Chemicals Plastics Mate rial and Resins Organic Chemicals Year Number of Percent Number of Percent Number of Percent Firms Change Firms Change Firms Change 1990 640 301 579 1991 678 5.9% 319 6.0% 584 0.9% 1992 699 3.1% 255 -20.1% 611 4.6% 1993 683 -2.3% 284 11.4% 648 6.1% 1994 677 -0.9% 295 3.9% 644 -0.6% 1995 657 -3.0% 343 16.3% 644 0.0% 1996 625 -4.9% 403 17.5% 596 -7.5% 1997 611 -2.2% 358 -11.2% 674 13.1% 1998 b 618 1.1% 322 -10.1% 710 5.3% 1999 b 609 -1.3% 337 4.7% 684 -3.6% 2000 b 611 0.2% 352 4.5% 683 -0.1% 2001 b 606 -0.8% 375 6.5% 692 1.3% 2002 b 552 -8.9% 443 18.1% 685 -1.0% 2003 b 592 7.3% 554 25.1% 717 4.7% Total Percent Change 1990-2003 -7.5% 84.1% 23.9% Average Annual -0.6% 4.8% 1.7% Growth Rate

a The Statistics of U.S. Business is deri ved from Census County Business Patterns data, and reports so mewhat different numbers o f firms and facilities than other Census data sources. b Before 1998, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA convert ed the NAICS classification data to the S IC code classifications usi ng the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2003.


### C2B-2.4 Employment and Productivity Figure C2B-3 below provides information on employment from the Annual Survey of Manufactures. With the exception of minor short-lived fluctuations, employment in the Organic Chemicals and Plastics Material and Resins segments remained relatively stable between 1988 and 2000 before seeing declines of greater than 4.5 percent in 2001. Slight increases in employment in 2002 were followed by further declines during 2003 to 2004. The Inorganic Chemicals segment, however, experienced a significant decrease in employment from 103,400 to 80,200 employees over the 1992 to 1996 period. This decrease reflects the industry’s restructuring and downsizing efforts intended to reduce costs in response to competitive challenges. Employment in this segment remained fairly constant over the next two years before experiencing three years of employment declines greater than 4 percent. A brief increase in employment in 20 02 was followed by further dec lines in both 2003 and 2004. From 1987 to 2004, the Inorganic Chemicals segment had the largest overall decrease in employment at 28 percent. The Organic Chemicals segment employment declined 24 percent, while the Plastics Material and Resins segment was the only segment to increase empl oyment, which rose by 2.6 percent for the period.

C2B-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Figure C2B-3: Employment for Profiled Chemical Segments (000s)

1 4 0

1 3 0

1 2 0

1 1 0

1 0 0

90

80

70

60

50

40 O r ga n ic C h em ic als ( N A I C S t o SI C ) O r ga n ic C h em ic als ( SI C 2 8 6 5 , 2 8 6 9 ) In o r ga n ic C h em icals (N A I C S t o SI C ) In o r ga n ic C h em icals (SIC 2 8 1 2 , 2 8 1 3 , 2 8 1 6 , 2 8 1 9 ) P last ics M a t e rial an d R e sin s ( N A I CS t o SI C) P last ics M a t e rial an d R e sin s ( SI C 2 8 2 1 )200420032002200120001999199819971996199519941993199219911990198919881987

a Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### Table C2B-6 presents the change in valu e added per labor hour, a measure of labor productivity , for each of the profiled industry segments between 1988 and 2004. Th e trends in each segment show considerable volatility through the 1990s into the 2000s. The gains in productiv ity in the Inorganic Chemicals segment reflect firms’ attempts to reduce costs by restructuring production a nd materials handling processes in response to maturing domestic markets and increased global competition (S&P, 2001). Over the 1988 to 2004 period, all three segments saw significant increases in productivity.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

Inorganic Chemicals Organic Chemicals 

### Table C2B-6: Productivity Trends for Profiled Chemical Segments ($2005) Plastics Material and Resins Value Value Value Year Value Added Prod. Hours Added/Hour Value Added Prod. Hours Added/Hour Value Added Prod. Hours Added/Hour ($mill.) (mill.) $/hr. Percent Change ($mill.) (mill.) $/hr. Percent Change ($mill.) (mill.) $/hr Percent Change 1988 19,020 114 168 19,547 80 245 39,548 152 261 1989 20,550 109 189 12.8% 18,540 84 222 -9.6% 41,520 155 269 3.1% 1990 22,120 115 193 2.2% 16,756 83 203 -8.3% 39,120 156 251 -6.5% 1991 20,875 121 173 -10.6% 14,620 81 181 -10.9% 34,622 156 222 -11.6% 1992 21,686 120 180 4.4% 16,215 79 207 14.2% 33,541 155 216 -2.8% 1993 20,134 108 186 3.4% 15,163 81 187 -9.3% 33,469 156 215 -0.5% 1994 18,703 101 186 -0.5% 19,009 89 213 13.4% 36,148 146 248 15.6% 1995 19,808 100 198 6.6% 21,429 92 234 10.1% 41,191 148 279 12.4% 1996 19,789 97 204 3.3% 18,289 81 227 -3.1% 33,979 158 215 -23.0% 1997 a 20,377 91 224 9.4% 20,710 84 248 9.2% 41,575 150 277 28.7% 1998 a 26,790 92 293 30.8% 22,162 83 266 7.5% 33,665 147 230 -17.0% 1999 a 19,203 88 219 -25.2% 21,302 84 252 -5.4% 34,780 143 244 6.2% 2000 a 15,961 94 171 -22.0% 20,582 87 236 -6.3% 34,987 138 253 3.7% 2001 a 16,694 87 191 12.2% 16,516 80 206 -12.9% 24,482 135 181 -28.4% 2002 a 16,989 86 197 2.8% 17,723 91 195 -5.3% 31,192 133 235 29.9% 2003 a 17,344 82 212 7.8% 18,745 87 215 10.2% 31,966 130 247 4.9% 2004 a 16,992 77 222 4.6% 23,844 82 290 35.0% 42,251 122 346 40.4% Total Percent Change -10.7% -32.5% 32.4% 22.0% 3.1% 18.3% 6.8% -19.7% 33.0% 1988-2004 Average Annual Percent -0.7% -2.4% 1.8% 1.2% 0.2% 1.1% 0.4% -1.4% 1.8% Change

a Before 1997, the Department of Commerce co mpiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA convert ed the NAICS classification data to the S IC code classifications usi ng the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2B-2.5 Capital Expenditures The chemicals industry is relatively capital-intensive. According to the Census’s 2001 Annual Survey of Manufactures , facilities in NAICS 325, which includes the entir e profiled chemical SIC codes, had aggregate capital spending of almost $19 billion in 2001. Capita l-intensive industries are characterized by large, technologically complex manufacturing facilities, which reflect the economies of scale required to manufacture products efficiently. New capital expenditures are needed to extensively modernize, expand, and replace existing capacity to meet growing demand. All three pr ofiled chemical industry segments experienced substantial increases in capital expenditures through the 1990s. Table C2B-7 on the following page shows that capital expenditures in the Inorganic Chemicals segment increased, in real terms, from $1.216 bi llion in 1987 to $2.803 billion in 1998. Although the following five years saw d eclines in capital expenditures, the Inorganic Chemicals segment increased capital expenditur es by 14.8 percent from 1987 to 2004. The Plastics segment more than doubled its capital expenditures from 1987 through 1999, before significant reductions occurred in the subsequent two years. The Organic Chemicals segment peaked in 1996, and has seen its capital expenditures decline

C2B-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### continuously until 2004, when expenditu res increased slightly. Overall, capital expenditures in this segment declined by almost 33 percent from 1988 to 2004. Much of the growth in capital expenditures was driven by investment in capacity expansions to meet the increas e in global demand for chemical products. Domestically, the continued substitution of synthetic materials for ot her basic materials and rising living standards caused consistent growth in the demand for chemical commodities (S&P, 2001). As the economy slowed in 2000, chemical industry firms curtailed capital expenditures in the face of weakening financial performance. As the economy picked up steam, an early 2003 survey of 19 chemical companies found that businesses sought to start increasing capital projects in 2003 (C&EN, 2003b).

Year Inorganic Chemicals Organic Chemicals Capital Change Capital Change Capital Change 1987 1,216 1,910 n/a 1988 1,242 2.1% 2,378 24.5% 4,713 1989 1,909 53.7% 2,806 18.0% 5,807 23.2% 1990 1,826 -4.3% 3,348 19.3% 7,022 20.9% 1991 1,827 0.1% 2,989 -10.7% 6,972 -0.7% 1992 2,017 10.4% 2,216 -25.9% 6,174 -11.4% 1993 1,496 -25.8% 2,443 10.3% 5,109 -17.2% 1994 1,620 8.3% 3,150 28.9% 4,358 -14.7% 1995 2,079 28.3% 2,829 -10.2% 5,953 36.6% 1996 2,391 15.0% 3,325 17.6% 7,457 25.3% 1997 a 2,347 -1.9% 3,435 3.3% 6,832 -8.4% 1998 a 2,803 19.5% 3,987 16.0% 5,804 -15.0% 1999 a 2,373 -15.3% 4,286 7.5% 5,340 -8.0% 2000 a 2,320 -2.2% 2,516 -41.3% 5,129 -4.0% 2001 a 2,193 -5.5% 2,017 -19.8% 3,860 -24.7% 2002 a 1,514 -31.0% 2,225 10.3% 3,611 -6.5% 2003 a 1,210 -20.1% 1,586 -28.7% 2,981 -17.4% 2004 a 1,397 15.4% 1,882 18.7% 3,169 6.3%
1987(8)-2004

Growth Rate 14.8%

0.8% -1.5%

-0.1% -32.8%

-2.4%

a (

. Source: 

### Table C2B-7: Capital Expenditures for Profile d Chemical Segments (in millions, $2005) Plastics Material and Resins
Expenditures Percent Expenditures Percent Expenditures Percent

Total Percent Change
Average Annual
Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System NAICS). For this analysis, EPA convert ed the NAICS classification data to the S IC code classifications usi ng the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2B-2.6 Capacity Utilization Capacity utilization measures actual output as a percentage of total potential output given the available capacity. Capacity utilization reflects excess or insufficient capacity in an industry and is an indication of whether new investment is likely. To take advantage of econo mies of scale, chemical commodities are typically produced in large facilities. Capacity additions in this indu stry are often made on a relatively large scale and can substantially affect the industry’s capacity utilization ra tes. Figure C2B-4 presents the capacity utilization index from 1989 to 2004 for specific 4-digit SIC codes within each of the profiled segments in the chemicals industry. Capacity utilization in the Organic Chemicals segment re mained the most stable through this time period with

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### only moderate fluctuations between 1989 and 1999, followed by decreased utilization rates in 2000 and 2001, before rebounding in 2002. Plastics Material and Resins capacity utilization showed a downward trend, as the production of many commodity resins shifted over seas. U.S. producers responded by emphasizing the manufacture of specialty and higher-value-added products and by rationalizing capacity to improve profitability (McGraw-Hill, 2000). Overall, the Inorganic Chemicals segme nt demonstrated the most volatility in capacity utilization between 1989 and 2002. The chlor-alkali industry (SIC code 2812) e xperienced an almost consis tent decline in capacity utilization since its high of 96 percen t from 1992 through 1994. This decrease reflects the enactment of treaties and legislation designed to reduce the emission of ch lorinated compounds into the environment. These regulations decreased the demand for chlorine, which, together with caustic soda, accounts for more than 75 percent of production by this segment. The significan t increase in capacity utilization in the industrial gases segment (SIC code 2813) in the mid 1990s reflects the expansion of key intermediate purchasers of chemical commodities such as the primary metals and electronics i ndustries. As these markets and the economy in general started to slow, utilization rates declined as well. Si milarly, capacity utilization in the pigments and other inorganic chemicals segments (SIC codes 2816 and 2819) remained relatively stable between 1989 and 1998, before dropping in the early 2000s. Capacity utilization in the inorganic pigments industry increased significantly in 2002 before declining again over 2003 to 2004; no such rebound is evident in the industrial inorganic chemicals segment, where capacity utili zation has been declining each year since 1998. The stability in these segments through 1999 reflects the fact that these are essen tially mature markets where the demand for products tends to track growth in gross domestic product (GDP) (McGraw-Hill 2000) . As the economy continued its sluggish performance in the early 2000s, utilization wi thin this segment dampened, as demand for product decreased.

C2B-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

60 65 70 75 80 85 90 951989199019911992199319941995199619971998199920002001200220032004 (
( )
(
(
( )
(

( )

60 65 70 75 80 85 90 95 1001989199019911992199319941995199619971998199920002001200220032004 (

( 

### Figure C2B-4: Capacity Utilization Rates (Fou rth Quarter) for Profiled Chemical Segments

100

A lka lie s a n d C hlo rine N A IC S to S IC ) A lka lie s a n d C hlo rine S IC 2812
Ino rga nic P igm e nts N A IC S to S IC ) Ino rga nic P igm e nts S IC 2816)

In d u s tria l G a s e s N A IC S to S IC
Indus tria l G a s e s S IC 2813)
Indus tria l In o rga nic C he m ic a ls , N EC (NAIC S to S IC ) Indus tria l In o rga nic C he m ic a ls , N EC S IC 2819

P last ics Mat erial and Resins NAICS t o SIC) P last ics Mat erial and Resins SIC 2821)

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-17§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Figure C2B-4: Capacity Utilization Rates (Fou rth Quarter) for Profiled Chemical Segments

100

95

90

85

80

75

70

65

60 Cy clic Organ ic Crudes an d Interm ediates (NAICS to SIC) Cy clic Organ ic Crudes an d Int erm ediat es (SIC 2865)
Indust rial Organic Chem icals, NEC (NAICS t o SIC)
Indust rial Organic Chem icals, NEC (SIC 2869)2004200320022001200019991998199719961995199419931992199119901989

Source: U.S. DOC, 1989-2004. a Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

.



## C2B-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### The chemicals industry continues to restructure and redu ce costs in response to competitive challenges, including global oversupply for commodities. In the early 1990s, the chemical industry’s cost cutting came largely from restructuring and downsizing. The industry has taken steps to improve productivity, and co nsolidated to cut costs. Companies seeking growth within these relatively mature industry segments have made acquisitions to achieve production or marketing efficiencies. The Plastics Material and Resins segment, for example, experienced sizable consolidations in the late 1990s into 2000 (S&P, 2001).
C2B-3.1 Firm Size The Small Business Administration (SBA) defines small firm s in the chemical industries according to the firm’s number of employees. Firms in the Inorganic Chemical s segment (SIC codes 2812, 2813, 2816, 2819) and in Industrial Organic Chemicals, NEC (SIC code 2869) are de fined as small if they have 1,000 or fewer employees; firms in Plastics Material and Resins (SIC 2821) and Cy clic Organic Crudes and Intermediates (SIC code 2865) are defined as small if they have 750 or fewer employees. The size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size cl assifications, therefore preventing precise use of the SBA size threshold in conjunction with SUSB data. The SUSB data presented in Table C2B-8 show that in 2003, 474 of 592 firms in the Inorganic Chemicals segment had less than 500 employees. Therefore, at least 80 percent of firms in this segment were classified as small. These small firms owned 555 facilities, or 45 percen t of all facilities in the segment. In the Plastics and Resins Industry segment, 455 of 554 firms, or 82 percent, had less than 500 employees in 2003. These small firms owned 493 of 802 facilities (61 percent) in the segme nt. In the Organic Chemicals segment, 76 percent of firms (546 of 717) had fewer than 500 employees, owning 55 percent of all facilities in that segment.

C2B-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 20060-19 § 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-8 below shows the distribution of firms, fac ilities, and receipts in the Inorganic Chemicals, Plastics Material and Resins, and Organic Chemicals segments by the employment size of the parent firm.

Table C2B-8: Number of Firms and Facilities by Firm Size Category for Profiled Chemical Segments, 2003 a Inorganic Chemicals Plastics Materi al and Resins Organic Chemicals Employment Number of Number of Number of Number of Number of Number of Size Category Firms Facilities Firms Facilities Firms Facilities 261 261 228 230 289 291 20-99 143 171 171 176 174 184 100-499 70 123 56 87 83 117

500+ 118 672 99 309 172 483 Total 592 1,227 554 802 717 1,074

a Before 1998, the Department of Comme rce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classification Sy stem (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2003.



### C2B-3.2 Concentration Ratios Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely related to entry barriers with more concen trated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the ma rket share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, th e less competition there is in the industry, other things being equal 3 

### . An industry with a CR4 of more than 50 percen t is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the in dustry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, th e HHI of this industry would be equal to 4,600 (602 + 302
+ 102). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s gu idelines for evaluating mergers, markets in which the HHI is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated. Of the profiled chemicals and allied products segments, as shown in Table C2B-9, only Alkalies and Chlorine (SIC 2812), Industrial Gases (SIC 2813), Inorganic Pigmen ts (SIC 2816), and Cyclic Crudes and Intermediates (SIC 2865) would be considered concentrated based on their CR4 and HHI values. In contrast, Industrial Inorganic Chemicals, NEC (SIC 2819), Plastics Materi al and Resins (SIC 2821), and Industrial Organic Chemicals, NEC (SIC 2869) would be considered competitiv e. The diversity of products in some of the profiled segments, however, makes generalizations about concentra tion less reliable than in industries with a more limited

The measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the extent of competition in an industry.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-19 3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### product slate. That is, within a single SIC code, the numbers of producers may vary substantially by individual product – firms may possess relatively high market power in products with a smaller number of competing producers even though the total SIC code would appear to have a relatively low concentration. On the basis of concentration information, some industry segments woul d therefore appear to be moderately concentrated; accordingly, firms in these segments might possess a moderate degree of market power and thus the ability to pass compliance costs through to customers as price increases. However, as discussed above and more specifically in the following section, competition from foreign producer s in both domestic and export markets, increasingly restrains any discretionary pricing power of U.S. firms in the profiled industry segments.

Table C2B-9: Selected Ratios for SIC and NAICS Codes Within The Profiled Chemical Segments in 1987, 1992, and 1997 a Concentration Ratios SIC (S) or Year 20 Firm 50 Firm 4 Firm (CR4) 8 Firm (CR8) (CR20) (CR50) Inorganic Chemicals
S 2812 1987 1992 72% 75% 93% 90% 99% 99% 100% 100% 2,328 1,994 N 325181 1997 80% 92% 100% 100% 2,870

S 2813 1987 1992 77% 78% 88% 91% 95% 96% 98% 99% 1,538 1,629 1997 64% 85% 96% 99% 1,225
S 2816 1987 1992 64% 69% 76% 79% 94% 93% 99% 99% 1,550 1,910 N 325131 b 1997 67% 79% 95% 100% 1,848

S 2819 1987 1992 38% 39% 49% 50% 68% 68% 84% 85% 468 677 N 325188 c 1997 31% 42% 63% 82% 394HerfindahlNAICS (N) Code Hirschman Index

N 325120

Plastics Material and Resins 1987 20% 33% 61% 89% 248 S 2821 1992 24% 39% 63% 90% 284 1997 26% 39% 64% 89% 304 N 325211 Organic Chemicals

S 2865 1987 1992 34% 31% 50% 45% 77% 72% 96% 94% 542 428 N 325132 c 1997 42% 59% 83% 97% 700 N 325192 d 1997 62% 79% 98% 100% 1701

S 2869 1987 1992 31% 29% 48% 43% 68% 67% 86% 86% 376 336 N 325199 b 1997 25% 38% 57% 80% 256

a The 1997 Census of Manufactures is the most recent concentration ratio data available. b NAICS code represents largest percentage of faciliti es and value of shipments within this SIC based on 1997 Bridge Between SIC and NAICS NAICS code represents largest percentage of facilities within this SIC based on 1997 Bridge Between SIC and NAICS d NAICS code represents largest percentage of value of shipments within this SIC based on 1997 Bridge Between SIC and NAICS Source: U.S. DOC, 1987, 1992, 1997, and 2002.

C2B-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006

c§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### C2B-3.3 Foreign Trade The chemicals industry is the largest exporter in the United States. The industry generates more than 10 percent of the nation’s total exports, and overseas sales constitute a growing share of U.S. chemical company revenues. The major U.S. producers still derive 50 percent or mo re of their revenue from domestic sales, however (S&P, 2001). This profile uses two measures of foreign competition: export dependence and import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total import s divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefor e be at a relative disadvant age in their ability to passthrough costs because foreign producers would not incu r costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. ma nufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulation-induced increases in producti on costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadvant age in potentially recovering compliance costs through price increases since export sales ar e presumed subject to substantial competition from foreign producers. Table C2B-10 presents trade statistics for each of the pr ofiled chemical segments. Both export dependence and import penetration experienced increases in each of these segments between 1989 and 2001. Globalization of markets has become a key factor in the Inorganic Chemicals segment, with both import penetration and export dependence growing substantially over the 14-year analysis period. During this period, imports rose by just over 6 percent, while exports climbe d 0.4 percent. The greater growth in imports underscores the increasing competition from foreign producers in domestic markets. Increased globalization has also affected the Plastics Material and Resins segment. Imports and exports of plastics and resins have increased significantly over the tim e period, reflecting the continued growth in the global market. Of the three profiled chemical segments, this segment has shown the largest overall increases in values of imports and exports with total grow th of 174 percent and 67 percent, respectively, from 1989 through 2002. Import penetration grew more quickly than export de pendence in this segment due to declining export opportunities and increased competition from new foreign capac ity. The United States remained a net exporter of plastics and resins, despite these trends. The market for organic chemicals, particularly petrochemicals, has become increasingly competitive. Significant capacity expansions for petrochemicals worldwide increased competition in domestic markets from imports and began to limit export o pportunities for U.S. producers. Through 1999, the segment still exported more than it impor ted. This balance recently changed though as imports exceeded exports during 2000 through 2002. From 1989 through 2002, imports in this segment grew by 161 percent, while export growth was at 39 percent.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### In 2002, the Inorganic Chemicals segment’s import pe netration ratio was 24.7 percent, while the Organic Chemicals segment’s import penetration ratio was slightly higher at 24.8 percent. Both segments likely face strong competition from foreign firms in U.S. markets. The Plastics Material and Resins segment had an import penetration ratio of 14.0 percent in 2002, suggesting this segment does not presently face strong competition from foreign firms’ presence in U.S. markets. However, the import penetration ratio nearly doubled in the decade from 1991 to 2001, which could indicate that foreign firms have begun aggressive pursuit of these U.S. markets. In 2002, the export dependence ratio was 26 percent for the Inorganic Chemicals segment, 26 percent for the Plastics Material and Resins segment, and 23 percent for the Orga nic Chemicals segment. All three segments likely face significant competitive pressure in retaining these positions in export markets. Given these levels of exposure to competition from foreign firms in domestic and export ma rkets, the profiled chemicals industry segments likely have little discretionary power to recover compliance costs through price increases.
Recent trends in international chemicals markets im ply that U.S. producers will continue to face strong competition from foreign producers. The industry’s trade balance declined in 2000, due to increased imports from Western Europe, encouraged by the strong U.S. dollar relative to the Euro, and growth in the petrochemical industry in the Middle East. Declines in the dollar re lative to the Euro improved export performance somewhat, but decline in the global economy resulted in mixed trade performance in 2001 (Chemical Market Reporter, 2001). In 2002, the chemical industry’s traditional trade surplus reversed, reaching a deficit of around $4 billion (C&EN, 2003a). After nine months of 2003, the defi cit had ballooned to $7.7 billion (C&EN, 2003c).

C2B-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-10: Trade Statistics for Profiled Chemical Segments

Year (millions, $2005) (millions, $2005) Value of (millions, $2005) Implied Domestic

a b Export

c

1989 6,035 6,852 30,090 29,274 20.6% 22.8% 1990 5,941 6,405 32,270 31,806 18.7% 19.8% 1991 5,687 6,625 31,294 30,357 18.7% 21.2% 1992 5,407 6,658 31,214 29,963 18.0% 21.3% 1993 5,123 6,117 29,255 28,262 18.1% 20.9% 1994 5,846 6,477 26,924 26,293 22.2% 24.1% 1995 6,825 7,520 28,538 27,843 24.5% 26.3% 1996 7,466 7,613 28,993 28,846 25.9% 26.3% 1997 d 6,166 7,326 29,817 28,658 21.5% 24.6% 1998 d 6,188 6,493 36,250 35,946 17.2% 17.9% 1999 d 6,167 6,178 28,705 28,694 21.5% 21.5% 2000 d 7,035 7,065 26,186 26,157 26.9% 27.0% 2001 d 6,750 7,196 25,510 25,063 26.9% 28.2% 2002 d 6,407 6,882 26,423 25,948 24.7% 26.0%

1989-2002

Growth Rate 6.2%

0.5% 0.4%

0.0% -12.2%

-1.0% -11.4%

-0.9% 19.8%

1.4% 14.4%

1.0%

1989 2,216 7,878 47,461 41,800 5.3% 16.6% 1990 2,488 8,605 43,040 36,924 6.7% 20.0% 1991 2,356 9,802 39,252 31,807 7.4% 25.0% 1992 2,676 9,094 40,626 34,208 7.8% 22.4% 1993 3,194 9,109 40,015 34,100 9.4% 22.8% 1994 4,074 10,467 46,336 39,943 10.2% 22.6% 1995 4,971 12,582 52,889 45,278 11.0% 23.8% 1996 4,988 12,646 47,897 40,239 12.4% 26.4% 1997 d 5,163 12,759 53,139 45,543 11.3% 24.0% 1998 d 5,250 11,940 52,327 45,637 11.5% 22.8% 1999 d 5,528 11,957 53,300 46,871 11.8% 22.4% 2000 d 6,462 13,892 58,537 51,106 12.6% 23.7% 2001 d 6,143 13,004 50,770 43,910 14.0% 25.6% 2002 d 6,071 13,121 50,407 43,358 14.0% 26.0%

1989-2002

Growth Rate 173.9%

8.1% 66.6%

4.0% 6.2%

0.5% 3.7%

0.3% 164.1%

7.8% 56.8%

3.5% Value of imports Value of exports shipments Consumption Import Penetration Dependence Inorganic Chemicals, Except Pigments

Total Percent Change
Average Annual

Plastics Material and Resins

Total Percent Change
Average Annual

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-23§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

c Year (millions, $2005) (millions, $2005) Value of (millions, $2005) Implied Domestic

a b Export

c

1989 8,300 14,134 93,226 87,392 9.5% 15.2% 1990 8,619 13,452 89,380 84,546 10.2% 15.1% 1991 8,742 13,445 84,596 79,894 10.9% 15.9% 1992 9,400 13,083 82,834 79,151 11.9% 15.8% 1993 9,300 13,258 80,601 76,643 12.1% 16.4% 1994 10,751 15,386 85,959 81,325 13.2% 17.9% 1995 12,862 19,011 92,397 86,247 14.9% 20.6% 1996 13,779 16,956 89,426 86,249 16.0% 19.0% 1997 d 18,370 21,306 97,285 94,349 19.5% 21.9% 1998 d 17,702 19,269 81,847 80,281 22.1% 23.5% 1999 d 19,153 20,040 87,599 86,711 22.1% 22.9% 2000 d 23,504 22,517 97,856 98,843 23.8% 23.0% 2001 d 21,988 20,189 83,041 84,840 25.9% 24.3% 2002 d 21,653 19,641 85,421 87,434 24.8% 23.0%

1989-2002

Growth Rate 160.9%

7.7% 39.0%

2.6% -8.4%

-0.7% 0.0%

0.0% 160.8%

7.7% 51.7%

3.3%

a
b

d

Source: 

### Table C2B-10: Trade Statistics for Profiled Chemical Segments Value of imports Value of exports shipments Consumption Import Penetration Dependence Organic Chemicals, Except Gum & Wood

Total Percent Change
Average Annual
Calculated by EPA as shipments + imports - exports. Calculated by EPA as imports divided by implie d domestic consumption. Calculated by EPA as expor ts divided by shipments. Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. U.S. DOC, 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

C2B-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

019891990199119921993199419951996199719981999200020012002 ( )

(

( )

(

019891990199119921993199419951996199719981999200020012002 ( ) ( ) ) ) 

### Figure C2B-5: Value of Imports and Export s for Profiled Chemicals Industry Segments

2,500 5,000 7,500 10,000

Exports NAICS to SIC
Exports SIC 2812, 2813, 2819) Imports NAICS to SIC
Imports SIC 2812, 2813, 2819)

2,500 5,000 7,500 10,000 12,500 15,000

Exports NAICS to SIC Exports SIC 2821 Imports (NAICS to SIC Imports (SIC 2821

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-25§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Figure C2B-5: Value of Imports and Export s for Profiled Chemicals Industry Segments

25 ,0 00 22 ,5 00 20 ,0 00 17 ,5 00 15 ,0 00 12 ,5 00 10 ,0 00

7,50 0 5,00 0 2,50 0
0 Exp ort s (NAICS t o SIC) Expo rt s (2 8 65, 28 69) Im p ort s (NAICS t o SIC) Im po rt s (SIC 28 65, 28 69)20022001200019991998199719961995199419931992199119901989

Source: U.S. DOC, 2006. a Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

.



## C2B-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### The financial performance and condition of the chemical industry are important determinants of its ability to withstand the costs of regulatory compliance without mate rial, adverse economic/financial impact. To provide insight into the industry’s financia l performance and condition, EPA review ed two key measures of financial performance over the 14-year period, 1992-2005: net profit margin and return on total capital. EPA calculated these measures as a revenue-weighted index of measure values for public reporting firms in the respective industries, using data from the Value Line Investment Su rvey. Financial performance in the most recent financial reporting period (2005) is obviously not a perfect indicator of conditions at the time of regulatory compliance. However, examining the trend, and deviation from the trend, through th e most recent reporting period gives insight into where the industry may be , in terms of financial performan ce and condition, at the time of compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the potential risk faced by the industry in a future period in which compliance requirements are faced: all else equal, the more volatile the historical performance, the more likely the industry may be in a period of relatively weak financial conditions at the time of compliance. Net profit margin is calculated as after-tax income before nonr ecurring gains and losses as a percentage of sales or revenues, and measures profitability, as reflected in the conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fl uctuations in profit margin stem from several factors, including: variations in aggregate economic conditions (including international and U.S. conditions), variations in industry-specific market conditi ons (e.g., short-term cap acity expansion resulting in overcapacity), or changes in the pricin g and availability of inputs to the in dustry’s production processes (e.g., the cost of energy to the chemical process). The extent to which these fluctuations affect an industry’s profitability,

C2B-26 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### in turn, depends heavily on the fixed vs. variable cost structure of the industry’s operations. In a capital intensive industry such as the chemical and allie d products industry, the relatively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-ha lf of annual long-term interest, divided by the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). As such, the retu rn on total capital provides insight in to the profitability of a business’ assets independent of financial structure and is thus a “purer” i ndicator of asset profitability than return on equity. In the same way as described for net profit margin , the firms in an industry, and the in dustry collectively, must generate over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital

. Figure C2B-6 presents net profit margin and return on total capital for public-reporting firms in two chemical industry segments – (1) Industrial Chemicals and (2) Plasti cs and Synthetic Fibers – for the 14-year period, 1992 and 2005. The Industrial Chemicals segment corresponds approximately to the Organic Chemicals and Inorganic Chemicals profiled industry segments; the Plastics and Synthetic Fibers segment co rresponds approximately to the Plastics Material and Resins profiled industry segme nt. The financial performance information reported in Figure C2B-6 confirms the trends and perfo rmance discussed above in this section. As shown in Figure C2B-6, the Industrial Chemicals (O rganic Chemicals and Inorganic Chemicals) segment has seen moderate volatility of financial performance over the analysis peri od. Return on total capital moved off a post-recession low near 10 percent in 1992 to achieve leve ls in excess of 20 percent during 1995-1997. Recovery of demand accompanied by industry restructuring and downsizing accounted for the upturn in performance. During the latter part of the decade, though, increased competition from foreign producers and demand weakness in Asian markets eroded this performance. As a result, return on capital fell below 15 percent in 1998, and remained at this lower level through 2000. In 2001, a ser ies of factors – high energy and raw material prices at the start of the year, overcapacity, the terrorist attacks, and slowing U.S. and global economies at the end of the year – led to a further sharp decline in return on capital performance of approxi mately 8 percent. Starting in 2002, however, return on total capital has shown steady improveme nt, increasing to more than 15 percent by 2005. Net profit margin shows a similar, though less volatile, trend, with declines in 2000 through 2001, followed by steady improvement between 2002 and 2005. In 2005, net prof it margin reached the highest values observed during the entire 1992 to 2005 time period. The same factors largely influenced performance in the Plastics and Synthetic Fibers (Plastics Material and Resins) segment over the 14-year period. Performance in this segment followed a similar, but less volatile, pattern to that of the Industrial Chemicals segment. Return on total capital rose from a low near 10 percent in 1993 to a period high of 15 percent in 1995. Since th en, performance trended down to reach a period low of approximately 9 percent in 2001. This segment achieve d steady, though moderate improvement during 2002 to 2005. Net profit margin again shows a similar, thoug h less volatile, trend compared to return on capital. Overall, the profiled segments of the chemical industry remain at weaker levels of financial performance than achieved during the mid 1990s but appear to be rec overing from the sharp weakness of 2001-2002. Continued recovery in 2006 and beyond suggests improved ability to withstand additional regulatory compliance costs without imposing significant financial impacts.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-27§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

0% 5% 10% 15% 20% 25%19921993199419951996199719981999200020012002200320042005 -

-

0% 5% 10% 15% 20%19921993199419951996199719981999200020012002200320042005 -

-

Source:



## C2B-5 F ACILITIES 

## O PERATING 

## C OOLING 

## W ATER 

## I NTAKE 

## S

4



### . nd 

### in Figure C2B-6: Net Profit Margin and Return in Total Capital for the Chemical Industry Industrial Chemicals (O rganic and Inorganic)

Return on Total Capital Industrial Chemicals

Net Profit M argin Industrial Chemicals

Plastics and Synthetic Fibers

Return on Total Cap ital Plastics and Synthetic Fibers

Net Profit M argin Plastics and Synthetic Fibers

Value Line, 2003; Value Line, 2006.



### TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point s ource facilities that use or propose to use a cooling water intake structure that withdraws cooling water directly fro m a surface waterbody of the United States. In 1982, the chemical and allied products industry withdrew 2,79 7 billion gallons of cooling water, accounting for approximately 3.6 percent of total industria l cooling water intake in the United States The industry ranked 2 industrial cooling water use behind the electric power generation industry (1982 Census of Manufactures).

Data on cooling water use are from the 1982 Census of Manufactures . 1982 was the last year in which the Census of Manufactures reported cooling water use.

C2B-28 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 4§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### This section provides information for facilities in the prof iled chemical and allied products segments estimated to be subject to regulation under the regulatory analysis op tions. Existing facilities that meet all of the following conditions could have b een subject to regulation under the three regulatory analysis options:

f 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supplier who has a coo ling water intake structure; or their cooling water intake structure(s) withdraw(s) cooling water from wa ters of the United States, and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;

f 

### Have a National Pollutant Discharge Elimination Syst em (NPDES) permit or are required to obtain one; and

f 

### Meet the applicability criteria for the specific regulator y analysis option in terms of design intake flow and source waterbody type (i.e., 50 MGD for All Wate rbodies, 100 MGD for Certain Waterbodies, or 200 MGD for All Waterbodies). The regulatory analysis options also cover substantial add itions or modifications to operations undertaken at such facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the Phase III regulation based on a minimum applicability thr eshold of 2 MGD, this section focuses on the facilities nationwide in the profiled chemical a nd allied products segments that are est imated to be subject to regulation under the DIF applicability thresholds defined by the re gulatory analysis options (see Table C2B-1, above for additional information on the broader set of f acilities potentially subject to Phase III regulation). 5


### C2B-5.1 Waterbody and Cooling System Type
Table C2B-11 show the distribution of Phase III facilities in the profiled chemical segments by type of waterbody and cooling system for each analysis opt ion. The tables show that most of the Phase III facilities either have a once-through system or employ a combination of a once through and a recirculating system. The majority of existing facilities draw water from a freshwater stream or river.

EPA applied sample weights to the sampled facilities to account for non-sampled facilitie s and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industry Survey, please refer to the Information Collection Request (U.S. EPA, 2000).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-29 5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Chemical Segments
Waterbody Type Recirculating No. % of Total Combination No. % of Total Once-Through No. % of Total No. Other % of Total Total
Inorganic Chemicals /

Ocean 0 0 0 0 0% 0% 0% 0% 4 0 0 0 100% 0% 0% 0% 1 7 4 4 7% 40% 26% 27% 0 0 4 0 0% 0% 100% 0% 5 7 9 4 Total a 0 0% 4 17% 16 66% 4 17% 25

0 0% 9 84% 0 0% 0 0% 9 0 0% 2 16% 0 0% 0 0% 2 Total a 0 0% 10 100% 0 0% 0 0% 10 Organic Chemicals 0 0% 0 0% 9 100% 9 100% 18 Total a 0 0% 0 0% 9 51% 9 41% 18

/

Ocean 0 0 0 0 0 0% 0% 0% 0% 0% 4 9 0 2 0 30% 59% 0% 11% 0% 1 16 4 0 4 5% 61% 17% 0% 17% 0 9 4 0 0 0% 67% 33 0% 0% 5 33 9 2 4 Total a 0 15 25 13 53

a Source:

Combination Other Total No. No. No. No. Inorganic Chemicals / 0 0% 0 0% 1 50% 0 0% 1 0 0% 0 0% 1 50% 0 0% 1 Total a 0 0% 0 0% 2 100% 0 0% 2

Total a 0 0% 0 0% 0 0% 0 0% Organic Chemicals / 0 0 0% 0% 0 0 0% 0% 1 2 20% 80% 0 0 0% 0% 1 2 Total a 0 0% 0 0% 3 100% 0 0% 3

/ 0 0% 0 0% 2 33% 0 0% 2 0 0% 0 0% 3 67% 0 0% 3 Total a 0 0 5 0 5

a Source:

C2B-30 0

Estuary Tidal River Freshwater River/ Stream Great Lake

Plastics Material and Resins Freshwater River/ Stream Lake/ Reservoir

Freshwater River/ Stream

Total Profiled Chemicals Industries Estuary Tidal River Freshwater River/ Stream Great Lake Lake/ Reservoir

0% 28% 48% 25% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.


### Table C2B-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Chemical Segments

Recirculating Once-Through Waterbody Type % of Total % of Total % of Total % of Total

Estuary Tidal River Freshwater River/ Stream

Plastics Material and Resins

Estuary Tidal River Freshwater River/ Stream

Total Profiled Chemicals Industries Estuary Tidal River Freshwater River/ Stream 0% 0% 100% 0% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.

Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Chemical Segments

Recirculating Combination Once-Through Other Waterbody Type Total No. % of Total No. % of Total No. % of Total No. % of Total Inorganic Chemicals Estuary/ Tidal River 0 0% 40 100% 1 15% 0 0% 5 Freshwater River/ Stream 0 0% 0% 7 85% 0 0% 7 Total a 0 0% 0 36% 9 64% 0 0% 12 Plastics Material and Resins Freshwater River/ Stream 0 0% 4 100% 0 0% 0 0% 4 Total a 0 0% 4 100% 0 0% 0 0% 4 Organic Chemicals Estuary/ Tidal River 0 0% 0 0% 1 7% 0 0% 1 Freshwater River/ Stream 0 0% 0 0% 8 93% 0 0% 8 Total a 0 0% 0 0% 9 100% 0 0% 9 Total Profiled Chemicals Industries Estuary/ Tidal River 0 0% 4 50% 2 11% 0 0% 6 Freshwater River/ Stream 0 0% 4 50% 14 89% 0 0% 19 9 35% 16 65% Total a 0 0% 0 0% 25

a Individual numbers may not add up to total due to independent rounding. Source: U.S. EPA, 2000; U. S. EPA analysis, 2006.


### C2B-5.2 Facility Size The facilities in the Inorganic Chemicals, Plastics Materi als and Resins and Organic Chemicals segments that are estimated subject to regulation under each analysis option are relatively large, with the vast majority of facilities employing more than 100 employees. Figure C2B-7 show the number of facilities in the profiled chemical segments by employment size category for each analysis option.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-31§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

4

00 4

00 1 00 13

4 5

2 6 12

0 2 4 6 8 10 12 14

i (
Pl i (
i i ls (

Source:

0 0 0 0 0 0 0 0 0 0 0 0 2

0 3

0 1 1 2 2 3 3

<100 >=1000 (
i (
(

Source:



### Figure C2B-7: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for Profiled Chemicals Industry Segments

<100 100-249 250-499 500-999 >=1000 Inorganic Chemcals SIC 2812, 2813, 2816, 2819)

ast cs SIC 2821)
Organ c Chemca SIC 2865, 2869)

U.S. EPA, 2000; U. S. EPA analysis, 2006.


### Figure C2B-8: Number of Facilities Estimated Su bject to the 200 MGD All Option by Employment Size for Profiled Chemicals Industry Segments

100-249 250-499 500-999 Inorganic Chemicals SIC 2812, 2813, 2816, 2819) Plast cs SIC 2821) Organic Chemicals SIC 2865, 2869)

U.S. EPA, 2000; U. S. EPA analysis, 2006.

C2B-32 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts

0 0 0 0 0 0 1

00 9

4 5

2

0 3

0 1 2 3 4 5 6 7 8 9

<100 >=1000 (
i (
(

Source: 

### Figure C2B-9: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Employment Size for Profiled Chemicals Industry Segments

100-249 250-499 500-999 Inorganic Chemicals SIC 2812, 2813, 2816, 2819) Plast cs SIC 2821) Organic Chemicals SIC 2865, 2869)

U.S. EPA, 2000; U. S. EPA analysis, 2006.



### C2B-5.3 Firm Size EPA used the Small Business Administration (SBA) small entity size standards to determine the number of facilities in the three profiled chemical segments that are owned by small firms. Firms in the Inorganic Chemicals segment (SIC codes 2812, 2813, 2816, 2819) and in Industrial Organic Chemicals, NEC (SIC code 2869) are defined as small if they have 1,000 or fewer employees; firms in Plastics Material and Resins (SIC 2821) and Cyclic Organic Crudes and Intermediates (SIC code 2865) are defined as small if they have 750 or fewer employees. As shown in Table C2B-14Table C2B-16, Table C2B-15, and Table C2B-16, large firms own all of the facilities estimated subject to the Phase III final regulation in this industry, regardless of the option.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-33§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-14: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for Profiled Chemical Segments

SIC Code Total Large Small No. No. % of SIC % of SIC Inorganic Chemicals 2812 15 100% 0 0% 15 2813 4 100% 0 0% 4 2816 0 0% 0 0% 0 2819 5 100% 

### 0 0% 5 Total 25 100% 0 0% 25 Plastics Material and Resins 2821 10 100% 0 0% 10 Organic Chemicals 2865 4 100% 0 0% 4 2869 13 100% 0 0% 13 Total 18 100% 0 0% 18 Total for Profiled Chemical Facilities Total 53 100% 0 0% 53 Source: U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006. 

### Table C2B-15: Number of Facilities Estimate d Subject to the 200 MGD All Option by Firm Size for Profiled Chemical Segments

SIC Code Total Large Small No. No. % of SIC % of SIC Inorganic Chemicals 2812 2 100% 0 0% 2 2813 0 0% 0 0% 0 2816 0 0% 0 0% 0 2819 0 0% 

### 0 0% 0 Total 2 100% 0 0% 2 Plastics Material and Resins 2821 0 0% 0 0% 0 Organic Chemicals 2865 0 0 0 0% 0 2869 3 100% 0 0% 3 Total 3 100% 0 0% 3 Total for Profiled Chemical Facilities Total 5 100% 0 0% 5 Source: U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.

C2B-34 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### Table C2B-16: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Firm Size for Profiled Chemical Segments Large Small SIC Code No. No. Total % of SIC % of SIC Inorganic Chemicals 2812 11 100% 0 0% 11 2813 0 0% 0 0% 0 2816 0 0% 0 0% 0 2819 1 100% 

### 0 0% 1 Total 12 100% 0 0% 12 Plastics Material and Resins 2821 4 100% 0 0% 4 Organic Chemicals 2865 4 100% 0 0% 4 2869 4 100% 0 0% 4 Total 8 100% 0 0% 8 Total for Profiled Chemical Facilities Total 24 100% 0 0% 24 Source: U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-35§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



## R EFERENCES 

### Bureau of Labor Statistics (BLS). 2006. Producer Price Index . Industry Data Series: PDU2812#-Alkalies and Chlorine; PDU2813#-Industrial Gases; PDU2816#-I norganic Pigments; PDU2819#-Industrial Inorganic Chemicals n.e.c., PDU2821#-Plastic Materials and Re sins; PDU2865#-Cyclic Crudes and Intermediates; PDU2869#-Industrial Organic Chemicals, n.e.c.; PCU325131- Inorganic Dye and Pigment Manufacturing; PCU32512- Industrial Gas Mfg; PCU325181- Alkalies and Chlorine; PCU325188- All Other Basic Inorganic Chemical Manufacturing. Available at: http://www.bls.gov/ppi/home.htm. Downloaded March 7, 2006. Chemical & Engineering News (C&EN) . 2003a. “Chemicals finally showed some signs of life in 2002; this year should be better.” pp. 16-18. January 13, 2003. Chemical & Engineering News (C&EN) . 2003b. “Counting Pennies.” Volume 81, No. 5, pp. 17-21. February 3, 2003. Chemical & Engineering News (C&EN) . 2003c. “2003 Industry Review.” Volume 81, No. 51, pp. 18-26. December 22, 2003. Available at: http://pubs .acs.org/cen/business/8151/8151businessreview.html Chemical Marketing Reporter . 2001. “U.S. Chemical Industry Outlook: Trade and Domestic Demand”. v260, issue 25, p. 33. June 18, 2001. Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001. Economagic. 2006. Industrial Production: Industry Subtotals, Individual Series, and Special Aggregates. Seasonably Adjusted. Data Series: Basic Inorganic Chemicals; Plastics Material and Resin; and Organic Chemicals. Available at: http://www.economagic.com/fr bg17.htm#IPMarket. Downloaded February 2, 2006. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry & Trade Outlook ‘00. Standard & Poor’s. (S&P) 2001. Industry Surveys - Chemicals: Basic . July 5, 2001.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bu reau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration. Industry, Trade, and the Economy: Data and Analysis . Data by NAICS and SIC. Available at: http://www.ita.doc.gov/td/industry/otea/industry_sector/tabl es_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge Between NAICS and SIC.
U.S. Department of Commerce (U.S. DOC). 1987, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Environmental Protection Agency (U.S. EPA) 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures

.

C2B-36 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



### U.S. Environmental Protection Agency (U.S. EPA). 1995a. Profile of the Organic Chemicals Industry

. September, 1995.
U.S. Environmental Protection Agency (U.S. EPA) 1995b . Profile of the Inorganic Chemical Industry

. September, 1995.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses . Available at: http://www.sba.gov/advo/research/data.html. Downloaded February 4, 2006.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards . Available at: http://www.sba.gov/size/sizetable2002.html.
Value Line. 2006. Value Line 3.0 Investment Analyzer

. Value Line. 2003. Value Line Investment Survey

.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2B-37§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Produc ts



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C2B-38 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining 

# Chapter C2C: Petroleum Refining (SIC 2911)

I NTRODUCTION


### EPA’s Detailed Industry Questionnaire , hereafter referred to as the DQ, identified the Petroleum Refining Industry (SIC 2911) with at least one existing facility that operates a CWIS, holds a NPDES permit, and withdraws equal to or greater than two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes. (Facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). Table C2C-1, below, provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnair e respondents (weighted to represent a national total of facilities that hold a NPDES permit and operate cooling water intake structures), the number of facilities estimated to be potentially subject to Phase III regulation based on the minimum withdrawal threshold of 2 MGD, and the number of facilities estimated to be subject to regulation under each primary analysis option. 

## C HAPTER 

## C ONTENTS
Introductio n..........................................................C2C-1 C2C-1 Summary Insights from this Profile ........C2C-2 C2C-2 Domestic Produ ction...............................C2C-3 C2C-2.1 Output.............................................C2C-4 C2C-2.2 Prices ..............................................C2C-7 C2C-2.3 Number of Facilities and Firms ......C2C-7 C2C-2.4 Employment and Productivity ........C2C-8 C2C-2.5 Capital Expenditures ....................C2C-10 C2C-2.6 Capacity Utiliz ation......................C2C-11 C2C-3 Structure and Competitiveness..............C2C-12 C2C-3.1 Firm Size ......................................C2C-13 C2C-3.2 Concentration Ratios ....................C2C-13 C2C-3.3 Foreign Trade ...............................C2C-14 C2C-4 Financial Condition and Performance...C2C-17 C2C-5 Facilities Operating Cooling Water Intake Structures ..............................................C2C-18 C2C-5.1 Waterbody and Cooling System Type...... ...................................................C2C-19 C2C-5.2 Facility Si ze..................................C2C-20 C2C-5.3 Firm Size ......................................C2C-22 References..........................................................C2C-23

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining

SIC SIC Description Total a

Regulated b to 50 MGD All

Option to 200 MGD All

Option to 100 MGD CWB Option 2911 Petroleum 163 36 17 4 8 Refining

a
b Source:



### EPA

a 

### ) SIC Code SIC Description Code Establishments ($000) 2911 324110 203 193,547,214 61,585

a Source: 

### Table C2C-1: Phase III Facilities in the Petroleum Refining Industry (SIC 29)

Important Products Manufactured Number of Phase III Facilities
Potentially

Facilities Subject Subject Subject

Gasoline, kerosene, distillate fuel oils, residual fuel oils, and lubricants, through fractionation or straight distillation of crude oil, redistillation of unfinished petroleum derivatives, cracking, or other processes; a liphatic and aromatic chemicals as byproducts Number of weighted detailed questionnaire survey respondents. Individual numbers may not add up due to independent rounding. Executive Office of the President, 1987; U.S. EPA 2000; U. S. EPA analysis, 2006.


### As shown in Table C2C-1, EPA estimates that, out of the total of 163 facilities with a NPDES permit and operating cooling water intake structures in the Chemi cals and Allied Products Industry (SIC 28), 17 (or 10%) would be subject to regulation under the 50 MGD All option, 4 (or 2.5%) would be subject to regulation under the 200 MGD All option, and 8 (or 4.9%) would be subject to regulation under the 100 MGD CWB option.. also estimated the percentage of total production that o ccurs at facilities estimated to be subject to regulation under each analysis option. Total value of shipments for the Paper and Allied Products Industry from the 2004 Annual Survey of Manufactures is $288.1 billion. Value of shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because the DQ did not collect value of shipments data, these data were not available for Phase III facilities. Total revenue, as reported on the DQ, was used as a close approximation for value of shipments for these facilities. EPA estimated the total revenue of facilities expected to be subject to regulation under the 50 MGD, 200 MGD, a nd 100 MGD option to be $25.4 billion, $9.3 billion, and $15.3 billion, respectively. Therefore, EPA estimates that the percentage of total production in the petroleum industry that occurs at facilities estimated to be subj ect to regulation under the 50 MGD, 200 MGD, and 100 MGD options is 9%, 3% and 5%, respectively. Table C2C-2 provides the crosswalk between SIC codes a nd NAICS codes for the profiled petroleum SIC codes. For the Petroleum Refining segment, the translation of NAICS-reported data to the SIC framework is straightforward as these frameworks have a simple one-to- one match for Petroleum Re fining: SIC code 2911 and NAICS code 324110.

Table C2C-2: Relationship between SIC and NAICS Codes for the Petroleum Refining Industry (2002 NAICS NAICS Description Value of Shipments Employment Petroleum Refining Petroleum Refineries Industry data for relevant NAICS codes from the 2002 Economic Census. U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.



## C2C-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of Petroleum Refining firms absorb compliance costs under each analysis option without material, adverse economic/financial effects. The industry’s ability to withstand compliance costs is primarily influenced by th e following two factors: (1) the extent to which the

C2C-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### industry may be expected to shift compliance costs to its customers through price increases and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, the Petroleum Refining segment is relatively unconcentrated, which suggests that firms in this in dustry would have less power to pass a significant portion of their compliancerelated costs through to customers. As discussed above, given the small proportion of total value of shipments in the industry estimated to be subject to regulation under each option, EPA believes that the theoretical threshold for justifying the use of industry-wide CPT rates in the impact analysis of potential Phase III refineries has not been met. Even though the Petroleum Refining segment is not characterized by high competitive pressure from foreign markets, the low market concentration leads EPA to believe that the market power held by individual firms is likely to be quite small. For these reasons, in its analysis of regulatory impacts for the Petroleum Refining segment, EPA assumed that complying firms w ould be unable to pass compliance costs through to customers: i.e., complying facilities must absorb all co mpliance costs at the time of compliance (see following sections and Appendix 3, Cost Pass-Through Analysis , to Chapter C3: Economic Impact Analysis for Manufacturers , for further information).
Financial Health and General Business Outlook Over the past decade, Petroleum Refining, like other U. S. manufacturing industries, has experienced a range of economic/financial conditions, includin g substantial challenges. In the early 1990s, the domestic Petroleum Refining segment was affected by reduced U.S. dema nd as the economy entered a recessionary period. Although domestic market conditions improved by mid-decade, oversupply of crude oil, weakness in Asian markets, along with other domestic factors, materially weakened re finers’ financial performance in 1998. As petroleum producing countries reduced crude oil s upply and refiners cut production, pr ices rebounded in the late 1990's and into 2000, before another U.S. recession, the attacks of 9/11, and global economic downturn again had a negative effect on petroleum refiners. More recently, as the U.S. economy began recovery from its economic weakness, domestic petroleum refineries have app eared to recuperate, with continuous improvements in demand levels and financial performance during 2003 to 2005. Although the industry has weathered difficult periods over the past few years, the strengthening of the industry’s financ ial condition and general busin ess outlook suggest improved ability to withstand additional regulatory compliance costs without imposing significant financial impacts.


## C2C-2 D OMESTIC 

## P RODUCTION 

### The Petroleum Refining segment accounts for about 4 per cent of the value of shipments of the U.S. entire manufacturing sector and 0.4 percent of the manufacturi ng sector’s labor supply (U.S. DOE, 1999a). According to the Annual Survey of Manufactures, in 2001, Petrol eum Refineries achieved shipments of approximately $206 billion dollars ($2003) and employed 63,251 people. Petr oleum products constitute approximately 40 percent of the total energy used in the United St ates, including virtually all of the en ergy consumed in transportation (U.S. DOE, 1999a).
U.S. DOE Energy Information Administration (EIA) data report that there were 149 operable Petroleum Refineries in the U.S. as of January 2003, of which 145 were operating and four were idle (U.S. DOE, 2004) 1



### . Some data reported in this profile ar e taken from EIA publications. Readers should note that the Census data

1 

### In addition, there was one operating and one idle refinery in Puerto Rico and one operating refinery in the Virgin Islands.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### reported for SIC 2911 cover a somewhat broader range of facilities than do the U.S. DOE/EIA data, and the two data sources are therefore not entirely comparable. 2 

### The petroleum industry includes exploration and production of crude oil, refining, transportation, and marketing. Petroleum refining is a capital-intensive process that c onverts crude oil into a variety of refined products. Refineries range in complexity, depending on the types of products produced. Nearly half of all U.S. refinery output is motor gasoline. The number of U.S. refineries has declined by almost ha lf since the early 1980s. The remaining refineries have improved their efficiency and flexibility to process h eavier crude oils by adding “downstream” capacity 3 

### . While the number of refineries has declined, the average refine ry capacity and utilization has increased, resulting in an increase in domestic refinery production overall. C2C-2.1 Output Table C2C-3 shows trends in production of petroleum refinery products from 1990 through 2004. In general, output of refined pr oducts grew over this period, reflecting growth in transporta tion demand and ot her end-uses. Output fell in 1991 due to the domestic economic recession, and the early years of the 2000s experienced little or negative growth due to the downturn of the U.S. economy and events of 9/11 (API, 2003). At the beginning of 2002, petroleum products were in excess supply in the world market, and the focus was on the elimination of excess supplies and stabilization of prices (U.S. DOE, 2004) . In 2003, the industry rebounded, with refinery processing increasing 2 percent, producing record or near record levels of gasoline and distillate (API, 2004). Petroleum demand in 2004 is expected to increase 1.1 percent. As the U.S. and global economy improves, Petroleum Refining firms should continue to see improving results in their markets and earnings. This should place companies in a better position to incur any costs associated with regulatory compliance.

2 

### For comparison, preliminary 1997 Census data included 244 establishments for NAICS 3241/SIC 2911, whereas U.S. DOE/EIA reported 164 operable refineries as of January 1997. 3 

### The first step in refining is atmospheric distillation, wh ich uses heat to separate va rious hydrocarbon components in crude oil. Beyond this basic step are more complex operations (generally referred to as “downstream” from the initial distillation) that increase the refinery’s capacity to process a wide range of crude oils and increase the yield of lighter (lo wboiling point) products such as gasoline. These downstream ope rations include vacuum distillation, cracking units, reforming units, and other processes (U.S. DOE, 1999a).

C2C-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### Table C2C-3: U.S. Petroleum Refinery Product Production (million barrels per day) Motor Distillate Residual Other Total Percent Change Year Jet Fuel Gasoline Fuel Oil Fuel Oil Products a Output in Total Output 1990 6.96 2.93 1.49 1991 6.98 2.96 1.44 1992 7.06 2.97 1.40 1993 7.30 3.13 1.42 1994 7.18 3.20 1.45 1995 7.46 3.16 1.42 1996 7.57 3.32 1.52 1997 7.74 3.39 1.55 1998 7.89 3.42 1.53 1999 7.93 3.40 1.57 2000 7.95 3.58 1.61 2001 8.02 3.70 1.53 2002 8.18 3.59 1.51 2003 8.19 3.71 1.50 2004 8.23 3.82 1.55 0.95 0.78 15.27 n/a 0.93 0.76 15.26 -0.1% 0.89 0.80 15.40 0.9% 0.84 0.78 15.79 2.5% 0.83 0.79 15.79 0.0% 0.79 0.78 15.99 1.3% 0.73 0.76 16.32 2.1% 0.71 0.84 16.76 2.7% 0.76 0.89 17.03 1.6% 0.70 0.84 16.99 -0.2% 0.70 0.79 17.24 1.5% 0.72 0.73 17.29 0.3% 0.60 0.77 17.27 -0.1% 0.66 0.78 17.49 1.3% 0.65 0.83 17.77 1.6% Total Percent 18.2% 30.4% 4.0% -31.6% 6.4% 16.4% Change 1990-2004 Average Annual 1.2% 1.9% 0.3% -2.7% 0.4% 1.1% Growth Rate

a Kerosene, lubricants, petrochemical feed stocks, waxes, and miscellaneous products. Source: U.S. DOE, 2005


### Value of shipments and value added are two common measures of manufacturing output 4 

### . They provide insight into the overall economic health and outlook for an in dustry. Value of shipments is the sum of the receipts a manufacturer earns from the sale of its outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors. Value added m easures the value of production activity in a particular industry. It is the difference between the value of shipme nts and the value of inputs used to make the products sold. Figure C2C-1 on the following page shows value of ship ments and value added for petroleum products from 1987 to 2004. Value of shipments rose through 1990; however , during and following the recession of 1991, value of shipments fell through 1994. This was followed by some volatility in value over the next few years until experiencing a sharp drop in 1998, when a range of fact ors led to a dramatic decrease in petroleum prices. Increased production quotas by OPEC, increased produc tion from Iraq through the “oil-for-food” program, weak demand in Asia due to their financial crisis, and a warm winter in the U.S. all increased the supply of petroleum products (U.S. DOE, 1999c). Estimates of worldwide petroleum supply exceeding demand during 1998 range from 1.47 millions barrels per day to 2.4 million barrels pe r day (World Oil, 1999). As crude oil producers and refiners cutback on production, the i ndustry rebounded with significant improvements in 1999 and 2000, before the latest recession and global economic slowdown and w eakening demand decreased th e value of shipments in 2001. In 2003 and 2004, however, the value of shipments increased significantly, peaking at nearly $300 billion in 2004. Value added generally followed the path of va lue of shipments over this time period, though it did not quite have the volatility of the value of shipments.

Terms highlighted in bold and italic font are further explained in the glossary.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-5 4§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining198719881989199019911992199319941995199619971998199920002001200220032004 

### 324110)

2911)198719881989199019911992199319941995199619971998199920002001200220032004 

### (

Note:

. Source: 

### Figure C2C-1: Value of Shipments and Value Added for Petroleum Refineries (millions, $2005) Value of Shipments



### 120,000 140,000 160,000 180,000 200,000 220,000 240,000 260,000 280,000 300,000 320,000

Petroleum Refineries (NAICS

Petroleum Refineries (SIC

Value Added



### 15 ,0 0 0 20 ,0 0 0 25 ,0 0 0 30 ,0 0 0 35 ,0 0 0 40 ,0 0 0 45 ,0 0 0 50 ,0 0 0 55 ,0 0 0

P et roleum Refineries NAICS 3 241 0) P et ro leum Refin eries (SIC 29 11)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

C2C-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### C2C-2.2 Prices
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and indicates the overall trend of product pricing, a nd thus supply-demand conditions, within a segment. Figure C2C-2 shows substantial fluctuations in petrol eum product prices between 1987 and 2002. Through the early 1990s, refiners faced declining prices due to th e effects of the 1991 recession and weak demand before rebounding somewhat in the mid 1990s. Prices plumme ted in 1998 as a massive oversupply of petroleum products coupled with decreased demand led to significant drops in petroleum prices. As the subsequent production cutbacks took hold and the glut of supply dw indled, prices recovered in 1999 and 2000, as shown in Figure C2C-2. The higher prices reflect low refinery product inventories and higher crude oil input prices (Value Line, 2001). Excess supply, the global recession, impact s from 9/11, and the relatively warm winter of 2001- 2002 led to decreases in prices in subsequent years (U .S. DOE, 2004). During 2003 to 2005, however, prices rose dramatically. By 2005, the price of petroleum products was nearly double the price seen in 2000, the previous peak year during the 1987 to 2005 time period.

220
200
180
160

120 140 ( 324110)

100

80
60
401987198819891990199119921993199419951996199719981999200020012002200320042005

Source: 

### Figure C2C-2: Producer Price Index for Petroleum Refineries

P et roleum Refineries NAICS

BLS, 2006.



### C2C-2.3 Number of Facilities and Firms The number of operable refineries fell substantially during the 1980s, with a more gradual reduction in refineries continuing through the 1990s and into the 2000s. This decr ease resulted in part from the elimination of the Crude Oil Entitlements Program in the early 1980s. The Entitle ments Program encouraged smaller refineries to add capacity throughout the 1970s. After the program was el iminated, surplus capacity and falling profit margins led to the closure of less efficient capacity (U.S. DOE, 1999a). The decrease in the number of refineries continued, as the industry consolidated to improve margins. After peaking in the early 1980s, refining capacity decreased throughout the rest of the decade. Refining capacity h as remained relatively stable since the decrease in the 1980s, with a slight upward trend occurring in the latter part of the 1990s into the 2000s. This trend is expected to continue, with no new “greenfield” refineries likely to be built in the United States, but continuing capacity expansion at existing facilities (S&P, 2001).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### Table C2C-4 presents the numbers of refinery facilities and firms from 1990 to 2003 based on Statistics of U.S. Businesses for SIC 2911. As shown in the table, despite some gains in the early 2000s, the number of refinery facilities and the number of firms reporting Petroleum Re fining as their primary business both declined since 1990.

Table C2C-4: Number of Firms and Facilities for Petroleum Refineries Firms Facilities Year Number Percent Change Number Percent Change 1990 215 340 1991 215 0.0% 346 1.8% 1992 185 -14.0% 303 -12.4% 1993 148 -20.0% 251 -17.2% 1994 161 8.8% 265 5.6% 1995 150 -6.8% 251 -5.3% 1996 173 15.3% 275 9.6% 1997 128 -26.0% 248 -9.8% 1998 a 155 21.1% 304 22.6% 1999 a 145 -6.5% 292 -3.9% 2000 a 162 11.7% 298 2.1% 2001 a 165 1.9% 302 1.3% 2002 a 202 22.4% 349 15.6% 2003 a 142 -29.7% 274 -21.5% Total Percent Change 1990 - 2003 -34.0% -19.4% Average Annual Growth -3.1% -1.6% Rate

a Before 1998, these data were compiled in the Standard I ndustrial Classification (SIC) sy stem; since 1998, these data have been compiled in the North American Industry Classifi cation System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.

. Source: U.S. SBA, 1989-2003.


### C2C-2.4 Employment and Productivity Employment in the Petroleum Refining segment declined by 22 percent between 1987 and 2004, from 74,600 to 58,331 employees, as shown in Figure C2C-3. After incr easing in the early 1990s, employment at Petroleum Refineries declined almost contin uously through 2004, reflecting overall industry consolidation.

C2C-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining198719881989199019911992199319941995199619971998199920002001200220032004 

### (

(

Note:

. Source: 

### Figure C2C-3: Employment for Petroleum Refineries

54,000 56,000 58,000 60,000 62,000 64,000 66,000 68,000 70,000 72,000 74,000 76,000

Petroleum Refineries NAICS 324110) Petroleum Refineries SIC 2911)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997 these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### Table C2C-5 shows substantial year-to-year changes in labor productivity , measured by value added per production hour. These fluctuations reflect volatility in va lue added, which in turn reflect variations in the relationship between input prices (primarily crude oil) and refinery product prices. Changes in production hours from year to year were less volatile, with a net reduc tion over the period 1987 to 2004. Value added, however, was not affected as it more than doubled over the same period.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### Table C2C-5: Productivity Trends for Petroleum Refineries ($2005) Value Added/Hour
Year Value Added (millions) Production Hours (millions) ($/hr) % Change in Value Added/ Hour 1987 21,779 103 211 1988 30,642 103 298 41.2% 1989 30,797 105 294 -1.1% 1990 31,357 106 296 0.7% 1991 26,281 107 247 -16.7% 1992 24,789 109 227 -8.1% 1993 23,734 107 223 -1.7% 1994 29,569 110 269 20.6% 1995 29,185 107 274 1.8% 1996 31,065 103 303 10.7% 1997 a 36,281 100 363 20.0% 1998 a 27,917 98 285 -21.4% 1999 a 36,103 94 384 34.4% 2000 a 41,069 92 445 15.9% 2001 a 44,145 94 472 6.1% 2002 a 30,533 85 361 -23.5% 2003 a 41,240 86 482 33.3% 2004 a 53,070 85 621 29.0% Total Percent Change 1987-2004 143.7% -17.3% 194.7% Annual Average 5.4% -1.1% 6.6% Growth Rate

a Before 1997, these data were co mpiled in the Standard Industrial Cl assification (SIC) system; since 1997, these data have been compiled in the North American Industry Classification Syst em (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2C-2.5 Capital Expenditures Petroleum industry capital expenditures increased substa ntially between 1987 and 1993, generally decreased afterwards through 2000, then increased significantly in 2001, as shown in Table C2C-6. During 2001 through 2004, capital expenditures fluctuated somewhat, peaking at nearly 8 billion in 2002 befo re declining in both 2003 and 2004. In 2004, the industry spent about $6.7 billi on ($2005), as compared with $3.1 billion ($2005) in 1988, representing a 115 percent increase in expenditures during this time period. Much recent investment in Petroleum Refineries has been to expand and de-bottleneck units downstream from distillation, partially in response to environmental requirements. Changes in refinery configurations have included adding catalytic cracking units, installing additional sulfur removal hydrotreaters, and using manufacturing additives such as oxygenates. These process changes have resulted from two factors:

f 

### processing of heavier crudes with higher levels of sulfur and metals; and

f 

### regulations requiring gasoline reformulation to re duce volatiles in gasoline and production of diesel fuels with reduced sulfur content (U.S. EPA, 1996b).

C2C-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### Environmentally related investments have also accounted fo r a substantial part of capital expenditures. In the future, substantial capital investments by refineries will be required to comply with: product quality regulations, including EPA’s Tier 2 Gasoline Sulfur Rule requiring reductions in the sulfur content of gasoline; reductions or elimination of the use of MTBE in gasoline; and, propo sed sulfur reductions in highway diesel fuel (NPC, 2000).
Table C2C-6: Capital Expenditures for Petroleum Refineries ($2005)
Year Capital Expenditures (millions) % Change 1987 3,117 1988 3,446 10.6% 1989 4,263 23.7% 1990 5,247 23.1% 1991 7,436 41.7% 1992 7,968 7.2% 1993 7,593 -4.7% 1994 6,862 -9.6% 1995 7,140 4.1% 1996 6,208 -13.1% 1997 a 4,987 -19.7% 1998 a 4,845 -2.9% 1999 a 4,517 -6.8% 2000 a 5,252 16.3% 2001 a 7,463 42.1% 2002 a 7,956 6.6% 2003 a 7,268 -8.6% 2004 a 6,710 -7.7% Total Percent Change 1987-2004 115.3% Average Annual 4.6% Growth Rate

a Before 1997, these data were compiled in the Standard Industrial Classification (SIC) system; since 1997, these da ta have been compiled in the North American Industry Classification System (NAICS). For this analys is, EPA converted the NAI CS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2C-2.6 Capacity Utilization Refinery capacity is frequently measured in terms of crude oil distillation capacity. EIA defines refinery capacity utilization as input divided by calendar day capacity, which is the maximum amount of crude oil input that can be processed during a 24-hour period with certain limitations. Some downstream refinery capacities are measured in terms of “stream days,” which is the amount a unit can process when running full capacity under optimal crude and product mix conditions for 24 hou rs (U.S. DOE, 1999a). Downstream capacities are reported only for specific units or products, and are not summed across pr oducts, since not all products could be produced at the reported levels simultaneously. Figure C2C-4 below shows the fluctuation in utilization rates over the period 1989-2002, based Census Bureau data. Capacity utilization fluctuated over a relativel y lower range between 1989-1992, followed by an increase in

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### utilization rates for five straight years, concluding in 1997. After decreasing in 1998, utilization rates climbed until 2000, before excess supply, recession, and other factor s led to decreases in rates in the early 2000s. The industry appears to be recovering, however, as capacity utilization increased to 93 percent in 2004. Overall refinery utilization has remained high over this entire time period. Capacity utilization for production of specific products may vary, however, as the industry adjusts to ch anges in the desired product mix and characteristics.

84 86 88 90 92 94 961989199019911992199319941995199619971998199920002001200220032004

Note:

. Source: 

### Figure C2C-4: Capacity Utilization Rates (Fourth Quarter) for Petroleum Refineries

Petroleum Refineries (NAICS 324110) Petroleum Refineries (SIC 2911)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1989-2004.



## C2C-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### The Petroleum Refining segment in the United States is made up of integrated international oil companies, integrated domestic oil companies, and independent dom estic refining/marketing companies. In general, the petroleum industry is highly integrated, with many firms involved in more than one stage of petroleum industry operations. Large companies, referred to as the “majors, ” are fully integrated across crude oil exploration and production, refining, and marketing. Smaller, noninteg rated companies, referred to as the “independents,” generally specialize in one segment of the industry. Like the oil business in general, refining was dominated in the 1990s by integrated in ternationals, specifically a few large companies such as Exxon Corporation, Mobil Corporation, and Chevron Corporation. These three ranked in the top ten of Fortune’s 500 sales during this time period. Substantial diversification by major petroleum companies into other energy and non-energy seg ments was financed by high oil prices in the 1970s and 1980s. With lower profitability in the 1990s, the major producers began to exit unconve ntional energy operations (e.g., oil shale) as well as coal and non-energy operations in the 1990s. Some have recently ceased chemical production.

C2C-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### During the 1990s and into the early 2000s, several me rgers, acquisitions, and joint ventures occurred in the Petroleum Refining segment in an effort to cut cost an d increase profitability. This consolidation has taken place among the largest firms (as illustrated by the acquisition of Amoco Corporation by British Petroleum in 1999, the merger of Chevron and Texaco in 2001, the merger of Conoco and Phillips in 2002, and the mega-merger of Exxon and Mobil Corporation in 1998) as well as am ong independent refiners and marketers (e.g., the independent refiner/marketer Ultram ar Diamond Shamrock (UDS) acquired Total Petroleum North America in 1997) (U.S. DOE, 1999b, 2004). Merger activity seems to have slowed since 2002, however, possibly as companies seek to address financial issues or wait to see that the recent positive econom ic growth continues (U.S. DOE, 2004).
C2C-3.1 Firm Size For SIC 2911, the Small Business Administration defines a small firm as having 1,500 or fewer employees. The size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size classifications, therefore preventing precise use of the SBA size threshold in conjunction with SUSB data. Table C2C-7 below shows the distribution of firms and establis hments in SIC 2911 by the employment size of the parent firm. The SUSB data show that 163 of the 274 SIC 2911 establishments reported for 2003 (59 percent) are owned by larger firms (those with 500 employees or more), some of which may still be defined as small under the SBA definition, and 111 (41 percen t) are owned by small firms (those with fewer than 500 employees).

Table C2C-7: Number of Firms and Establishments for

Category Number of Establishments

0-19 59 60 20-99 21 25 100-499 21 26

500+ 41 163 Total 142 274 Note: Source: 

### Petroleum Refineries by Firm Employment Size Category, 2003 Employment Size Number of Firms

Based on NAICS 324110 U.S. SBA, 1989-2003.



### C2C-3.2 Concentration Ratios Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely related to entry barriers, with more con centrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the ma rket share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, th e less competition there is in the industry, other things being equal 6 

### . An industry with a CR4 of more than 50 percen t is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the in dustry. It is equal to the sum of the squares of the

Note that the measured concentration ratio and the HHF ar e very sensitive to how the industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the extent of competition in an industry.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-13 6§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, th e HHI of this industry would be equal to 4,600 (602 + 302
+ 102). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s gu idelines for evaluating mergers, markets in which the HHI is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated. As shown in Table C2C-15, the CR4 and the HHI for SI C 2911 are both below the benchmarks of 50 percent and 1,000, respectively. For the Petroleum Refining segment, the HHI is 422, suggesting the sector is unconcentrated. With the majority of the firms in this industry having small market shares, this suggests limited potential for passing through to customers any increase in production costs resulting from regulatory compliance.

SIC (S) or Total Concentration Ratios NAICS (N) Code Year Firms 4 Firm (CR4) 8 Firm (CR8) 20 Firm (CR20) 50 Firm (CR50)
S 2911 1987 1992 200 132 32% 30% 52% 49% 78% 78% 95% 97% 435 414 1997 122 29% 49% 82% 98% 422

a The Source: 

### Table C2C-8: Selected Ratios for Petroleum Refineries

Number of HerfindahlHirschman Index

N 324110 1997 Census of Manufactures is the most recent concentration ratio data available. U.S. DOC, 1987, 1992, 1997, and 2002.


### C2C-3.3 Foreign Trade This profile uses two measures of foreign competition: export dependence and import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total import s divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefor e be at a relative disadvant age in their ability to passthrough costs because foreign producers would not incu r costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. ma nufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulation-induced increases in producti on costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadvant age in potentially recovering compliance costs through price increases since export sales ar e presumed subject to substantial competition from foreign producers.

C2C-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### Table C2C-9 presents trade statistics for the profiled Pe troleum Refining segment from 1989 to 2002. The table shows that while export dependence has been relatively stable, import penetration decreased during the economic weakness of the early 1990s, before leveling off thro ugh the mid 1990s. Import penetration increased steadily through 2000 and then dropped slightly in 2001. This cycle follows the growth in the U.S. economy of the late 1990s, followed by the subsequent econom ic slowdown arriving in the latter ha lf of 2000 into 2001. Mexico received the largest amount of U.S. exported refined petr oleum products in 2001, followed by Canada and Japan. Imports of refined petroleum products increased 47.3 percent from 1989 to 2001, with 46.6 percent of total imports coming from OPEC countries (U.S. DOE, 2003). The import penetration ratio for facilities in the Petr oleum Refining segment in 2002 was only 15 percent, well below the U.S. manufacturing segment average of 22 percent. The export dependence ratio for petroleum refiners in 2001 was only four pe rcent compared to the U.S. manufacturing av erage of 15 percent. Thus, based on the lack of competitive pressures from foreign markets/firms, the petroleum industry appears to be in a position to pass-through to consumers a significant portion of co mpliance-related costs associated with the Phase III regulation. However, given the low HHI for this indu stry EPA believes that existing market competition among domestic firms most likely nullifies any favorable influe nce the lack of foreign competitors would have on increasing the market power of firms in this industry.
Table C2C-9: Foreign Trade Statistics for Petroleum Refining ($2005)

Year Value of Imports (millions) Value of Exports (millions) Value of Shipments (millions) Implied Domestic Consumption a Import Penetration b Export Dependence c
1989 16,837 6,162 187,227 197,902 9% 3% 1990 19,605 8,227 219,025 230,403 9% 4% 1991 14,458 8,438 193,023 199,042 7% 4% 1992 13,218 7,474 176,809 182,553 7% 4% 1993 12,358 7,155 164,853 170,055 7% 4% 1994 11,519 6,158 159,839 165,200 7% 4% 1995 10,668 6,491 165,743 169,920 6% 4% 1996 22,111 7,526 188,817 203,402 11% 4% 1997 d 24,009 8,087 186,428 202,351 12% 4% 1998 d 19,825 6,027 137,306 151,104 13% 4% 1999 d 25,071 6,602 165,289 183,759 14% 4% 2000 d 44,920 9,784 241,662 276,797 16% 4% 2001 d 38,456 8,839 218,854 248,471 15% 4% 2002 d 34,278 8,322 208,236 234,192 15% 4% Total Percent Change 1989-2002 103.6% 35.0% 11.2% 18.3% Average Annual 5.6% 2.3% 0.8% 1.3% Growth Rate

a Calculated by EPA as shipments + imports - exports. b Calculated by EPA as imports divided by implie d domestic consumption. Calculated by EPA as expor ts divided by shipments. d Before 1997, these data were compiled in the Standard Industr ial Classification (SIC) system; since 1997, these data have been compiled in the North American Industry Cla ssification System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifica tions using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. DOC, 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### The United States consumes more petroleum than it produces, requiring net imports of both crude oil and refined products to meet domestic demand. In 2002, the U.S. imported 9.05 million barrels per day (MBD) of crude oil

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-15

c§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### and 2.31 MBD of refined products. These refined product imports represented roughly 12 percent of the 19.65 MBD of refined products supplied to U. S. consumers. The U.S. exported 0.97 MBD of refined products in 2002 (U.S. DOE, 2003). Imports of refined petroleum products ha ve fluctuated since 1985. Imports rose to 2.3 MB in the early 1980s, due to rapid growth in oil consumption, especially consumption of light products, which exceeded the growth in U.S. refining capacity. Imports then declined as a result of the 1990/91 recession and increased upgrading of refinery capacity resulting primarily from the 1990 Clean Air Act Amendments and other environmental requirements (U.S. DOE, 1997). Since the 1995 low point, imports steadily increased through 2000 with the exception of 1998, before dropping again, due to general economic weakness, in 2001 and 2002 (see Figure C2C-5).

0 5,00019891990199119921993199419951996199719981999200020012002

Note:

. Source: 

### Figure C2C-5: Value of Imports and Exports for Petroleum Refining (millions, $2005)

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Imports (NAICS 324110) Imports (SIC 2911) Exports (NAICS 324110) Exports (SIC 2911)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 2006.


### Petroleum exports include heavy products such as residual fuel oil and petroleum coke, which are produced as coproducts with motor gasoline and other light products. Production of these heavier products often exceeds U.S. demand, and foreign demand absorbs the excess. Petrol eum coke is the leading petroleum export product, accounting for 35 percent of petroleum exports in 2002, follo wed by residual fuel oil (18 percent of exports) and motor gasoline (almost 13 percent) (U.S. DOE, 2003). Export s generally reflect foreign demand, but other factors influence exports as well. For example, exports of motor gasoline increased due to high prices in Europe at the time of the 1990 Persian Gulf War. U.S. refiners and ma rketers have gained experience in marketing to diverse world markets, and U.S. products are now sold widely abroad (U.S. DOE, 1997). As reported by the International Trade Administration and shown in Figure C2C-5, the real value of petroleum exports has fluctuated between $5 and $10 billion during the years 1989 and 2002.

C2C-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



## C2C-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### The financial performance and condition of the Petroleu m Refining segment are important determinants of its ability to withstand the costs of regulatory compliance w ithout material adverse econo mic/financial impact. To provide insight into the industry’s financial perform ance and condition, EPA reviewed two key measures of financial performance over the 14-year period, 1992-2005: net profit margin and return on total capital. EPA calculated these measures as a reve nue-weighted index of measure values for public reporting firms in the respective industries, using data from the Value Line I nvestment Survey. Financial performance in the most recent financial reporting period (2005) is obviously not a pe rfect indicator of conditions at the time of regulatory compliance. However, examining the trend, and devi ation from the trend, through the most recent reporting period gives insight into where the industry may be , in terms of financial perform ance and condition, at the time of compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the potential risk faced by the industry in a future period in which compliance requirements are faced: all else equal, the more volatile the historical performance, the more likely the industry may be in a period of relatively weak financial conditions at the time of compliance. Net profit margin is calculated as after-tax income before nonr ecurring gains and losses as a percentage of sales or revenue, and measures profitability, as reflected in th e conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fl uctuations in profit margin stem from several factors, including: variations in aggregate economic conditions (including international and U.S. conditions), variations in industry-specific market conditi ons (e.g., short-term cap acity expansion resulting in overcapacity), or changes in the pricin g and availability of inputs to the in dustry’s production processes (e.g., the cost of energy to the petroleum refining process). The ex tent to which these fluctuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. va riable cost structure of the industry’s operations. In a capital intensive industry such as Petroleum Refining, the re latively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in outpu t or prices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-ha lf of annual long-term interest, divided by the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). As such, the retu rn on total capital provides insight in to the profitability of a business’ assets independent of financial structure and is thus a “purer” i ndicator of asset profitability than return on equity. In the same way as described for net profit margin , the firms in an industry, and the in dustry collectively, must generate, over time, a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital

. Figure C2C-6 below shows trends in net profit margins and return on total capital for the Petroleum Refining segment between 1992 and 2005. Through the first half of the 1990s, unusually low product margins, low profitability, and substantial restructuring characterized the petroleum industry. These low profit margins resulted from three supply-side factors – (1) increases in operating costs as a result of governmental regulations; (2) expensive upgrading of processing units to accommodate lower-quality crude oils; 7 

### and (3) upgrading of

Crude oils processed by U.S. refineries have become heav ier and more contaminated with materials such as sulfur. This trend reflects reduced U.S. dependence on the more expens ive high gravity (“light”) and lo w sulfur (“sweet”) crude oils produced in the Middle East, and greater reliance on crude oil from Latin America (especially Mexico and Venezuela), which is relatively heavy and contains higher sulfur (“sour”) (U.S. DOE, 1999a).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-17 7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### operations to adapt to changes in demand for refinery products 8 

### – coupled with lower product prices, resulting from competitive pressures (API, 1999). In the late 1990s, the petroleum industry pursued cost-cutting measures throughout their operations (Rodekohr, 1999) 9 

### . These cost-cutting measures, along with increases in the prices of petroleum refining products, resulted in significantly im proved financial performance in the Petroleum Refining segment. Refinery profits remained high in 2000 and the first half of 2001, due to low product inventories and high operating rates. The latter half of 2001 and 2002 saw the effects of the global recession, the attacks of 9/11, and a mild winter. These factors, coupled with world supply in excess of demand, led to decreases in refiner margins, as crude oil prices increases and petroleum pr oduct prices decreased. In 2003, as the U.S. economy began recovery from its economic weakness, the domestic Petroleum Refining segment returned to relatively strong financial performance. The segment’s performance continued to improve in 2004 and 2005, reaching the highest return on total capital and net profit marg in observed over the time period analyzed by 2005.

0% 5% 10% 15% 20% 25%19921993199419951996199719981999200020012002200320042005



## C2C-5 F ACILITIES 

## O PERATING 

## C OOLING 

## W ATER 

## I NTAKE 

## S

( Figure C2C-6: Net Profit Margin and Return on Total Capital for Petroleum Refining

Return on Total Capital - Petroleum Refining
Net Profit Margin - Petroleum Refining

Source: Value Line, 2003; Value Line, 2006.



### TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point sour ce facilities that use, or propose to use, a cooling water intake structure that withdraws cooling water directly fro m a surface waterbody of the United States. In 1982, the Petroleum and Coal Products industry SIC 29) withdrew 590 billion gallons of c ooling water, accounting for

Demand for lighter products such as gasoline and diesel fuel has increased, and demand for heavier products has decreased. 9 

### Reductions in costs resulted from:

< divesting marginal refine ries and gasoline outlets; < divesting less profitable activities (e.g., gasoline credit cards); < reducing corporate overhead costs, including eliminating redundancies through restructuring ; < outsourcing some administrative activities; and < use of new technologies requiring less labor.

C2C-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 8§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### approximately 0.8 percent of total industria l cooling water intake in the United States 10 

### . The industry ranked 4 th 

### in industrial cooling water use, behind the electric power generation industry and the chemical and primary metals industries (1982 Census of Manufactures). This section provides information for facilities in the petrol eum segment estimated to be subject to regulation for the regulatory analysis options. Existing facilities that m eet all of the following conditions are expected to be subject to regulation:

f 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supplier who has a coo ling water intake structure; or their cooling water intake structure(s) withdraw(s) cooling water from wa ters of the United States, and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;

f 

### Have a National Pollutant Discharge Elimination Syst em (NPDES) permit or are required to obtain one; and

f 

### Meet the applicability criteria for the specific regulator y analysis option in terms of design intake flow and source waterbody type (i.e., 50 MGD for All Wate rbodies, 100 MGD for Certain Waterbodies, or 200 MGD for All Waterbodies). The regulatory analysis options also cover substantial add itions or modifications to operations undertaken at such facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the Phase III regulation based on a minimum applicability thr eshold of 2 MGD, this section focuses on the facilities nationwide in the petroleum segment that are estimated to be subject to regulatio n under the DIF applicability thresholds defined by the regulatory analysis options (see Table C2C-1, above for additional information on the broader set of facilities potentially subject to regulation). 5


### C2C-5.1 Waterbody and Cooling System Type
Table C2C-10 show the distribution of Phase III facilities by type of water body and cooling system for each option.

10 

### Data on cooling water use are from the 1982 Census of Manufactures . 1982 was the last year in which the Census of Manufactures reported cooling water use. 5 

### EPA applied sample weights to the sampled facilities to account for non-sampled facilitie s and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industry Survey, please refer to the Information Collection Request (U.S. EPA, 2000).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-19§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining

Total Combination

Number Total Number Total Number Total 0 0% 3 35% 2 40% 5 2 100% 4 41% 2 40% 8 0 0% 2 24% 0 0% 2 Ocean 0 0% 0 0% 1 20% 1 Total a 2 9 5 17

a Source:

Total Combination

Number Total Number Total Number Total 0 0% 2 68% 1 100% 3 0 0% 1 32% 0 0% 1 Total a 0 3 1 4

a Source:

Total Combination

Number Total Number Total Number Total 0 0% 2 40% 1 100% 3 1 100% 2 39% 0 0% 3 0 0% 1 21% 0 0% 1 Total a 1 5 1 8

a Source: 

### Table C2C-10: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Petroleum Refining Segment

Water Body Type Cooling System Recirculating Once-Through % of % of % of
Estuary/ Tidal River Freshwater Stream/ River Great Lake

13% 56% 32% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Table C2C-11: Number of Facilities Estimate d Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Petroleum Refining Segment

Water Body Type Cooling System Recirculating Once-Through % of % of % of
Estuary/ Tidal River Freshwater Stream/ River 0% 76% 24% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Table C2C-12: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Petroleum Refining Segment

Water Body Type Cooling System Recirculating Once-Through % of % of % of
Estuary/ Tidal River Freshwater Stream/ River Great Lake 14% 72% 14% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.


### According to the American Petroleum Institute and EPA, water use at Petroleum Refineries has been declining because facilities are increasing their reuse of water (U.S. EPA, 1996a). C2C-5.2 Facility Size All petroleum refinery facilities that are estimated to be subject to regulation under the regulatory analysis options are relatively large. Figure C2C-7 show the number of potential Phase III facilities by employment size category for the regulatory analysis options.

C2C-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining

0 3
2 8

3

0 1 2 3 4 5 6 7 8 9 10

ineri ( )

Source:

0 0 0 3

1

0 1 2 3 4 5 6 7 8 9 10

ineries (

Source:



### Figure C2C-7: Number of Facilities Estimated Su bject to the 50 MGD All Option by Employment Size for the Petroleum Refinery Segment

<100 100-249 250-499 500-999 >=1000 Petroleum Ref es SIC 2911

U.S. EPA, 2000; U. S. EPA analysis, 2006.


### Figure C2C-8: Number of Facilities Estimated Su bject to the 50 MGD All Option by Employment Size for the Petroleum Refinery Segment

<100 100-249 250-499 500-999 >=1000 Petroleum Ref SIC 2911)

U.S. EPA, 2000; U. S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining

0 0 1 4

2

0 1 2 3 4 5 6 7 8 9 10

<100 100-249 250-499 >=1000 i

Source:



### C2C-5.3

Large Small SIC Total No. No. 2911 17 100% 0 0% 17 Source:

Large Small SIC No. No. Total

2911 4 100% 0 0% 4 Source:

Large Small SIC No. No. Total

2911 

### 8 100% 0 0% 8 Source: 

### Figure C2C-9: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Employment Size for the Petroleum Refinery Segment

500-999 Petroleum Ref neries (SIC 2911)

U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Firm Size EPA used the Small Business Administration (SBA) small entity thresholds to determine the number of facilities in the petroleum-refining segment that owned by small firms. Firms in this industry are considered small if they employ fewer than 1,500 people. As shown in Table C2C-13, Table C2C-14, and Table C2C-15, all of the facilities that are estimated to be subject to regulati on are owned by large business, regardless of the option.

Table C2C-13: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Petroleum Refinery Segment

% of SIC % of SIC

U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.



### Table C2C-14: Number of Facilities Estimated Su bject to the 200 MGD All Option by Firm Size for the Petroleum Refinery Segment

% of SIC % of SIC

U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.



### Table C2C-15: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the Petroleum Refinery Segment

% of SIC % of SIC

U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.

C2C-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



## R EFERENCES 

### American Petroleum Institute (API). 2004. “Year-e nd API monthly statistical report.” January 14, 2004. American Petroleum Institute (API). 2003. “Yea r-end statistical report, 2002.” January 15, 2003. American Petroleum Institute (API). 1999. Po licy Analysis and Strategic Planning Department. Economic State of the U.S. Petroleum Industry. February 26, 1999. Bureau of Labor Statistics (BLS). 2006. Producer Price Index . Industry Data Series: PCU324110-Petroleum Refineries. Available at: http://www.bls.gov/ppi/h ome.htm. Downloaded February 2, 2006. Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual. National Petroleum Council (NPC). 2000. U.S. Petroleum Refining. Assuring the Adequacy and Affordability of Cleaner Fuels . Executive Summary. June 2000. Rodekohr, Dr. Mark. Financial Developments in ‘96-‘97: How th e U.S. Majors Survived the 1998 Crude Oil Price Storm . Presentation. May 27, 1999. Available at: http://www.eia.doe.gov/emeu/finance/highlite7/sld001.htm Standard & Poor’s. (S&P) 2001. Industry Surveys - Oil & Gas: Production & Marketing. March 8, 2001.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration. Industry, Trade, and the Economy: Data and Analysis . Data by NAICS and SIC. Available at: http://www.ita.doc.gov/td/industry/otea/industry_sector/tabl es_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bu reau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge Between NAICS and SIC.
U.S. Department of Commerce (U.S. DOC). 1987, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Department of Energy (U.S. DOE) 2005. Energy Information Administration. Annual Energy Review 2004 . DOE/EIA-0384(2004). August 2005.
U.S. Department of Energy (U.S. DOE). 2004. Energy Information Administration. Performance Profiles of Major Energy Producers 2002 . DOE/EIA-0206(04). February 2004.
U.S. Department of Energy (U.S. DOE). 2003. Energy Information Administration. Annual Energy Review 2002 . DOE/EIA-0384(2002). October 2003.
U.S. Department of Energy (U.S. DOE). 1999a. Energy Information Administration. Petroleum: An Energy Profile, 1999 . p. 25. DOE/EIA-0545(99). July 1999.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2C-23§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2C: Petroleum Refining



### U.S. Department of Energy (U.S. DOE). 1999b. Energy Information Administration. The U.S. Petroleum Refining and Gasoline Marketing Industry. Recent Structural Changes in U.S. Refining: Joint Ventures, Mergers, and Mega-Mergers. July 9, 1999.
U.S. Department of Energy (U.S. DOE). 1999c. Energy Information Administration. Petroleum Marketing Annual 1998 . DOE/EIA-0487(98). October 1999.
U.S. Department of Energy (U.S. DOE). 1997. Energy Information Administration. Petroleum 1996: Issues and Trends . p. 15. DOE/EIA-0615(96). September 1997.
U.S. Department of Energy (U.S. DOE). Fina ncial Reporting System (FRS) historical data. http://www.eia.doe.gov/emeu/aer/finance.html
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures.
U.S. Environmental Protection Agency (U.S. EPA). 1996a. Office of Water. Preliminary Data for the Petroleum Refining Category . EPA-821-R-96-016. July, 1996.
U.S. Environmental Protection Agency (U.S. EPA). 1996b. Office of Solid Waste. Study of Selected Petroleum Refining Residuals: Industry Study . August, 1996.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards . Available at: http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses. Available at: http://www.sba.gov/advo/stats/int_data.html
Value Line. 2006. Value Line 3.0 Investment Analyzer

. Value Line. 2003. Value Line Investment Survey. Value Line. 2001. “Petroleum (Integrated) Industry.” September 21, 2001. World Oil. 1999. “1998: A year of infamy.” Februa ry 1, 1999. Vol. 220. No.2 Available at: http://www.worldoil.com/magazine/MAGAZINE_DETAIL.asp?ART_ID=478&MONTH_YEAR=Feb-1999

C2C-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel 

# Chapter C2D: Steel (SIC 331)

I NTRODUCTION


### EPA’s Detailed Industry Questionnaire , hereafter referred to as the DQ, identified five 4-digit SIC codes in the Steel Works, Blast Furnaces, and Rolling and Finishing Mills Industries (SIC 331) with at least one existing facility that operates a CWIS, holds a NPDES permit, and withdraws equal to or greater than two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes (facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). For each of the five SIC codes, Table C2D-1, following page, provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnaire respondents (weighted to represent a national total of facilities that hold a NPDES permit and operate cooling water intake structures), the number of facilities estimated to be potentially subject to Phase III regulation based on the minimum withdrawal threshold of 2 MGD, and the number of facilities estimated to be subject to regulation for the regulatory analysis options. 

## C HAPTER 

## C ONTENTS
Introduction..........................................................C2D-1 C2D-1 Summary Insights from this Profile ........C2D-3 C2D-2 Domestic Production...............................C2D-4 C2D-2.1 Output.............................................C2D-5 C2D-2.2 Employment and Productivity ......C2D-11 C2D-2.3 Capital Expend itures ....................C2D-13 C2D-2.4 Capacity Utiliz ation......................C2D-14 C2D-3 Structure and Competitiveness..............C2D-15 C2D-3.1 Firm Size ......................................C2D-15 C2D-3.2 Concentration Ratios ....................C2D-16 C2D-3.3 Foreign Trade ...............................C2D-17 C2D-4 Financial Condition and Performance...C2D-19 C2D-5 Facilities Operating Cooling Water Intake Structures ..............................................C2D-21 C2D-5.1 Waterbody and Cooling System Type...... ...................................................C2D-22 C2D-5.2 Facility Si ze..................................C2D-23 C2D-5.3 Firm Size ......................................C2D-25 References..........................................................C2D-27

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel

a 

### Table C2D-1: Phase III Facilities in the Steel Industry (SIC 331) Number of Phase III Facilities Potentially Subject to Subject to Subject to SIC SIC Description Important Products Manufactured 50 MGD 200 MGD 100 MGD Total Regulated All CWB Facilities b All Option Option Option

3312 Steel Works, Blast 161 46 21 14 19

Ovens), and

3315 122 7 3 0 0

3316

Bars ; 57 10 0 0 0

3317 Tubes 130 5 1 0 1

309 21 5 0 1

3313 6 2 2 0 0

Total Steel (SIC 331) 476 68 27 14 20

a
b Source: Steel Mills (SIC 3312) Hot metal, pig iron, and silvery pig iron from Furnaces (Including Coke iron ore and iron and steel scrap; converting pig iron, scrap iron, and scrap steel into steel; hot-rolling iron and steel into basic shapes, Rolling Mills such as plates, sheets, strips, rods, bars, and tubing; merchant blast furnaces and byproduct or beehive coke ovens Steel Products (SICs 3315, 3316, 3317) Steel Wiredrawing and Steel Nails and Drawing wire from purchased iron or steel rods, bars, or wire; further manufacture of Spikes products made from wi re; steel nails and spikes from purchased materials Cold-Rolled Steel Sheet, Strip, and Cold-rolling steel sheets and strip from purchased hot-rolled sheets cold-drawing steel bars and steel shapes from hot-rolled steel bars; producing other cold finished steel Steel Pipe and Production of welded or seamless steel pipe and tubes and heavy riveted steel pipe from purchased materials Total Steel Products Other Segments Electrometallurgica l Products, Except Ferro and nonferrous metal additive alloys by electrometallurgical or metallothermic Steel processes, including high percentage ferroalloys and high percentage nonferrous additive alloys

Total SIC Code 331 Number of weighted detailed questionnaire survey respondents. Individual numbers may not add up due to independent rounding. Executive Office of the President, 1987; U.S. EPA 2000; U. S. EPA analysis, 2006.


### As shown in Table C2D-1, EPA estimates that, out of the total of 476 facilities with a NPDES permit and operating cooling water intake structures in the Steel Industry (SIC 331), 27 (or 4%) would be subject to regulation under the 50 MGD All option, 14 (or 2.9%) would be subject to regulation under the 200 MGD All option, and 20 (or 4.2%) would be subject to regulatio n under the 100 MGD CWB option. EPA also estimated the percentage of total production that occurs at facilities estimated to be subject to regulation for each primary analysis option. Total value of shipments for the steel industry from the 2004 Annual Survey of Manufacturers is $92.8 billion. Value of shipments, a measure of the dolla r value of production, was selected for the basis of this estimate. Because the DQ did not collect value of ship ments data, these data were not available for Phase III facilities. Total revenue, as reported on the DQ, was u sed as a close approximation for value of shipments for these facilities. EPA estimated the total revenue of faciliti es expected to be subject to regulation under the 50 MGD, 200 MGD and 100 MGD to be $32 billion, $24.3 billion, and $26.8 billion, respectively. Therefore, EPA

C2D-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### estimates that the percentage of total production in the steel industry that occurs at facilities estimated to be subject to regulation under the 50 MGD, 200 MGD, and 100 MGD options is 34%, 26%, and 29%, respectively.. The responses to the Detailed Questionnaire indicate that two main steel segments account for the largest numbers of potential Phase III facilities: (1) Steel Mills (SIC code 3312) and (2) Steel Products (SIC codes 3315, 3316, and 3317). The remainder of the steel industry profile therefore focuses on these two industry segments Table C2D-2 provides the crosswalk between SIC codes and the new NAICS codes for the profiled steel SIC codes. The table shows that both cold finishing of steel shapes (SIC 3316) and steel pipe and tubes (SIC 3317) have a one-to-one relationship to NAICS codes. The othe r SIC codes in the profiled steel segments correspond to two NAICS codes.

Table C2D-2: Relationships between SIC and NAICS Codes for the Steel Industries (2002) Value of SIC NAICS Number of SIC Description NAICS Description Shipments Employment Code Code Establishments ($1000) Blast furnaces and All other petroleum and coal 324199 82 1,895,666 3,191 steel mills products manufacturing (pt) 3312 331111 379 46,221,417 117,016

3313 products

products 331112

331492 manufacturing

aluminum) (pt) 22

235 819,311

2,686,875 2,333

9,669

3315 products
products 331222

332618 manufacturing ( 338
1,672 3,905,687
42,314 18,576
5,879,897

3316 331221 manufacturing 147 5,004,079 12,202

3317 331210 183 6,240,489 21,858

a Source: Blast furnaces and steel mills Iron and steel mills (pt)
Electrometallurgical

Electrometallurgical Electrometallurgical ferroalloy product
Secondary smelting, refining, and alloying of nonferrous metal (except copper and

Steel wire and related

Steel wire and related Steel wire drawing Other fabricated wire product pt) Cold finishing of steel shapes Rolled steel shape

Steel pipe and tubes Iron and steel pipes and tubes manufacturing from purchased steel Industry data for relevant NAICS codes from the 2002 Economic Census. U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.



## C2D-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of steel industry firms to absorb compliance costs under each primary analysis option without material adverse economic/financial effects. The industry’s ability to withstand compliance costs is primarily influenced by two factors: (1) the ex tent to which the industry may be expected to shift compliance co sts to its customers through price increas es and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, th e steel industry is relatively unconcentrated, which would suggest that firms in this industry would have difficulty in passing a significant portion of their complianceJune 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### related costs through to customers. In addition, the domestic steel i ndustry faces high competition from imports into the U.S. market, further curtailing the potential of firms in this industry to pass through to customers a significant portion of their compliance-related costs. As discussed above, given the relatively small proportion of total value of shipments in the indus try estimated subject to regulation u nder the primary analysis options, EPA believes that the theoretical threshold for justifying the u se of industry-wide CPT rates in the impact analysis of existing Phase III steel facilities has not been met. For these reasons, in its an alysis of regulatory impacts for the steel industry, EPA assumed that complying firms would be unable to pass compliance costs through to customers: i.e., complying facilities must absorb all co mpliance costs at the time of compliance (see following sections and Appendix 3, Cost Pass-Through Analysis , to Chapter C3: Economic Impact Analysis for Manufacturers , for further information).
Financial Health and General Business Outlook Over the past decade, the steel industry, like other U.S. manufacturing industries, experienced a range of economic/financial conditions, including substantial challenges. The U.S. st eel industry went through a difficult restructuring process in the 1980s and early 1990s, including the closing of a number of inefficient mills, substantial investment in new technologies, and reductions in the labor force. Although U.S. demand for steel was strong in the late 1990s, low-priced imports increased substantially in 1998, which caused a number of U.S. steel bankruptcies and steelworker layoffs. The increased imports resulted from the Asian financial crisis, with the associated decline in Asian demand for steel and cu rrency devaluations. Tariffs provided temporary relief through 2002; however, all tariffs were removed by the end of 2003. The steel industry was also negatively affected by economic recession in 2000 and 2001 and has been slow to recover. In 2004, however, the industry’s financial performance improved significantly, with 2004, followed by 2005, showing the highest financial performance over the survey timeframe. The industry has weathered difficult periods over the past few years and may be in position for better performan ce with continued strengthening of the U.S. economy. However, until such improvement manifests more concretely, the indust ry’s relatively weak financ ial condition suggest a lower ability (among the industries subject to the 316(b) regula tion) to withstand additional regulatory compliance costs without imposing significant financial impacts.


## C2D-2 D OMESTIC 

## P RODUCTION 

### Steel is one of the most important products of the U.S. industrial metals industry. For most of the twentieth century, the U.S. steel industry consisted of a few large companies utilizing an integrated steelmaking process to produce the raw steel used in a variety of commodity steel products. The integrated process requires a large capital investment to process coal, iron ore, limestone, a nd other raw materials into molten iron, which is then transformed into finished steel products (S&P, 2001). In recent decades, the integrated steel industry has undergone a dramatic downsizing as a result of increased steel imports, decreased consumption by the auto industry, and the advent of “minimills” (S&P, 2001). While the traditional integrated facilities using basic oxygen furnaces (BOF) still account for a substantial per cent of U.S. steel mill product production, the share of electric arc furnace (EAF) facilities using scr ap steel as an input has grown steadily 1 

### . By 2002, about 72 companies operating about 107 steelmaking plants used the EAF steelmaking process; these non-integrated, minimill facilities produced 46.1 million metric tons of st eel, an increase of about eight percent compared with that of 2001, and accounted for 50.4 percent of total steelmaking (USGS, 2002). The range of products produced by EAFs has also expanded over time. Initially, EAFs produced primarily lower-quality structural materials.

1 

### Production from open hearth furnaces, which dominated prod uction until the early 1950s, ended in 1991. BOF facilities have traditionally been referred to as inte grated producers, because th ey combined iron-making fr om coke, production of pig iron in a blast furnace, and prod uction of steel in the BOF. In recent years, some facilities have closed their coke ovens. These BOF facilities are no longer fully integrated.

C2D-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### Starting in the 1990s, EAFs began prod ucing higher quality sheet products as well. All recent capacity additions have been at EAF facilities. Basic steel mill products include carbon steel, steel allo ys, and stainless steel. Steel forming and finishing operations may take place at facilities co-located with st eelmaking or at separate facilities. These operations take steel (in the form of blooms, billets, and slabs) and use heating, rolling or drawing, pickling, cleaning, galvanizing, and electroplating processes in various combina tions to produce finished bars, wire, sheets, and coils (semifinished steel products). Establishments that produce hot rolled products, along with basic BOF and EAF steelmaking facilities, are included in SIC 3312. SIC c odes 3315, 3316, and 3317 perform additional processing of steel bars, wires, sheets, and coils (including cold-ro lling of sheets) to produce steel products for a variety of end-uses (U.S. EPA, 1995). The steel industry is the fourth largest energy-consuming industry in the U.S. economy. Energy costs account for approximately 17 percent of the total manufacturing cost (A ISI, 2000). Steelmakers use coal, oil, electricity, and natural gas to fire furnaces and run process equipment. Minimill producers require large quantities of electricity to operate the electric arc furnaces used to melt and refi ne scrap metal, while integrated steelmakers depend on coal for up to 60 percent of their total energy requirements (McGraw-Hill, 1998). C2D-2.1 Output Steel mill products are sold to service centers (which bu y finished steel, often process it further, and sell to a variety of fabricators, manufacturers, and construction industry clients), to vehicle producers, and to the construction industry. The rapid growth in sales of heav y sports utility vehicles contributed to increased U.S. steel consumption in the 1990s. Efforts to increase the fu el efficiency of vehicles have eroded steel’s position in the automotive market as a whole, however, as aluminum and plastic have replaced steel in many automotive applications. Other end-uses for steel include a wide range of agricultural, industrial, appliance, transportation, and container applications. Use of steel in beve rage cans has been largely replaced by aluminum. Table C2D-3 shows trends in production from the two ma jor groups of steel producers: BOF and EAF facilities.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### Table C2D-3: U.S. Steel Production by Type of Producer Steel Production Percent from Percent from Year BOF EAF Million MT % Change 1990 a 89.7 59.1% 37.3% 1991 b 79.7 -11.15% 60.0% 38.4% 1992 84.3 5.77% 62.0% 38.0% 1993 88.8 5.34% 60.6% 39.4% 1994 91.2 2.70% 60.7% 39.3% 1995 95.2 4.39% 59.6% 40.4% 1996 95.5 0.32% 57.4% 42.6% 1997 98.5 3.14% 56.2% 43.8% 1998 98.6 0.10% 54.9% 45.1% 1999 97.4 -1.22% 53.7% 46.3% 2000 102 4.72% 53.0% 47.0% 2001 90.1 -11.67% 52.6% 47.4% 2002 91.6 1.66% 49.6% 50.4% 2003 93.7 2.29% 49.0% 51.0% 2004 99.7 6.40% 47.8% 52.2% 2005 c 92.4 -7.32% 44.9% 55.1% Total Percent Change 3.0% 1990-2005 Average Annual 0.2% Growth Rate

a 3.5 percent of 1990 production was from open hearth furnaces. b 1.6 percent of 1991 production was from open hearth furnaces.

c Estimated. Source: AISI, 2001b; USGS, 1997;USGS, 2001; USGS 2004; USGS, 2006; USGS, Iron and Steel Statistical Compendium.


### This table shows the cyclical nature of the U.S. steel industry, with variations in growth from year to year reflecting general U.S. and world economic conditions , persistent excess production capacity worldwide, the competitive strength of imports, and trends in steel’s shar e of the automotive and other end-use markets for steel. The U.S. steel industry went through a difficult restructur ing process in the 1980s and early 1990s, including the closing of a number of inefficient mills, substantial i nvestment in new technologies, and reductions in the labor force. The U.S. became a world lead er in low-cost production, lead by the minimill producers. Although U.S. demand for steel was strong in the late 1990s, low-priced imports increased substantially in 1998, which led to a number of U.S. steel bankruptcies and steelworker layoffs. The increased imports resulted from the Asian financial crisis, with the associated decline in Asian demand for steel and currency devaluations. The U.S. government initiated the Steel Action Program in response to the crisis, focusing on strong enforcement of trade laws through the World Trade Organization and bilatera l efforts to address market-distorting practices abroad 2



### . The industry began to show signs of recovery in the second half of 1999, and by early 2000 capacity utilization recovered to above 90 percent and earnings were up for most major steel companies (U.S. DOC, 2000). However, beginning in 2000, the weakening of the U. S. economy significantly reduced steel demand and total U.S. steel production fell by nearly 12 percent in 2001. In March 2002, the U.S. steel industry received temporary relief under Section 201 of the 1974 Trade Act with 3 year s of tariffs ranging up to 30 percent on certain steel

2 

### World steel trade is characterized by noncompetitive practices in a number of countries, which have resulted in substantial friction over trade issues since the late 1960s. Sin ce 1980, almost 40 percent of the unfair trade practice cases investigated in the U.S. have been related to steel products (U.S. DOC, 2000).

C2D-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### imports. Relief from imports was nullified to some extent when the U.S. Department of Commerce exempted 727 imported steel products from the tariff in June 2002. By year-end, 2002 was the fourth highest steel import year in U.S. history (USGS, 2002). Removal of all tariffs occurred on December 4, 2003 (S&P, 2004). The steel industry is recovering, but slowly, from the im port penetration in the late 90's followed by the economic recession in 2001. In 2003, the integrated steel industr y had poor operating results, as high raw material costs outweighed increased sales and higher volumes. As a result, most domestic steel producers instituted a raw material surcharge to offset sharply rising costs for raw materials such as scrap, iron ore and coke. Additionally, worldwide capacity remains in excess of long-term needs. Imports will most likely rise in 2004 after the removal of tariffs. However, to the extent that imports put downward pressure on prices, they may force the shutdown of marginal capacity currently operating. These capacity reductions will reduce domestic supply, and may set the stage for better financial performance in later years (S&P, 2004). Value of shipments and value added are two common measures of manufacturing output 3 

### . Change in these values over time provides insight into the overall economic health and outlook for an industry. Value of shipments is the sum of receipts earned from the sale of outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors. Value added, defined as the difference between the value of shipments and the value of inputs used to make the produc ts sold, measures the value of production activity in a particular industry. Figure C2D-1 presents trends in constant-dollar value of shipments and value added for Steel Mills and Steel Products. Value of shipments and value added from Steel Mills declined in the early 1990s, and recovered through 1997, prior to the 1998 import crisis and the la ter U.S. economic recession. The segment’s value of shipments continued to decline through 2001, but has risen continuously since 2002, peaking at nearly $75 billion in 2004. Steel Mills value added, on the other hand, continued to decline until 2003, increasing slightly in 2004. Value of shipments and value added for Steel Products were less volatile, increasing gradually over 1990 through 1997. Value added stayed relatively co nstant through 2004, while value of shipments declined until 2003, then increased slightly in 2004.

3 

### Terms highlighted in bold and italic font are further explained in the glossary.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### (millions, $2005)

0198719881989199019911992199319941995199619971998199920002001200220032004 (

l ( )

( )

(

0198719881989199019911992199319941995199619971998199920002001200220032004 (

( )

( )

(

Note:

. Source: 

### Figure C2D-1: Value of Shipments and Value Added for Profiled Steel Industry Segments

Value of Shipments

1 0 , 0 0 0 2 0 , 0 0 0 3 0 , 0 0 0 4 0 , 0 0 0 5 0 , 0 0 0 6 0 , 0 0 0 7 0 , 0 0 0 8 0 , 0 0 0

St e e l M ills N A I CS t o SI C)

St e e l M i ls SI C 3 3 1 2

St e e l P r o duc t s N A I CS t o SI C

St e e l P r o duc t s SI C 3 3 1 5 , 3 3 1 6 , 3 3 1 7 )

Value Added

2,000 4,000 6,000 8,000 10 ,000 12 ,000

St eel M ills NAICS t o SIC)

St eel M ills SIC 3312

St eel P ro ducts NAICS to SIC

St eel P ro duct s SIC 3315, 3 316, 331 7)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

C2D-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### B2D-2.2 Prices
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and indicates the overall trend of product pricing, a nd thus supply-demand conditions, within a segment. Figure C2D-2 below shows that prices increased from 1987 to 1989 and then decreased in the early 1990s, due to a depressed domestic economy and the resulting decline in the demand for steel. Prices rebounded sharply through 1995 before eroding again, due to the global oversupply and increases in exports discussed above. Basic steel prices declined sharply with the growth of imports in the late 1990s, recovered in 2000, but dropped again in 2001 with the decline in steel demand (S&P, 2001; AISI, 200 1a). Prices began to rise in 2002 with the beginning of economic recovery, and then proceeded to increase dr amatically during 2003 to 2005. In 2005, both Steel Products and Steel Mills segments recorded the high est prices observed during the 1987 to 2005 time period.

90 100 110 120 130 140 150 160 170 180 190 2001987198819891990199119921993199419951996199719981999200020012002200320042005 ( ) (

Note:

Source: 

### Figure C2D-2: Producer Price Index for Profiled Steel Industry Segments

St e e l P r o duc t s N A I C S 3 3 1 2 1 0 , 3 3 1 2 2 1 , 3 3 1 2 2 2 St e e l M ills N A I C S 3 3 1 1 1 1 )

Data for 2005 were prelim inary at the time of this writing. The NAICS va lues shown in this figure match the historical values of the profiled SIC codes. As data by SIC were only available through 2003, the representative NAICS codes are presented for evaluation through 2005. BLS, 2006.



### B2D-2.3 Number of Facilities and Firms The number of operating Steel Mills fluctuated si gnificantly between 1990 and 2003, as the U.S. industry underwent a substantial restructuring. Table C2D-4 s hows substantial decreases in the number of facilities in 1992 and 1993 due to a significant decrease in global demand for Steel Products and resulting overcapacity. This decrease was followed by a significant recovery in 1995 and 1996. The number of facilities continued to rise through 2001, with the largest increa se around 1999. This increase may have resulted in part from the advent of minimills, as discussed above. The import crisis in 1998 ultimately led to bankruptcy for a number of U.S. producers, including LTV and Bethlehem Steel (S&P, 200 1). Additionally, 7 major bankruptcies occurred over 2002 and early 2003, including Bayou Steel Corp, Kentucky Electric Steel Inc, Slater Steel Inc, and Weirton Steel

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### Corp (USGS, 2004). Nonetheless, the Steel Mills segme nt saw an overall 74 percent increase in the number of facilities during 1990 to 2003. In contrast to the volatility in the number of Steel Mills, the number of facilities in the Steel Products segment has remained relatively stable between 1990 and 2003, with decreases towards the end of the period.

Table C2D-4: Number of Facilities in the Profiled Steel Industry Segments Steel Mills Steel Products Year Number of Percent Number of Percent Facilities Change Facilities Change 1990 497 776 1991 531 6.8% 807 4.0% 1992 412 -22.4% 831 3.0% 1993 343 -16.7% 833 0.2% 1994 339 -1.2% 804 -3.5% 1995 391 15.3% 791 -1.6% 1996 483 23.5% 770 -2.7% 1997 297 -38.5% 727 -5.6% 1998 a 398 34.0% 865 19.0% 1999 a 685 72.1% 919 6.2% 2000 a 981 43.2% 1,026 11.7% 2001 a 1,352 37.9% 1,028 0.2% 2002 a 1,249 -7.6% 953 -7.3% 2003 a 866 -30.7% 918 -3.6% Total Percent Change 74.2% 18.3% 1990-2003 Average Annual 4.4% 1.3% Growth Rate

a Before 1998, data were compiled in the SIC syst em; since 1998, these data have been compiled in the North American Industry Classi fication System (NAICS). For th is analysis, EPA converted the NAICS classification data to the SIC code cla ssifications using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. SBA, 1989-2003.


### The trend in the number of firms over the period between 1990 and 2003 is similar to the trend in the number of facilities in both industry segments. The number of firms in the Steel Mill segment decreased to a period-low of 216 in 1997, before increasing significantly over 1998 to 2001. This rise in the number of Steel Mill firms was followed by slight declines in 2002 and 2003. Overall, how ever, the number of Steel Mill firms increased by just over 83 percent between 1990 and 2003. The number of firm s in the Steel Products segment also decreased from 1992 to 1998, before rising steadily through 2001, then declining slightly in 2002 and 2003.
Table C2D-5 shows the number of firms in the two profiled steel segmen ts between 1990 and 2003.

C2D-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel

Year 

### Table C2D-5: Number of Firms in the Profiled Steel Industry Segments Steel Mills Steel Products Number of Firms Percent Change Number of Firms Percent Change 1990 408 597 1991 433 6.1% 635 6.4% 1992 321 -25.9% 661 4.1% 1993 261 -18.7% 641 -3.0% 1994 258 -1.1% 618 -3.6% 1995 309 19.8% 607 -1.8% 1996 397 28.5% 583 -4.0% 1997 216 -45.6% 544 -6.7% 1998 a 314 45.3% 666 22.4% 1999 a 593 89.0% 716 7.4% 2000 a 885 49.2% 810 13.2% 2001 a 1,254 41.6% 811 0.1% 2002 a 1,140 -9.0% 757 -6.7% 2003 a 748 -34.4% 767 1.4% 83.3% 28.5% 1990-2003 4.8% 1.9% Growth Rate

a

. Source: Total Percent Change
Average Annual
Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classificatio n System (NAICS). For this analysis, EP A converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. SBA, 1989-2003.


### C2D-2.2 Employment and Productivity Figure C2D-3, following page, provides information on Employment from the Annual Survey of Manufactures for the Steel Mills and Steel Products segments. As shown in the figure, employment levels in the Steel Mills segment decreased by a total of 43 percent between 1987 an d 2004. Employment is a significant cost component for steelmakers, accounting for approximately 30 percen t of total costs (McGraw-Hill, 1998). Labor cost reductions enabled Steel Mills to impr ove profitability and competitiveness in the face of limited opportunity for price increase in the highly competitive market for Steel Pr oducts. The steady decline in employment reflects the smaller number of Steel Mill facilities and firms, in conjunction with aggressive efforts to improve worker productivity in order to cut labor costs and improve prof its (McGraw-Hill, 1998). Employment declined further as a result of the 1998 import crisis, with almost 26,000 U.S. steelworkers reportedly losing their jobs (AISI, 2001a). Employment in the Steel Products segment over th e period 1987-2001 remained fairly constant, before experiencing moderate declines in the subsequent three years.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel198719881989199019911992199319941995199619971998199920002001200220032004 (

( )

( )

(

a (

. Source: 

### Figure C2D-3: Employment for Profiled Steel Industry Segments

25,000 50,000 75,000 1 00,000 1 25,000 1 50,000 1 75,000 2 00,000 2 25,000

St eel Mills NAICS t o SIC)

St eel M ills SIC 3312

St eel P ro ducts NAICS to SIC

St eel P ro duct s SIC 3315, 3 316, 3317)

Before 1997, the Department of Commerce compiled data in th e SIC system; since 1997, these da ta have been compiled in the North American Industry Classification System NAICS). For this analysis, EPA convert ed the NAICS classification data to the SIC code classifications us ing the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### Table C2D-6 presents the change in valu e added per labor hour, a measure of labor productivity , for the Steel Mill and Steel Products segments betwee n 1987 and 2004. Labor productivity at Steel Mills increased slightly over this period. Value added per labor hour increase d around 14.4 percent between 1987 and 2004. Much of this increase in labor productivity can be attributed to the restructuring of the U.S. steel industry and the increased role of minimills in production. Minimills are capable of producing rolled steel fro m scrap with substantially lower labor needs than integrated m ills (McGraw-Hill, 1998). Labor produc tivity in the Steel Products segment has also fluctuated, but increased by 17.8 percent overall from 1987 to 2004.

C2D-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### Table C2D-6: Productivity Trends for the Profiled Steel Industry Segments ($2005) Steel Mills Steel Products
Value Production Value Added/Hour Value Production Value Added/Hour Year Added Hours Percent Added Hours Percent (millions) (millions) $/hr Change (millions) (millions) $/hr Change 1987 9,836 306 32 2,499 108 23 1988 10,418 324 32 -0.2% 2,706 94 29 24.4% 1989 10,219 348 29 -8.5% 2,597 112 23 -19.9% 1990 10,069 315 32 8.9% 2,595 93 28 21.0% 1991 9,213 279 33 3.3% 2,485 106 23 -16.7% 1992 9,131 277 33 -0.3% 2,573 87 30 26.9% 1993 8,880 268 33 0.7% 2,707 109 25 -16.1% 1994 9,050 266 34 2.4% 2,729 91 30 20.9% 1995 9,130 263 35 2.3% 2,809 114 25 -17.7% 1996 8,902 260 34 -1.6% 2,806 134 21 -15.1% 1997 a 8,708 252 35 1.2% 2,806 110 25 21.1% 1998 a 8,669 245 35 2.0% 2,867 113 25 -0.1% 1999 a 8,186 237 35 -2.1% 2,747 108 26 0.5% 2000 a 8,315 241 34 -0.4% 2,803 109 26 0.4% 2001 a 7,200 283 25 -26.1% 2,516 97 26 1.3% 2002 a 6,660 194 34 35.3% 2,404 91 27 2.1% 2003 a 6,251 180 35 0.9% 2,186 85 26 -2.9% 2004 a 6,780 184 37 6.0% 2,162 79 27 6.4% Total Percent Change -31.1% -39.8% 14.4% -13.5% -26.5% 17.8% 1987-2004 Average Annual -2.2% -2.9% 0.8% -0.8% -1.8% 1.0% Growth Rate

a Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the Nor th American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using th e 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2D-2.3 Capital Expenditures Steel production is a capital intensive process. The integr ated production process requires a capital investment of approximately $2,000 pe r ton of capacity for plants and equipment. The nonintegrated process employed in minimills is significantly less capital intensive with cap ital costs of approximately $500 per ton of capacity (McGraw-Hill, 1998). New capital expenditures are needed to modernize, expand, and replace existing capacity to meet growing demand. Capital expenditures in the Steel Mills a nd the Steel Products segments between 1987 and 2004 are presented in Table C2D-7, following page. The table shows that capital expenditures in both the Steel Products and the Steel Mills dropped significantly between 1987 and 200 4. Capital outlays increased in the late 1980s and early 1990s, rising by a total of 112 percent from 1987 to 1991. This substantial increase coincides with the advent of thin slab casting, a technology that allowed minim ills to compete in the market for flat rolled sheet steel. The significant decreases in capital expend itures by Steel Mills that followed this expansion reflect the bottoming out of the demand for Steel Products in the early 1990s. The recovery in capital expenditures in the mid 1990s reflected increased demand and higher utilization rates (M cGraw-Hill, 1998). However, the import crisis of the late 1990s and later weakening of th e U.S. economy put pressure on the domestic industry, and expenditures for

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### new capacity decreased steadily sin ce 1997 (McGraw-Hill, 2000). In 2004, however, capital expenditures in both the Steel Mills and Steel Products sectors rose by 45 and 11 percent, respectively.

Table C2D-7: Capital Expenditures for the Prof iled Steel Industry Segments (millions, $2005) Steel Mills Steel Products Year Capital Capital Expenditures Percent Change Expenditures Percent Change
1987 1,869 831 1988 2,804 50.0% 633 -23.8% 1989 3,566 27.2% 719 13.5% 1990 3,509 -1.6% 718 -0.1% 1991 3,965 13.0% 511 -28.8% 1992 2,869 -27.6% 527 3.0% 1993 2,256 -21.4% 575 9.2% 1994 3,246 43.9% 664 15.4% 1995 3,348 3.2% 648 -2.4% 1996 3,366 0.5% 698 7.7% 1997 a 3,046 -9.5% 642 -8.0% 1998 a 2,993 -1.7% 613 -4.5% 1999 a 2,537 -15.2% 518 -15.6% 2000 a 2,308 -9.0% 538 3.9% 2001 a 1,675 -27.4% 412 -23.4% 2002 a 1,452 -13.3% 457 10.9% 2003 a 1,006 -30.7% 454 -0.7% 2004 a 1,459 45.0% 503 10.8% -21.9% -39.4% 1987-2004 -1.4% -2.9% Growth Rate

a

. Source: Total Percent Change
Average Annual
Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Cl assification System (NAICS). For this anal ysis, EPA converted th e NAICS classification data to the SIC code classificati ons using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2D-2.4 Capacity Utilization Capacity utilization measures actual output as a percentage of total potential output given the available capacity. Capacity utilization provides insight into the exte nt of excess or insufficient capacity in an industry, and into the likelihood of investment in new capacity. Fi gure C2D-4 presents the capacity utilization index from 1989 to 2004 for the 4-digit SIC codes that make up the Stee l Mill and Steel Products segments. As shown in the figure, the index follows similar trends in each segment. For all segments, capacity utilization peaked in 1994 and decreased through 2001. Capacity utilization remain ed relatively constant th rough 2003 and 2004 for both segments, though the Steel Mills segment showed slight dec lines during both years. This trend reflects the overcapacity in the U.S. steel industry, which has followed the substantial capacity add itions in the late 1980s and early 1990s and increased imports throughout the 1990s. Worldwide capacity remains in excess of long-term needs (S&P, 2004).

C2D-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel

50 60 70 80 90 1001989199019911992199319941995199619971998199920002001200220032004 ( )

( )

( )

(

Note:

Source:



### Figure C2D-4: Capacity Utilization Rates (Fourt h Quarter) for Profiled Steel Industry Segments

St eel Mills NAICS t o SIC

St eel Mills SIC 3 3 12

St eel P ro ducts NAICS to SIC

St eel P roduct s SIC 3315 , 3316, 33 17)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Be tween NAICS and SIC. U.S. DOC, 1989-2004.



## C2D-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### The companies that manufacture steel operate in a highly capital intensive industry. The Steel Mill segment is comprised of two different kinds of facilities, integrat ed mills and minimills. The integrated steelmaking process requires expensive plant and equipment purchases th at will support production capacities ranging from two million to four million tons per year. Until the early 1960s, integrated steelmaking was the dominant method of U.S. steel manufacturing. Since then, the integrat ed steel business underwent dramatic downsizing due to competition from minimills and imports. These trends re duced the number of integrated steelmakers (S&P, 2001). Minimills vary in size, from capacities of 150,000 t ons at small facilities to larger facilities with annual capacities of between 400,000 tons and two million tons. In tegrated companies have significant capital costs of approximately $2,000 pe r ton of capacity compared with minimills’ $500 per ton. Because minimills do not require as much investment in capital equipment as integr ated steelmakers, minimills have been able to lower prices, driving integrated companies out of many of th e commodity steel markets (S&P, 2001). The advent of minimills, with their lower initial capita l investments, has made it easier fo r new producers to enter the market.
C2D-3.1 Firm Size For both Steel Mills and Steel Products, the Small Busi ness Administration defines a small firm as having 1,000 or fewer employees. The size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size classifications, therefore preventing pr ecise use of the SBA size threshold in conjunction with SUSB data. Table C2D-8 below shows the distribution of firms, facilities, and receipts by the employment size of the parent firm. The SUSB data presented in Table C2D-8 show that in 2003, 674 of 748 firms in the Steel Mills segment had less than 500 employees. Therefore, at least 90 percent of firms in this segment were classified as small. These small firms owned 691 facilities, or 80 percent of all facilities in the segment.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### Of the 767 firms with facilities that manufacture Steel Products, 677, or 88 percent, employ fewer than 500 employees, and are therefore considered small businesses. Small firms own 78 percent of facilities in the industry.

Table C2D-8: Number of Firms and Facilities by Employment Size Category in the Profiled St eel Industry Segments, 2003 a Steel Mills Steel Products Employment Number of Number of Number of Number of Size Category Firms Facilities Firms Facilities 0-19 491 494 413 413 20-99 120 122 156 161 100-499 63 75 108 140 500+ 74 176 91 204 Total 748 866 767 918

a Before 1998, data were compiled in the SI C system; since 1997, th ese data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2003.



### C2D-3.2 Concentration Ratios Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely related to entry barriers with more concen trated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the ma rket share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, th e less competition there is in the industry, other things being equal 4 

### . An industry with a CR4 of more than 50 percen t is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the in dustry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (60 2 

### + 30 2


### + 10 2 

### ). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s gu idelines for evaluating mergers, markets in which the HHI is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated.
Table C2D-9 shows that Steel Mills have an HHI of 445 and that Steel Products, comprised of SIC 3315, 3316, and 3317, have HHIs of 223, 631, and 200, respectivel y. The Steel Mills and Steel Products segments are considered competitive, based on standard measures of con centration. The CR4 and the HHI for the relevant SIC codes are below the benchmarks of 50 percent and 1,000, resp ectively. Moreover, the table shows that each of the industry segments generally became more competitive be tween 1987 and 1997. The relatively low concentration

4 

### Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in beverage containers). Concentration ratios based on share of production are therefore only one indicator of the extent of competition in an industry.

C2D-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### values suggest that this factor would not increase the industry’s overall ability to pass through compliance costs as price increases to customers.

Table C2D-9: Selected Ratios for the Profiled Steel Industry Segments SIC (S) or Total Concentration Ratios NAICS (N) Year Number of 4 Firm 8 Firm 20 Firm 50 Firm HerfindahlCode Firms (CR4) (CR8) (CR20) (CR50) Hirschman Index Steel Mills
S 3312 1987 1992 271 135 44% 37% 63% 58% 81% 81% 94% 96% 607 551 N 331111 b 1997 191 33% 53% 75% 94% 445

S 3315 1987 1992 274 271 21% 34% 54% 78% 212 19% 32% 54% 80% 201 1997 199 21% 36% 56% 80% 223
S 3316 1987 1992 156 158 45% 62% 82% 95% 654 43% 60% 81% 96% 604 N 331221 b 1997 153 44% 60% 81% 96% 631
S 3317 1987 1992 155 166 23% 34% 58% 85% 242 19% 31% 53% 80% 194 1997 166 20% 30% 52% 82% 200

a The b and NAICS Source: Steel Products

N 331222

N 331210 1997 Census of Manufactures is the most recent concentration ratio data available. NAICS code represents largest pe rcentage of facilities and value of shipments within this SIC based on 1997 Bridge Between SIC
U.S. DOC, 1987, 1992, 1997, and 2002.


### C2D-3.3 Foreign Trade This profile uses two measures of foreign competition: export dependence and import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total import s divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefor e be at a relative disadvant age in their ability to passthrough costs because foreign producers would not incu r costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. ma nufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulation-induced increases in producti on costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-17§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadvant age in potentially recovering compliance costs through price increases since export sales ar e presumed subject to substantial competition from foreign producers. The global market for steel continues to be extremely competitive. From 1945 until 1960, the U.S. steel industry enjoyed a period of tremendous prosperity and was a ne t exporter until 1959. Howe ver, by the early 1960s, foreign steel industries had thoroughly recovered from Wo rld War II and had begun c onstruction of new plants that were more advanced and efficient than the U.S. inte grated steel mills. Foreign producers also enjoyed lower labor costs, allowing them to take substantial market share from U.S. producers. This increased competition from foreign producers, combined with decreased consumption in some key end use markets, served as a catalyst for the restructuring and downsizing of the U.S. steel industry. The industry emerged from this restructuring considerably smaller, more technologically advan ced and internationally competitive (S&P, 2001). Table C2D-10 presents trade statistics for the profiled steel industry segments from 1990 to 2002. The table shows that while the trend in export dependence has been relatively stable, import penetration increased almost continuously from the early 1990s until 1998 and fluctuated annually during 1999 to 2002. Historically, the U.S. steel industry has exported a relatively small share of shipments compared to the steel industries of other developed nations (McGraw-Hill, 2000). U.S. exports rose in 1995 to the highest level since 1941, and remained relatively high through 2002. Imports penetration rose to 21 percent in 1998, after hovering around 15 percent in the early 1990s. This increase in imports reflected excess steel capacity worldwid e and the competitiveness of foreign steel producers, as described previously. Canada received the largest amount of U.S. exported steel in 2003, followed by Mexico. Imports of steel mill products increased 8.4 percent from 2001 to 2002. Brazil, Canada, the EU, Japan, the Republic of Korea, Mexico, Ru ssia, and Turkey were major sources of steel mill product imports (USGS, 2002). The steel industry’s import penetration ratio was 18.2 percen t in 2002, implying that the industry currently faces moderate competition from foreign firms in setting prices for U.S. sales. However, as noted above, the removal of temporary import restrictions will leave the industry mo re exposed to competition from foreign producers. The steel industry’s export dependence ratio in 2002 was 7.3 percent; therefore, the industry will not likely be affected by competitive pressures from abroad in export sales. This finding implies that competitive pressures from foreign firms/markets do not characterize the steel industr y and thus market power and cost pass through potential are not diminished by export penetration. However, it is questionable that firms in an industry will have a comparatively high cost pass-through potential simply b ecause firms in that industry are not active in export markets. From the standpoint of firms gaining market power, EPA believes that the finding of low export dependence diminishes the importance of export competition as indicator of market power. Thus, other indicators must be relied upon to gauge the amount of market power firms in the steel industry are expected to hold. On balance, the U.S. steel industry is subject to signifi cant international competitive pressure, largely manifesting though the penetration of foreign product into domestic markets. Although the U.S. industry’s competitiveness against foreign producers improved in recent years, th e industry remains substantially vulnerable to foreign competition, indicating a low likelihood that steel indus try producers subject to the 316(b) regulation would be able to pass a material share of co mpliance costs through to customers.

C2D-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### Table C2D-10: Import Penetration and Expo rt Dependence: Steel Mill Products ($2005)

c Value of Value of Value of Implied Export Year Exports Domestic b c (millions) (millions) (millions) a 1989 13,710 4,259 87,290 96,742 14.2% 4.9% 1990 12,253 4,064 85,638 93,827 13.1% 4.7% 1991 11,076 5,134 75,827 81,769 13.5% 6.8% 1992 11,040 4,141 75,383 82,282 13.4% 5.5% 1993 11,794 3,789 75,925 83,930 14.1% 5.0% 1994 16,696 3,980 82,449 95,166 17.5% 4.8% 1995 15,709 5,953 87,314 97,070 16.2% 6.8% 1996 16,547 5,191 87,487 98,842 16.7% 5.9% 1997 d 17,440 6,105 90,133 101,468 17.2% 6.8% 1998 d 20,886 5,747 86,768 101,908 20.5% 6.6% 1999 d 16,173 5,249 81,817 92,740 17.4% 6.4% 2000 d 18,479 5,883 80,551 93,147 19.8% 7.3% 2001 d 14,044 5,496 69,930 78,479 17.9% 7.9% 2002 d 14,593 5,132 70,535 79,997 18.2% 7.3% 6.4% 20.5% -19.2% -17.3% 1989-2002 0.5% 1.4% -1.6% -1.5% Growth Rate

a
b

d

. Source: Import Imports Shipments Penetration Dependence Consumption

Total Percent Change
Average Annual
Calculated by EPA as sh ipments + imports - exports. Calculated by EPA as imports divided by impl ied domestic consumption. Calculated by EPA as e xports divided by shipments. Before 1997, data were compiled in th e SIC system; since 1998, these data have b een compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.



## C2D-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### The financial performance and condition of the steel industr y are important determinants of its ability to withstand the costs of regulatory compliance without material, adver se economic/financial impact. To provide insight into the industry’s financial performance and condition, EPA reviewed two key measures of financial performance over the 14-year period, 1992- 2005: net profit margin and return on to tal capital. EPA calculated these measures as a revenue-weighted index of measure values for public re porting firms in the respective industries, using data from the Value Line Investment Survey. Financial performance in the most recent financial reporting period (2005) is obviously not a perfect indicator of conditio ns at the time of regulatory compliance. However, examining the trend, and deviation from the trend, through the most recent reporting period gives insight into where the industry may be , in terms of financial performance and c ondition, at the time of compliance. In addition, the volatility of performance against th e trend, in itself, provides a measure of the potential risk faced by the industry in a future period in which compliance requi rements are faced: all else equal, the more volatile the historical performance, the more likely the industry may be in a period of relatively weak financial conditions at the time of compliance. Net profit margin is calculated as after-tax income before nonr ecurring gains and losses as a percentage of sales or revenue, and measures profitability, as reflected in th e conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fluc tuations in profit margin stem from

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-19§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### several factors, including: variations in aggregate economic conditions (including international and U.S. conditions), variations in industry-specific market conditi ons (e.g., short-term cap acity expansion resulting in overcapacity), or changes in the pricin g and availability of inputs to the in dustry’s production processes (e.g., the cost of energy to the steel production process). The extent to which these fluctuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. va riable cost structure of the industry’s operations. In a capital intensive industry such as the steel industry, the relatively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in outpu t or prices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-ha lf of annual long-term interest, divided by the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). As such, the retu rn on total capital provides insight in to the profitability of a business’ assets independent of financial structure and is thus a “purer” i ndicator of asset profitability than return on equity. In the same way as described for net profit margin , the firms in an industry, and the in dustry collectively, must generate over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital

. Figure C2D-5, following page, presents trends in net pr ofit margins and return on total capital for the steel industry between 1992 and 2003. The graph shows considerable volatility in the trend over this period. After registering improvement in financial performance in th e first half of the 1990s, steel industry financial performance declined markedly from 1997/1998 forward to 2003, due first to incr easing imports and later to general economic weakness. Measures of financial performance improved in 2002 when the U.S. steel industry received temporary relief with tariffs ra nging up to 30 percent on certain steel imports, but in 2003 the integrated steel industry again had poor operating results, as high raw material costs outweighed increased sales and higher volumes. In 2004, the industry rebounded, with returns on both total capital and net profit margins reaching the highest values observed during the entire analysis period. In 2005, the industry saw a slight weakening in financial performance. However, overa ll financial performance remained subs tantially higher than in the prior years of the analysis period.

C2D-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 

### Figure C2D-5: Net Profit Margin and Return on Total Capital for the Iron and Steel Industry

-4% -2%19921993199419951996199719981999200020012002200320042005 Return on Total Capital - Iron and Steel Industry Net Profit Margin - Iron and Steel Industry

Source: Value Line, 2003; Value Line, 2006.



## C2D-5 F ACILITIES 

## O PERATING 

## C OOLING 

## W ATER 

## I NTAKE 

## S TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point s ource facilities that use or propose to use a cooling water intake structure that withdraws cooling water directly fro m a surface waterbody of the United States. In 1982, the Primary Metals industries as a whole (including Nonferr ous and Steel producers) wit hdrew 1,312 billion gallons of cooling water, accounting for approxi mately 1.7 percent of total industrial cooling water intake in the United States 5 

### . The industry ranked 3 rd 

### in industrial cooling water use, behind the electric power generation industry, and the chemical industry (1982 Census of Manufactures). This section provides information for facilities in the profile d steel segments estimated to be subject to regulation under the primary analysis options. Existing facilities that meet all of the following conditions would have been subject to regulation under the three regulatory analysis options:

f 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supplier who has a coo ling water intake structure; or their cooling water intake structure(s) withdraw(s) cooling water from wa ters of the U.S., and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;

f 

### Have an National Pollutant Discharge Elimination Sy stem (NPDES) permit or are required to obtain one; and

f 

### Meet the applicability criteria for the specific regulator y analysis option in terms of design intake flow and source waterbody type (i.e., 50 MGD for All Wate rbodies, 100 MGD for Certain Waterbodies, or 200 MGD for All Waterbodies).

5 

### Data on cooling water use are from the 1982 Census of Manufactures . 1982 was the last year in which the Census of Manufactures reported cooling water use.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### The analysis options also cover substantial additions or modifications to operations undertaken at such facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the Phase III regulation based on a minimum applicability threshold of 2 MGD, this section focuses on the facilities nationwide in the profiled steel segments that are estimated to be s ubject to regulation under the DIF applicability thresholds defined by the primary analysis options (see Table C2D-1, above for additional inform ation on the broader set of facilities potentially subject to Phase III regulation). 6 

### C2D-5.1 Waterbody and Cooling System Type Minimills use electric-arc-furnaces (EAF) to make steel from ferrous scrap. The electric-arc-furnace is extensively cooled by water, which is in turn recy cled through cooling towers (U.S. EPA, 1995). This is important to note since most new steel facilities are minimills. Table C2D-11, Table C2D-12, and Table C2D-16 show the distribution of Phase III facilities in the profiled steel segments by type of water body and cooling system for each analysis option. The tables show that most of the Phase III facilities employ a combination of a once-through and recirculating systems or an “other” system. The largest proportion of existing facilities draws water from a freshwater stream or river.

Table C2D-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Steel Industry Segments Cooling Systems Recirculating Combination Once-Through Other Water Body Type % of Total % of % of % of Number Number Number Number Total Total Total Total Steel Mills Freshwater Stream/ River 1 0 100% 0% 3 9 29% 71% 1 1 50% 50% 4 0 100% 0% 10 10 Total a 1 12 2 4 20

Lake/Reservoir 0 0 0% 0% 3 1 73% 27% 0 0 0% 0% 0 0 0% 0% 3 1 Total a 0 4 0 0 4

Freshwater Stream/ River

Lake/Reservoir 1 0 0 100% 0% 0% 7 9 1 40% 53% 7% 1 1 0 50% 50% 0% 4 0 0 100% 0% 0% 13 10 1 Total a 1 16 2 4 24

a Source: Great Lake 6% 61% 12% 22% Steel Products Freshwater Stream/ River

0% 100% 0% 0% Total for Profiled Steel Industries

Great Lake

5% 68% 10% 18% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.

6 

### EPA applied sample weights to the sampled facilities to account for non-sampled facilitie s and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industry Survey, please refer to the Information Collection Request (U.S. EPA, 2000).

C2D-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### Table C2D-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Steel Industry Segments

Total Total Total Total Total

Freshwater Stream/ River 0 0 0% 0% 1 9 12% 88% 0 0 0 0 3 0 100% 0% 4 9 Total a 0 10 76% 0 0% 3 24% 13

0 0% 3 100% 0 0% 0 0% 3 Total a 0 3 100% 0 0 3

Freshwater Stream/ River

Total a 0 0 0 0% 0% 4 9 13 33% 67% 80% 0 0 0 0 0 0% 3 0 3 100% 0% 20% 7 9 16

a Source:

Total Total Total Total Total

Freshwater Stream/ River 1 0 100% 0% 2 9 21% 79% 0 1 0% 100% 4 0 100% 0% 8 10 Total a 1 7% 11 62% 1 7% 4 25% 17

Lake/Reservoir 0 0 0% 0% 3 1 73% 27% 0 0 0% 0% 0 0 0% 0% 3 1 Total a 0 4 100% 0 0 4

Freshwater Stream/ River

Lake/Reservoir Total a 1 0 0 1 100% 0% 0% 5% 5 9 1 15 36% 57% 8% 70% 0 1 0 1 0% 100% 0% 5% 4 0 0 4 100% 0% 0% 20% 11 10 1 22

a Source: Water Body Type Cooling Systems Recirculating

Number % of Combination

Number % of Once-Through

Number % of Other

Number % of

Steel Mills

Great Lake 0% Steel Products Freshwater Stream/ River 0% 0% 0% Total for Profiled Steel Industries

Great Lake 0% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Table C2D-13: Number of Facilities Estimated Su bject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Steel Industry Segments

Water Body Type Cooling Systems Recirculating

Number % of Combination

Number % of Once-Through

Number % of Other

Number % of

Steel Mills

Great Lake

Steel Products Freshwater Stream/ River

0% 0% 0% Total for Profiled Steel Industries

Great Lake

Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; U. S. EPA analysis, 2006.


### C2D-5.2 Facility Size The facilities in the Steel Mills and Steel Products segments that are estimated subject to regulation are relatively large, with no facilities employing fewer than 250 pe ople. Figure C2D-6 show the number of Phase III facilities by employment size category.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-23§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel

00 00 1 0 1 0 17

4

0 2 4 6 8 10 12 14 16 18

ills (
(

Source:

00 00 00 0 0 13

0 0 2 4 6 8 10 12 14

( (

Source:



### Figure C2D-6: Number of Facilities Estimated Su bject to the 50 MGD All Option by Employment Size for Profiled Steel Industry Segments

<100 100-249 250-499 500-999 >=1000 Steel M SIC 3312)
Steel Products SIC 3315, 3316, 3317)

U.S. EPA, 2000; U. S. EPA analysis, 2006.


### Figure C2D-7: Number of Facilities Estimated Su bject to the 200 MGD All Option by Employment Size for Profiled Steel Industry Segments

<100 100-249 250-499 500-999 >=1000 Steel Mills SIC 3312) Steel Products SIC 3315, 3316, 3317)

U.S. EPA, 2000; U. S. EPA analysis, 2006.

C2D-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel

0 0 00 1 0 1 0 15

1

0 2 4 6 8 10 12 14 16

<100 >=1000 Steel Mills ( (

Source:



### C2D-5.3

As shown in Table C2D-14, Table C2D-15,

Large SIC Code Total Number % of SIC Number % of SIC 

### Figure C2D-8: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Employment Size for Profiled Steel Industry Segments

100-249 250-499 500-999 SIC 3312) Steel Products SIC 3315, 3316, 3317)

U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Firm Size EPA used the Small Business Administration (SBA) small entity size standards to determine the number of Section 316(b) profiled steel industry facilities owned by sma ll firms. Firms in the Steel Mills and Steel Products segments are defined as small if they have 1000 or fewer employees. and Table C2D-16, large firms own all of the Steel M ill and Steel Products facilities estimated subject to the regulation under the three primary analysis options.

Table C2D-14: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Profiled Steel Segments Small

Steel Mills 3312 20 100% 0 0% 20

3315 3 100% 0 0% 3 3316 0 0% 0 0% 0 3317 1 100% 0 0% 1 Total 4 0 0% 4

Total a 24 0 24

a Source: Steel Products

100% Total for Profiled Steel Facilities 100% 0% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-25§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel

Large SIC Code Total Number % of SIC Number % of SIC 

### Table C2D-15: Number of Facilities Estimate d Subject to the 200 MGD All Option by Firm Size for the Profiled Steel Segments Small

Steel Mills 3312 13 100% 0 0% 13

3315 0 0% 0 0% 0 3316 0 0% 0 0% 0 3317 0 0% 0 0% 0 0 0% Total 0 0

Total a 13 0 13

a Source:

Large SIC Code Total Number % of SIC Number % of SIC

3312 17 100% 0 0% 17

3315 0 0% 0 0% 0 3316 0 0% 0 0% 0 3317 1 100% 0 0% 1 0 0% Total 0 0

Total a 18 0 18

a Source: Steel Products

0% Total for Profiled Steel Facilities 100% 0% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.



### Table C2D-16: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Firm Size for the Profiled Steel Segments Small

Steel Mills

Steel Products

0% Total for Profiled Steel Facilities 100% 0% Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.

C2D-26 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



## R EFERENCES 

### American Iron and Steel Institute (AISI). 2001a. “Imports Continue at Se verely Depressed Prices; United U.S. Steel Industry Urges Effective 201 Trade Remedy.” September 25, 2001. American Iron and Steel Institute (AISI). 2001b . July 2001 Selected Steel Industry Data

. Bureau of Labor Statistics (BLS). 2006. Producer Price Index . Industry Data Series: PCU331111-Iron and Steel Mills; PCU 331210-Iron/Steel Pipe & Tube Mfg fro m Purchased Steel; PCU 331221-Rolled Steel Shape Manufacturing; PCU331222-Steel Wire Drawing. Ava ilable at: http://www.bls.gov/ppi/home.htm. Downloaded February 1, 2006. Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001. Economagic. 2006. Industrial Production: Industry Subtotals, Individual Series, and Special Aggregates. Seasonably Adjusted. Data Series: Raw Steel and Iron and Steel Products. Available at: http://www.economagic.com/frbg17.htm#IPMarket. Downloaded February 2, 2006. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry & Trade Outlook ‘00. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 1998. U.S. Industry & Trade Outlook ‘98. Standard & Poors (S&P). 2004. Sub-Industry Outlook: Steel . February 21, 2004. Standard & Poors (S&P). 2001. Industry Surveys - Metals: Industrial . July 12, 2001.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration. Industry, Trade, and the Economy: Data and Analysis . Data by NAICS and SIC. Available at: http://www.ita.doc.gov/td/industry/otea/industry_sector/tabl es_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bu reau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1987, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Department of Commerce (U.S. DOC). 2000. International Trade Administration. Report to the President: Global Steel Trade S Structural Problems and Future Solutions . July, 2000.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. Bridge Between NAICS and SIC.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures

. U.S. Environmental Protection Agency (U.S. EPA). 1995. Profile of the Iron and Steel Industry . EPA 310-R95-005. September, 1995.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2D-27§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Phase III Existing Fa cilities Chapter C2D: Steel



### United States Geological Survey (USGS). 2006. Mineral Commodity Summaries. Iron and Steel. Author: Michael D. Fenton. Available at: http://minerals.usgs.gov/minerals/pubs/c ommodity/iron_&_steel/index.html#mcs United States Geological Survey (USGS). 2004. Mineral Commodity Summaries. Iron and Steel. Author: Michael D. Fenton. Available at: http://minerals.usgs.gov/minerals/pubs/c ommodity/iron_&_steel/index.html#mcs United States Geological Survey (USGS). 2002. Minerals Yearbook. Iron and Steel. Author: Michael D. Fenton. United States Geological Survey (USGS). 2001. Mineral Commodity Summaries. Iron and Steel. Author: Michael D. Fenton. Available at: http://minerals.usgs.gov/minerals/pubs/c ommodity/iron_&_steel/index.html#mcs United States Geological Survey (USGS). 1997. Mineral Commodity Summaries. Iron and Steel. Author: Michael D. Fenton. Available at: http://minerals.usgs.gov/minerals/pubs/c ommodity/iron_&_steel/index.html#mcs United States Geological Survey (USGS). Historical Statistics for Mineral Commodities in the United States. Iron and Steel. United States Geological Survey (USGS). Iron and Steel Statistical Compendium.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards . Available at: http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses . Available at: http://www.sba.gov/advo/research/data.html. Downloaded February 4, 2006.
Value Line. 2006. Value Line 3.0 Investment Analyzer

. Value Line. 2003. Value Line Investment Survey.
Value Line. 2001. Metals & Mining (Diversified) Industry . July 27, 2001.

C2D-28 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum 

# Chapter C2E: Aluminum (SIC 333/5)

I
EPA’s Detailed Industry Questionnaire 

## C HAPTER 

## C ONTENTS

SIC Total a

Regulated b to 50 MGD All

Option to 200 MGD All

Option to 100 MGD CWB Option 3334 Production of Aluminum 31 11 1 1 1

3353 57 10 3 0 0

Total 88 21 5 1 1

a
b Source:



### NTRODUCTION 

### , hereafter referred to as the DQ, identified two 4-digit SIC codes in the Nonferrous Metals industries (SIC codes 333/335) with at least one existing facility that operates a CWIS, holds a NPDES permit, withdraws equal to or greater than two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes (facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). For these two SIC codes, Table C2E-1, below, provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnaire respondents (weighted to represent a national total of facilities that hold a NPDES permit and operate cooling water intake structures), the number of facilities estimated to be potentially subject to regulation based on the minimum withdrawal threshold of 2 MGD, and the number of facilities estimated to be subject to the regulatory analysis options. Introductio n.......................................................... C2E-1 C2E-1 Summary Insights from this Profile ........ C2E-2 C2E-2 Domestic Production............................... C2E-3 C2E-2.1 Output............................................. C2E-4 C2E-2.2 Prices .............................................. C2E-7 C2E-2.3 Number of Facilities and Firms ...... C2E-8 C2E-2.4 Employment and Productivity ...... C2E-10 C2E-2.5 Capital Expend itures .................... C2E-12 C2E-2.6 Capacity Utiliz ation...................... C2E-13 C2E-3 Structure and Competitiveness.............. C2E-14 C2E-3.1 Firm Size ...................................... C2E-14 C2E-3.2 Concentration Ratios .................... C2E-15 C2E-3.3 Foreign Trade ............................... C2E-16 C2E-4 Financial Condition and Performance... C2E-19 C2E-5 Facilities Operating Cooling Water Intake Structures .............................................. C2E-21 C2E-5.1 Waterbody and Cooling System Type...... ................................................... C2E-22 C2E-5.2 Facility Si ze.................................. C2E-23 C2E-5.3 Firm Size ...................................... C2E-25 References.......................................................... C2E-27



### Table C2E-1: Phase III Facilities in the Aluminum Industries (SIC 333/335)

SIC Description Important Products Manufactured Number of Facilities
Potentially

Facilities Subject Subject Subject

Primary Producing aluminum from alumina and in refining aluminum by any process
Aluminum Sheet, Plate, and Foil Flat rolling aluminum and aluminum-base alloy basic shapes, such as rod and bar, pipe and tube, a nd tube blooms; producing tube by drawing
Number of weighted detailed questionnaire survey respondents. Individual numbers may not add up due to independent rounding. Executive Office of the President, 1987; U.S. EPA 2000; U. S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### As shown in Table C2E-1, EPA estimates that, out of the total of 88 facilities with a NPDES permit and operating cooling water intake structures in the Aluminum Industr ies (SIC 333/335), 5 (or 6%) facilities are estimated to be subject to the 50 MGD option, while 1 or (1.1%) facility is expected to be subject to each of the other two regulatory analysis options. EPA also estimated the percentage of total production that occurs at facilities estimated to be subject to the regulatory analysis options . Total value of shipments for the Aluminum Industries (SIC 333/335) from the 2004 Annual Survey of Manufacturers is $18.3 billion. Value of shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because value of shipments data were not collected using the DQ, these data were not ava ilable for the sample of Phase III manufacturing facilities potentially subject to the regulatory analysis options. Total revenue, as reported on the DQ, was used as a close approximation for value of shipments for these facilities. EPA estimates the total revenue of facilities in the aluminum industry subject to the 50 MGD, 200 MGD, and 100 MGD options is $5.3 billion, $0.5 billion, and $0.5 billion, respectively. Therefore, EPA estimates that the percentage of total domestic aluminum production that occurs at facilities estimated to be subject to the 50 MGD, 200 MGD, and 100 MGD options is 29%, 3%, and 3%, respectively. Table C2E-2 provides the crosswalk between SIC codes a nd the new NAICS codes for the profiled aluminum SIC codes. The table shows that both of the profiled 4-digit SIC codes in the aluminum industry have a one-to-one relationship to NAICS codes.

Table C2E-2: Relationships between SIC and NAICS Codes for the Al uminum Industries (2002 a 

### ) Value of SIC Code SIC Description NAICS Code NAICS Description Number of Establishments Shipments ($1000) Employment

3334 Primary aluminum 331312 Primary aluminum 40 4,748,435 12,197 production 3353 Aluminum sheet, 331315 Aluminum sheet , plate, and 103 11,964,636 19,362 plate, and foil foil manufacturing

a Industry data for relevant NAICS codes from the 2002 Economic Census. Source: U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.



## C2E-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of aluminum industry firms to absorb compliance costs under the regulatory analysis options wit hout material adverse economic/financial effects. The industry’s ability to withstand compliance costs is primarily influenced by two factors: (1) the extent to which the industry can shift compliance costs to its customers thr ough price increases, and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, the aluminum industry is moderately concentrated. This potentially supports the notion that firms in this industry may be able to pass a significant portion of their compliance-related costs through to consumers. Howe ver, the domestic Primary Aluminum Production segment faces significant competition from imports into the U.S. mark et. In addition, facilities in the Aluminum Sheet, Plate, and Foil segment have a notable reliance on sales into foreign markets. The substantial competitive pressure from abroad weakens th e potential of firms in this industry to pass through to customers a significant portion of their compliance-related costs. As discussed above, given the relatively small proportion of total value of shipments in the industry potentially subject to regul ation under the regulatory analysis options, EPA believes that the theoretical threshold for justifying the use of i ndustry-wide CPT rates in the impact analysis of existing

C2E-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### Phase III aluminum facilities has not been met. For these reasons, in its analysis of regulatory impacts for the aluminum industry, EPA assumed that complying firms would be unable to pass compliance costs through to customers: i.e., complying facilities must absorb all co mpliance costs at the time of compliance (see following sections and Appendix 3, Cost Pass-Through Analysis , to Chapter C3: Economic Impact Analysis for Manufacturers , for further information).
Financial Health and General Business Outlook Over the past decade, the aluminum industry, like other U.S. manufacturing industries, has experienced a range of economic/financial conditions, includin g substantial challenges. In the early 1990s, the domestic aluminum industry was adversely affected by reduced U.S. demand and the dissolution of the Soviet Union, which resulted in substantially increased Russian aluminum exports. Although domestic market conditions improved by middecade, weakness in Asian markets, along with growi ng Russian exports, dampened performance during the latter half of the 1990s. Demand for aluminum industry pr oducts declined again in 2000 through 2002, reflecting weakness in both the U.S. and world economies, and again resulted in oversupply and declining financial performance. More recently, as the U.S. economy be gan recovering from economic weakness, the domestic aluminum industry is showing signs of recovery with higher demand levels and im proving financial performance over the course of 2004 and 2005. Although the industry h as weathered difficult periods over the past few years, the strengthening of the industry’s financial condition and general business outlook suggest improved ability to withstand additional regulatory co mpliance costs without imposing significant financial impacts.


## C2E-2 D OMESTIC 

## P RODUCTION 

### Commercial production of aluminum using the electrolytic reduction process, known as the Hall-Heroult process, began in the late 1800s. The production of primary alum inum involves mining bauxite ore and refining it into alumina, one of the feedstocks for aluminum metal. Dir ect electric current is used to split the alumina into molten aluminum metal and carbon dioxide. The molten aluminum metal is then collected and cast into ingots. Technological improvements over the years have improved the efficiency of aluminum smelting, with a particular emphasis on reducing energy requirements. Currently, no commercially viable alternative exists to the electrometallurgical process (Aluminum Association, 2001). In 2003, aluminum recovered from purchased scrap was about 2.8 million tons, of which about 60% came from new (manufacturing) scrap and 40% from old scrap (discarded aluminum products). Aluminum recovered from old scrap was equivalent to about 17% of apparent c onsumption (USGS, 2004a). R ecycling consists of melting used beverage cans and scrap generate d from operations. Recycling saves approximately 95% of the energy costs involved in primary smelting from bauxite (S&P, 2001). In contrast to the steel industry, aluminum minimills have had limited impact on the profitability of traditional integrated aluminum producers. Aluminum minimills are not able to produce can sheet of th e same quality as that produced by integrat ed facilities. As a result, they are able to compete only in production of commodity sheet products for the building and distributor markets, which are considered mature markets. According to Standard & Poor’s (2001), construction of new minimill capacity is unlikely given the potential that added capacity would drive down prices in th e face of slow growth in the markets for minimill products. No secondary smelters (included, along with secondary smelting of other metals, in SIC code 3341) were reported in EPA’s Detailed Industry Questionnaire . These facilities are therefore not addressed in this profile. Facilities in SIC code 3353 produce semi-fabricated products from primary or secondary aluminum. Examples of semi-fabricated aluminum products include (Aluminum Association, undated):

f 

### sheet (cans, construction materials, and automotive parts);

f 

### plate (aircraft and spacecraft fuel tanks);

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum

f 

### foil (household aluminum foil, building insulation, and automotive parts);

f 

### rod, bar, and wire (electrical transmission lines); and

f 

### extrusions (storm windows, bridge structures, and automotive parts).
U.S. aluminum companies are generally vertically integr ated. The major aluminum companies own large bauxite reserves, mine bauxite ore and refine it into alumina, produce aluminum ingot, and operate the rolling mills and finishing plants used to produce semi-fabricated aluminum products (S&P, 2001). As noted, the production of primary aluminum is an el ectrometallurgical process, which is extremely energy intensive. Electricity accounts for approximately 30% of total production costs for primary aluminum smelting. The aluminum industry is therefore a major industrial user of electricity, spending more than $2 billion annually. The industry has pursued opportunities to reduce its use of el ectricity as a means of lowering costs. In the last 50 years, the average amount of electricity needed to ma ke a pound of aluminum has declined from 12kilowatt hours to approximately 7 kilowatt hours (Aluminum Association, undated). C2E-2.1 Output The largest single source of demand for aluminum is the transportation segment, primarily the manufacture of motor vehicles. Demand for lighter, more fuel-efficient vehicles has increased demand for aluminum in auto manufacturing, at the expense of steel (S&P, 2001). Until 1996, containers were the largest U.S. market for aluminum. Production of beverage cans is a major use of aluminum sheet, and aluminum has entirely replaced steel in the beverage can market. Other major uses of aluminum include constr uction (including aluminum siding, windows, and gutters) and consumer durables (USGS, 2001a).
Demand for aluminum reflects the overall state of the dom estic and world economies, as well as long-term trends in materials use in major end-use sectors. Because aluminum production involves large fixed investments and capacity adapts slowly to fluctuations in demand, th e industry has experienced alternating periods of excess capacity and tight supplies. The early 1980s was a period of oversupply, high invent ories, and excess capacity. By 1986, excess capacity was closed, inventories were lo w, and demand increased substantially. The early 1990s were affected by reduced U.S. demand and the dissoluti on of the Soviet Union, resulting in large increases in Russian exports of aluminum. By the mid-1990s, globa l production declined, demand rebounded, and aluminum prices rose. Subsequent increased production reflected an overall increase in the demand for aluminum with stronger domestic economic growth, driven by increased consumption by the transportation, container, and construction segments. The economic crises in Asian markets in the later 1990s, along with growing Russian exports, again resulted in a period of oversupply, although U.S. demand for aluminum remained strong. Demand declined again in 2000 through 2002 due to slower growth in both the U.S. and the world economy, resulting in oversupply. The surplus was mitigated somewhat as demand in the auto motive and housing markets remained relatively high through mid-2003. In addition, the California energy crisis in 2000 and 2001 reduced production from primary smelters located in the Pacific Northwest (Aluminum Association, 1999; USGS, 1999c; USGS, 1998; USGS, 1994c; Value Line, 2001). Production in China increased during this period, and although increased Chinese consumption helped reduce the surplus slightly, the country switche d from being a net importer to a net exporter. Additionally, interest rates are likely to increase which may decrease U.S. demand for aluminum from major industrial end markets (aerospace, automotive, home-construction, and co mmercial-construction). However, with the economy showing signs of recovery th e aluminum industry saw higher demand levels in 2003. If the economy remains strong, demand is expected to c ontinue at 2003 levels (Val ue Line, 2003a, 2003b; S&P 2004). Table C2E-3 shows trends in output of aluminum by Primary Aluminum producers and recovery of aluminum from old and new scrap. Secondary production grew fro m 24% to just over 30% of total domestic production

C2E-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### over the period from 1991 to 2005. Primary production of aluminum recorded a net decrease over the 15-year period, with a particularly sharp decline in 2001. As noted above, this decrease reflects reduced domestic and world demand for aluminum, and curtailed production at a number of Pacific Northwest mills caused by the California energy crisis (S&P 2001; USGS, 2001a). Productio n remained fairly constant for the final four years of the period.

Year

MT )

MT MT 1991 4,121 1,320 5,441 1992 4,042 -1.9% 1,610 22.0% 5,652 3.9% 1993 3,695 -8.6% 1,630 1.2% 5,325 -5.8% 1994 3,299 -10.7% 1,500 -8.0% 4,799 -9.9% 1995 3,375 2.3% 1,510 0.7% 4,885 1.8% 1996 3,577 6.0% 1,580 4.6% 5,157 5.6% 1997 3,603 0.7% 1,530 -3.2% 5,133 -0.5% 1998 3,713 3.1% 1,500 -2.0% 5,213 1.6% 1999 3,779 1.8% 1,570 4.7% 5,349 2.6% 2000 3,688 -2.4% 1,370 -12.7% 5,058 -5.4% 2001 2,637 -28.5% 1,210 -11.7% 3,847 -23.9% 2002 2,707 2.7% 1,170 -3.3% 3,877 0.8% 2003 2,703 -0.1% 1,070 -8.5% 3,773 -2.7% 2004 2,516 -6.9% 1,160 8.4% 3,676 -2.6% 2005 a 2,500 -0.6% 1,100 -5.2% 3,600 -2.1% -39.3% -16.7% -33.8% 1991-2005 Average annual -3.5% -1.3% -2.9% growth rate Source:


### Value of shipments and 1



### . Value of
Value added, defined as the difference between the value of particular industry. Table C2E-3: U.S. Aluminum Production Aluminum Ingot Primary Production

Thousand % Change Secondary Production (from old scrap Thousand % Change Total Production

Thousand % Change

Total percent change

USGS 1995a, 1999a, 2002a, 2006a



### value added are two common measures of manufacturing output Change in these values over time provides insight into the overall economic health and outlook for an industry. shipments is the sum of receipts earned from the sale of outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors. shipments and the value of inputs used to make the produc ts sold, measures the value of production activity in a

Figure C2E-1 reports constant dollar value of shipme nts and value added for the Primary Aluminum, and Aluminum Sheet, Plate, and Foil segments between 1987 and 2004.

1 

### Terms highlighted in bold and italic font are further explained in the glossary.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### (millions, $2005)

0198719881989199019911992199319941995199619971998199920002001200220032004 il ( il (

( (

0198719881989199019911992199319941995199619971998199920002001200220032004 ( (

( (

Note:

.



### Figure C2E-1: Value of Shipments and Value Added for Profiled Alumin um Industry Segments

Value of Shipments

2 , 0 0 0 4 , 0 0 0 6 , 0 0 0 8 , 0 0 0 1 0 , 0 0 0 1 2 , 0 0 0 1 4 , 0 0 0 1 6 , 0 0 0 1 8 , 0 0 0 2 0 , 0 0 0

A lum in um Sh eet , P lat e, an d F o N A I CS t o SI C) A lum in um Sh eet , P lat e, an d F o SIC 3 3 5 3 ) P r im a r y A lum in um P r o duc t io n N A I CS t o SI C) P r im a r y A lum in um P r o duc t io n SI C 3 3 3 4 )

Value Added

20 0 40 0 60 0 80 0 1,00 0 1,20 0 1,40 0 1,60 0

Alum in um Sheet , P lat e, an d Fo il NAICS t o SIC) Alum in um Sheet , P lat e, an d Fo il SIC 335 3) P rim ary Alum in um P ro duct io n NAICS t o SIC) P rim ary Alum in um P ro duct io n SIC 333 4)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### The value of Primary Aluminum shipments shows generally the same pattern as the quantity data shown in Table C2E-3. Trends in production over 1990 to 2004 refl ect trends in demand for aluminum; both production and

C2E-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### value of shipments have fallen with increases n the per centage of domestic demand provided by imports, and in the secondary production of aluminum, which substitutes in some but not all markets for primary production. Value added by aluminum production excludes the va lue of purchased materials and services (including electricity), and shows less fluctuation since 1990 than value of shipments. Demand for semi-finished aluminum pr oducts reflects demand from the trans portation, container, and building industries. Real value of shipments of Aluminum Sheet, Plate, and Foil declined from the late 1980s through 1993, and then recovered by mid-decade, before turning down again in the late 1990s. Demand for semi-finished products has been affected by strong growth in both the container and packaging segment and the auto segment (S&P, 2001). Both industry segments show lower va lues for the constant dollar value of shipments and value added at the end of the 18-year analysis period than at the beginning of the period. These declining values reflect the overall maturity of the aluminum production industry and the in creasing role of foreign production in meeting total U.S. demand.
C2E-2.2 Prices The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and indicates the overall trend of product pricing, a nd thus supply-demand conditions, within a segment. The price trends shown for Primary Aluminum in Figur e C2E-2 reflect the fluctuations in world supply and demand discussed in the previous section. During the early 1980s, the aluminum industry experienced oversupply, high inventories, excess capacity, and weak de mand, resulting in falling prices for aluminum. By 1986, much of the excess capacity had been permanently closed, inventories had been worked down, and worldwide demand for aluminum increased strongly. This resulted in price increases through 1988, as shown in Figure C2E-2. In the early 1990s, the dissolution of the Soviet Union ha d a major impact on aluminum markets. Large quantities of Russian aluminum that formerly had been consumed inte rnally, primarily in military applications, were sold in world markets to generate hard currency. At the same time, world demand for aluminum was decreasing. The result was increasing inventories and depressed aluminum prices. The United States and five other primary aluminum producing nations signed an agreement in January 1994 to curtail global output, in response to the sharp decline in al uminum prices. At the time of the agreement, there was an estimated global overcapacity of 1.5 to 2.0 million metric tons per year (S&P, 2000). By the mid-1990s, production cutbacks, increased demand, a nd declining inventories led to a sharp rebound of prices. Prices declined again during the late 1990s, how ever, when the economic cri ses in Asian markets reduced the demand for aluminum (USGS, 2001b). During 2000, prices rebounded sharply despite the continuing trend of high Russian production and exports. However, economic recession caused prices to fall again through 2002(S&P, 2001-2004). Prices seen by both segments increas ed sharply in 2003, and continued to rise in 2004 and 2005, reaching peak levels for the Aluminum Sheet, Plate and Foil segment.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum

80 901987198819891990199119921993199419951996199719981999200020012002200320042005 (

(

Note:

Source:



### C2E-2.3 Number of Facilities and Firms

Year Number of Companies 1995 13 22 1996 13 22 1997 13 22 1998 13 23 1999 12 23 2000 12 23 2001 12 23 2002 7 16 2003 7 15 2004 6 14 2005 6 15 Source: 

### Figure C2E-2: Producer Price Indexes fo r Profiled Aluminum Industry Segments

1 0 0 1 1 0 1 2 0 1 3 0 1 4 0 1 5 0 1 6 0 1 7 0

P r im a r y A lu m in u m N A I C S 3 3 1 3 1 2 ) A l u m i n u m Sh e e t , P l a t e a n d F o i l N A I C S 3 3 1 3 1 5 )

Data for 2005 was preliminary at the time of this writing. The NAICS values shown in th is figure match the historical values of the profiled SIC codes. As data by SIC were only available through 2003, the representative NAICS codes are presented for evaluation through 2005. BLS, 2006.



### U.S. Geological Survey data indicate that the number of Primary Aluminum facilities and the number of firms that own them remained fairly constant over the pe riod 1995 through 2005, as shown in Table C2E-4. The number of domestic companies and plants sharply declined in 2002 and dropped again in 2004. Furthermore, in 2002, the 10 domestic producers had a total of 7 smelters that were either temporarily or permanently idled. The bulk of the idled capacity resulted from curtailed production at a number of Pacific Northwest mills caused by the California energy crisis. Most of the smelters outside of this region continued to operate at or near their engineered capacities (S&P 2001; USGS, 2001a; USGS, 2002c).

Table C2E-4: Primary Aluminum Production - Number of Companies and Plants Number of Plants

USGS, 1995a-2006a

C2E-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### Statistics of U.S. Businesses covers a larger number of facilities classified under SIC 3334 than do the USGS data, and also provide data on SIC 3353 (Aluminum Sheet, Plate, and Foil). These data, shown in Table C2E-5 and Table C2E-6, show more fluctuation in the number of establishments and the number of firms. Table C2E-5 shows that the number of Primary Aluminum facilities decreased by 30 percent between 1991 and 1995, with the majority of this decrease, 27 percent, occurring between 1991 and 1993. The number of facilities in the Aluminum Sheet, Plate, and Foil segment showed a more consistent trend, increasing each year except in 1993. In 1998, the number of facilities decreased in bot h segments. Since then, the number of Primary Aluminum facilities has continuously grown, while the number of Aluminum Sheet, Plate, and Foil facilities showed some fluctuation.

Table C2E-5: Number of Facilities for Profiled Aluminum Industry Segments Primary Aluminum Production Aluminum Sheet, Plate, and Foil Year Number of Establishments Percent Change Number of Establishments Percent Change
1990 54 64 1991 57 5.6% 73 14.1% 1992 52 -8.8% 73 0.0% 1993 44 -15.4% 63 -13.7% 1994 41 -6.8% 69 9.5% 1995 40 -2.4% 76 10.1% 1996 51 27.5% 81 6.6% 1997 34 -33.3% 91 12.3% 1998 a 28 -17.6% 79 -13.2% 1999 a 29 3.6% 93 17.7% 2000 a 32 10.3% 103 10.8% 2001 a 38 18.8% 111 7.8% 2002 a 50 31.6% 95 -14.4% 2003 a 54 8.0% 99 4.2% 0.0% 54.7% 1989-2003 0.0% 3.4% Growth Rate

a

. Source: Total Percent Change
Average Annual
Before 1998, these data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classificatio n System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. SBA, 1989-2003.


### The trend in the number of firms over the period between 1990 and 2003 is similar to the trend in the number of facilities in both industry segments. Table C2E-6 on the following page presents SUSB information on the number of firms in each segm ent between 1990 and 2003.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### Table C2E-6: Number of Firms for Profiled Aluminum Industry Segments

Year Primary Aluminum Production Aluminum Sheet, Plate, and Foil Number of Firms Percent Change Number of Firms Percent Change 1990 38 43 1991 41 7.9% 53 23.3% 1992 36 -12.2% 53 0.0% 1993 33 -8.3% 45 -15.1% 1994 30 -9.1% 47 4.4% 1995 30 0.0% 51 8.5% 1996 40 33.3% 56 9.8% 1997 23 -42.5% 66 17.9% 1998 a 19 -17.4% 56 -15.2% 1999 a 20 5.3% 66 17.9% 2000 a 22 10.0% 73 10.6% 2001 a 28 27.3% 82 12.3% 2002 a 43 53.6% 74 -9.8% 2003 a 43 0.0% 76 2.7% Total Percent Change 13.2% 76.7% 1990-2003 Average Annual 1.0% 4.5% Growth Rate

a Before 1998, these data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications us ing the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2003.


### C2E-2.4 Employment and Productivity Figure C2E-3, below, provides information on employment from the Annual Survey of Manufactures for the Primary Aluminum and Aluminum Sheet, Plate, and Fo il segments. Trends in Primary Aluminum facility employment reflect trends in both production and producers’ efforts to compete with less labor-intensive minimills through improvements in labor productivity (M cGraw-Hill, 2000). The figure shows that employment in the Primary Aluminum segment has declined steadily since 1992, even in years of increased production. Employment in the Aluminum Sheet, Plate, and Foil segment declined from 1987 through 1994, but rose between 1995 and 1997, before declining again during 1997 to 200 4. Employment in the Primary Aluminum Production segment increased during the 1987 to 1992 period, but fell persistently over the remainder of the 1990s and through 2004.

C2E-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum198719881989199019911992199319941995199619971998199920002001200220032004 ( (

( (

Note:

. Source: 

### Figure C2E-3: Employment for Profiled Aluminum Industry Segments

8,0 0 0 10,0 0 0 12,0 0 0 14,0 0 0 16,0 0 0 18,0 0 0 20,0 0 0 22,0 0 0 24,0 0 0 26,0 0 0 28,0 0 0

Alum inum Sh eet , P lat e, an d Fo il NAICS t o SIC) Alum inum Sh eet , P lat e, an d Fo il SIC 3353) P rim ary Alum in um P ro duct io n NAICS t o SIC) P rim ary Alum in um P ro duct io n SIC 3334)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.



### Table C2E-7 presents the change in va lue added per labor hour, a measure of labor productivity, for the Primary Aluminum Production and Aluminum Sheet, Plate, and Foil segments between 1987 and 2004. The trend in labor productivity in both segments showed volatility over this period, reflecting variations in capacity utilization. Value added per hour in the Primary Aluminum segment showed a 0.4 percent net increase over the entire period 1987 and 2004. Value added per hour in the Aluminum Sheet, Plate, and Foil segment, however, saw an 11.6 percent decrease over the whole period between 1987 and 2001.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum

Year Value
(millions) Production Hours (millions) ($/hour) Change Value
(millions) Production Hours (millions) ($/hour) Change 1987 871 28 31 n/a 1,397 40 35 n/a 1988 991 32 31 -1.5% 1,427 41 35 -0.4% 1989 1,023 30 34 9.1% 1,417 41 35 0.3% 1990 1,031 32 32 -4.9% 1,403 40 35 1.7% 1991 1,031 32 32 0.0% 1,327 39 34 -4.4% 1992 1,046 32 32 0.8% 1,316 40 33 -2.3% 1993 923 29 32 -1.7% 1,298 39 34 2.0% 1994 878 27 33 2.5% 1,219 37 33 -0.7% 1995 907 28 32 -1.8% 1,250 38 33 -1.7% 1996 896 29 31 -1.9% 1,289 39 33 1.5% 1997 a 831 26 32 1.4% 1,381 41 34 0.8% 1998 a 849 27 32 0.0% 1,259 39 33 -2.6% 1999 a 788 26 30 -4.9% 1,229 37 34 2.7% 2000 a 743 24 30 0.4% 1,178 35 34 1.4% 2001 a 638 19 33 8.0% 1,071 32 33 -1.8% 2002 a 678 19 35 7.2% 1,080 33 33 -1.5% 2003 a 574 18 32 -10.6% 986 32 31 -7.3% 2004 a 540 17 32 0.2% 1,007 33 31 0.5% -38.0% -38.3% 0.4% -28.0% -18.5% -11.6% 1987-2004 -2.8% -2.8% 0.0% -1.9% -1.2% -0.7% Growth Rate

a (

. Source: 

### Table C2E-7: Productivity Trends for Profiled Aluminum Segments ($2005) Primary Production of Aluminum Value Added/Hour Added Percent Aluminum Sheet, Plate, and Foil Value Added/Hour Added Percent

Total Percent Change
Average Annual
Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classification System NAICS). For this analysis, EPA convert ed the NAICS classification data to the S IC code classifications usi ng the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2E-2.5 Capital Expenditures Aluminum production is a highly capital-intensive process. Capital expenditures are needed to modernize, replace, and when market conditions warrant, expand capac ity. Environmental requirements also require major capital expenditures. Capital expenditures in the Primary Aluminum Produc tion and Aluminum Sheet, Plate, and Foil segments between 1987 and 2004 are presented in Table C2E-8. Th e table shows that capital expenditures in the Primary Aluminum segment increased throughout the early 1990s, reaching a high in 1992 and again in 1998. In between these two periods of increased capital investment there w as a significant decrease of 46 percent between 1992 and 1994. These decreases resulted from the production cutbacks and capacity reduc tions implemented in response to oversupply conditions prevalent in the market for alumin um. Capital expenditures declined between 1999 and 2003, but increased significantly in 2004. Capital expenditures in the Aluminum Sheet, Plate, and Fo il segment also fluctuated considerably between 1987 and 2004, with the highest values occurring in 1990, two years earlier than in the Primary Aluminum segment. Producers of Aluminum Sheet, Plate, and Foil reduced capital expenditures by approximately 50 percent between 1988 and 1997. Outlays increased by 62 percent in 2001, but declined again in both 2002 and 2003.

C2E-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### Table C2E-8: Capital Expenditures for Prof iled Aluminum Segments (millions, $2005)

Year Primary Aluminum Production Aluminum Sheet, Plate, and Foil Capital Expenditures Percent Change Capital Expenditures Percent Change 1987 266 n/a 673 n/a 1988 217 -18.2% 776 15.4% 1989 260 19.4% 788 1.5% 1990 258 -0.6% 936 18.8% 1991 276 6.8% 753 -19.6% 1992 279 1.2% 543 -27.9% 1993 212 -24.0% 306 -43.6% 1994 150 -29.2% 340 11.1% 1995 185 23.0% 461 35.5% 1996 247 34.0% 478 3.7% 1997 a 376 52.2% 389 -18.5% 1998 a 458 21.8% 369 -5.3% 1999 a 403 -12.2% 373 1.2% 2000 a 393 -2.3% 389 4.1% 2001 a 283 -28.0% 630 62.0% 2002 a 160 -43.3% 310 -50.8% 2003 a 90 -44.0% 207 -33.2% 2004 a 129 43.4% 207 0.1% Total Percent Change -51.5% -69.2% 1987-2004 Average Annual -4.2% -6.7% Growth Rate

a Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2E-2.6 Capacity Utilization Capacity utilization measures actual output as a percentage of total potential output given the available capacity. Capacity utilization reflects excess or insufficient capacity in an industry and is an indication of whether new investment is likely. Capacity u tilization is also closely linked to fi nancial performance for industries with substantial fixed costs, such as the aluminum industry. Like integrated steel mills, the aluminum manufacturing process requires a large capital base to transform raw material into finished product. Because of the resulting high fixed costs of production, earnings can be very sensitive to production levels, with hi gh output levels relative to capacity needed for plants to remain profitable. Figure C2E-4 shows capacity utilization from 1989 to 2004 for the Primary Aluminum Production and Aluminum Sheet, Plate, and Foil segments. The figure shows that for most of the 1990s, the Primary Aluminum segment was characterized by excess capacity. Although capacity u tilization for this segment was in the high 90 percent range between 1990 and 1992, domestic utilization fell sharply in 1993 as large amounts of Russian aluminum entered the global market for the first time (McGraw-Hill, 1999). Capacity utilization remained at this lower level through 1999. In 2000 and 2001, cap acity utilization fell again reflecting the general weakening of product demand during the Asian economic crisis and later, general economic weakness in the U.S. and world economies. Reflecting the economic recovery, product demand incr eased and capacity utilization rose during 2002 through 2004. In 2004, capacity utilization for the Prim ary Aluminum segment was above 90 percent.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### Although also experiencing year-to-year fluctuation, capac ity utilization in the Aluminum Sheet, Plate, and Foil segment grew overall between 1989 and 1998. This growth resulted largely from the continued strength of rolled aluminum products, which account for more than 50 percent of all shipments from the aluminum industry. Increased consumption by the transportation segment, the largest end-use segment for aluminum sheet, plate, and foil, is responsible for bringing idle capacity into production (McGraw-Hill, 1999) However, falling demand in these segments after 1998 and through 2001, led to a marked fa ll-off in capacity utilization. Again, reflecting the economic recovery that began in 2002 , capacity utilization in this segment had risen substantially by 2004.

60 70 80 90 1001989199019911992199319941995199619971998199920002001200220032004 ( (

( (

Note:

. Source: 

### Figure C2E-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Aluminum Segments

P rim ary Alum in um P ro duct ion NAICS t o SIC) P rim ary Alum in um P ro duct ion SIC 333 4) Alum inum Sh eet , P lat e, an d Fo il NAICS t o SIC) Alum inum Sh eet , P lat e, an d Fo il SIC 335 3)

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1989-2004.



## C2E-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### Aluminum production is a highly-concentrated industry. A number of large mergers among aluminum producers have increased the degree of concentration in the industry. For example, Alcoa (the largest aluminum producer) acquired Alumax (the third largest producer) in 1998 and Reynolds (the second largest producer) in May 2000. Alcan acquired Algroup in 2000 and Pechiney in 2004. Three companies now account for just over 50 percent of global aluminum output (S&P, 2004). Some sources speculate that, with increased consolidation resulting from mergers, aluminum producers might refrain from returning idle capacity to production as demand for aluminum grows, which could reduce the cyclical volatility in production and aluminum prices that has characterized the industry in the past (S&P, 2000).
C2E-3.1 Firm Size The Small Business Administration (SBA) defines a small firm for SIC codes 3334 and 3353 as a firm with 1,000 or fewer and 750 or fewer employees, respectively. The Statistics of U.S. Businesses (SUSB) provide employment data for firms with 500 or fewer employees and do not specify data for companies with 500-750

C2E-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### employees for SIC 3353 and 500-1000 for SIC 3334. Therefore, based on 200 1 data for firms with up to 500 employees,

f 

### 34 of the 43 firms in the Primary Aluminum Production segment had less than 500 employees. Therefore, at least 79 percent of this segment’s firms are classified as small. These small firms owned 35 facilities, or 65 percent of all facilities in the segment.

f 

### 61 of the 76 firms in the Aluminum Sheet, Plate and Foil segment had less than 500 employees. Therefore, at least 80 percent of this segment’s firms are classified as small. These small firms owned 62 facilities, or 63 percent of all facilities in the segment.
Table C2E-9 below shows the distribution of firms and f acilities in SIC 3334 and 3353 by the employment size of the parent firm.

Aluminum Industry Segments, 2003 a

0-19 26 26 39 39 20-99 5 6 14 14 100-499 3 3 8 9

500+ 9 19 15 37 Total 43 54 76 99

a

. Source:



### C2E-3.2 Concentration is closely

equal 2



### . The HHI indicates

2 

### + 30 2 2 

### ). Table C2E-9: Number of Firms and Facilities by Employment Size Category for the Profiled

Employment Size Category Primary Aluminum Production Number of Firms Number of Facilities Aluminum Shee Number of Firms t, Plate, and Foil Number of Facilities

Before 1998, data were compiled in the SIC system; since 1997, these data have been co mpiled in the North American Industry Classification System (NAICS). Fo r this analysis, EPA converted the NAIC S classification data to the SIC code classifications using th e 1997 Economic Census Bridge Between NAICS and SIC U.S. SBA, 1989-2003.



### Concentration Ratios Concentration is the degree to which industry output is con centrated in a few large firms. related to entry barriers with more concentrat ed industries generally having higher barriers. The four-firm concentration ratio (CR4) and the He rfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industr y account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, the less co mpetition there is in the industry, other things being An industry with a CR4 of more than 50 percent is generally considered concentrated. concentration based on the largest 50 firm s in the industry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (60 + 10 The higher the index, the fewer the number of firms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s gu idelines for evaluating mergers, markets in which the HHI

2 

### Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the extent of competition in an industry.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated. Table C2E-10 shows that Primary Aluminum has an HHI of 1231 and Aluminum Sheet, Plate and Foil has an HHI of 1447. The Primary Aluminum and Aluminum Sheet, Plate, and Foil segments, with HHI values of 1231 and 1447, respectively, appear to be moderately concentrated. Thus, based on this factor, firms in the aluminum industry enjoy moderate amounts of market power, which ma y enable them to pass-thr ough costs at a more than negligible rate. However, an accurate assessment of th e cost pass-through potential of firms in the Aluminum industry must be considered in conjuncti on with other measures of market power. The four largest firms in Primary Aluminum Production accounted for 59 percent of total U.S. primary capacity in 1997. Consolidation in the i ndustry since the early 1990s has increased concentration. With the merger of Alcoa, Inc. and Reynolds in May 2000, the single merged company accounted for 50 percent of domestic primary aluminum capacity, and the four largest U.S. producers control 72 percent of the domestic capacity (Alcoa Inc. for 50 percent, Century Aluminum Co. for almost 10 per cent, and Noranda Aluminum Inc. and Ormet Primary Aluminum Corp. for 6 percent each) reported at the end of 2002 (USGS, 2002c).

Table C2E-10: Selected Ratios for the Profiled Aluminum Segments, 1987, 1992, and 1997 Concentration Ratios SIC (S) or Total NAICS (N) Year Number 4 Firm 8 Firm 20 Firm 50 Firm HerfindahlCode of Firms (CR4) (CR8) (CR20) (CR50) Hirschman Index 1987 34 74% 95% 99% 100% 1,934 S 3334 1992 30 59% 82% 99% 100% 1,456 N 331312 1997 13 59% 82% 100% N/A 1,231
S 3353 1987 39 74% 91% 99% 100% 1,719 1992 45 68% 86% 99% 100% 1,633 1997 41 65% 85% 98% 100% 1,447

Source: N 331315 Note: The 1997 Census of Manufactures is the most recent concentration ratio data available. U.S. DOC, 1987, 1992, 1997, and 2002.


### C2E-3.3 Foreign Trade This profile uses two measures of foreign competiti on: export dependence and import penetration. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total import s divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefor e be at a relative disadvant age in their ability to passthrough costs because foreign producers would not incu r costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. ma nufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not

C2E-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulation-induced increases in producti on costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadvant age in potentially recovering compliance costs through price increases since export sales ar e presumed subject to substantial competition from foreign producers. Table C2E-11 reports export depende nce and import penetration for both the Primary Aluminum Production and the Aluminum Sheet, Plate, and Foil segments, since 1993. Imports of Primary Aluminum rose dramatically in 1994, primarily due to the large expor ts from Russian producers. Representa tives of major aluminum producing countries met in late 1993 and 1994 to address the excess global supply of primary aluminum. Those discussions resulted in the Russian Federation’s ag reement to reduce production by 500,000 MTs per year, and plans for other producers to cut their production and to assist Russian producers to improve their environmental performance and stimulate the development of internal demand for the Ru ssian production (USGS, 1994c ). Nonetheless, imports have continued to represent a substantial and growing proportion of U.S. demand, reaching an estimated 41 percent in 2002 for Primary Aluminum Production. By 2002, Canada was the largest supplier of imports, supplying more than one-half of total imports. Russia continued to be the second largest supplier of aluminum materials to the U.S. (USGS, 2002c). The majority of U.S. exports (two-thirds) are shipped to Canada and Mexico. As discussed previously, the import penetration ratio for the Primary Aluminum Production segment in 2002 was 41 percent, which is nearly twice the U.S. manufacturi ng segment average of 22 percent. The export ratio for Primary Aluminum Production in 2001 was eight percent; therefore, competitive pressures from abroad in export sales are less likely to affect this segment. On bala nce, the U.S. Primary Aluminum Production segment is subject to significant international competitive pressure, largely manifesti ng though the penetration of foreign product into domestic markets. This finding indicates a low likelihood that Primary Aluminum producers subject to the 316(b) regulation would be able to pass a mate rial share of compliance costs through to customers. In 2002, the import penetration ratio for facilities in the Aluminum Sheet, Plate, and Foil segment was 11 percent, which is one-half of the U.S. manufacturing segment averag e of 22 percent. In 2002, the export dependence ratio for this segment was 13 percent, or just below the averag e for U.S. manufacturers. This industry segment appears to face lower competition from foreign producers in dom estic markets than the Primary Aluminum Production segment, but this segment competes more vigorously in fo reign markets, where it is more exposed to foreign competition than the Primary Aluminum Production segment. On balance, this industry segment is likely to face moderate competitive pressure from foreign producers, whet her in domestic or export markets, in attempting to recover regulation-induced increases in production costs through price increase. Overall, the competitive pressure from foreign firms/mark ets may offset the finding, stated above, that the aluminum industry would appear to possess market power fro m being a moderately concentrated industry. As a result, from a total market perspective, the industry is not likely to possess any substantial market power advantage in being able to pass compliance costs through to customers as price increases.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-17c § 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### Table C2E-11: Import Share and Export Depende nce for the Profiled Aluminum Segments ($2005) Value of Value of Imports Value of Exports Shipments Implied Import Export Year Domestic Penetration b Dependence c (millions) (millions) (millions) Consumption a Primary Aluminum Production 1993 d 2,727 686 1994 d 4,322 666 1995 d 4,491 840 1996 d 3,631 815 1997 d 4,176 738 1998 e 4,387 643 1999 e 4,547 702 2000 e 4,817 714 2001 e 4,472 511 2002 e 4,507 464 7,667 9,708 28.1% 9.0% 11,563 15,220 28.4% 5.8% 10,905 14,557 30.9% 7.7% 9,664 12,481 29.1% 8.4% 8,230 11,669 35.8% 9.0% 7,591 11,335 38.7% 8.5% 6,559 10,403 43.7% 10.7% 6,933 11,036 43.6% 10.3% 8,128 12,090 37.0% 6.3% 7,087 11,130 40.5% 6.5% Total Percent Change 65.2% -32.4% -7.6% 14.6% 1993-2002 Average Annual 5.7% -4.3% -0.9% 1.5% Percent Change Aluminum Sheet, Plate, and Foil 1993 d 1,062 1,879 1994 d 1,344 2,294 1995 d 2,000 3,188 1996 d 1,533 2,845 1997 d 1,504 2,865 1998 e 1,616 2,698 1999 e 1,650 2,552 2000 e 1,816 2,576 2001 e 1,579 2,231 2002 e 1,693 1,945 14,547 13,730 7.7% 12.9% 17,251 16,301 8.2% 13.3% 16,869 15,681 12.8% 18.9% 15,281 13,968 11.0% 18.6% 14,302 12,942 11.6% 20.0% 13,820 12,738 12.7% 19.5% 12,269 11,367 14.5% 20.8% 13,138 12,378 14.7% 19.6% 16,912 16,260 9.7% 13.2% 15,101 14,849 11.4% 12.9% Total Percent Change 59.5% 3.5% 3.8% 8.1% 1993-2002 Average Annual 5.3% 0.4% 0.4% 0.9% Percent Change

a Calculated by EPA as sh ipments + imports - exports. b Calculated by EPA as imports divided by impl ied domestic consumption. Calculated by EPA as e xports divided by shipments. d As no ITA data is available before 1997, Export and Import values are taken from USGS Mineral Yearbooks for years 1993-1997. “Metals and Alloys, Crude” represent SIC 3334 and “Plate, Sheets, Bars, Strip, etc.” is equivalent to SIC 3353.

e Before 1998, the Department of Commerce compiled data in the SIC system; since 1998, these data have been compiled in the Nor th American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using th e 1997 Economic Census Bridge Between NAICS and SIC

. Source: USGS 1993c-1997c; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002; U.S. DOC, 2006.


### Table C2E-12 shows trends in exports and imports separately for aluminum metal and alloys and for semifinished products separately. U.S. aluminum compan ies have a large overseas presence, which makes it difficult to analyze import data. Reported import data may refl ect shipments from an overseas facility owned by a U.S. firm. The import data therefore do not provide a comple tely accurate picture of the extent to which foreign companies have penetrated the domestic market for al uminum. This table shows that imports have grown substantially in both categories between 1993 and 2004. Exports of primary aluminum have generally declined,

C2E-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### with some fluctuation over the period. Exports of sem i-finished aluminum products rose steadily until 1999, before declining during 2000 to 2003. Exports did, however, rebound in 2004.

Year a Export b a Export b Quantity Value Quantity Value Quantity Value Quantity Value 1993 1,840 2,150 400 541 400 837 594 1,481 1994 2,480 3,480 339 536 507 1,082 719 1,847 1995 1,930 3,690 369 690 622 1,643 812 2,619 1996 1,910 3,040 417 682 498 1,283 760 2,382 1997 2,060 3,500 352 606 562 1,519 882 2,746 1998 2,400 3,660 265 449 649 1,715 893 2,723 1999 2,650 3,760 318 515 735 1,777 907 2,564 2000 2,490 4,030 273 468 791 2,088 845 2,380 2001 2,560 3,930 192 320 683 1,762 751 2,120 2002 2,790 4,040 206 337 796 1,922 706 1,880 2003 2,870 4,270 214 351 653 1,510 690 1,900 2004 3,250 5,880 298 565 724 1,950 795 2,380
76.6% 173.5% -25.5% 4.4% 81.0% 133.0% 33.8% 60.7% 1993-2004
5.3% 9.6% -2.6% 0.4% 5.5% 8.0% 2.7% 4.4% Growth Rate Source:

a
b 

### Table C2E-12: Trade Statistics for Aluminum and Semi-fabricated Aluminum Products (Quantities in thousand metric tons; Values in $millions) Metals and Alloys, Crude Plate, Sheets, Bars, Strip, etc. Import Import

Total Percent Change
Average Annual

USGS 1994c-2004c. Table 10: U.S. Imports for Co nsumption of Aluminum, by Class Table 9: U.S. Exports of Aluminum, by Class



## C2E-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### The financial performance and condition of the aluminum industry are important determ inants of its ability to withstand the costs of regulatory compliance without mate rial, adverse economic/financial impact. To provide insight into the industry’s financia l performance and condition, EPA review ed two key measures of financial performance over the 14-year period, 1992-2005: net profit margin and return on total capital. EPA calculated these measures as a revenue-weighted index of measure values for public reporting firms in the respective industries, using data from the Value Line Investment Su rvey. Financial performance in the most recent financial reporting period (2005) is obviously not a perfect indicator of conditions at the time of regulatory compliance. However, examining the trend, and deviation from the trend, through th e most recent reporting period gives insight into where the industry may be , in terms of financial performan ce and condition, at the time of compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the potential risk faced by the industry in a future period in which compliance requirement s are faced: all else equal, the more volatile the historical performance, the more likely the industry may be in a period of relatively weak financial conditions at the time of compliance. Net profit margin is calculated as after-tax income befo re nonrecurring gains and losses as a percentage of sales or revenues, and measures profitability, as reflected in th e conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fl uctuations in profit margin stem from

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-19§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### a several factors, including: variations in aggregat e economic conditions (including international and U.S. conditions), variations in industry-specific market conditi ons (e.g., short-term cap acity expansion resulting in overcapacity), or changes in the pricin g and availability of inputs to the in dustry’s production processes (e.g., the cost of energy to the aluminum production process). The ex tent to which these fluctuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. va riable cost structure of the industry’s operations. In a capital intensive industry such as the aluminum industry, the relatively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by the total of shareholders' equity and long- term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of th e financial source of the capital (i.e., equity, debt, or liability element). As such, the retu rn on total capital provides insight in to the profitability of a business’ assets independent of financial structure and is thus a “purer” i ndicator of asset profitability than return on equity. In the same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital. Figure C2E-5, following page, shows net profit margin and return on total capital for the aluminum industry between 1992 and 2005. The graph sh ows considerable volatility. Perform ance was very low between 1988 and1993, reflecting general economic weaknesses and oversupply in the market (McGraw-Hill, 2000). By the mid1990s, performance improved as demand recovered and alum inum prices increased. Performance declined again though in 2000 through 2002, reflecting economic downturn in both the U.S. and world economies. By 2003, financial performance began to level off compared to the significant declines experienced in the three prior years and by 2004, had begun to improve. The industry saw fu rther improvements in financial performance in 2005. These results point to improving financial performance in 2006 and beyond as U.S. ec onomic conditions continue to strengthen.

C2E-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum

0% 2% 4% 6% 8% 10% 12% 14% 16% 

### Figure C2E-5: Net Profit Margin and Return on Total Capital for the Aluminum Industry

-4% -2%19921993199419951996199719981999200020012002200320042005 Return on Total Capital - Aluminum Industry Net Profit Margin - Aluminum Industry

Source: Value Line, 2003c; Value Line, 2006.



## C2E-5 F ACILITIES 

## O PERATING 

## C OOLING 

## W ATER 

## I NTAKE 

## S TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point s ource facilities that use or propose to use a cooling water intake structure that withdraws cooling water directly fro m a surface waterbody of the United States. In 1982, the Primary Metals industries as a whole (including Steel a nd Non-ferrous producers) wit hdrew 1,312 billion gallons of cooling water, accounting for approxi mately 1.7 percent of total industrial cooling water intake in the United States 3 

### . The industry ranked 3rd in industrial cooling wate r use, behind the electric power generation industry, and the chemical industry (1982 Census of Manufactures). This section provides information for facilities in the pr ofiled aluminum segments estimated to be subject to regulation under the regulatory analysis options. Exis ting facilities that meet all of the following conditions would have been subject to the regulation under the three regulatory analysis options:

f 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supplier who has a coo ling water intake structure; or their cooling water intake structure(s) withdraw(s) cooling water from wa ters of the U.S., and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;

f 

### Have an National Pollutant Discharge Elimination Sy stem (NPDES) permit or are required to obtain one; and

f 

### Meet the applicability criteria for the specific regulator y analysis option in terms of design intake flow and source waterbody type (i.e., 50 MGD for All Wate rbodies, 100 MGD for Certain Waterbodies, or 200 MGD for All Waterbodies).

3 

### Data on cooling water use are from the 1982 Census of Manufactures . 1982 was the last year in which the Census of Manufactures reported cooling water use.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### The regulatory options also cover substantial additions or modifications to operations undertaken at such facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the Phase III regulation based on a minimum applicability thr eshold of 2 MGD, this section focuses on the facilities nationwide in the profiled steel segments that are estimated to be subject to regulation based on the design intake flow and waterbody applicability criteria set forth in the regulatory analysis options (see Table C2E-1, above for additional information on the broader set of facilities potentially subject to regulation). 4


### C2E-5.1 Waterbody and Cooling System Type Table C2E-13, Table C2E-14, and Table C2E-18 show the distribution of Phase III facilities in the profiled aluminum segment by type of water body and cooling syst em. The table shows that the majority of the potential Phase III facilities use a once-through cooling system. None of the facilities withdraw from an estuary, the most sensitive type of water body.

Table C2E-13: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System for the Profiled Aluminum Segments Cooling System Water Body Type Recirculating Once-Through Total Number % of Total Number % of Total

Primary Production of Aluminum Lake or Reservoir 1 100% 0 0% 1 Aluminum Sheet, Plate, and Foil Great Lake 0 0% 3 100% 3 Total for Profiled Aluminum Facilities Lake or Reservoir 1 100% 0 0% 1 Great Lake 0 0% 3 100% 3 Total 1 27% 3 73% 4 Source: U.S. EPA, 2000; U. S. EPA analysis, 2006.

4 

### EPA applied sample weights to the sampled facilities to account for non-sampled facilitie s and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industry Survey, please refer to the Information Collection Request (U.S. EPA, 2000).

C2E-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### Table C2E-14: Number of Facilities Estimate d Subject to the 200 MGD All Option by Waterbody Type and Cooling System for the Profiled Aluminum Segments Cooling System Water Body Type Recirculating Once-Through Total Number % of Total Number % of Total

Primary Production of Aluminum Lake or Reservoir 1 100% 0 0% 1 Aluminum Sheet, Plate, and Foil Total 0 0% 0 0% 0 Total for Profiled Aluminum Facilities Lake or Reservoir 1 100% 0 0% 1 Total 1 100% 0 0% 1 Source: U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Table C2E-15: Number of Facilities Estima ted Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System for the Profiled Aluminum Segments Cooling System Water Body Type Recirculating Once-Through Total Number % of Total Number % of Total

Primary Production of Aluminum Lake or Reservoir 1 100% 0 0% 1 Aluminum Sheet, Plate, and Foil Total 0 0% 0 0% 0 Total for Profiled Aluminum Facilities Lake or Reservoir 1 100% 0 0% 1 Total 1 100% 0 0% 1 Source: U.S. EPA, 2000; U. S. EPA analysis, 2006.


### C2E-5.2 Facility Size The 316(b) facilities in the aluminum industry are relatively large. The single Primary Aluminum producer employs at least 1,000 people, while all three Aluminum Sheet, Plate and Foil manufacturers have between 500 and 999 employees. Figure C2E-6 show the number of Phase III facilities by employment size category.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-23§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum

0 3

1

0
0 1 2 3 4

i i luminum ( A lumi l l (

Source:

0 0 1

0
0 1 2 3 4

i i luminum ( 3334) Alumi l l ( 3353)

Source:



### Figure C2E-6: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the Profiled Aluminum Segments

500-999 >=1000 Pr mary Produc t on of A SIC 3334) num Sheet, Pate, and Foi SIC 3353)

U.S. EPA, 2000; U. S. EPA analysis, 2006.


### Figure C2E-7: Number of Facilities Estimated Su bject to the 200 MGD All Option by Employment Size for the Profiled Aluminum Segments

500-999 >=1000 Pr mary Product on of A SIC
num Sheet, Pate, and Foi SIC

U.S. EPA, 2000; U. S. EPA analysis, 2006.

C2E-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum

0 0 1

0
0 1 2 3 4

>=1000 3334)
3353)

Source:



### C2E-5.3

SIC Code Number Large % of SIC Number % of SIC Total

3334 1 100% 0 0% 1 3353 3 100% 0 0% 3 Total 4 100% 0 0% 4 Source:

SIC Code Number Large % of SIC Number % of SIC Total

3334 1 100% 0 0% 1 3353 0 0% 0 0% 0 Total 1 100% 0 0% 1 Source: 

### Figure C2E-8: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Employment Size for the Profiled Aluminum Segments

500-999 Primary Production of Aluminum (SIC
Aluminum Sheet, Plate, and Foil (SIC

U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Firm Size EPA used the Small Business Administration (SBA) small entity size standards to determine the number of Section 316(b) profiled aluminum industry facilities owned by small firms. Firms in the Primary Production of Aluminum segment are defined as small if they have 1 000 or fewer employees; firms in the Aluminum Sheet, Plate, and Foil segment are defined as small if they ha ve 750 or fewer employees. Table C2E-16, Table C2E-17, and Table C2E-18 show that large firm s own all of the aluminum facilities estimated subject to regulation under the regulatory analysis options.

Table C2E-16 Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Profiled Aluminum Segments Small

U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.



### Table C2E-17: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Profiled Aluminum Segments Small

U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-25§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum

SIC Code Number Large % of SIC Number % of SIC Total

3334 1 100% 0 0% 1 3353 0 0% 0 0% 0 Total 1 100% 0 0% 1 Source: 

### Table C2E-18: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Firm Size for the Profiled Aluminum Segments Small

U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.

C2E-26 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



## R EFERENCES 

### The Aluminum Association. 2001. The Aluminum Situation. September 2001.
The Aluminum Association. 1999. “Northwest Smelter Restarts Are Seen Unlikely”, Industry News. October 29, 1999. The Aluminum Association. Undated. Aluminum: An American Industry in Profile. Bureau of Labor Statistics (BLS). 2006. Producer Price Index . Industry Data Series: PCU331312-Primary Aluminum Production; PCU331315-Aluminum Sheet, Plate, & Foil Mfg. Available at: http://www.bls.gov/ppi/home.htm. Downloaded February 1, 2006. Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual

. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry & Trade Outlook ‘00. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 1999. U.S. Industry & Trade Outlook ‘99. Standard & Poor’s (S&P). 2004. Sub Industry Outlook- Alcoa Inc. February 21, 2004. Standard & Poor’s (S&P). 2001. Industry Su rveys - Metals: Industrial. July 12, 2001. Standard & Poor’s (S&P). 2000. Industry Su rveys - Metals: Industrial. January 20, 2000.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration. Industry, Trade, and the Economy: Data and Analysis . Data by NAICS and SIC. Available at: http://www.ita.doc.gov/td/industry/otea/industry_sector/tabl es_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bu reau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the Census. Annual Survey of Manufactures

. U.S. Department of Commerce (U.S. DOC). 1987, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Department of Commerce (U.S. DOC). 1997. Bu reau of the Census. 199 7 Economic Census Bridge Between NAICS and SIC.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures

. United States Geological Survey (USGS). 1995a-2006a. Mineral Commodity Summaries . Aluminum. Author: Patricia Plunkert. United States Geological Survey (USGS). 1993c-2004c. Minerals Yearbook . Aluminum. Author: Patricia Plunkert.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2E-27§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facil ities Chapter C2E: Aluminum



### United States Geological Survey (USGS). 2001b-2003b. Mineral Industry Surveys . Aluminum. Author: Patricia Plunkert. United States Geological Survey (USGS). 2002. Histor ical Statistics for Mineral and Material Commodities in the United States. Aluminum. Authors: United States Geological Survey (USGS). 1998. Metal Prices in the United States through 1998 . Available at: http://minerals.usgs.gov/minerals/pubs /metal_prices/metal_prices1998.pdf
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards . Available at: http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses . Available at: http://www.sba.gov/advo/research/data.html. Downloaded February 4, 2006.
Value Line. 2006. Value Line 3.0 Investment Analyzer

. Value Line. 2003a. Metal Fabrica ting Industry. March 28, 2003. Value Line. 2003b. Metals & Mining (Diversified) Industry. April 25, 2003.
Value Line. 2003c. Value Line Investment Survey. Value Line. 2001. Metals & Mining (Diversified) Industry. July 27, 2001.

C2E-28 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products 

# Chapter C2F: Profile of Food and Kindred Products Industry (SIC 20)

I NTRODUCTION 

### In framing its analysis and data gathering for the section 316(b) Regulation for Phase III Facilities, EPA initially focused on the electric power industry and five manufacturing industries – Paper, Chemicals, Petroleum, Aluminum, Steel (the “Primary Manufacturing Industries”) – that were estimated to account for over 90 percent of cooling water usage, according to Census of Manufactures data. Accordingly, EPA targeted its Detailed Industry Questionnaire (the “DQ”) to these industries. Although the DQ was targeted to these industries, EPA received 22 questionnaires from in-scope facilities withoperations in industries other than these major coolingwater intensive industries (these industries are referred to as the “Other Industries”). These questionnaires were received as part of the non-utility electric power generators sample frame; however, further inspection found these facilities to be cooling water-dependent facilities whose primary operations lie in businesses outside the electric power industry or Primary Manufacturing Industries. These 22 questionnaires represent eight 2-digit SIC industries: Agriculture Production - Crops (SIC 01); Metal Mining (SIC 10); Mining and Quarrying of Nonmetallic Minerals, except fuels (SIC 14); Food and Kindred Products (SIC 20); Textile Mill Products (SIC 22); Lu mber and Wood Products, except furniture (SIC 24); Fabricated Metal Products, except machinery and tran sportation equipment (SIC 34); and Transportation Equipment (SIC 37). However, over half (12)of the 22 questionnaires received were from facilities in the Food and Kindred Products industry (SIC 20). Moreover, from the 1982 Census of Manufactures (the most recent Economic Census to report data on c ooling water use by industrial sector), the Food and Kindred Products sector was the fifth largest user of cooling water – i.e., th e next 2-digit SIC sector behind the Primary Manufacturing Industries (both Aluminum and Steel fall under the 2-digit SIC 33 for primary metal industries). Given the substantial number of questionnaires received from in-sc ope facilities in the Food and Kindred Products industry, and its relatively high reliance on cooling water, EPA prepared an industry profile for the Food and Kindred Products industry. 

## C HAPTER 

## C ONTENTS
Introduction.......................................................... C2F-1 C2F-1 Summary Insights from this Profile ........ C2F-3 C2F-2 Domestic Production............................... C2F-4 C2F -2.1 Output............................................. C2F-4 C2F -2.2 Number of Facilities and Firms ...... C2F-8 C2F -2.3 Employment and Productivity ...... C2F-10 C2F -2.4 Capital Expend itures .................... C2F-11 C2F -2.5 Capacity Utiliz ation...................... C2F-12 C2F-3 Structure and Competitiveness.............. C2F-14 C2F -3.1 Firm and Facility Size .................. C2F-14 C2F -3.2 Concentration Ratios .................... C2F-15 C2F -3.3 Foreign trade................................. C2F-16 C2F-4 Financial Condition and Performance... C2F-18 C2F-5 Facilities Operating Cooling Water Intake Structures .............................................. C2F-22 C2F -5.1 Waterbody and Cooling System Type...... ................................................... C2F-23 C2F -5.2 Facility Si ze.................................. C2F-23 C2F -5.3 Firm Size ...................................... C2F-25 References.......................................................... C2F-26



### EPA used the cooling water usage-based multiplier of 3.11, as documented at NODA and in the public record of the Phase III final regulation, to estimate the industry-le vel costs and impacts of Phase III regulatory compliance for the Food and Kindred Products industry. Therefore, these 12 sampled facilities represent 37 facilities in the Food and Kindred Products Industry. Table C2F-1, follo wing page, lists the five 4-digit SIC codes from which the 22 Food and Kindred Products industry surveys were received, the number of potentially regulated facilities

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### (based on a minimum applicability threshold of two MGD), a nd the number of facilities estimated to be subject to regulation under the regulatory analysis options. Although the questionnaires received fall in only five of the forty-eight 4-digit SIC codes within the Food and Kindred Products industry, EPA knows of no basis to exclude any of the remaining 4-digit codes from consideration in this profile. Accordingly, this profile focuses on the entirety of SIC 20, Food and Kindred Products.

Table C2F-1: Phase III Facilities in the Food and Kindred Products Industry (SIC 20) Subject to

SIC SIC Description Important Products Manufactured Potentially Regulated Facilities Subject to 50 MGD All Option Subject to 200 MGD All Option 100 MGD CWB Option

2046 Wet Corn Milling Corn oil cake and meal; corn starch; corn syrup; dextrose, fruct ose; glucose; high fructose syrup; starches 12 6 3 3

2061 Cane sugar, except refining Cane sugar; molasses; granulated sugar; powdered sugar; raw sugar; cane syrup (all made from sugarcane) 2 0 0 0
Molasses, blackstrap; granulated sugar; 2062 Cane sugar refining powdered sugar; refined sugar; syrup (all made from purchased raw cane or sugar 12 0 0 0 syrup) Beet sugar; molasses; granulated sugar; 2063 Beet sugar liquid sugar; powdered sugar; syrup (all 6 0 0 0 made from sugar beets) Distilled and blended liquors, except brandy; 2085 Distilled and blended liquors gin; rum; vodka; wh iskey; cocktails; cordials; eggnog; grain alcohol for medicinal 3 3 0 3 and beverage purposes Total SIC Code 20 37 9 3 6 Source: Executive Office of the President, 1987; U.S. EPA 2000; U. S. EPA analysis, 2006.


### The Food and Kindred Products industry includes faciliti es that process or manufacture food and beverages for human consumption, feed for animals, and other relate d products. Statistics for the industry were previously recorded under the Standard Industry Classification (SIC ) code of 20, for Food a nd Kindred Products. SIC 20 included 9 industry groups at the 3-digit SIC level, and 48 industries at the 4-digit SIC level. Under the SIC system, beverage manufacturing was included in SIC 20, th e Food and Kindred Products sector. In 1997, the U.S. Census Bureau began repor ting economic activity in the North American Industry Classification System (NAICS), which replaced the SIC system (U.S. DOC, 1997a). Under NAICS, the previous SIC 20 sector is recorded in two 3-digit NAICS sectors: (1) NAICS 311, Food Manufacturing, and (2) NAICS 312, Beverage and Tobacco Product Manufacturing. This profile focu ses on NAICS 311, Food Manufacturing, and NAICS 3121, the Beverage Manufacturing subsector within NAICS 312, an d excludes consideration, to the extent possible, of the tobacco-manufacturing sector. Because the analysis pe riod for this profile extends across the SIC-to-NAICS transition, most of the data series presented in the pr ofile include data from both the SIC system and NAICS: for years before 1997, data are from the SIC system; for 199 7 and after, data are from NAICS. Table C2F-2, following page, summarizes the relationship between SIC and NAICS codes used for this profile and provides summary information on the relevant NAICS sectors from the 2002 Economic Census.

C2F-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### Table C2F-2: Relationship between SIC and NAICS Codes for the Food Manufacturing and Beverage Manufacturing Segments (2002 a 

### )

SIC Code SIC Description NAICS Code NAICS Description Establishments Value of Shipments

($000) Employment

20-- (excluding 2082, 2084, 2085, 2086, Food and Kindred Products 311 Food Manufacturing 27,897 456,586,656 1,505,776
and 2097) 2082 Malt Beverages
2084
2085
2086 Wines, Brandy, and Brandy Spirits Distilled and Blended Liquors Bottled and Canned Soft Drinks and Carbonated Waters 3121 Beverage Manufacturing 2,903 65,153,490 136,074

2097 Manufactured Ice

a Industry data for relevant NAICS codes from the 2002 Economic Census. Source: U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.



## C2F-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight in to the ability of firms in the Food and Kindred Products industry to absorb compliance costs from the regulat ory analysis options without material adverse economic/financial effects. The industry’s ability to w ithstand compliance costs is primarily influenced by two factors: (1) the extent to which the industry may be e xpected to shift compliance costs to its customers through price increases and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile , the Food Manufacturing and Beverage Manufacturing segments face somewhat limited foreign competitive pressu res, and, based on this factor, would have some latitude to pass through to customers any increase in production costs resulting from regulatory compliance. However, within the U.S. market, the Food Manufacturi ng and Beverage Manufacturing segments have relatively low concentrations. Although nich e product and/or regional segments are likely to face lighter overall competition, the lack of industry concentration, as describ ed later in this profile, suggests that firms in this industry may have little ability to recover compliance costs through increased prices – particularly if the increased costs do not occur in a relatively uniform way throughout the industry. Given the likelihood that only a relatively small subset of facilities and firms in this industry will face additional costs as a result of the regulatory options considered for the section 316(b) Phase III regulation, EPA believes that a conservative assumption of no-costpass-through is appropriate for analysis of the impact on this industry. For the facility impact analysis, EPA therefore assumed that Food and Kindred Products fac ilities would not be able to pass on to customers any increases in production costs incurred th rough compliance with the regulatory options considered for the section 316(b) Phase III regulation – i.e., the firms would absorb all regulatory compliance costs.
Financial Health and General Business Outlook Unlike the more cyclical sectors in the Primary Manu facturing Industries, the Food and Kindred Products industry, being a consumer staples industry, was not as strongly affected by the economic downturn that occurred in the early 2000s. The industry was able to maintain a moderate level of positive financial performance over the data period, and recent trends suggest the industry should be able to c ontinue the moderate, steady growth,

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### accompanied by moderate financial performance, that it has historically achieved. In an effort to increase sales, profits, and market share, Food and Kindred Products industry firms have pursued mergers and acquisitions, looked into foreign market opportunities, reduced costs, and introduced new products (H arris, 2002). In addition, the industry has exhibited substantially less fluctuati on in capacity utilization and financial performance than more cyclical industries, such as the five Primary Ma nufacturing Industries. Th ough foreign competition is growing, the industry also experiences less international competition than firms in the Primary Manufacturing Industries, as indicated by the industry’s lower reliance on export sales and the lower extent of import penetration in domestic markets. On the whole, the Food and Kindr ed Products industry has maintained a steadily increasing level of capital expenditures over the data period and has correspondingly r ecorded moderately increasing labor productivity. These factors suggest that the industry’s capital equipment base has been maintained and regularly improved over the analysis period, and that the business f aces no inordinate needs for capital expenditure due, for example, to offset a period in which capital expenditure substantially retrenched because of declining business performance. Within the broader Food and Kindred Products industry, the Food Manufacturing segment has generally achieved more stable growth and financial performance than the Beverage segment. Nevertheless, the general financial health and outlook for the overall industry appear positive. Favorable product demand trends, efficient production capability, and effective management of production costs and supply chains all point to a favorable industry outlook, both near and longer term. As a result, EPA concludes that the Food and Kindred Products industry should be able to withstand the cost of section 316(b) Phase III compliance requirements under the regulatory options without material adverse financia l impact. Indeed, EPA judges overall that the Food and Kindred Products industry is currently in better economic/financial condition overall than the Primary Manufacturing Industries.


## C2F-2 D OMESTIC 

## P RODUCTION 

### The Food and Kindred Products industry is one the largest manufacturing industries in the United States, with the Food Manufacturing and Beverage segments accounting for approximately one-sixth of U.S. industrial activity (McGraw-Hill, 2000). The Food Manufacturing segment alone accounts for over 10 percent of all manufacturing shipments (U.S. DOC, undated). The industry is considered mature, however, and firms are seeking new avenues for increased sales. With total food industry shipments growing more slowly than GDP, U.S. producers have actively sought growth opportunities in overseas markets. Although exports still represent a small share of domestic shipments, changes in global food consumption could lead to increased demand and trade for processed food products. As developing countries experience growth in income, the demand for higher quality food products, such as meat products, present an opportunity for U.S. firms to increase exports. In developed countries, consumer demand for food is based more on tastes, quality, convenience, and value added, again providing an avenue for firms to expand sales (U.S. DOC, undated). C2F -2.1 Output Figure C2F-1 and Figure C2F-2, following pa ges, show trends in constant dollar value of shipments and value added for the Food Manufacturing and Beverage Manufacturing segments. 1 

### Change in these values over time provides insight into the overall economic health and ou tlook for an industry. Valu e of shipments is the sum of receipts earned from the sale of outputs; it indicates the ove rall size of a market or the size of a firm in relation to its market or competitors. Value added, defined as th e difference between the value of shipments and the value of inputs used to make the products sold, measures the value of production activity in a particular industry. The trends over time in value of shipments and value added show that both the F ood Manufacturing and Beverage Manufacturing segments have achieved generally stable performance over the 1987-2004 period: these industries

1 

### Terms highlighted in bold and italic font are further explained in the glossary.

C2F-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### have not been substantially affected by fluctuations in the performance tre nd of the aggregate U.S. economy. The lack of major swings in shipments and value added resu lts largely from the consumer staple-character of the industry. Over the 1987-2004 period, both segments ende d with a higher total value of shipments and value added (in inflation-adjusted dollars) than in 1987. In 2003, 40 percent of respondents to Food Engineering’s State of Food Manufacturing Survey expected output to increase by over 6 percent, with almost 20 percent forecasting an increase of up to 6 percent in output (Higgins, 2003). In 2004, the value of shipments rose by 3.1 and 2.5 percent for the Food Manufacturing and Beverage Manufactur ing industries, respectively. Over the 18-year time period analyzed, Food Manufacturing and Beverage Manuf acturing segments increased their value of shipments by 44 percent and 16 percent, respectively. Increases in value added over the period were 89 percent for Food Manufacturing, and 33 percent for Be verage Manufacturing. The general trends suggest that firms in these industries have been able to increase shipments and value added, a sign that the industries are able to find ways to expand their market and continue to grow.



### (millions, $2005)198719881989199019911992199319941995199619971998199920002001200220032004Food Mfg.Beverage Mfg.

Note:

Source: 

### Figure C2F-1: Value of Shipments for Food Manufacturing and Beverage Manufacturing Segments

300,000 330,000 360,000 390,000 420,000 450,000 480,000 510,000 540,000 570,000 600,000

60 ,0 00 63 ,0 00 66 ,0 00 69 ,0 00 72 ,0 00 75 ,0 00 78 ,0 00 81 ,0 00 84 ,0 00 87 ,0 00 90 ,0 00

Fo o d M fg. NAICS Fo o d M fg. SIC Bev erage M fg. NAICS Bev erage M fg. SIC

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Be tween NAICS and SIC. U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### (millions, $2005)198719881989199019911992199319941995199619971998199920002001200220032004Food Mfg.Beverage Mfg.

Note:

Source: 

### Figure C2F-2: Value Added for Food Manufactu ring and Beverage Manufacturing Segments

60,000 80,000 1 00,000 1 20,000 1 40,000 1 60,000 1 80,000 2 00,000 2 20,000 2 40,000

26,000 29,000 32,000 35,000 38,000 41,000 44,000 47,000 50,000 53,000

Fo o d M fg. N AICS Fo o d M fg. SIC Bev erage M fg. NAICS Bev erage M fg. SIC

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, thes e data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Be tween NAICS and SIC. U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### Table C2F-3, following page, provides the Federal Reserve System’s index of industrial production for the profiled Food Manufacturing and Bevera ge Manufacturing segments, showing trends in production between 1989 and 2005. This index more closely reflects total output in physical terms, whereas value of shipments and value added reflect the economic value of production. The production index is expressed as a percentage of output in the base year, 2002. With the exception of modest decreases in production during 1995 to 1996 and 2002 to 2003, the Food Manufacturing segment has seen year-to-year production increases over the period, with an overall increase in production of approximately 30 per cent from 1989 to 2005. The Beverage Manufacturing segment, on the other hand, saw production mostly risi ng from 1989 through the 1990s, before hitting a peak in 1998 and decreasing slightly for the next few years. Production then rebounded in 2002, and has since continued to increase. Over the entire period, the segment achiev ed an increase in production of over 23 percent. Going forward, businesses in these sectors ar e turning towards automation of plant processes to increase production (Higgins, 2004).

C2F-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### Table C2F-3: U.S. Food and Beverage Manufac turing Industry Industrial Production Index

Year Food Manufacturing (NAICS 311) Beverage Manufacturing (NAICS 3121) Index 2002=100 Percent Change Index 2002=100 Percent Change 1989 79.7 89.7 1990 82.1 3.1% 90.9 1.3% 1991 83.6 1.8% 92.1 1.3% 1992 85.2 1.9% 92.6 0.6% 1993 87.5 2.7% 92.4 -0.2% 1994 88.0 0.6% 96.3 4.2% 1995 90.2 2.6% 96.9 0.7% 1996 88.4 -2.1% 101.2 4.4% 1997 90.8 2.8% 102.8 1.6% 1998 94.8 4.4% 104.3 1.5% 1999 95.8 1.0% 99.1 -5.0% 2000 97.5 1.7% 98.9 -0.3% 2001 97.5 0.1% 98.8 -0.1% 2002 100.0 2.5% 100.0 1.3% 2003 99.6 -0.4% 101.7 1.7% 2004 100.8 1.3% 104.6 2.8% 2005 103.3 2.5% 110.5 5.7% Total Percent Change 29.6% 23.2% 1989-2005 Average Annual 1.6% 1.3% Growth Rate Source: Economagic, 2006



### The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and indicates the overall trend of product pricing, a nd thus supply-demand conditions, within a segment. As shown in Figure C2F-3, price levels in the U.S. Food Manufacturing and Bevera ge Manufacturing Segments have risen steadily from 1987 to 2005, with bot h segments seeing a Compound Annual Growth Rate of approximately 2%. It is estimated that consumers spe nd only 10 percent of their disposable income on food purchases. Of this 10 percent, 6 percent is for food to be consumed in the home and 4 percent for food consumed away from home. As disposable income rises with sustained economic growth, consumer demand is also expected to increase (U.S. DOC, undated).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### Segments1987198819891990199119921993199419951996199719981999200020012002200320042005

Source: 

### Figure C2F-3: Producer Price Indexes for Food Manufacturing and Beverage Manufacturing

100 110 120 130 140 150 160

Beverage Mfg. NAICS Food Mfg. NAICS

BLS, 2006.



### C2F -2.2 Number of Facilities and Firms As reported in the Statistics of U.S. Businesses , the number of facilities in the Food Manufacturing segment increased by 19% between 1990 and 2003. The number of fi rms in this segment grew by about 24% during this time period. In the Beverage Manufacturing segment, the number of facilities and number of firms increased even more dramatically. Between 1990 and 2001, th e number of facilities in the Beverage Manufacturing segment grew by just over 40%, from 2,200 facilities in 1990 to 3,082 facilities in 2003. The number of firms in Beverage Manufacturing grew more rapidly, with an increase of 44% over the analysis period. Table C2F-4, and Table C2F-5, following page, present the number of fac ilities and firms for the Food Manufacturing and Beverage Manufacturing segments between 1990 and 2003.

C2F-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products

Year Percent Change Percent Change 1990 16,740 2,200 1991 16,790 0.3% 2,211 0.5% 1992 17,824 6.2% 2,287 3.4% 1993 18,114 1.6% 2,281 -0.3% 1994 17,795 -1.8% 2,293 0.5% 1995 17,726 -0.4% 2,333 1.7% 1996 18,587 4.9% 2,576 10.4% 1997 18,558 -0.2% 2,660 3.3% 1998 a 20,088 8.2% 2,601 -2.2% 1999 a 19,954 -0.7% 2,671 2.7% 2000 a 19,902 -0.3% 2,748 2.9% 2001 a 20,340 2.2% 3,033 10.4% 2002 a 19,136 -5.9% 3,099 2.2% 2003 a 19,873 3.9% 3,082 -0.5% 18.7% 40.1%

1.3% 2.6%

a

Source:

Year 

### Table C2F-4: Number of Facilities Owned by Firms in the Food and Beverage Manufacturing Segments Food Manufacturing Number of Facilities Beverage Manufacturing Number of Facilities

Total Percent Change 1990-2003 Average Annual Growth Rate Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. U.S. SBA, 1989-2003. 

### Table C2F-5: Number of Firms in the Food and Beverage Manufacturing Segments Food Manufacturing Beverage Manufacturing Number of Firms Percent Change Number of Firms Percent Change 1990 13,346 1,789 1991 13,418 0.5% 1,818 1.6% 1992 14,409 7.4% 1,875 3.1% 1993 14,698 2.0% 1,867 -0.4% 1994 14,378 -2.2% 1,893 1.4% 1995 14,330 -0.3% 1,954 3.2% 1996 15,189 6.0% 2,192 12.2% 1997 15,189 0.0% 2,235 2.0% 1998 a 16,656 9.7% 2,137 -4.4% 1999 a 16,559 -0.6% 2,196 2.8% 2000 a 16,533 -0.2% 2,267 3.2% 2001 a 16,960 2.6% 2,558 12.8% 2002 a 15,796 -6.9% 2,616 2.3% 2003 a 16,561 4.8% 2,576 -1.5% Total Percent Change 1990-2003 24.1% 44.0% Average Annual Growth Rate 1.7% 2.8%

a Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. SBA, 1989-2003.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### C2F -2.3 Employment and Productivity The U.S. Food and Kindred Products industry is among the most modern in the world. A steady trend of industry growth and accompanying capital outlays have both incr eased production capacity and led to installation of increasingly modern and more efficient, higher technology, production equipmen t (see Section C2F -2.4, below). The higher technology production equipm ent requires a more skilled labor force (Higgins, 2003). At the same time, the higher technology equipment reduces the nu mber of employees needed per dollar of production (Higgins, 2004). Employment has followed different profiles in the two segments between 1987 and 2003. After a sharp increase from 1987 to 1988, Food Manufacturing segment employment followed a relatively stable profile from year to year, decreasing by no more than 2.5 percent and increasing by no more than 3.5 percent. Over the entire period, segment employment increased by 37 percent. The Beverage Manufacturing segment, however, has experienced more volatility over the period, with both a year-to-year increase and decrease in employment of greater than 5 percent at times. Overall, the Beverage Manufacturing segment faced decreasing employment almost every year from 1987 through 1994, before re versing course and experiencing gains from 1994 through 2001. These gains, however, were followed by consecutive declines in 2002 and 2003, with 11 and 8 percent decreases, respectively. This most recent two-year peri od alone has largely accounted for the total decline of 21% in the Beverage Manufacturing segment over the entire peri od. Recent trends towards more automated production and out-sourcing of some tasks could lead to even furthe r reduced employment in these segments in future years (Higgins, 2004). Figure C2F-4 presents employment for the two profiled segments between 1987 and 2001.19871988198919901991199219931994199519961997199819992000200120022003

Note:

Source: 

### Figure C2F-4: Employment for Food Manufacturi ng and Beverage Manufacturing Segments

800,000 880,000 960,000 1,040,000 1,120,000 1,200,000 1,280,000 1,360,000 1,440,000 1,520,000 1,600,000Food Mfg.

100,000 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 200,000Beverage Mfg. Food Mfg. NAICS Food Mfg. SIC Beverage Mfg. NAICS Beverage Mfg. SIC

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classificatio n System (NAICS). For this analysis, EP A converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

C2F-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### Table C2F-6, following page, presents the change in value added per labor hour, a measure of labor productivity , for the two profiled industry segments between 1987 and 2004. As shown in the table, labor productivity in the Food Manufacturing segment has generally grown steadily and at a modest rate, with only four years showing declines in productivity between 1987 and 20 04. Similarly, the Beverage Manufacturing segment also experienced four years in which productivity declined . However, year-to-year changes have shown greater volatility, with both increases and decreases in productivit y nearing 12 percent at several points during the 1987 to 2004 time period. Overall, productivity in both Food Manufacturing and Beverage Manufacturing increased by 29 and 48 percent over the observed time period, respectively, with substantial gains occurring in the years since 2001. Technology improvement in the industry is pl aying an important role in increasing production, as automation allows output levels to increase without significant increases in employment (U.S. DOC, undated).

Year Value ($ millions) Production Hours (millions) $/hr Change Value ($ millions) Production Hours (millions) $/hr Change 1987 120,746 1,522 79 n/a 29,624 148 200 n/a 1988 160,316 1,916 84 5.5% 30,410 145 209 4.6% 1989 156,284 1,917 82 -2.6% 29,797 142 211 0.7% 1990 164,558 1,999 82 1.0% 29,134 140 208 -1.3% 1991 160,577 1,996 80 -2.3% 30,240 139 217 4.5% 1992 172,835 2,105 82 2.0% 31,231 140 223 2.7% 1993 179,335 2,133 84 2.4% 30,800 144 214 -4.0% 1994 181,319 2,161 84 -0.2% 32,301 138 234 9.1% 1995 187,669 2,181 86 2.6% 32,604 139 235 0.4% 1996 178,850 2,162 83 -3.9% 34,711 139 250 6.5% 1997 a 190,869 2,200 87 4.9% 34,947 149 235 -6.0% 1998 a 199,089 2,232 89 2.8% 35,991 148 244 3.7% 1999 a 200,928 2,270 89 -0.7% 34,758 140 248 1.9% 2000 a 205,427 2,284 90 1.6% 33,641 153 220 -11.4% 2001 a 209,742 2,266 93 2.9% 34,642 150 231 5.2% 2002 a 216,737 2,261 96 3.6% 35,399 139 255 10.1% 2003 a 221,351 2,262 98 2.1% 39,420 138 285 11.9% 2004 a 227,654 2,229 102 4.4% 39,315 133 295 3.6% 88.5% 46.4% 28.7% 32.7% -10.1% 47.6%

3.8% 2.3% 1.5% 1.7% -0.6% 2.3% Growth Rate

a

. Source: 

### Table C2F-6: Productivity Trends for Food and Beverage Manufacturing Segments ($2005)

Added Food Manufacturing Value Added/Hour Percent Beverage Manufacturing Value Added/Hour Added Percent

Total Percent Change, 1987-2004 Average Annual
Before 1997, data were compiled in the SIC system; since 1997, these data have been co mpiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using th e 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2F -2.4 Capital Expenditures The Food Manufacturing and Beverage Manufacturing industri es are capital intensive, and need to invest in new machinery, retrofit older equipment, or expand their plants in order to increase production (Higgins, 2002). Capital-intensive industries are characterized by a large va lue of capital equipment per dollar value of production. In order to modernize, expand, and replace existing capacity, new capital expenditures are needed. In 2004, the total level of capital expenditures for the Food Manufacturing and Beverage Manufacturing segments was $14

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### billion ($2005). Approximately 82% of that spending (see Table C2F-7) occurred in the Food Manufacturing segment. From 1987 to 2004, capital expenditur es in the Food Manufacturing increased by almost 58 percent, with a high of $14.5 billion ($2005) in 1999. In the years that foll owed, expenditures decreased s ubstantially, at nearly 7% a year on average, before eventually increasing again in 2004. The Beverage Manufacturing segment has also seen substantial growth in the level of cap ital expenditures. Over the same time period, expenditures in this segment increased by nearly 42 percent, with a peak of $3.3 bi llion in 2002. Expansion or retrofitting of facilities is a priority to keep production trendi ng upward (Higgins, 2002). In 2003, fo od manufacturers operated at capacities above 80 percent, the Institute for Supply Manageme nt’s threshold indicating need for increased capital investment (Higgins, 2003). Recent years have seen increased capital expenditure budgets, with budgeting for 2004 being the strongest in several years (Higgins, 2004).

(millions, $2005)

Year Percent Change Percent Change 1987 7,293 n/a 1,839 n/a 1988 9,194 26.1% 1,904 3.6% 1989 9,939 8.1% 1,839 -3.4% 1990 10,554 6.2% 1,617 -12.0% 1991 10,478 -0.7% 1,825 12.8% 1992 10,967 4.7% 1,880 3.0% 1993 10,254 -6.5% 1,655 -11.9% 1994 10,601 3.4% 1,936 16.9% 1995 12,294 16.0% 2,226 15.0% 1996 11,827 -3.8% 2,170 -2.5% 1997 a 12,600 6.5% 2,799 29.0% 1998 a 13,286 5.4% 2,582 -7.7% 1999 a 14,496 9.1% 2,617 1.4% 2000 a 13,434 -7.3% 2,946 12.6% 2001 a 12,525 -6.8% 2,750 -6.6% 2002 a 11,677 -6.8% 3,311 20.4% 2003 a 11,234 -3.8% 2,501 -24.5% 2004 a 11,499 2.4% 2,605 4.2% 57.7% 41.7%

a 2.7% 2.1% Growth Rate

a

. Source: 

### Table C2F-7: Capital Expenditures for Food and Beverage Manufacturing Segments

Food Manufacturing Beverage Manufacturing Capital Expenditures Capital Expenditures

Total Percent Change 1987- 2004 Average Annual
Before 1997, data were compiled in the SIC system; since 1997, these data have been co mpiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using th e 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 1988-1991, 1993-1996, 1998-2001; a nd 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.


### C2F -2.5 Capacity Utilization Capacity utilization measures output as a percentage of total potential output from available capacity. Capacity utilization reflects excess or insufficient capacity in an industry and is an indication of whether new

C2F-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### investment is likely. The degree of fluctuation in capacity utilization is also an indicator of the relative stability of demand and business conditions in an industry. As shown in Figure C2F-5, following page, capacity u tilization in the Food Manufacturing and Beverage and Tobacco Manufacturing 2 

### industries has generally trended downward over the period 1986 to 2005 3 

### . The food manufacturing industry, however, has not experienced the volatility that the beverage and tobacco manufacturing industry has experienced over this period. Food manufacturing capacity utilization rates have generally remained between 80 and 85 percent, while the beverage and tobacco industry has experienced a high of roughly 85 percent in 1996, followed by a significant decline to below 70 percent by 2002. Looking at both segments together, after peaking in 1988 at about 85 percent, capacity utilizati on generally trended downward to a low of approximately 77 percent in 2002. Over the following two years, capacity utilization increased significantly, rising to nearly 81 percent by 2004. The recent uptrend in utilization suggests overall improving financial performance in these industries. At the same time, the fact that capacity utili zation has remained at a moderate level – lows 70s to mid 80s percent –implies that the industries do not face requirements for large outlays near-term to increase production capacity.

Figure C2F-5: Capacity Utilization for Food Manufacturing and Beverage and Tobacco Manufacturing a



### 65 70 75 80 85 9019861987198819891990199119921993199419951996199719981999200020012002200320042005 

### ( 311)

(

a 

### Food Manufact uring NAICS
Bev erage an d T o bacco Manufact uring NAICS 312)

The Federal Reserve provides capacity utilization data for the combined NAICS 312 (Beverage and Tobacco Manufacturing) sectors. The Federal Reserve does not provide capacity utilization data for ju st the Beverage Manufacturing sector. Source: Federal Rese rve Board, 2005.

2 

### The Federal Reserve provides capacity utilization data for the combined NAICS 312 (Beverage and Tobacco Manufacturing) sector. The Federal Reserv e does not provide capacity utilization da ta for just the Beverage Manufacturing sector. 3 

### More recent capacity utilization data is available than for ot her metrics, and is therefore presented to the latest complete year of available data.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



## C2F-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### Food Manufacturing and Beverage Manufacturing compan ies range in size from multi-billion dollar corporations to small producers with revenues a fraction of the size of the large producers. Many of the companies in these segments are diversified producers of multiple food or beverage products. Since food is a necessary purchase, demand is less affected by the ups and down s of the economy than for other industries. The Food Manufacturing and Beverage Manufacturing segment s have consolidated over the profile time period as companies moved to diversify their product offerings and gain market share. The segments have also looked abroad to tap into the emerging markets of foreign countries. In the Food Manufacturing industry, 415 merger and acquisition transactions were re ported in 2003, down from a high of 813 in 1998. These acquisitions and mergers permit companies to acquire more efficient manuf acturing plants, close inefficient plants, expand product lines, and increase market share in a mature market (U.S . DOC, undated). Some recent mega-mergers in the Food Manufacturing segment include the Kraft Foods’ acquisition of Nabisco, General Mills’ acquisition of Pillsbury, and Tyson’s bringing beef and pork firm IBP into its line up. One aspect of current consumption trends that might be beneficial to the Food Manufacturing firms is the fact that consumers are cooking less, with half of every food dollar being spent on food away from home. Devoting res ources to products geared towards restaurants, vending machines, and other food service providers could reward firms with higher profit margins (Yahoo, 2005b). The Beverage Manufacturing segment has also recorded a number of acquisitions and mergers. Pepsi added the Quaker Oats Company and Gatorade. Cadbury Schweppes acquired the Snapple line, following the industry trend towards non-carbonated beverages, the area of the market that non-alcoholic manufacturers are looking to for growth opportunities (Value Line, 2004). Product differen tiation is a key strategy for larger firms to increase brand awareness and market share (Yahoo, 2005a). As sal es in the United States slow, firms in the non-alcoholic beverage industry are seeing their largest gains from non-U.S. markets (Value Line, 2004). Alcoholic beverage manufacturers have also consolidated during this time period. Anheuser-Busch lost the rank of world’s largest brewer due to the merger of Inbrew and Brazil’s Ambev. The merger between Adolph Coors and Molson further consolidated the industry. Brewers ar e also looking for acquisitions in China, which is seen as an untapped market. Spirits and wine manufacturers have also moved to conso lidate, with Constellation Brands purchasing The Robert Modavi Corporation, a l eader in wine making, as well as working in a joint venture with the French vintner Domaines Barons de Rothschild. Diageo and France’s Pernod Ricard bought Seagrams Company, after outbidding the tandem of Bacardi and Brown-Forman (Yahoo, 2005a). C2F -3.1 Firm and Facility Size
For almost all NAICS codes in the Food Manufactur ing and Beverage Manufacturing segments, the Small Business Administration defines a small firm as having fe wer than 500 employees. The exceptions are NAICS codes 311221, 311312, 311313, 311821, and 312140, which are considered small if the firm has fewer than 750 employees, and NAICS codes 311223, 311225, 311230, and 31 1422, which are deemed small if the firm employs fewer than 1,000 employees. The size categories reported in Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size classifications, therefore preventing precise use of the SBA size threshold in conjunction with SUSB data. Table C2F-8, following page, reports the size distribution of firms and facilities in the Food Manufacturing and Beverage Manufacturing segments for 2003. As shown in the table, small establishments dominate both segments:

f 

### 15,448 of 16,561 (93%) firms in the Food Manufacturing segment had fewer than 500 employees. These small firms owned 16,105 facilities, or 81% of all facilities in the segment.

f 

### 2,500 of 2,576 (97%) firms in the Beverage Manufacturing segment had fewer than 500 employees. These small firms owned 2,587 facilities, or 84% of all Beverage Manufacturing facilities.

C2F-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### Because some six-digit NAICS codes within the Fo od Manufacturing and Beverage Manufacturing segments have small business size thresholds of greater than 500 employees, the reported numbers and percentages of businesses with fewer than 500 employees represent lo wer bounds of the number and percentage of small businesses in these industry segments. Comparing the two sectors to manufacturing industries in gene ral, the percentage of small firms in the food and beverage industry is comparable to the percentage of small firms in all manufacturing industries combined. In 2003, approximately 94 percent of the firms in NAICS 311 and 3121 had fewer than 500 employees, compared to almost 99 percent for all manufacturing firms (U.S. SBA, 2002). However, compared to the Primary Manufacturing Industries, the Food Manufacturing and Be verage Manufacturing industries have a significantly higher percentage of firms within the industry identified as small. As noted below, however, the larger companies within each segment dominate in terms of producing th e majority of shipments for each segment, with the 50 largest firms in Food Manufacturing accounting for 51 pe rcent of shipments, while the 50 largest companies in Beverage Manufacturing producing an even greater share of shipments, at 79 percent of the total (see Table C2F-8, following page).

Manufacturing Segments, 2003 a

Category

0-19 10,519 10,548 1,934 1,936 20-99 3,509 3,703 435 464 100-499 1,420 1,854 131 187

500+ 1,113 3,768 76 495 Total 16,561 19,873 2,576 3,082

a

. Source: 

### Table C2F-8: Number of Firms and Facilities by Size Category for Food and Beverage

Employment Size Food Manufacturing (NAICS 311) Beverage Manufacturing (NAICS 3121) No. of Firms No. of Facilities No. of Firms No. of Facilities

Before 1998, data were compiled in the SIC system; since 1997, these data have been co mpiled in the North American Industry Classification System (NAICS). Fo r this analysis, EPA converted the NAIC S classification data to the SIC code classifications using th e 1997 Economic Census Bridge Between NAICS and SIC U.S. SBA, 1989-2003.



### C2F -3.2 Concentration Ratios Concentration is the degree to which industry output is con centrated in a few large firms. Concentration is closely related to entry barriers, with more concentrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the ma rket share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, th e less competition there is in the industry, other things being equal. 4 

### An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the in dustry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (3,600 +

4 

### Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the extent of competition in an industry.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### 900 + 100). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s guidelines for evaluating mergers, markets in which the HHI is under 1000 are considered unconcentr ated, markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated. As shown in Table C2F-9, following page, the Food Manuf acturing segment has an HHI of 91, and the Beverage Manufacturing segment has an HHI of 532. At these HHI levels, the two industry segments, especially the Food Manufacturing segment, appear quite unconcentrated. With relatively low concentration in the affected industries, firms are unlikely to possess the market power to recover regulatory compliance costs through price increases, particularly if those cost s do not apply relatively uniformly a nd broadly througho ut the industry. The concentration ratios also show that each segment operates in unconcentrated markets. The Beverage Manufacturing segment has the higher concentration of the two segments, with a CR4 of 41 percent. This is slightly lower than the 50 percent threshold, which would begin to indicate concentration in the market. The CR4 for the Food Manufacturing segment is considerably lo wer at only 14 percent. In this segment, the top 50 companies control roughly half of the market, indicating a rather unconcentrated market segment. As noted above, however, mergers and acquisitions are occurring in both segments, wh ich will likely lead to increased concentration. Also, certain subsectors within each segment can be highly concentrated. For example, within the soft drink market, Coca-Cola claims around 50% of the global market, followed by Pepsi with roughly 21% and Cadbury-Schweppes with 7% (Yahoo, 2005a).

Table C2F-9: Selected Concentration Ratios for Food Manufacturing and Beverage Manufacturing Segments, 1997 a Concentration Ratios Total NAICS Code Year Number of Firms 4 Firm (CR4) 8 Firm (CR8) 20 Firm (CR20) 50 Firm CR50) HerfindahlHirschman Index 311 1997 21,958 14% 22% 35% 51% 91 3121 1997 2,169 41% 52% 66% 79% 532

a The 1997 Census of Manufactures is the most recent concentration ratio data available by NAICS code. Source: U.S. DOC, 1987, 1992, 1997, and 2002.


### C2F -3.3 Foreign trade This profile uses two measures of foreign competition: export dependence and import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total import s divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefor e be at a relative disadvant age in their ability to passthrough costs because foreign producers would not incu r costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. ma nufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers.

C2F-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### Export dependence , calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulation-induced increases in producti on costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadvant age in potentially recovering compliance costs through price increases since export sales ar e presumed subject to substantial competition from foreign producers. Table C2F-10, following page, presents trade statistic s for the combined Food Manufacturing and Beverage Manufacturing segments. Due to data limitations, it is not possible to accurately separate the two segments; therefore, they are presented together. Imports and expor ts play a small role in these two segments, with import penetration and export dependence ratios of 6.2 and 6.3 percent, respectively, in 2001. Both measures of foreign competition are well below the U.S. manufacturing averages for 2001. Given just these measures, it would be reasonable to assume that these segments do not face signi ficant foreign competitive pressures, and would have more latitude in passing through to customers any increase in production costs resulting from regulatory compliance. However, as noted above, the HHI of the Food Manufacturing and Beverage Manufacturing segments is 91 and 532 respectively, suggesting firms in these segments have low market power, limiting their ability to pass through any in crease in production costs.
Table C2F-10: Trade Statistics for Combined Food and Beverage Manufacturing Segments

Year (millions, $2005) Value of Exports (millions, $2005) (millions, $2005) Implied Domestic

a b Export

c 1989 20,426 20,917 451,370 450,879 4.5% 4.6% 1990 21,177 21,191 463,736 463,722 4.6% 4.6% 1991 19,893 22,437 445,213 442,669 4.5% 5.0% 1992 20,723 24,833 462,462 458,352 4.5% 5.4% 1993 20,019 25,312 470,713 465,420 4.3% 5.4% 1994 21,243 27,846 468,573 461,970 4.6% 5.9% 1995 22,044 30,604 477,200 468,640 4.7% 6.4% 1996 24,652 31,071 479,552 473,132 5.2% 6.5% 1997 a 26,188 32,229 493,238 487,196 5.4% 6.5% 1998 d 27,241 30,511 494,083 490,813 5.6% 6.2% 1999 d 29,082 28,779 485,511 485,815 6.0% 5.9% 2000 d 30,036 29,728 484,977 485,284 6.2% 6.1% 2001 d 30,539 30,749 491,424 491,214 6.2% 6.3% 2002 d 32,661 28,822 489,876 493,715 7.0% 6.0% 59.9% 37.8% 8.5% 9.5% Change 1989-2002 Compound Annual 3.7% 2.5% 0.6% 0.7% Growth Rate

a
b

d

. Source: Value of Imports Value of Shipments Consumption Import Penetration Dependence

Total Percent

Calculated by EPA as sh ipments + imports - exports. Calculated by EPA as imports divided by impl ied domestic consumption. Calculated by EPA as exports divided by shipments. Before 1997, data were compiled in th e SIC system; since 1997, these data have b een compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classifica tion data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-17 c§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### As shown in Figure C2F-6, following page, Food and Beverage Manufacturing im ports remained relatively constant from 1989 through 19 95, before beginning a steady climb through 2002. Over these seven years, Food and Beverage Manufacturing imports gr ew by approximately 48 percent, fro m $22.0 billion ($2005) in 1995 to $32.7 billion in 2002. Food and Beve rage Manufacturing exports increased from 1989 through 1997, with a high of approximately $32.2 billion in that year. Since then, Food and Beverage Manufactur ing exports have remained relatively stable, averaging $30 billion from 1998 to 2002. For most of this period, the Food and Beverage Manufacturing segments recorded a positive trade balance, even though the value of imports was growing. However, in 1999, imports exceeded exports by just over $300 million. By 2002, this trade deficit widened to over $3.5 billion.

Manufacturing Segments (millions, $2005)19891990199119921993199419951996199719981999200020012002

a

. Source: 

### Figure C2F-6: Value of Imports and Export s for Food Manufacturing and Beverage

1 5 ,0 0 0 1 7 ,5 0 0 2 0 ,0 0 0 2 2 ,5 0 0 2 5 ,0 0 0 2 7 ,5 0 0 3 0 ,0 0 0 3 2 ,5 0 0 3 5 ,0 0 0 3 7 ,5 0 0 4 0 ,0 0 0

Fo o d & Bev erage Im p o rt s N A ICS Fo o d & Be v e r age I m p o r t s SI C Fo o d & Be v e rage E x p o rt s N A ICS Fo o d & Bev er a ge E x p o r t s SI C

Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North American Industry Classi fication System (NAICS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC U.S. DOC, 2006.



## C2F-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### Financial performance in the Food Manufacturing and Beve rage Manufacturing segments is not as closely linked to macroeconomic cycles as it is in other, more cyclical manufacturing industries. As products from these segments are generally “consumer staples,” they are no t as affected by swings in the U.S. economy as other manufactured products, such as those from the five Primar y Manufacturing Industries. As a result, businesses in these segments have been able to maintain a moderate level of positive financial performance over the profile time period, including the U.S. recession of the ear ly 2000s, which more substantially affected other manufacturing industries such as pulp and paper and steel. Although the Food Manufacturing segment experienced some business weakness from the economic sl owdown of the early 2000s, the effects were milder compared to other manufacturing industries. By 2002 , business conditions improved and the Food Manufacturing segment returned to positive growth (Higgins, 2002). In 2003, the food and beverage companies were expected to

C2F-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### fare much better than U.S. manufacturers generally in overall revenue growth, bei ng ranked third out of major U.S. manufacturing industries in revenue growth expectations (Higgins, 2003). This profile uses two measures of financial condition and performance: Net Profit Margin and Return on Total Capital

. Net profit margin is calculated as after-tax income before nonrecu rring gains and losses as a percentage of sales or revenue, and measures profitability, as reflected in the conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectively, must generate a sufficient profit margin if the industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from several factors, including: variations in aggregate economic c onditions (including international and U.S. conditions), variations in industry-specific market conditions (e.g., short-term capacity expansion resulting in overcapacity), or changes in the pricing and availability of inputs to the industry’s production processes (e.g., the cost of energy to the manufacturing process). The extent to which these fluc tuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. variable cost structure of the industry’s operations. In a capital intensive industry such as the food and beverage industry, the relativel y high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in output or pr ices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by the total of shareholders’ equity and long- term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of th e financial source of the capital (i.e., equity, debt, or liability element). As such, the retu rn on total capital provides insight in to the profitability of a business’ assets independent of financial structure and is thus a “purer” i ndicator of asset profitability than return on equity. In the same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital. EPA calculated net profit margin and return on total capital using data from the Value Line Investment Survey for U.S. firms identified by Value Line as operating prim arily in the Food and Kindred Products industry and specifically in the following business segments: Food Pro cessing (112 firms), Beverage-soft drink (15 firms), and Beverage-alcoholic (20 firms). The data series were calculated on a revenue-weighted basis using the Value Line-reported items: Net Profit Margin, Return on Total Ca pital, and Revenue. These data series thus represent the performance of a broad, but not exhaustive, set of publicly traded firms in th ese business segments over the analysis period. The data series excludes privately held firms and publicly held firms not reported in the Value Line database. The Value Line-based Food Processing data series may be taken to align approximately with the NAICS 311 sector, Food Manufacturing; the Beverage-sof t drink and Beverage-alc oholic data series align approximately with the NAICS 3121 sector, Beverage Manufacturing. Figure C2F-7, following page, shows trends in net pr ofit margins for food processing, alcoholic beverage, and soft drink beverage firms between 1992 and 2005. All three business segments reported positive margins over the entire period. Being a lower risk segment of the over all Food and Kindred Products industry, the food-processing segment has the lowest net profit margin of the three gr oups, roughly 5 percent, but its margin remained the most stable over the time period. Margins in both beverage segments rose from approximately 8 percent in 1992 to just over 12 percent by 2005. However, the soft drink segme nt exhibited greater year-to-year volatility while the alcoholic beverage segment’s margin experienced relatively steady growth over the period.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-19§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products

0% 3% 6% 9% 12% 15%19921993199419951996199719981999200020012002200320042005 ( ( ) 

### 0% 3% 6% 9% 12% 15%19921993199419951996199719981999200020012002200320042005 

### Figure C2F-7: Net Profit Margin for Food and Beverage Manufacturers

Beverage Soft Drink) Beverage Alcoholic Food Processing 

### Beverage (Soft Drink) Beverage (Alcoholic) Food Processing

Source: Value Line, 2003; Value Line, 2006.



### Figure C2F-8, following page, presents tr ends in return on total capital for th e three segments. Again, all three business segments reported positive returns over the entire period. Of the three segments, the soft drink beverage segment recorded the highest averag e return on capital over the analysis period, followed by the alcoholic beverage segment and the food processing segments. Simi lar to the trend in net profit margin, the alcoholic beverage segment has shown the least volatility of the three segments in return on total capital, increasing from 14 percent in 1992 to about 17 percent by 2005, without e xperiencing any substantial shifts in performance over the time period. Since the onset of the U.S. recession in early 2000, the food-processing segment has shown the lowest return on total capital, decreasing from a high of almost 18 percent in 1999 to a low of 10 percent in 2002. The segment has rebounded since 2002, with returns to cap ital increasing to about 12 percent by 2005. Although

C2F-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### the soft drink beverage segment achieved higher overall re turns than the other segment s, this segment has also exhibited substantial year-to-year volatility.

0% 4% 8% 12% 16% 20% 24% 28%19921993199419951996199719981999200020012002200320042005 ) ) 

### 0% 4% 8% 12% 16% 20% 24% 28%19921993199419951996199719981999200020012002200320042005 

### Figure C2F-8: Return on Total Capita l for Food and Beverage Manufacturers

Beverage (Soft Drink Beverage (Alcoholic Food Processing 

### Beverage (Soft Drink) Beverage (Alcoholic) Food Processing

Source: Value Line, 2003; Value Line, 2006.


### Overall, the business outlook for the Food and Kindred Produc ts industry, both in aggregate and for the individual segments, is generally positive. Over the past several years, the Food Processing Segment has enjoyed generally stronger financial performance than the U.S manufact uring industry as a whole. Reflecting this strong performance, securities market returns for the food-processing segment have substantially exceeded the performance of the broader securities market. Between 2000 and mid-year 2005, the Standard & Poor’s Packaged Foods/Meats segment index gained nearly 80 percent, while the Standard & Poor’s 500 Index recorded a loss of

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### approximately 5 percent (Standard & Poor’s, 2005a). N ear-term, this segment is experiencing some margin pressure from rising costs of energy and other input comm odities, and from pension funding burdens. However, the longer-term outlook remains positive as the segment has modernized its capital stoc k and achieved substantial operating efficiencies through mergers and acquisitions a nd other restructurings to reduce operating costs. Finally, rising global income and trade liberalization are also expected to contribute to growing demand and additional market opportunities for U.S. producers (Standard & Poor’s, 2005a). The business outlook for the Soft Drink Segment is gene rally favorable. As shown in Figure C2F-7 and Figure C2F-8, this segment has performed better financially than the Food Processing Segment in recent years. The near-term business outlook remains gene rally positive for U.S. producers in this segment, in particular due to improved productivity and general strengthening of dom estic and international markets for this segment’s products (Standard & Poor’s, 2005b). The outlook for the Alcoholic Beverage Segment is also ge nerally favorable. This segment is composed of two sub-industry segments, the Brewers sub-segment and Distillers/Vintners sub-segment. Although the Brewers subsegment has achieved generally good financial performance over the past five years (increase of approximately 35 percent in the Standard & Poor’s sub-segment index vs . Standard & Poor’s 500 Index loss of approximately 5 percent), near-term this sub-segment is expected to reco rd more modest gains, largely due to moderating growth in demand for this segment’s products. At the same time, this sub-segment has achieved substantial productivity improvements and is positioned to achie ve moderate growth a nd financial performance l onger-term (Standard & Poor’s, 2005c). The outlook for the Distillers/Vintners s ub-segment is generally more favorable. After recording very strong financial performance since 2000 (increase of approximately 140 percent in the Standard & Poor’s sub-segment index vs. Standard & Poor’s 500 Index loss of approximately 5 percent), this sub-segment remains positioned to benefit from favorable dem ographic trends and a generally stable trend of modestly rising product demand. Consolidation and increased productivity also c ontribute to a favorable financial outlook for this subsegment (Standard & Poor’s, 2005d).


## C2F-5 F ACILITIES 

## O PERATING 

## C OOLING 

## W ATER 

## I NTAKE 

## S TRUCTURES 

### Point source facilities that use or propose to use a cooli ng water intake structure that withdraws cooling water directly from a surface water body of the United States ar e potentially subject to Section 316(b) of the Clean Water Act. In 1982, the Food and Kindred products industry withdrew 272 billion gallons of cooling water, accounting for approximately 5 percent of total manufacturi ng cooling water intake in the United States. The industry ranked 6 th 

### in industrial cooling water use, behind the electric power generation industry, chemical, primary metals, petroleum and coal products, and paper and allied products indu stries (U.S. DOC, 1982). This section provides information for the facilities in the Food and Kindred Products i ndustry that EPA estimates to be subject to regulation under the regulatory analysis options. Existing facilities that meet all of the following conditions would have been subj ect to regulation under the three regulatory analysis options:

f 

### Have a National Pollutant Discharge Elimination Syst em (NPDES) permit or are required to obtain one;

f 

### Use or propose to use one or more cooling water inta ke structures to withdraw water from waters of the United States;

f 

### Use at least twenty-five (25) percent of the wate r withdrawn exclusively for contact or non-contact cooling purposes; and

f 

### Meet the applicability criteria for the specific regulator y analysis option in terms of design intake flow and source waterbody type (i.e., 50 MGD for All Wate rbodies, 100 MGD for Certain Waterbodies, or 200 MGD for All Waterbodies).

C2F-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### The regulatory options also cover substantial additions or modifications to operations undertaken at such facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the Phase III regulation based on a minimum applicability thr eshold of 2 MGD, this section focuses on the facilities nationwide in the profiled Food and Kindred Products indus try segments that are estimated to be subject to regulation based on the design intake fl ow and waterbody applicability criteria set forth in the regulatory analysis options (see Table C2F-1, above for additional informati on on the broader set of facilities potentially subject to regulation). C2F -5.1 Waterbody and Cooling System Type Table C2F-11, Table C2F-12, and Table C2F-16, following page, report the distribution of the Food and Kindred Products industry facilities by type of wa ter body and cooling system for each analysis option. All of the Section 316(b) Food and Kindred Products fac ilities withdraw cooling water from either a freshwater river or stream.

Table C2F-11: Number of Food and Kindred Products Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and Cooling System Combination No. No. No. No. Other Total

0 0% 3 33% 3 33% 3 33% 9 Source: Source:

Combination No. No. No. No. Other Total

0 0% 0 100% 3 100% 0 0% 3 Source: Source:

Combination No. No. No. No. Other Total

0 0% 0 100% 3 50% 3 50% 6 Source: Source: Recirculating Waterbody Type % of Total % of Total Once-Through % of Total % of Total Freshwater River/ Stream U.S. EPA, 2000; U.S. EPA analysis, 2006.



### Table C2F-12: Number of Food and Kindred Produc ts Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and Cooling System Recirculating Waterbody Type % of Total % of Total Once-Through % of Total % of Total Freshwater River/ Stream U.S. EPA, 2000; U.S. EPA analysis, 2006.



### Table C2F-13: Number of Food and Kindred Pro ducts Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and Cooling System Recirculating Waterbody Type % of Total % of Total Once-Through % of Total % of Total Freshwater River/ Stream U.S. EPA, 2000; U.S. EPA analysis, 2006.


### C2F -5.2 Facility Size Figure C2F-11, Figure C2F-10, and Figure C2F-11 below, show the employment size category for the Food and Kindred Products industry facilities esti mated subject to regulation under the regulatory analysis options. The majority of the facilities have equal or greater than 100, but fewer than 500 employees. Three of the facilities (33 percent) have between 500 and 999 employees, with no facilities employing greater than 1,000 employees.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-23§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products

0 3 3 3

0 0 1 2 3 4

i ( )

Source:

4

1 2 3 3

i (

0 0 0 0 0

Source:



### Figure C2F-9: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the Profiled Food Manufacturing and Beverage Segments

<100 100-249 250-499 500-999 >=1000 Food & K ndred Products SIC 20

U.S. EPA, 2000; U. S. EPA analysis, 2006.


### Figure C2F-10: Number of Facilities Estimate d Subject to the 200 MGD All Option by Employment Size for the Profiled Food Manufacturing and Beverage Segments

Food & K ndred Products SIC 20)

<100 100-249 250-499 500-999 >=1000

U.S. EPA, 2000; U. S. EPA analysis, 2006.

C2F-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products

20 0 3

0 3

0 0 1 2 3 4

<100 100-249 250-499 500-999 >=1000 i

Source:



### C2F -5.3

As shown in Table

Large Small SIC Code SIC Description Total Number Number 9 100% 0 0% 9 Source:

Large Small SIC Code SIC Description Total Number Number 3 100% 0 0% 3 Source:

Large Small SIC Code SIC Description Total Number Number 3 100% 0 0% 3 Source: 20

20 

### Figure C2F-11: Number of Facilities Estimate d Subject to the 100 MGD CWB Option by Employment Size for the Profiled Food Manufacturing and Beverage Segments

Food & K ndred Products (SIC 20)

U.S. EPA, 2000; U. S. EPA analysis, 2006.



### Firm Size EPA used the Small Business Administration (SBA) small entity size standards to determine the number of facilities in the Food and Kindred Products facility dataset that are owned by small firms. Depending on their SIC code, firms are defined as small based on either their re venues or number of employees. C2F-14, Table C2F-15, and Table C2F-16, large firms own all of the Food and Kindred Products facilities estimated to be subject to regulation, rega rdless of the analysis option considered.

Table C2F-14: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Food and Kindred Products Industry

% of SIC % of SIC Food and Kindred Products U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006. 

### Table C2F-15: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Food and Kindred Products Industry

% of SIC % of SIC Food and Kindred Products U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006. 

### Table C2F-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the Food and Kindred Products Industry

% of SIC % of SIC Food and Kindred Products U.S. EPA, 2000; D&B, 2001; U. S. SBA 2006; U.S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-25§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



## R EFERENCES 

### Bureau of Labor Statistics (BLS). 2006. Producer Price Index . Industry Data Series: PCU311-Food Mfg.; PCU3121-Beverage Mfg. Available at: http://www.bls. gov/ppi/home.htm. Downloaded February 1, 2006. Dun & Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum. August 2001. Economagic. 2006. Industrial Production: Industry Subtotals, Individual Series, and Special Aggregates. Seasonably Adjusted. Data Series: Food; Beverage. Available at: http://www.economagic.com/frbg17.htm#IPMarket. Downloaded February 2, 2006. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual.
Federal Reserve Board. 2005. Capacity Utilization: Manufac turing, Mining, and Utilities. Data extracted February 4, 2006. Available at: http://www.fe deralreserve.gov/Releases/G17/ipdisk/utl_sa.txt Harris, J.M. 2002. “Food manufacturing.” U.S. Food Marketing System, 2002/AER-811. Economic Research Service/USDA. Higgins, K. 2004. “The state of food manufacturi ng: processors bring out the checkbooks and focus on productivity and people.” Food Engi neering. September 2, 2004. Higgins, K. 2003. “The state of food manufacturing: pr ocessors address changing priorities.” Food Engineering. October 1, 2003. Higgins, K. 2002. “State of food manufacturing: stuck in neutral.” Food Engineering. September 1, 2002. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry & Trade Outlook ‘00.
Standard & Poor’s. 2005a. Industry Outlook: Packaged Foods/Meats . June 11, 2005. The McGraw-Hill Companies.
Standard & Poor’s. 2005b. Industry Outlook: Soft Drinks . June 11, 2005. The McGraw-Hill Companies.
Standard & Poor’s. 2005c. Industry Outlook: Brewers . June 11, 2005. The McGraw-Hill Companies.
Standard & Poor’s. 2005d. Industry Outlook: Distillers/Vintners . June 11, 2005. The McGraw-Hill Companies.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration. Industry, Trade, and the Economy: Data and Analysis . Data by NAICS and SIC. Available at: http://www.ita.doc.gov/td/industry/otea/industry_sector/tabl es_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1989, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge Between NAICS and SIC.

C2F-26 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



### U.S. Department of Commerce (U.S. DOC). Undated. 2004 Industry Outlook for Processed Foods

. International Trade Administration. Downloaded on May 6, 2005. Available at: http://www.ita.doc.gov/td/ocg/outlook_food04.pdf
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards . Available at: http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses . Available at: http://www.sba.gov/advo/research/data.html . Downloaded February 4, 2006.
U.S. Small Business Administration (U.S. SBA). 2002. Employer Firms, and Employment by Employment Size of Firm by NAICS Codes, 2002 . Available at: http://www.sba.gov/advo/stats/us_02_n6.pdf
Value Line. 2006. Value Line 3.0 Investment Analyzer.
Value Line. 2004. Soft Drink Industry . February 6, 2004.
Value Line. 2003. Value Line Investment Survey. Yahoo. 2005a. Beverages Industry Profile. Downloaded May 6, 2005. Available at: http://biz.yahoo.com/ic/profile/bevalc_1042.html Yahoo, 2005b. Food Industry Profile. Downloaded May 6, 2005. Available at: http://biz.yahoo.com/ic/profile/fodmfg_1349.html

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2F-27§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Exis ting Facilities Chapter C2F: Food and Kindred Products



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C2F-28 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Existi ng Facilities Chapter C2G: Other Industries 

# Chapter C2G: Facilities in Other Industries (Various SICs)

I NTRODUCTION 

### The preceding profile sections focus on the six Primary Manufacturing Industries – Paper and Allied Products, Chemicals and Allied Products, Petroleum Refining, Steel, Aluminum, and Food and Kindred Products – identified, after electric power generato rs, as using the largest amount of cooling water in their oper ations and most likely, after electric power generators, to be within the scope of the 316(b) Phase III regulation. However, facilities in other industries use cooling water and would therefore also be subject to the final regulation if they meet the regulation’s specifications. This section of the profile provides inform ation on a sample of facilities in these Other Industries. 

## C HAPTER 

## C ONTENTS
Introduction..........................................................C2G-1 C2G-1 Facilities Operating Cooling Water Intake Structures ................................................C2G-2 C2G-1.1 Waterbody and Cooling System Types .... .....................................................C2G-2 C2G-1.2 Facility Si ze....................................C2G-3 C2G-1.3 Firm Size ........................................C2G-5 References............................................................C2G-6



### Although EPA targeted its Detailed Industry Questionnaire at the electric power industry and manufacturing industries that use large amounts of cooling water, the Agency received 10 questionnaire responses from facilities with business operations in industries other than these majo r cooling water-intensive industries. EPA originally believed these facilities to be non-utility electric power generators; however, inspection of their responses indicated that the facilities were better understood as cooling water-dependent facilities whose principal operations lie in businesses other than the electric power industry or the Primary Manufacturing Industries. Unlike the sample facility observations for the six Primar y Manufacturing Industries, the sample of observations from Other Industries is not based on a scientifically fram ed sample and the information from this sample of observations may not be reliably extrapolated beyond these f acilities. As a result, EPA’s profile of information for the Other Industries facilities is restricted to these 10 sample facilities and is not presented as national estimates. Of the 10 Other Industries facilities, 7 withdraw at least 50 million gallons of water a day and are thus would be subject to regulation under the regulator y analysis options considered for ex isting facilities. These facilities fall in a wide range of businesses, as defined by 2-digit SIC indus try group. Table C2G-1, following page, presents the number of responses received from facilities in the Ot her Industries by industry group. The information summarized in the following sections focuses on these Othe r Industries facilities that EPA estimates will be subject to regulation under the regulatory analysis options.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2G-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Existi ng Facilities Chapter C2G: Other Industries



### Table C2G-1: Facilities in Other Industries by 2-digit SIC code Estimated Subject to Regulation Under the Regulatory Analysis Options No. of Facilities SIC Code SIC Description Important Operations
2 10 Metal mining Mining, developing mines, or exploring fo r metallic minerals (ores); ore dressing and beneficiating operations, whether perfo rmed at mills operated in conjunction with the mines served or at mills, such as custom mills, operated separately. 3 34 Fabricated metal products, Ferrous and nonferrous metal products, such as metal cans, tinware, handtools, except machinery and cutlery, general hardware, nonelectric hea ting apparatus, fabricated structural transportation equipment metal products, metal forgings, metal st ampings, ordnance (except vehicles and guided missiles), and a variety of me tal and wire products, not elsewhere classified. 1 37 Transportation equipment Equipment for transportation of passenge rs and cargo by land, air, and water. 1 49 Electric, gas, and sanitary Generation, transmission, a nd/or distribution of electricity or gas or steam. services Water and irrigation systems, and sanitary systems engaged in the collection and disposal of garbage, sewage and othe r wastes by means of destroying or processing materials. Source: U.S. EPA, 2000; Executive Of fice of the President, 1987.



## C2G-1 F ACILITIES 

## O PERATING 

## C OOLING 

## W ATER 

## I NTAKE 

## S TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point s ource facilities that use or propose to use a cooling water intake structure and that withdraws cooling water directly from a surface waterbody of the United States. This section provides information for facilities in Other Industri es subject to regulation under the regulatory analysis options. The regulatory analysis options apply to existi ng facilities that meet all of the following conditions:

f 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supplier who has a coo ling water intake structure; or their cooling water intake structure(s) withdraw(s) cooling water from wa ters of the U.S., and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;

f 

### Have an National Pollutant Discharge Elimination Sy stem (NPDES) permit or are required to obtain one; and

f 

### Meet the applicability criteria for the specific regulator y analysis option in terms of design intake flow and source waterbody type (i.e., 50 MGD for All Wate rbodies, 100 MGD for Certain Waterbodies, or 200 MGD for All Waterbodies). The regulatory options also cover substantial additions or modifications to operations undertaken at such facilities. C2G-1.1 Waterbody and Cooling System Types Table C2G-2, Table C2G-3, and Table C2G-7, followi ng page, summarize information on the Other Industries facilities by type of water body and cooling system for each option. All of these facilities have a once-through system. Plants with once-through cooling water system s withdraw between 70 and 98 percent more water than those with recirculating systems.

C2G-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Existi ng Facilities Chapter C2G: Other Industries



### Table C2G-2: Other Industries Facilities Estimated Subject to the 50 MGD All Option by Water Body and Cooling System Type Cooling System Recirculating Combination Once-Through Other Water Body Type % of % of % of % of Total a Number Number Number Number Total Total Total Total Other Industries Estuary/ Tidal River 0 0% 0 0% 1 15% 0 0% 1 Freshwater Stream/River 0 0% 0 0% 3 40% 0 0% 3 Great Lake 0 0% 0 0% 2 30% 0 0% 2 Ocean 0 0% 0 0% 1 15% 0 0% 1 Total a 0 0% 0 0% 7 100% 0 0% 7

a Individual numbers may not sum to total due to independent rounding. Source: U.S. EPA, 2000; U. S. EPA Analysis, 2006.



### Table C2G-3: Other Industries Fac ilities Estimated Subject to the 200 MGD All Option by Water Body and Cooling System Type Cooling System Recirculating Combination Once-Through Other Water Body Type % of % of % of % of Total a Number Number Number Number Total Total Total Total Other Industries Estuary/ Tidal River 0 0% 0 0% 1 50% 0 0% 1 Great Lake 0 0% 0 0% 1 50% 0 0% 1 Total a 0 0% 0 0% 2 100% 0 0% 2

a Individual numbers may not sum to total due to independent rounding. Source: U.S. EPA, 2000; U. S. EPA Analysis, 2006.



### Table C2G-4: Other Industries Fac ilities Estimated Subject to the 100 MGD CWB Option by Water Body and Cooling System Type Cooling System Recirculating Combination Once-Through Other Water Body Type % of % of % of % of Total a Number Number Number Number Total Total Total Total Other Industries Estuary/ Tidal River 0 0% 0 0% 1 25% 0 0% 1 Freshwater Stream/River 0 0% 0 0% 1 25% 0 0% 1 Great Lake 0 0% 0 0% 2 50% 0 0% 2 Total a 0 0% 0 0% 4 100% 0 0% 4

a Individual numbers may not sum to total due to independent rounding. Source: U.S. EPA, 2000; U. S. EPA Analysis, 2006.


### C2G-1.2 Facility Size Figure C2G-3, Figure C2G-2, and Figure C2G-3 show the employment size category for the Other Industries facilities that EPA estimates will be subject to the regulation under each analysis option.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2G-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Existi ng Facilities Chapter C2G: Other Industries

4

0 0 0 3

0 1 2 3 4

i

Source:

0 0 0 0 2

0 1 2 3 4

i

Source: 

### Figure C2G-1: Other Industries Facilities Esti mated Subject to the 50 MGD All Option by Employment Size

<100 100-249 250-499 500-999 >=1000 Other Industr es

U.S. EPA, 2000; U. S. EPA Analysis, 2006.


### Figure C2G-2: Other Industries Facilities Estimated Subject to the 200 MGD All Option by Employment Size

<100 100-249 250-499 500-999 >=1000 Other Industr es

U.S. EPA, 2000; U. S. EPA Analysis, 2006.

C2G-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Existi ng Facilities Chapter C2G: Other Industries

2

0 0 0 2

0 1 2 3 4

<100 >=1000

Source:



### Figure C2G-3: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size

100-249 250-499 500-999 Other Industries

U.S. EPA, 2000; U. S. EPA Analysis, 2006.



### C2G-1.3 Firm Size EPA used the Small Business Administration (SBA) small entity size standards to determine the number of the Other Industries facilities that are owned by small firms. Depending on their SIC code, firms are defined as small based on either revenues or number of employees. As reported in Table C2G-5, Table C2G-6, and Table C2G-7, large firms own all of the Other Industries facilities th at EPA estimates will be subject to regulation.
Table C2G-5: Other Industries Facilities Estimated Subject to the 50 MGD All Option by Firm Size Large Small Total Other Industries 7 0 7 Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA, 2006; U.S. EPA Analysis, 2006.



### Table C2G-6: Other Industries Facilities Estimated Subject to the 200 MGD All Option by Firm Size Large Small Total Other Industries 2 0 2 Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA, 2006; U.S. EPA Analysis, 2006.



### Table C2G-7: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size Large Small Total Other Industries 4 0 4 Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA, 2006; U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C2G-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Phase III Existi ng Facilities Chapter C2G: Other Industries



## R EFERENCES 

### Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum . August 2001. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures

. U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards . Available at: http://www.sba.gov/size/sizetable2002.html.

C2G-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2: Profile of Manufacturers



## G LOSSARY 

### Capital expenditures: As reported in the Economic Censuses , reflects permanent additions and major alterations, as well as replacements a nd additions to capacity, for which depr eciation, depletion, or Office of Minerals Exploration accounts are ordinarily maintain ed. Reported capital expenditures include work done on contract, as well as by the mine forces. Totals for expenditures include the costs of assets leased from other concerns through capital leases. Excluded are expenditures for land and cost of maintenance and repairs charged as current operating expenses. Also excluded are capita l expenditures for mineral land and rights, which are shown as a separate item. Capacity utilization: Indicates the extent to which plant capacity is being used and shows potential excess or insufficient capacity. This profile reports capacity utilization as published by the U.S. Bureau of Census in the Survey of Plant Capacity published in the Current Industrial Reports. The u tilization rate is equal to an output index divided by a capacity index. Output is measured by seasonally adjusted indexes of industrial production, and is based on actual output in 1992. The capacity indexes attempt to capture the concep t of sustainable practical capacity, which is defined as the greatest level of output that a plant can maintain within the framework of a realistic work schedule, taking account of normal down time, and assuming sufficient availability of inputs to operate the machinery and equipment in place. Concentration ratio: The combined percentage of total indust ry output accounted for by the largest producers in the industry. For example, the four-firm concentration ra tio (CR4) refers to the market share of the four largest firms. The higher the concentration ratio, the more concen trated the industry. A market is generally considered highly concentrated if the CR4 is greater than 50 percent. Coverage ratio: The ratio of primary products shipped by the establishments classified in the industry to the total shipments of such products that are shipped by all manufacturing establishments, wherever classified. An industry with a high coverage ratio accounts for most of the value of shipments of its primary products, whereas an industry with a low coverage ratio produces a smaller portion of the total value of shipments of its primary products produced by all sources. Employment:Total number of full-time equivalent employees, including production workers and nonproduction workers. Export dependence: The share of shipments by domestic producer s that is exported; calculated by dividing the value of exports by the value of domestic shipments. Herfindahl-Hirschman index (HHI): An alternative measure of concen tration. Equal to the sum of the squares of the market shares for the largest 50 firms in th e industry. The higher the index, the more concentrated the industry. The Department of Justice uses the HHI for antitrust enforcement purposes. The benchmark used by DOJ is 1,000, where any industry with an HHI less than 1,000 is considered to be unconcentrated. The advantage of the HHI over the concentration ratio is that the former gives information about the dispersion of market share among all the firms in the industry, not just the largest firms (Arnold, 1989). Import penetration: The share of all consumption in the U.S. that is provided by imports; calculated by dividing imports by reported or apparent domestic co nsumption (the latter calcu lated as domestic value of shipments minus exports plus imports). Labor productivity: Amount of output produced per unit of labor input on average. Calculated in this profile as real value added divided by production hours. This me asure indicates how an industry uses labor as an input in the production process. Changes over time in labor produc tivity may reflect changes in the relative use of labor versus other inputs to produce output, due to technological changes or cost-cutting efforts. Changing patterns of

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Di stribute C2Glos-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2: Profile of Manufacturers



### labor utilization relative to output are particularly im portant in understanding how regulatory requirements may translate into job losses, both in a ggregate and at the community level. Net Profit Margin: is calculated as after-tax income before nonrecurring gains and losses as a percentage of sales or revenue, and measures profitability, as reflected in the conventional accounting concept of net income. Nominal values: Dollar values expressed in current dollars. Operating margin: Measure of the relationship between input costs and the value of production, as an indicator of financial performance and condition. Everyt hing else being equal, industries and firms with lower operating margins will generally have less flexibility to ab sorb the costs associated with a regulation than those with higher operating margins. Operating margins were calculated in this profile by subtracting the cost of materials and total payroll from the value of shipments. Operating margin is only an approximate measure of profitability, since it does not consider capital costs and othe r costs. It is used to examine trends in revenues compared with production costs within an industry; it should not be used for cross-industry comparisons of financial performance. Primary product shipments: An establishment is classified in a particular industry (4-digit SIC codes) if its shipments of the primary products of that industry exceed in value its shipments of the products of any other single industry. An establishment = s primary product shipments are those products considered primary to its industry. Producer production indexes (PPI): A family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services (Bureau of Labor Statistics, PPI Overview).
Real values: Nominal values normalized using a price index to express values in a single year = s dollars. Removes the effects of price inflation when evaluating trends in dollar measures. Return on Total Capital: calculated as annual net profit, plus one-half of annual long-term interest, divided by the total of shareholders’ equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). Secondary product shipments: An establishment = s products that are considered secondary to the industry in which the establishment is classified and primary to other industries. For example, a petroleum refinery classified in SIC code 2911 would produce petroleum products as primary products, but might produce organic chemicals as secondary products. Value added: A measure of manufacturing activity, derived by subtracting the cost of purchased inputs (materials, supplies, containers, fuel, purchased electricity , contract work, and contract labor) from the value of shipments (products manufactured plus receipts for serv ices rendered), and adjusted by the addition of value added by merchandising operations (i.e ., the difference between the sales value and the cost of merchandise sold without further manufacture, processing, or assembly) plus the net change in finished goods and work-in-process between the beginning-and end-of-year inventories. Value added avoids the duplication in value of shipments as a measure of economic activity that results from the use of products of some establishments as materials by others. Value added is considered to be the best va lue measure available for co mparing the relative economic importance of manufacturing among industries and geographic areas. Value of shipments: Net selling values of all products shipped as well as miscellaneous receipts. Includes all items made by or for an establishments from materials owne d by it, whether sold, transferred to other plants of the same company, or shipped on consignment. Value of sh ipments is a measure of the dollar value of production,

C2Glos-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2: Profile of Manufacturers



### and is often used as a proxy for revenues. This profile u ses value of shipments to indicate the size of a market and how the size differs from year to year, and to calculate operating margins.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Di stribute C2Glos-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Chapter C2: Profile of Manufacturers



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C2Glos-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers 

# Chapter C3: Economic Impact Analysis for Manufacturers

I NTRODUCTION 

### This chapter assesses the expected economic effect of the regulatory analysis options considered for regulation of Phase III Manufacturing Facilities on the Manufacturers that would be subject to national categorical requirements under each analysis option. The analysis focuses on impacts in six key manufacturing industries – Paper, Chemicals, Petroleum, Aluminum, Steel, and Food and Kindred Products (the “Primary Manufacturing Industries”) – in which a substantial number of facilities would be subject to regulation. EPA’s analysis of the regulation’s expected impact in these industries is based on a statistically valid sample survey of facilities in these six industries. The sample survey indicates that the regulation would potentially subject as many as 155 facilities in the Primary Manufacturing Industries 1 

### to national requirements. This chapter also considers the effect of the regulation on facilities in other industries (“Other Industries”) that would be within the scope of the regulatory options. The facility impact analysis for Other Industries is restricted to a 

## C HAPTER 

## C ONTENTS
Introduction............................................................ C3-1 C3-1 Data Sources ............................................. C3-3 C3-2 Methodology ............................................. C3-3 C3-2.1 Market-Level Impacts ...................... C3-5 C3-2.2 Impact Measures............................... C3-5 C3-3 Results..................................................... C3-15 C3-3.1 Baseline Clos ures ........................... C3-16 C3-3.2 Number of Facilities with Regulatory Requirements.................................. C3-16 C3-3.3 Post-Compliance Impacts ............... C3-17 C3-3.4 Compliance Costs........................... C3-17 C3-3.5 Summary of Facility Impacts ......... C3-18 C3-3.6 Firm Impacts................................... C3-19 Glossary ............................................................... C3-21 Abbreviations....................................................... C3-22 References............................................................ C3-23 Appendices to Chapter C3 ................................... C3-24



### sample of 4 facilities for which EPA received surveys, but wh ich are not part of the statistically valid sample. As a result, EPA’s analysis for the Other Industries group is limited to these known facilities. EPA has not estimated the number of facilities in the Other Industries group that may be subject to the regulation because EPA does not believe that this number can be reliably extrapolated from the sample of known facilities in this group. However, because the statistically valid survey group of six industr ies (i.e., for the six Primary Manufacturing Industries and Electric Generators) reflects 99% of total cooling water w ithdrawals, EPA believes that few additional facilities in the Other Industries group are potentially subject to the regulatory analysis options. Although EPA was able to undertake impact analysis fo r the Other Industries group using only the sample of known facilities for this group, EPA believes that its analysis for the Other Industries group provides a sufficient basis for regulation development. EPA’s review of the e ngineering characteristics of cooling water intake and use in the Other Industries group indicates that cooling water intake and use in these industries do not differ materially from cooling water intake and use in th e electric power industry and the Primary Manufacturing Industries. In addition, EPA specifically analyzed the economic impacts of the three regulatory analysis options on the 4 sample facilities in the Other Industries group and found no economic impact of the regulatory analysis options on these facilities. For these reasons, EPA believes that its findings of no economic impact to the known

1 

### EPA applied sample weights to 199 sample facilities to account for non-sampled facilitie s and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industry Survey, please refer to the Information Collection Request (U.S. EPA, 1999).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-12 § 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### facilities in the Other Industries group, and thus the practicability of the three regulatory analysis options, are generally applicable to the full breadth of industries, in cluding the Other Industries group, within the regulation’s scope. Based on the sum of the sample-weighted estimate of 155 facilities in the Primary Manufacturing Industries and the 4 known facilities in the Other Industries group, EPA in cluded a total of 159 potentially regulated facilities in the economic impact analysis for the Manufacturers se gment. The total number of Manufacturers segment facilities considered in the economic impact analysis (159) differs from the number of facilities potentially subject to regulation (161), as reported in Chapter A1: Introduction , and as used as the basis for calculating the social costs of the regulatory analysis options. EPA determined that the survey responses of 6 sample facilities lacked certain financial data needed for the facility impact analysis while containing sufficient data to support estimates of facility counts and compliance costs. EPA therefor e retained these sample facilities (8 sample weighted facilities) in the analyses to estimate the total number of Manufacturers facilities potentia lly subject to regulation and for the calculation of social cost but excluded them from the economic impact analysis. When these sample facilities were excluded from the impact analysis, the samp le weights for remaining facilities within the affected sample frames were adjusted upwards to account for their removal. The difference in the reported facility totals in the impact and social cost anal yses reflects the removal of these 6 fac ilities and the use of adjusted sample weights. Both values are valid statistical estimates of th e same, but unknown, value of the Manufacturers’ facility population. EPA undertook the economic impact analysis to aid in assessing the economic achievability of alternative regulatory options and, on the basis of that assessment, to aid in defining a potential fi nal regulation. Measures of economic impact include facility closures and associated losses in employment, financial stress short of closure (“moderate impacts”), and firm-level impacts. Severe impacts are facility closures and the associated losses in jobs at facilities that close due to the regulation. EPA also assessed moderate economic impacts to support its evaluation of regulatory options and to unders tand better the regulation’s economic impacts. Moderate impacts are adverse changes in a facility’s financial position th at are not threatening to its short-term viability. The firm impact analysis assesses whether firms that own multiple facilities are likely to incur more significant impacts than indicated by the facility impact analysis. Im pacts may be more significant at the firm level than at the facility level if a firm owns a number of facilities that in cur significant cost. In addition, a firm-level analysis is needed to assess impacts on sma ll businesses, as required by the Regul atory Flexibility Act and SBREFA. Other chapters consider the impacts on small entities ( Chapter D1: Regulatory Flexibility Analysis ) and impacts on governments ( Chapter D2: UMRA Analysis ). This chapter presents the impact analysis results for the three regulatory analysis options: the “50 MGD for All Waterbodies” option (“50 MGD All”), the “200 MGD fo r All Waterbodies” option (“200 MGD All”), and the “100 MGD for Certain Waterbodies” Option (“100 MGD CWB”). These options differ with regard to (1) their design intake flow (DIF) applicability thresholds (50, 100, and 200 MGD, respectively); and (2) the type of waterbodies to which they would appl y (the options with the 50 and 200 MGD applicability thresholds would apply to all waterbody types while the 100 MGD app licability threshold option would apply only to certain waterbody types – an ocean, estuary, tidal river/stream, or one of the Great Lakes). Facilities meeting these applicability criteria would be required to meet simila r requirements to those required in the final Phase II regulation, including a 80-95% reduction in impingement mortality and a 60-90% reduction in entrainment. Facilities not meeting these criteria would have continue d to be subject to 316(b) requirements established by permit writers based on their Best Professional Judgment (B PJ). As a result, the number of facilities required to meet the national categorical requirements would vary unde r each of the three regulatory analysis options. Of the

2 

### Measures of economic impact include facility closures and associated losses in employment, financial stress short of closure (“moderate impacts”), and firm-level impacts.

C3-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### three options presented here, the 100 MGD for Certain Wate rbodies Option would subject the smallest number of facilities to national categorical requirements, with the 200 MGD for All Waterbodies Option and the 50 MGD for All Waterbodies Option subjecting successively larger numbers of facilities to national requirements.
As outlined in Chapter A1: Introduction , EPA considered several additional regulatory options based on varying flow regimes and waterbody types, in arriving at the regulatory analysis options. Summary results for these supplemental options can be found in Appendix B3A1 to this chapter. This chapter describes the methodology used to assess economic impacts for the Manufacturers’ facilities, and presents the results of the analyses.


## C3-1 D ATA 

## S OURCES 

### The economic impact analyses rely on data provided in the financial portion of the detailed questionnaires distributed by EPA to facilities potentially subject to the Phase III regulation. The surv ey financial data included facility and parent firm income st atements and balance sheets for the three years 1996, 1997, and 1998. In addition to the survey data, a number of secondary s ources were used to characterize economic and financial conditions in the industries subject to the final Phase III regulation. Secondary sources used in the analyses include:

f 

### Department of Commerce economic censu s and survey data, including the Census of Manufactures, Annual Surveys of Manufactures, and international trade data;

f 

### U.S. Industry and Trade Outlook , published by McGraw-Hill and the U.S. Department of Commerce;

f 

### Value Line Investment Survey;

f 

### Annual Statement Studies, published by Risk Management Association (RMA); and

f 

### Statistics of U.S. Businesses (SUSB).


## C3-2 M ETHODOLOGY 

### The impact analysis starts with compliance cost estimat es from the EPA engineering analysis and then calculates how these compliance costs would affect the financial c ondition of Section 316(b) Manufacturers. EPA included the following compliance cost categories in this analysis: capital cost, annual operating and maintenance cost, administrative cost, and the lo ss of business income from potential shutdown of facilities during installation of compliance equipment 3 

### . Of these cost categories, only operating and maintenance and certain administrative costs recur annually. The remaining costs occur only once at the beginning of compliance or on a multi-year interval over the period of the compliance analysis. Some of the impact analyses require combining the annually recurring and non-recurring costs into a single, annual equi valent value. For combining the annually recurring and non-recurring costs in this analysis, EPA calculated the annual equivalent cost of the non-recurring cost categories and added these annualized costs to the annually recurring operating and maintenance cost.
To derive the constant annual value of the non-annua l costs, EPA annualized each cost component over the component’s estimated useful life, using a 7.0% discount rate. The cost of compliance equipment, which includes fine-mesh traveling screens, with and without fish handling, and fish handling and return systems, was annualized over 10 years; initial permitting cost and the income loss from installation shutdown were annualized over 30

3 

### See Appendix C3A2 for details of the down time cost calculation.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### years; and re-permitting cost was annualized over 5 years 4 

### . For more information on the compliance cost components developed for this analysis, see Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities and Technical Development Document for the Fi nal Section 316(b) Phase III Existing Facilities Rule (U.S. EPA, 2006).
As discussed in Chapter C1 , the various economic information used in this analysis were initially provided in dollars of different years. For example, facility financial data obtained in the 316(b) survey for Manufacturers are for the years 1996, 1997, and 1998, while the technology costs of regulatory compliance were estimated in dollars of the year 2002. To support a consistent analysis using these data that were initia lly developed in dollars of different years, EPA needed to bring the dollar values to a common analysis year. For this analysis, EPA adjusted all dollar values to constant dollars of the year 2004 (average or mid-year, depending on data availability) using an appropriate inflation adjustment index. For adjusting compliance costs, EPA used the Construction Cost Index (CCI ) published by the Engineering News-Record. For financial statement information, EPA used the Gross Domestic Product Implicit Price Deflator (GDP Deflator ) to bring dollar values to mid-2004. The values used to adjust the dollar values to constant dollars can be found in Chapter B1

. For the impact analysis, EPA first eliminated from an alysis those facilities showing materially inadequate financial performance in the baseline, that is, in the absence of the regulation. EPA judged these facilities, which are referred to as baseline closures , to be at substantial risk of financ ial failure regardless of any financial impacts of the 316(b) regulation. Second, for the re maining facilities, EPA evaluated how compliance costs would likely affect facility financial health. A facility is identified as a regulatory closure if it would have operated under baseline conditions but would fall below an acceptable financial performance level when subject to the new regulatory requirements. EPA’s analysis also identified facilities that would li kely incur moderate impacts from compliance with the regulation. EPA anticipates that these facilities would e xperience moderate deterioration of financial performance but not at a level sufficient to cause the facility to fail fi nancially. The test of moderate impacts examined two financial ratios – pre-tax return on assets and interestcoverage ratio – calculated on a baseline and postcompliance basis. Incremental moderate impacts are attri buted to the regulation if both financial ratios exceeded threshold values in the baseline (i.e., no moderate impacts in the baseline), but at least one financial ratio fell below the threshold value in the post-compliance case. For the assessment of firm-level effects, EPA compared a nnualized after-tax compliance cost to firm revenue and reports the estimated number and percentage of firms incurring compliance cost in three cost-to-revenue ranges: less than 1.0%; at least 1.0% but less than 3.0%; and 3.0% or greater. Although EPA’s sample-based data support specific estimates of the number of facilities, these data do not support a specific estimate of the number of entities that own these facilities. As a result, EPA estimated the number of entities owning facilities in the manufacturing industries as a range, based on alternative assumptions about the potential ownership of regulated facilities. In its comparison of compliance cost to firm revenue, EPA also used this same range concept, which yields approximate upper and lower bound estimates of the va lue of compliance cost that might be incurred by an entity, based on the number of regulated facilities that it owns.

4 

### The annualization approach used for the facility impact analysis differs from that used to develop the social cost estimate presented in Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities . For the analysis of the social cost, th e present value of total cost and the constant an nual equivalent to that present value (annualiz ed cost) were calculated as of the expected effectiveness date of the Phase III final regulation for Phase III facilities, beginni ng of year 2007. In contrast, for the impact analysis, the present value and annualized value of compliance cost were determined as of the first year of compliance of each facility (for this analysis, assumed to be 2010 to 2014).

C3-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### Key steps in the facility- and firm-level impact met hodologies are described in the following discussions. In addition, seven appendixes to this chapter provide detail of specific aspects of the impact analysis methodologies. C3-2.1 Market-Level Impacts Increased cost from the regulation may affect industry- level prices and output. In some instances, facilities incurring compliance costs may be able to pass part of these costs through to customers as price increases and thus reduce the compliance cost burden borne directly by complying facilities. On the basis of analysis presented in Appendix C3A3 and the findings from the industry profile an alyses as discussed in the preceding chapter, Chapter C2: Profile of Manufacturers , EPA determined that an assumption of zero cost pass-through is appropriate for its analysis of the effect of the 316(b) regulation on manufacturing industries. The assumption of zero cost pass-through assumes that facilities must bear all compliance costs within baseline cash flow. Because facilities may be able to pass compliance costs through to consumers in some markets, this assumption may understate the ability of facilities to withstand the cost of 316(b) regulatory compliance without material financial impact. C3-2.2 Impact Measures C3-2.2.1 Test of Severe Impacts The assessment of severe impacts for 316(b) manufacturing facilities is based on the change in the facility’s estimated business value, as determined from a discounted present value analysis of baseline cash flow and the change in cash flow resulting from regulatory compliance. If the estimated discounted cash flow value of the facility is positive before considering the effects of regulatory compliance but becomes negative as a result of compliance outlays, then the facility is considered a regulat ory closure. In this impact test, the estimated ongoing business value of the facility is compared with a threshol d value of zero for the closure decision: as long as the discounted cash flow value of the facility is greater than zero, the business is earning its cost of invested capital and continuation of the business is warranted. If the discount ed cash flow value of the facility is less than zero in the baseline or becomes less than zero as a result of co mpliance outlays, then the business would not earn its cost of invested capital and the business owners would be better off financially by terminating the business. As noted in earlier discussion, facilities for which EPA estimated a negative baseline value were considered baseline closures and were not tested for additional adverse impacts from regulatory compliance. In an alternative formulation of this concept, business owners would compare the discounted cash flow value of the facility with the value that the facility’s assets would bring in liquidation. In this case, the estimated ongoing business value would be compared with a value that may be different from zero: liquidation value could be positive or negative. When liquidation value is positive, business owners might benefit financially by terminating a business and seeking its liquidation value even when th e ongoing business value is positive but less than the estimated liquidation value. With negative liquidati on value – which generally would result from business termination liabilities (e.g., site clean-up) – the oppos ite result could occur: business owners may find it financially advantageous to remain in business even though the business earns less than its cost of invested capital , if the liquidation value of the business is “more ne gative”, and thus less in value, than the ongoing business based on the discounted cash flow analysis. EPA a ttempted to implement this alternative impact test formulation. EPA judges that the liquidation value estimates are substantially speculative and subject to considerable error because such an asse ssment requires detailed facility specific financial and operational history. For these reasons, EPA decided against using liquidation value for comparison with ongoing business value in the closure test. The cash flow concept used in calculating ongoi ng business value for the closure analysis is free cash flow available to all capital. Free cash flow is the cash availa ble to the providers of capital – both equity owners and

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### creditors – on an after-tax basis from business operati ons, and takes into account the cash required for ongoing replacement of the facility’s capital equipment. Free cash flow is discounted at an estimated after-tax total cost of capital to yield the estimated business value of the facility. Details of the calculation of free cash flow and the discounting of free cash flow to yield the facility’s estimated value are explained in the following sections.
 Calculation of Baseline Free Cash Flow an d Performance of Baseline Closure Test Calculation of baseline free cash flow and performance of the baseline closure test involved the following steps: 1. Average survey income statement data over res ponse years and convert to mid-year 2004 dollars: EPA first adjusted facility income statement data for 1996, 1997, and 1998 to the year 1998, using the GDP Deflator. These data were then averaged over the months and/or years for which survey respondents reported data to develop an annual av erage income statement in 1998 constant dollars. For example, if a facility reported income statement data for 1996, 19 97, and 1998, then a simple average was calculated for the three reported years. The annual average in come statement in 1998 was then brought forward from 1998 to 2004, again using the GDP Deflator. 2. Calculate after-tax income excluding the effects of financial structure: The questionnaire responses include a calculation of after-tax income in accord with conventional accounting principles. However, this calculation reflects the financial structure of the business, which may include debt financing and thus interest charges against income. Because the cash fl ow concept to be discounted in the business value analysis is cash flow available to all capital, it is necessary to restate after-tax income to exclude the effects of debt financing, or on a before-interest basis. This restatement involves: (1) increasing after-tax income by the amount of interest charges and (2) increasing taxes (and thereby reducing after-tax income ) by the amount of tax reduction provided by interest deductibility. This adjustment amounts to adding taxadjusted interest expense to after-tax income and yields an estimate of after-tax income independent of capital structure or financing effects . In calculating the tax adjustment for interest, EPA used a combined federal/state corporate income tax rate. For this calculation, EPA used a tax rate that integrates the federal corporate income tax rate (35%) and state-sp ecific state corporate income tax rates, based on facility location. The combined federal/state corporate income tax rate was calculated as follows:

τ = τ S 

### + τ F 

### - ( τ S 

### * τ F 

### ) (C3-1) where:
τ = estimated combined federal-state tax rate;
τ S 

### = state tax rate; and
τ F 

### = federal tax rate (35%).
After-tax income, before interest, was calculated as follows:
ATI- BI = ATI + I - τ I or (C3-2) ATI-BI = ATI + (1 - τ )I where: ATI -BI = after-tax income before interest ; ATI = after-tax income from baseline financial statement; I = interest charge from baseline financial statement; and
τ = estimated combined federal-state tax rate.

C3-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### 3. Calculate after-tax cash flow from operations, befo re interest, by adjusting income for non-cash charges: The calculation of after-tax income may include a non-cash charge for depreciation (and potentially amortization). To convert income to after-tax cash flow (ATCF ) from operations, it is therefore necessary to add back any depreciation charge to the calculation of after-tax income, before interest. Cash flow, before interest , was calculated as follows:
ATCF -BI = ATI -BI +D (C3-3) where: ATCF -BI = after-tax cash flow before interest ; ATI -BI = after-tax income before interest ; and D = baseline depreciation.
As a final step in the calculation of after-tax cash fl ow before interest, EPA eliminated the implied cash flow benefit of any negative taxes, as reported in the facility’s income statement and after adjustment for removal of interest. That is, in these calculations, negative taxes increase after-tax income and cash flow, and thus appear to improve the financial performance a nd value of the facility in terms of cash flow from operations. However, whether and when the implied cash flow benefit of negative taxes can be realized depends on the overall profita bility and tax circumstances of the to tal enterprise, including any other facilities owned by the same firm, and the extent of prof itability in periods before or after the survey data periods. To ensure this effect is not overstated, EPA therefore assumed that a facility would not receive the implied cash flow benefit from negative taxes – ne gative taxes, after adjustment for interest, were set to zero in the baseline analysis. This assumption is consistent with a later step in the post-compliance analysis in which EPA limited the cash flow benef it of tax deductions on compliance outlays not to exceed the amount of taxes paid as reported in the base line income statement (and adjusted for interest). In theory, the application of this limit could cause some facilities that would otherwise pass the baseline closure analysis, instead to fail the analysis if the reported amount of negative tax, after adjustment for interest, would be sufficient to offset the negative cash flow from operations independent of taxes. In practice, though, this limitation did not affect the findings of the baseline closure analysis. This limit was applied as a check and did not cause a different outcome. 4. Adjust after-tax cash flow to reflect estimated real change in business performance from the time of survey data collection to the present: EPA adjusted facility baseline cash flow to reflect the estimated real change (i.e., independent of inflation) in business performance in the manufacturing industries from the time of the facility survey, 1996-1998, to the pr esent. This adjustment is intended to address two potential concerns that could lead to biased findings from the regulatory impact assessment:

f 

### First, EPA was concerned that facility survey data might have been collected during a period that deviated cyclically from the longer-term trend of business performance for the 316(b) manufacturing industries. Given the knowledge that U.S. business conditions during the latter half of the 1990s were cyclically strong, EPA wanted to account for the possibility that business conditions during the 316(b) survey period (1996-1998) might be uncharacter istically favorable for some of the Primary Manufacturing Industries. In this case, the busin ess performance and valuation measures, based on survey data, used to assess the burden of regulator y compliance costs might overstate industry’s ability to bear these costs and therefore understate th e potential impact of the regulatory options.

f 

### Second, apart from the issue of short-term deviation from trend caused by a cyclically strong economy, EPA was also aware from its profile analyses that some of the industries might be experiencing a longer-term trend of deteriorating performance. Using sample facility data that don’t reflect such possible trends would again potentiall y overstate industry’s ability to bear compliance costs and therefore understate the potential impact of the regulatory options.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### To calculate the adjustment factor, EPA collected data on after-tax cash flow for public firms in the 316(b) manufacturing industry sectors over a 14-year period and developed adjustment factors by industry and/or key industry segment (deta ils of this analysis are contained in Appendix C3A4 ) 5 

### . Adjusted after-tax cash flow is calculated as follows:

ATCF -BI ADJ 

### = ATCF -BI * Adj (C3-4)

where: ATCF -BI ADJ 

### = after-tax cash flow before interest adjusted to reflect the real change in business performance; ATCF -BI = after-tax cash flow before interest ; and Adj = adjustment factor to reflect the real change in business performance.

5. Calculate free cash flow by adjusting after-tax cash flow fr om operations for ongoing capital equipment outlays: The measure of after-tax cash flow from the previous step, cash flow from operations, reflects the cash receipts and outlays from ordinary business operations, but includes no allowance for replacement of the facility’s existing capital equipment. To sustain ongoing operations, however, a business must expend cash for capital replacement. Acco rdingly, to understand the true cash flow of a business and thus provide a conceptually valid cash fl ow measure for business valuation, it is necessary to reduce cash flow from operations by an allowance fo r capital replacement. For the calculation of free cash flow, EPA estimated baseline capital outlays fro m a regression analysis of capital expenditures by public firms in the 316(b) industry sectors over an 11-year period (details of this analysis and estimation framework are contained in Appendix C3A5 ). Free cash flow is calculated as follows:

FCF = ATCF -BI ADJ 

### - CAPEX (C3-5)

where: FCF = free cash flow ATCF -BI ADJ 

### = after-tax cash flow before interest adjusted to reflect the real change in business performance; and CAPEX = estimated baseline capital outlays.
Or on a more detailed accounting statement basis:

FCF = REV - TC - T - τ I - CAPEX (C3-6)

where: FCF = free cash flow REV = revenue TC = total operating costs, excluding interest, depreciation, and taxes T = baseline income tax

5 

### EPA also undertook an alternative case analysis in which it further adjusted baseline cash flow to reflect costs that facilities might incur from compliance with Federal environmental regulations that were recently promulgated and whose costs are not likely to be reflected fully in the ATCF adju stment analysis. This analysis, which is documented in Appendix C3A8 , found no material effect on the facility impact analysis, as reported in this chapter. The alternative case analysis, which incorporated estimated compliance costs from the recent Federal environmental regulations, found one additional baseline closure and no change in post-compliance closures.

C3-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### τ = estimated combined federal-state tax rate; I = interest charge from baseline financial statement;
τ I = the increase in tax liability resulting fro m calculating income on a pre-interest basis; and CAPEX = estimated annual baseline capital outlays.
This calculation of free cash flow is based on a static representation of a facility’s business. With the exception of bringing estimated cash flow forw ard from the time of the survey, 1996-1998, to approximately the present, 2005, the facility impact anal ysis assumes, in effect, that the facility’s business will continue in the future – absent the effects of re gulation – exactly as reflected in the baseline financial statements provided in the survey questionnaire 6. Calculate baseline facility value as the present va lue of free cash flow over a 10-year analysis horizon: To calculate baseline business value, EPA discounted fr ee cash flow over a 10-year period at an estimated real (i.e., excluding the effects of inflation), after-tax cost of capital of 7.0%. The use of 10 years as the discounting horizon reflects the expected useful life of capital equipment to be installed for 316(b) regulation compliance. Facility baselin e business value is calculated as follows:

9 

## VALUE = 

# ∑ FCF

t = 0 

## (1 + CoC ) t 

### (C3-7)

where: VALUE = estimated baseline business value of the facility FCF = free cash flow CoC = after-tax cost-of-capital (7.0%); and t = year index, t = 0-9 (10-year discounting horizon).
In the present value calculation, yearly cash flows accr ue at the beginning of the year. As a result, the first year of cash flows is not discounted – i.e., t = 0 for the first year of the analysis – and cash flows in the tenth and final year of the analysis period are di scounted over a 9-year period – i.e., t = 9 in the final year of the analysis. As explained above, EPA considered a facility to be a baseline closure if its estimated business value was negative before incurring regulatory compliance costs. Base line closures were neither tested for adverse impact in the post-compliance impact analysis nor were their complian ce costs included in the tally of total costs of 316(b) regulatory compliance.
 Calculation of Post-Compliance Free Cash Flow an d Performance of Post-Compliance Closure Test For the post-compliance closure analysis, EPA recalcula ted annual free cash flow, accounting for changes in annual expenses and taxes that are estimated to result from compliance-related outlays. EPA combined the postcompliance free cash flow value and the estimated comp liance capital outlay in the present value framework to calculate business value on a post-compliance basis. Calculation of post-compliance free cash flow and perform ance of the post-compliance closure test involved the following steps: 1. Adjust baseline annual free cash flow to reflect compliance expense effects: Compliance-related effects on annual free cash flow include: annually recurring operating and maintenance costs; the annual equivalent of permitting and re-permitting costs, which recur on other than an annual basis over the life of

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### the analysis; the annual equivalent of the income loss from installation downtime (see Appendix 2); and related changes in taxes 6 

### . The change in taxes includes: (1) the tax effect of these annually recurring and annualized expenses and (2) the tax effect from de preciation of initial compliance outlays. For calculating the tax effect of depreciation, EPA assumed that compliance capital outlays would be depreciated for tax purposes on a 10-year straight-lin e schedule. Post-compliance free cash flow was calculated as follows:

FCF PC 

### = FCF BL 

### - ∆ TC - τ (- ∆ TC - ∆ D) (C3-8)

where: FCF PC 

### = post-compliance free cash flow; FCF BL 

### = baseline free cash flow, as calculated above; ∆ TC = change in total facility annual costs (excluding interest, depreciation and taxes), calculated as the cost of operating and main taining compliance equivalent plus the annual equivalent of certain non-annual costs, as described above; Τ = marginal tax rate for calculating complian ce-related tax effects (combined federal-state tax rate); and ∆ D = change in depreciation expense, calculate d as compliance capital outlay (CC) divided by 10.

2. Limit tax adjustment to not exceed taxes as reported in baseline financial statement: The tax effect of compliance outlays is to reduce tax liability. As a result, in the free cash flow calculation, the tax adjustment generally increases cash flow and busin ess value and, all else equal, reduces the likelihood that a facility will fail the post-compliance closure test . However, the extent to which a facility would realize this contribution to cash flow depends on its tax circumstances. In particular, some businesses may not be paying sufficient tax es in the baseline to take full benefit of the implied tax reduction at the facility level – unless the unused tax loss can be transferred to other, profitable business units in the firm, these businesses would not be able to use fully the imp lied tax reduction on a current basis. Also, the marginal tax rate for businesses with relatively lowe r pre-tax income may be less than the combined Federal/State tax rate used in th e analysis. While businesses may be ab le to carry forward tax losses to reduce taxes in later years, EPA recognizes that the implied cash flow benefit from tax reduction may not be fully realized, particularly in circumstances involvi ng single-facility firms. To reduce the risk of over stating this effect in its analysis, EPA therefor e limited the amount of tax reduction from compliance outlays to be no greater than the amount of tax paid by facilities as reported in the baseline financial statement. The analysis effectivel y assumes that facilities will not be ab le to offset an implicit negative tax liability against positive tax liabilit y elsewhere in the owning firm’s ope rations or to carry forward (or back) the negative income and its implicit negative tax liability to other positive income/positive tax liability operating periods. Nevertheless, some businesses may be able to benefit from tax reductions that

6 

### For the facility cash flow analysis, EPA treated the income loss from installation downtime on an annual equivalent basis even though this financial event occurs only once, and at the beginning of the assumed analysis period. EPA treated the installation downtime on an annualized basis for two reasons. Fi rst, the installation downtime is assumed to have a useful “financial life” of 30 years to reflect the total potential busi ness life of the facility (note that reinstallation of the basi c capital equipment, which is assumed to recur on a 10-year interval, does not require a new round of downtime). Since compliance capital equipment is assumed to have a 10-year useful life and th e discounted cash flow analysis is accordingly structured as a 10-year analysis, including the income loss from installation do wntime (which is assumed to have a 30-year useful life) as a one-time up-front cost would overstate its impact in the discounted cash flow calculation. Second, calculation of the downtime cost on an annual basis allows the tax effect from the one-time income loss to be summed with other annual tax effects for applying the limit to tax offsets, as explained in the next step of the analysis.

C3-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### exceed facility baseline taxes, especially if the facility is owned by a multiple-site firm. Accordingly, EPA constrained the tax effect term in the free cash flow calculation, [- τ ( - ∆ TC - ∆ D)] as specified above, to be no greater than baseline financial statement tax liability, T. 3. Calculate post-compliance facility value, including post-compliance free cash flow and the compliance capital outlay: As in the baseline analysis, EPA calculated post-compliance facility value as the present value of free cash flow and accounting for the comp liance capital outlay as an undiscounted cash outlay in the first analysis period. Facility post-co mpliance business value was calculated as follows:

9 

## FCF PC 

## VALUE PC 

## = 

# ∑

− CC (C3-9)
t = 0 

## (1 + CoC ) t



### where: VALUE PC 

### = estimated post-compliance business value of the facility FCF PC 

### = estimated post-compliance free cash flow CoC = after-tax cost-of-capital (7.0%); t = year index, t = 0-9 (10-year discounting horizon); and CC = compliance capital outlay.
EPA considered a facility to be a post-compliance clos ure if its estimated business value was positive in the baseline but became negative after adjusting for compliance -related cost, revenue and tax effects. In addition to tallying closure impacts in terms of the number of estim ated facility closures, EPA also measured the significance of closures in terms of losses in employment and out put. Employment losses equal the number of employees reported by closure facilities in survey responses; output losses equal total revenue reported for regulatory closure facilities. EPA estimated national results by multiplying facility results by facility sample weights. 7


### C3-2.2.2 Test of Moderate Impacts EPA also conducted an analysis of financ ial stress short of closure to identif y the regulation’s moderate impacts. Facilities incurring moderate impacts are not projected to close due to the regulatory analysis options. The regulation, however, might reduce their financial performan ce to the point where they incur greater difficulty and higher costs in obtaining financing for future investments. The analysis of moderate impacts examined two financial measures: Pre-Tax Return on Assets (PTRA) : ratio of pre-tax operating income – earnings before interest and taxes (EBIT) – to assets. This ratio measures th e operating performance and profitability of a business’ assets independent of financial structure and tax circ umstances. PTRA is a comprehensive measure of a firm’s economic and fina ncial performance. If a firm cannot sustain a competitive PTRA on a postcompliance basis, it will likely face difficulty financi ng its investments, including the outlay for compliance equipment. Interest Coverage Ratio (ICR) : ratio of pre-tax operating cash flow – earnings before interest, taxes, and depreciation (EBITDA) – to interest expense. This ratio measures the facility’s ability to service its debt on the basis of current, ongoing financial performance a nd to borrow for capital investments. Investors and creditors will be concerned about a firm whose operating cash flow does not comfortably exceed its contractual obligations. As ICR increases, the firm’s general ability to meet interest payments and carry

7 

### For the analysis of options presented in this chapter, none of these impact measures (e.g., employment loss, output loss ) were in fact relevant because none of the three regul atory analysis options resulted in regulatory closures.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### credit also increases. ICR also provides a measure of the amount of cash flow available for equity after interest payments. Creditors and equity investors review the above two me asures as criteria to determine whether and under what terms they will finance a business. PTRA and ICR also provi de insight into a firm’s ability to generate funds for compliance investments from internally generated equity, i.e., from after-tax cash flow. The measures are defined as follows:
Pre-Tax Return on Assets


## EBIT PTRA = (C3-10) 

## TA where: PTRA = pre-tax return on assets, EBIT = pre-tax operating income, or earnings before interest and taxes , and TA = total assets.
Or, stated in terms of 316(b) income statement accounts,


## REV

− ( TC + D ) PTRA = TA (C3-11)

where: PTRA = pre-tax return on assets; REV = revenue; TC = total operating costs (excluding inter est, taxes, and depreciation/amortization); D = depreciation; and TA = total assets.
Interest Coverage Ratio


## EBITDA ICR = (C3-12) 

## I where: ICR = interest coverage ratio; EBITDA = pre-tax operating cash flow, or earnings before interest, taxes, and depreciation (and amortization) and I = interest expense.
Or, stated in terms of 316(b) income statement accounts,


## REV

− TC ICR = (C3-13) 

## I where: ICR = interest coverage ratio; REV = revenue; TC = total operating costs (excluding interest , taxes, and depreciation/amortization); and I = interest expenses.

C3-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006

### CC § 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### Including the effects of 316(b) compliance costs, post-compliance PTRA and ICR are: 

# [ REV

− 

# ( TC + ∆ TC + D + ∆ D 

# ) 

# ] (C3-14) 

## PTRA = pc 

# ( TA + CC 

# ) 

# [ REV

− 

# ( TC + ∆ TC 

# ) 

# ] (C3-15) 

## ICR = pc 

# ( I ∆ + I 

# )
where: PTRApc = pre-tax return on assets, post-compliance; ICRpc = interest coverage ratio, post-compliance; ∆ TC = change in total facility operating cost s (excluding interest, depreciation and taxes), calculated as operating and maintenance costs of compliance; ∆ D = change in depreciation expense, calculate d as compliance capital outlay (CC) divided by 10; = compliance capital outlay (assuming all of the outlay would be capitalized and reported as an addition to assets on the balance sheet); and ∆ I = incremental interest expense from financing of compliance capital outlay. As a simplifying, conservative assumption, incremental interest expense is calculated assuming that the compliance capital outlay is fully debt financed at the overall real costof-capital of 7.0%. The annual incremental in terest value is calculated as the annualized value of interest payments over 10 years, assuming a constant annual payment of principal and interest.
In calculating the baseline values of the PTRA and ICR me asures, EPA applied the same cash flow adjustments as described above for the facility closure analysis, to the numerators of the PTRA and ICR measures. In the same way as described for the facility closure analysis, these ad justments are intended to capture the change in the financial performance of firms in the Primary Manufact uring Industries between the time of the 316(b) Phase III survey and 2003 (see Appendix C3A4 ). For evaluating 316(b) manufacturing facilities according to the moderate impact measures, EPA compared baseline and post-compliance PTRA and ICR to 316(b) indu stry-specific thresholds that were developed from data compiled by Risk Management Association, Inc. (RMA). RMA compiles and reports financial statement information by industry as provided by member commerc ial lending institutions. The threshold values represent the 25 th 

### percentile values of PTRA and ICR for statements received by RMA for the eight years from 1994 to 2001 within relevant industries. EPA developed 316(b) industry-level values by weighting and summing the RMA industry values according to the definition of 316(b) industries 8 

### . Thresholds by sector ranged from 1.8% to 2.9% for PTRA and from 2.0 to 2.4 for ICR. Because the financial statements received by RMA are for businesses applying for credit from member institutions, the data don’t represent a random sample. In particular, the RMA data likely exclude representation from the fina ncially weakest businesses, which are unlikely to seek financing from RMA member lending institutions. As a result, EPA views the threshold values as somewhat likely to overestimate the occurrence of moderate impacts. Both measures are important to financia l success and firms’ ability to attract capital. Facilities failing at least one of the moderate impact measures in the baseline were deemed to be already experiencing moderate financial weakness and were not tested for add itional financial impact in the moderate impact analysis. Facilities that passed both moderate impact tests in the baseline but fa iled one or both threshold comparisons, post-compliance,

8 

### See Appendix C3A6 for details of moderate impact threshold development and sector-specific threshold values.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### were considered to incur moderate fi nancial impacts, short of closure, as a result of the final Section 316(b) regulation. C3-2.2.3 Firm Level Impacts The analysis of impact on firms builds on the facility im pact analysis to assess whether firms that own multiple facilities are likely to incur more significant impacts than indicated by the facility impact analysis. For the assessment of firm-level effects, EPA calculated annualized after-tax compliance costs as a percentage of firm revenue and reports the estimated numberand percentage of affected firms incurring compliance costs in 3 costto-revenue ranges: less than 1.0%; at least 1.0% but le ss than 3.0%; and 3.0% or greater. These ranges are accepted by EPA for screening of firm-level impacts. EPA’s sample-based facility analysis supports specific est imates of (1) the number of facilities expected to be subject to the regulation and (2) the total compliance cost s expected to be incurred in these facilities. However, the sample-based analysis does not support specific estimates of the number of firms that own manufacturing facilities. In addition, and as a corollary, the sample -based analysis does not support specific estimates of the number of regulated facilities that may be owned by a single firm, or the total of compliance costs across regulated facilities that may be owned by a single firm. For the firm level analysis, EPA therefore considered two cases based on the sample weights developed from the facility survey. These cases provide approximate upper and lower bound estimates on: (1) the number of firms incurring compliance costs and (2) the costs incurred by any firm owning a regulated facility. The cases are as follows: Case 1: Upper bound estimate of number of firms owning facilities that face requirements under the regulation; lower bound estimate of total compliance costs that a firm may incur. For this case, EPA assumed (1) that a firm owns only the regulated sample facility(ies) that it is known to own from the sample analysis and (2) that this pattern of ownership, observed for samp led facilities and their owning firms, extends over the facility po pulation represented by the sample facilities. This case minimizes the possibility of multi-facility ownership by a single firm and thus maximizes the count of affected firms, but also minimizes the potential cost burden to any single firm. For each firm that owns one sample facility, no firm is assumed to own more than one regulated facility, and the analysis is straightforward: the firm owns one regulated facility and incurs compliance costs only for that facility. This configuration is assumed to exist as many as times as the facility’s sample weight. However, EPA found that 28% of the firms identified as owning a sample facility, ow n more than one sample facility. Where the multiple facilities owned by the same firm have the same sample wei ght, the analysis is also straightforward: the firm is assumed to own and incur the compliance costs of the id entified sample facilities, and the configuration is assumed to exist as many times as many times as the uni form sample weight of the multiple facilities. In some instances, however, the sample facilities that are ow ned by the same firm have different sample weights. In these cases, which required a more complex analysis , EPA accounted for the ownership of multiple sample facilities by a single firm, but restricted the count of th e multiple facilities and their configuration of ownership for the firm-level cost analysis based on the sample weights of the indivi dual sample facilities. Specifically, the firm is assumed to exist on a sample-weighted basis as many times as the highest of the sample weights among the sample facilities known to be owned by the firm. Ho wever, sample facilities with a smaller sample weight, and their compliance costs , can be included in the total instances of ownership by the firm for only as many times as their sample weights. Otherwise, the total facility c ount implied in the firm analysis would exceed the samplebased estimated total of facilities; correspondingly, the to tal of compliance costs account ed for in the firm level analysis would exceed the sample-based estimated total of facility compliance costs. For implementation, this

C3-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### concept means that all of the sample facilities known to be owned by the same firm, and their compliance costs , can be included in the ownership c onfiguration for only as many sample weighted instances as the smallest sample weight among the multiple facilities owned by the fi rm. Once the sample weight of the smallest sample weight facility is “used up,” a new multiple facility owne rship is configured including only the costs for those facilities with weights greater than the weight of the sma llest sample weight facility. This configuration is assumed to exist for as many sample weighted instances as the difference between the lowest sample weight and the next higher sample weight among the facilities owned by the firm. This process is repeated – with successive removal of the new lowest sample weight facility, an d its compliance cost– as many times as necessary until only the highest sample weight facility remains in the ownership configuration. The survey asked respondents to provide firm-level revenue for the parent firm. For single-facility firms, firm revenue and compliance costs are identical to those for the facility. For multi-facility firms, EPA grouped together all facilities with a common parent firm from the surveys. For each firm in the analysis, firm-level compliance cost is:


## CC CC firm i i 

## = 

# ∑ (C3-16)

where: CC firm 

### = firm-level compliance cost CC i 

### = compliance cost for the surveyed facility i , known to be owned by the firm
Case 2: Lower bound estimate of number of firms owning facilities that face requirements under the regulation; upper bound estimate of total compliance costs that a firm may incur. For this case, EPA inverted the prior assumption and assumed that any firm owning a regulated sample facility(ies), owns the known sample facility(ies) and all of the sample weight associated with the sample facility(ies). This case minimizes the count of affected fi rms, while tending to maximize the potential cost burden to any single firm. For this case, EPA grouped together all facilities with a common parent firm from the surveys and sample weighted the facility compliance costs. EPA calculated the firm-level compliance cost as:


## CC firm 

## = 

# ∑ CC i 

### (C3-17) i 

### where: CC firm 

### = firm-level compliance cost CC i 

### = compliance cost for surveyed facility i owned by the firm W i 

### = sample weight for surveyed facility i owned by the firm
As stated above, for the analysis of firm-level impact s, EPA calculated annualized after-tax compliance costs as a percentage of firm revenue. EPA judged that firms with annualized after-tax compliance cost of less than 1.0% of revenue would not be materially affected by the regula tion. EPA identified firms as subject to potentially more serious impacts if annualized compliance cost exceeded 3.0% of revenue.


## C3-3 R ESULTS 

### This section presents the results of the facility impact analysis. The first section presents the results of the baseline closure analysis. The subsequent sections repor t the impact analysis results for the three regulatory

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### analysis options. Section C3-3.2 presents the number of facilities with regulatory requirements under the different options. Section C3-3.3 reviews post-compliance im pacts. Section C3-3.4 summarizes total annualized compliance costs on an after-tax basis by option. Section C3-3.5 summarizes the estimated impacts by option, including facility impacts and total an nualized compliance costs on both a pre-tax and after-tax basis. Section C3- 3.6 presents the results of the firm-level anal ysis for the two analytic cases described above.
C3-3.1 Baseline Closures Table C3-1 reports estimated baseline closures for exis ting facilities in the six Primary Manufacturing Industries and the additional known facilities in Other Industries. EPA determined that 15 facilities (or 9.4%) of the estimated 155 regulated facilities in the six Primary Manufacturing Industries have a negative business value before incurring regulatory compliance costs. The highest percentages of baseline closures occur in the Petroleum industry sector (18.7%) and Paper industry sector (11.1%). One additional facility (or 25%) of the four known facilities in Other Industries is assessed as a baseline closur e. These facilities are projected to close in the baseline and are not considered in the analysis of impacts attributable to the regulation. Appendix C3A7 provides information on historical establishment closure rates in the 316(b) industries. EPA compared the percentage of facilities assessed as baseline closures to typical establishment closure rates in the six Primary Manufacturing Industries, as reported in Statistics of U.S. Businesses (SUSB). SUSB data indicate that between 1.4% and 14.4% of all facilities in these industr ies close annually. The baseline closure rates for facilities in the Paper and Petroleum industry facilities are higher than the observed closure rates in these industries, as reported in SBA data. However, EPA based its analysis on survey data provided by the facilities and judges that these data and analysis provide an accu rate representation of the financial condition of the facilities that would subject to the Phase III regulation.

Table C3-1: Summary of Ba seline Closures by Sector for existing facilities estimated s ubject to the Phase III regulation Total Number of Number of Baseline Percentage Closing Number Operating Sector Facilities Closures in Baseline in Baseline Paper 41 5 11.1% 37 Chemicals 56 4 7.8% 52 Petroleum 17 3 18.7% 14 Steel 27 3 9.2% 25 Aluminum 5 0 0.0% 5 Food 9 0 0.0% 9 Total Facilities in Primary Manufacturing Industries 155 15 9.4% 141 Additional known facilities 4 1 25.0% 3 in Other Industries a

a Totals may not sum due to independent rounding. Source: U.S. EPA analysis, 2006.



### C3-3.2 Number of Facilities with Regulatory Requirements Of the three regulatory analysis options (50 MGD fo r All Waterbodies, 100 MGD for Certain Waterbodies, and 200 MGD for All Waterbodies), the 50 MGD All option would subject the largest number of facilities, 144 facilities, or 141 facilities in the Primary Manufacturing Industries and 3 known facilities in Other Industries to national categorical requirements (see Table C3-2). The other two options would subject fewer facilities to national requirements. The 200 MGD for All Waterbodies, would have subjected 30 facilities, or 29 facilities in

C3-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### the Primary Manufacturing Industries and 1 of the known facilities in Other Industries, to national requirements. The 100 MGD for Certain Waterbodies Option, would have s ubjected the smallest number of facilities to national requirements: 24 facilities, or 22 facilities in the Prim ary Manufacturing Industries and 2 known facilities in the Other Industries.

Table C3-2: Number of Facilities with Regulatory Requirements by Sector and Option

Sector Total Operating in Baseline Number of Facilities with Regulatory Requirements 50 MGD All 200 MGD All 100 MGD CWB Number Percentage Number Percentage Number Percentage Paper Chemicals Petroleum Steel Aluminum Food 37 52 14 25

5 9 37 100.0% 52 100.0% 14 100.0% 25 100.0%

5 100.0% 9 100.0% 3 8.2% 5 9.7% 4 32.1% 12 49.5%

1 27.8% 3 33.3% 0 0.0% 9 16.7% 5 33.5% 9 36.4% 0 0.0% 0 0.0% Total Facilities in Primary Manufacturing Industries 141 141 100.0% 29 20.7% 22 15.8% Additional known facilities in Other Industries 3 3 100.0% 1 33.3% 2 66.7% Source: U.S. EPA analysis, 2006.


### C3-3.3 Post-Compliance Impacts Of the 144 facilities estimated subject to regulation after baseline closures, EPA estimated that no facilities would close or incur employment losses as a resu lt of the regulatory analysis options. EPA also found that none of the existing facilities would in cur a moderate impact (i.e., financial stress short of closure) under any of the three regulatory analysis options. C3-3.4 Compliance Costs Table C3-3 reports the estimated total after-tax comp liance cost to facilities in the Primary Manufacturing Industries and the known facilities in Other Industries by sector and for each of the three regulatory analysis options. The reported costs exclude costs in baseline cl osures. The total annualized, after-tax compliance cost reported in Table C3-3 represents the cost actually incu rred by complying firms, assuming no recovery of costs from customers through increased prices and taking into account the reductions in tax liability resulting from incurrence of compliance outlays. The after-tax analysis uses a combined Federal/State tax rate, and accounts for facilities’ baseline tax circumstances. Specifically, tax offsets to compliance costs are limited not to exceed facility-level tax payments as reported in facility qu estionnaire responses. The total annualized, after-tax compliance cost reported here is the sum of annualized, after-t ax costs by facility at the year of compliance. This cost calculation differs in concept from the calculation of compliance costs as included in the calculation of the total social costs of the regulatory options. For the social cost calculation, which is presented in Chapter E1: Summary of Social Costs , the year-by-year stream of total pre-tax compliance costs for all facilities is discounted to the assumed year of promulgation of the 316(b) final regulation for Phase III facilities – i.e., beginning of year 2007 – and then annualized. Two social discount rate valu es, 3% and 7%, are used in the social cost analysis. Of the three regulatory analysis options, the 50 MGD All option has the highest total after-tax compliance cost, $26.8 million: $26.0 million for facilities in the Primary Manufacturing Industries, and $0.8 million for known facilities in Other Industries. The 100 MGD for Certain Waterbodies has the next higher total after-tax compliance cost, $12.1 million: $11.5 million for facilities in the Primary Manufacturing Industries, and $0.6

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-17§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### million for known facilities in Other Industries. Th e 200 MGD Option for All Waterbodies, would have the lowest cost, $11.8 million: $11.4 million for facilities in the Primary Manufacturing Industries, and $0.4 million for known facilities in Other Industries.

Table C3-3: Total Annualized Facility Compliance Cost a 

### by Sector and Regulatory Option

Sector 50 MGD All 200 MGD All 100 MGD CWB Paper 4.3 1.8 0.0 Chemicals 12.6 3.6 6.4 Petroleum 2.4 0.9 1.4 Steel 5.3 4.2 3.7 Aluminum 0.4 0.0 0.0 Food 0.9 0.9 0.0 Total Facilities in Primary Manufacturing Industries $26.0 $11.4 $11.5 Additional known facilities in Other $0.8 $0.4 $0.6 Industries 

### (millions, $2004) After-Tax Costs

a This table reflects the cost incurred by complying businesses and does not represent the cost to society from regulatory compliance. Chapter E1: Summary of Social Costs discusses the social cost of the final regulation and the other options. The values in this table exclude baseline closures. Source: U.S. EPA analysis, 2006.


### C3-3.5 Summary of Facility Impacts Table C3-4 summarizes the estimated impacts of the thr ee regulatory analysis options for existing facilities, as reported in the preceding sections.

C3-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### Table C3-4: Regulatory Impa cts for All Facilities by Option, National Estimates 50 MGD All 200 MGD All 100 MGD CWB Primary Manufacturing Industries Number of Facilities Operating in Baseline 141 141 141 Number of Facilities with Regulatory Requirements 141 29 22 Percentage of Facilities with Regulatory Requirements 100.0% 20.7% 15.8% Number of Closures (Severe Impacts) 0 0 0 Percentage of Facilities with Regulatory Requirements Predicted 0.0% 0.0% 0.0% to Close Number of Facilities with Moderate Impacts 0 0 0 Percentage of Facilities with Regulatory Requirements with 0.0% 0.0% 0.0% Moderate Impacts Annualized Compliance Costs (after tax, million $2004) 26.0 11.4 11.5 Additional Known Facilities in Other Industries Number of Facilities Operating in Baseline 3 3 3 Number of Facilities with Regulatory Requirements 3 1 2 Percentage of Facilities with Regulatory Requirements 100.0% 33.3% 66.7% Number of Closures (Severe Impacts) 0 0 0 Percentage of Facilities with Regulatory Requirements Predicted 0.0% 0.0% 0.0% to Close Number of Facilities with Moderate Impacts 0 0 0 Percentage with Moderate Impacts 0.0% 0.0% 0.0% Annualized Compliance Costs (after tax, million $2004) 0.8 0.4 0.6 Source: U.S. EPA analysis, 2006.


### C3-3.6 Firm Impacts As previously discussed, EPA’s analysis of firm -level impacts considered two analytic cases:

f 

### Case 1: Approximate upper bound estimate of number of firms owning facilities that face requirements under the regulation; approximate lower bound estimate of total compliance costs that a firm may incur, and

f 

### Case 2: Lower bound estimate of number of firm s owning facilities that face requirements under the regulation; approximate upper bound estimate of total compliance costs that a firm may incur. Based on these two analytic cases, EPA estimated the number of firms owning regulated facilities in the Primary Manufacturing Industries to range from 50 (Case 2 estimate) to 116 (Case 1 estimate), depending on the assumed ownership cases outlined above for firms that own a facility with a DIF of 50 MGD or greater. An additional 2 firms are known to own facilities in Other Industries. EPA included the additional known facilities in Other Industries in the firm impact analyses but since these facilities have no sample weight (i.e., they are not modeled to represent facilities other than themselves), the upper and lower bound estimates were not applicable to them. Under both Case 1 and Case 2, no firms are estimated to incur total compliance costs equal to or exceeding 1.0% of annual revenue under any of the three regulatory an alysis options (See Table C3-5, following page).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-19§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



### Table C3-5: Firm-Level After-Tax Annual Complia nce Costs as a Percentage of Annual Revenue

Number of Firms

in the Analysis Number and Percentage with A fter Tax Annual Compliance Cost s/Annual Revenue Equal to:

Total No Costs Less than 1% 1-3% At Least 3% Number % Number % Number % Number % Primary Manufacturing Industries a Case 1: Upper bound estimate of number of firms owning facil ities that face requirements und er the regulation; lower bound estimate of total compliance costs that a firm may incur 50 MGD All 200 MGD All 100 MGD CWB 116 116 116 0 87 91 0% 75% 78% 116 29 25 100% 25% 22% 0 0 0 0% 0% 0% 0 0 0 0% 0% 0% Case 2: Lower bound estimate of number of firms owning facil ities that face requirements und er the regulation; upper bound estimate of total compliance costs that a firm may incur 50 MGD All 200 MGD All 100 MGD CWB 50 50 50 0 33 36 0% 66% 72% 50 17 14 100% 34% 28% 0 0 0 0% 0% 0% 0 0 0 0% 0% 0% Other Industries 50 MGD All 200 MGD All 100 MGD CWB 2 2 2 0 2 1 0% 100% 50% 2 0 1 100% 0% 50% 0 0 0 0% 0% 0% 0 0 0 0% 0% 0%

a One known facility in Other Industries is owned by a firm that owns at least one facility in the Primary Manufacturing Industr ies and is included in this category. Source: U.S. EPA analysis, 2006.

C3-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



## G LOSSARY 

### after-tax cash flow (ATCF): The cash generated from business operati ons, after-tax, that is available to providers of capital – equi ty and debt – or for reinvestment in the business. baseline closures: Facilities showing inadequate financial perform ance in the baseline, th at is, in the absence of the regulation. EPA’s analysis assumes these closures w ould have occurred with or without the regulation. Construction Cost Index (CCI): Measures the cost of a hypothetical package of general construction goods and services compared a base year. The CCI can be used wh ere labor costs are a high proportion of total costs. The CCI uses 200 hours of common labor, multiplied by the 20 -city average rate for wages and fringe benefits. (http://www.enr.com/cost/costfaq.asp) cost of capital : Costs incurred for a firm to obtain financi ng from all capital sources including, in particular, equity and debt. cost pass-through: Calculates the percentage of compliance costs that EPA expects firms subject to regulation to recover from customers through increased revenue. facility: A contiguous set of buildings or machiner y on a piece of land under common ownership. free cash flow : Cash flow generated by the company that is av ailable to all providers of the company’s capital, both creditors and shareholders. Gross Domestic Product (GDP) Implicit Price Deflator: The GDP Deflator is a quarterly series that measures the implicit change in prices, over time, of the bundle of goods and services comprising gross domestic product. interest coverage ratio (ICR): Ratio of cash operating income to interest expenses. This ratio measures the facility’s ability to service its debt and borrow for capital investments. liquidation value: Net amount that could be realized by selling the assets of a firm after paying debt. moderate impacts: Adverse changes in a facility’s financial position that weaken financial performance and may increase cost of financing but are not threatening to short-term viability. operating and maintenance: Costs estimated to result from operating and maintaining pollution controls adopted to comply with effluent guidelines. Operating costs include the costs of monitoring. pre-tax return on assets (PTRA): Ratio of cash operating income to assets. This ratio measures facility profitability. regulatory closure: A facility that is predicted to close because it can not afford the costs of complying with the regulation. severe impacts: Facility closures and the associated losses in jobs, earnings, and output at facilities that close due to the regulation.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



## A BBREVIATIONS 

### ATCF : after-tax cash flow CCI : construction cost index ICR: interest coverage ratio
PTRA : pre-tax return on assets

C3-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



## R EFERENCES 

### Engineering News-Record (ENR). 2006. Construction Cost Index . Available at: http://enr.ecnext.com/freescripts/comsite2.pl?page=enr_docum ent&article=fecosu0603-cons tIndexHist. (Historical data requires subscription or purchase.)
Federation of Tax Administ rators (FTA). 2006. Range of State Corporate Income Tax Rates (for tax year 2005)

. http://www.taxadmin.org/fta/rate/corp_inc .html. Accessed January 20, 2006. McGraw-Hill and U.S. Department of Comme rce, International Trade Administration . U.S. Industry & Trade Outlook

. McKinsey & Company, Inc., et al. 2000 . Valuation: Measuring and Managing the Value of Companies , 3 rd 

### edition. New York: John Wiley & Sons, Inc. Risk Management Association (RMA). 1997-1998. Annual Statement Studies

. Risk Management Association (RMA). 2000-2001. Annual Statement Studies

. Risk Management Association (RMA). 2001-2002. Annual Statement Studies

. U.S. Department of Commerce (U.S. DOC). 2006. Bur eau of Economic Analysis (BEA). Gross Domestic Product. Table 1.1.9: Implicit Price Deflators for Gross Domestic Product (GDP) . Release December 12, 2005. Available at: http://www.econs tats.com/gdp/gdp__q4.htm.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration. Industry, Trade, and the Economy: Data and Analysis . Data by NAICS and SIC. Available at: http://www.ita.doc.gov/td/industry/otea/industry_sector/tables_naics.htm.
U.S. Department of Commerce (U.S. DOC). 1989, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the Census. Annual Survey of Manufactures.
U.S. Environmental Protection Agency (U.S. EPA). 2006. Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-003. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 1999. Information Collection Request (ICR), Detailed Industry Questionnaires: Phase II Cooling Water In take Structures & Watershed Case Study Short Questionnaire. August 1999.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses . Available at: http://www.sba.gov/advo/research/data.html.
Value Line. 2006. Value Line 3.0 Investment Analyzer

. Value Line. 2003. Value Line Investment Survey.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute C3-23§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Chapter C3: Economic Impact for Manufact urers



## A PPENDICES TO 

## C HAPTER 

## C3 Chapter C3 includes 8 appendices, which are contained in the following pages:

f 

### Appendix C3A1: Summary of Results for Supplemental Options

f 

### Appendix C3A2: Calculation of Installation Downtime Cost

f 

### Appendix C3A3: Cost Pass-Through Analysis

f 

### Appendix C3A4: Adjusting Baseline Facility Cash Flow

f 

### Appendix C3A5: Estimating Capital Outlays for Section 316(b) Phase III Manufacturing Sectors Discounted Cash Flow Analyses

f 

### Appendix C3A6: Summary of Moderate Impact Threshold Values by Industry

f 

### Appendix C3A7: Analysis of Baseline Closure Rates

f 

### Appendix C3A8: Analysis of Other Regulations.

C3-24 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Existing Facilities Appendix C3A1: Supplemental Options 

# Appendix C3A1: Summary of Results for Supplemental Options

A C ONTENTS 

## I

subject to national categorical requirements under the

f 

### For Electric Generator facilities with a DIF

 )





f



###  )





f 

### For Manufacturing facilities with a DIF of 50 MGD or greater:

 )

 ); and




## N UMBER OF 

## F R R EQUIREMENTS

Total Operating in

Baseline 114 114 114 114 355 355 355 355 144 144 144 144 Total 613 613 613 613 Source: 

### PPENDIX

NTRODUCTION Introduction........................................................C3A1-1 

### This appendix presents results for 8 additi onal regulatory options evaluated by EPA. For these options, facility C3A1-1 Number of Facilities with Regulatory Requirements ........................................C3A1-1 

### counts and other results include only those Phase III Manufacturers that are (1) non-baseline closures and (2) C3A1-2 Post-Compliance Closures ....................C3A1-2 C3A1-3 Moderate Impacts..................................C3A1-2 

### option. See the main body of this chapter for a description C3A1-4 After-Tax Compliance Costs.................C3A1-2 

### of data sources and methodologies used in these analyses. C3A1-5 Overview of Impacts .............................C3A1-3 

### In the following tables, results are presented for the C3A1-6 Firm Impacts .........................................C3A1-4 

### following options evaluated:
of 2 MGD or greater, but less than 50 MGD: Impingement-only (I-only requirements for all facilities on all waterbodies; Phase II-like requirements for all facilities on all waterbodies; and Impingement and Entrainment (I&E) require ments for all facilities on all waterbodies. For Manufacturing facilities with a DIF of 2 MGD or greater, but less than 50 MGD: Impingement-only (I-only requirements for all facilities on all waterbodies; Phase II-like requirements for all facilities on all waterbodies; and Impingement and Entrainment (I&E) require ments for all facilities on all waterbodies.

Impingement-only (I-only requirements for all facilities on all waterbodies; Phase II-like requirements for all facilities on all waterbodies (the Final Regulation Impingement and Entrainment (I&E) require ments for all facilities on all waterbodies.


## C3A1-1 ACILITIES WITH EGULATORY


### Table C3A1-1: Number of Facilities with Regu latory Requirements by Sector and Option Number of Facilities with Regulatory Requirements Sector I-Only Everywhere I&E like Phase II I&E Everywhere
Electric Generators 2-50 MGD Manufacturers 2-50 MGD Manufacturers 50+ MGD

U.S. EP A analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A1-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Existing Facilities Appendix C3A1: Supplemental Options



## C3A1-2 P OST 

## -C OMPLIANCE 

## C LOSURES 

### For a description of this analysis, see Section B3-2.3 , above.

Table C3A1-2: Number of Facilities Estimate d as Post-Compliance Closures by Option Number of Post-Compliance Closures Sector in Baseline I-Only Everywhere I&E like Phase II I&E Everywhere Total Operating

Electric Generators 2-50 MGD a,b 114 n/a 1 n/a Manufacturers 2-50 MGD 355 0 0 0 Manufacturers 50+ MGD 144 0 0 0 Total 613 0 1 0

a Impacts on Electric Generators under the I&E like Phase II optio n were performed using a method ology not comparable to the results presented here for manufacturers. See Chapter B5: Economic Impact Anal ysis for Electric Generators of the E conomic Analysis for the Proposed Section 316(b) Rule for Phase III Facilities for a discussion of impacts on Electric Generators. b Analyses were not performed for the I-onl y Everywhere and I&E Everywhere options. Source: U.S. EP A analysis, 2006.



## C3A1-3 M ODERATE 

## I MPACTS 

### For a description of this analysis, see Section C3-2.3 , above. Impacts on Electric Generators were performed using a methodology not comparable to the results presented here for manufacturers. See the Economic Analysis for the Proposed Section 316(b) Rule for Phase III Facilities for a discussion of impacts on Electric Generators.

Table C3A1-3: Number of Facilities Esti mated as Moderate Impacts by Option Total Number of Moderate Impacts Sector Operating in Baseline I-Only Everywhere I&E like Phase II I&E Everywhere
Manufacturers 2-50 MGD 355 0 0 0 Manufacturers 50+ MGD 144 0 0 0 Total 499 0 0 0 Source: U.S. EP A analysis, 2006.



## C3A1-4 A FTER 

## -T AX 

## C OMPLIANCE 

## C OSTS 

### For a description of this analysis, see Section C3-2.3 above.

Table C3A1-4: Total Annualized Facility a 

### After-Tax Compliance Cost by Option (millions, $2004) Sector I-Only Everywhere I&E like Phase II I&E Everywhere Electric Generators 2-50 MGD $2.3 $3.3 $7.9 Manufacturers 2-50 MGD $19.8 $31.5 $50.6 Manufacturers 50+ MGD $16.0 $26.7 $36.8 Total $38.2 $61.6 $95.3

a This table reflects the cost incurred by complying businesses and does not represent the cost to society from regulatory compl iance. Chapter E1: Summary of Social Costs discusses the social cost of the final rule and othe r regulatory analysis options. The estimates in this table exclude baseline closures bu t include regulatory closures. Source: U.S. EP A analysis, 2006.

C3A1-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Existing Facilities Appendix C3A1: Supplemental Options



## C3A1-5 O VERVIEW OF 

## I MPACTS 

### For a description of this analysis, see Section C3-2.3 , above. Table C3A1-5: Regulatory Im pacts for All Facilities by Option, National Estimates

114 114 114
Requirements 114 114 114

Requirements 100.0% 100.0% 100.0% ) a,b n/a 1 n/a
n/a 0.01% n/a
a,b n/a n/a n/a
Requirements with Moderate Impacts n/a n/a n/a
$2.3 $3.3 $7.9

Requirements
Requirements )

Requirements with Moderate Impacts 355
355

100%

0
0%
0
0%
$19.8 355
355

100%

0
0%
0
0%
$31.5 355
355

100%

0
0%
0
0%
$50.6

144 144 144
144 144 144 Requirements
100% 100% 100% Requirements ) 0 0 0
0% 0% 0%
0 0 0
0% 0% 0% Requirements with Moderate Impacts $16.0 $26.7 $36.8

a

b Source: I-Only Everywhere I&E like Phase II I&E Everywhere Electric Generators 2-50 MGD Number of Facilities Operating in Baseline Number of Facilities with Regulatory
Percentage of Facilities with Regulatory
Number of Closures (Severe Impacts Percentage of Facilities with Regulatory Requirements Predicted to Close Number of Facilities with Moderate Impacts Percentage of Facilities with Regulatory
Annualized Compliance Costs (after tax, million $2004)

Number of Facilities Operating in Baseline Number of Facilities with Regulatory
Percentage of Facilities with Regulatory
Number of Closures (Severe Impacts Percentage of Facilities with Regulatory Requirements Predicted to Close Number of Facilities with Moderate Impacts Percentage of Facilities with Regulatory
Annualized Compliance Costs (after tax, million $2004) Manufacturers 2-50 MGD

Manufacturers 50+ MGD Number of Facilities Operating in Baseline Number of Facilities with Regulatory
Percentage of Facilities with Regulatory
Number of Closures (Severe Impacts Percentage of Facilities with Regulatory Requirements Predicted to Close Number of Facilities with Moderate Impacts Percentage of Facilities with Regulatory
Annualized Compliance Costs (after tax, million $2004) Impacts on Electric Generators under the I&E like Phase II optio n were performed using a method ology not comparable to the results presented here for manufacturers. See the Chapter B5: Economic Impact Analysis fo r Electric Generato rs of the Economic Analysis for the Proposed Section 316(b) Rule for Phase III Fa cilities for a discussion of im pacts on Electric Generators. Analyses were not performed for the I-onl y Everywhere and I&E Everywhere options. U.S. EPA analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A1-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Anal ysis for Existing Facilities Appendix C3A1: Supplemental Options



## C3A1-6 F IRM 

## I MPACTS 

### For a description of this analysis, see Section C3-2.3 , above.

Table C3A1-6: Firm-level After- Tax Annual Compliance Costs as a Percentage of Annual Revenue
Number of Number and Percentage with A fter Tax Annual Compliance Cost s/Annual Revenue Equal to: Firms in the No Costs Less than 1% 1-3% At Least 3%

Analysis Total Number % Number % Number % Number % Primary Manufacturers a Case 1: Upper bound estimate of number of firms owning facil ities that face requirements und er the regulation; lower bound estimate of total compliance costs that a firm may incur I-only 339 0 0% 339 100% 0 0% 0 0% Everywhere I&E like Phase II 339 0 0% 339 100% 0 0% 0 0% I&E Everywhere 339 0 0% 339 100% 0 0% 0 0% Case 2: Lower bound estimate of number of firms owning facil ities that face requirements und er the regulation; upper bound estimate of the total compliance cost that a firm may incur I-only 109 0 0% 109 100% 0 0% 0 0% Everywhere I&E like Phase II 109 0 0% 109 100% 0 0% 0 0% I&E Everywhere 109 0 0% 109 100% 0 0% 0 0%

a An additional 7 known facilities incur costs of less than 1% of firm revenues under each option. EPA included the additional known facilities in Other Industries in the firm impact an alyses but since these fa cilities have no sample we ight (i.e., they are not modeled to represent facilities other than them selves), the upper and lower bound estimates were not appl icable to them. Source: U.S. EPA analysis, 2006.

C3A1-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A2: Installation Downtime 

# Appendix C3A2: Calculation of Installation Downtime Cost

I NTRODUCTION 

### Depending on the engineering design of a facility’s cooling water intake system, installation of some of the compliance technologies considered for the regulatory analysis options could require a one-time, temporary shutdown of the facility’s cooling water system. During this period, the facility’s cooling-water depe ndent operations would most likely be halted, with a potential loss of revenue and income from those operations. Accordingly, a key element of the potential cost to facilities in complying with the 316(b) Phase III regulation is the loss in income from in stallation downtime. Installation downtime may also present a cost to society, depending upon assumptions a bout the cost structure of the production to replace the goods and services not produced by complying facilities during the installation downtime. 

## A C ONTENTS 

## :

PPENDIX
Introduction........................................................C3A2-1 C3A2-1 Estimated Shut-Down Period for Installing Compliance Equipment.........................C3A2-1 C3A2-2 Calculating the Impact of Installation Downtime on Complying Facilities ......C3A2-2 C3A2-3 Calculating the Cost to Society of Installation Downtime..............................................C3A2-4



### Unlike the capital and operating cost elements of total compliance, this cost element is not estimated based solely on engineering analysis of compliance technology specif ications. Instead, the cost of installation downtime depends on a number of factors additional to the e ngineering assessment of compliance requirements. Specifically, the cost of installation downtime depends on the estimated length of time that a facility’s cooling water intake system would be removed from service, the extent to which the facility’s business operations depend on cooling water, and the revenue and operating cost stru cture of those cooling water dependent operations. Of these items, the length of time that the facility’s cooling water intake sy stem would be out of service was estimated as part of the engineering analysis of complia nce requirements. The remaining items – the extent to which the facility’s business operations depend on cooling water, and the reve nue and operating cost structure of the facility’s cooling water dependent operations – were obtained from the fa cility’s response to the economic/ financial section of the 316(b) Phase III questionnaire. EPA used this information to calculate the pre-tax income loss from installation downtime. The following sections of this appendix present the methodology used to estim ate the income loss from installation downtime. For a detailed discussion of how facility downtime estimates were derived, see Chapter 5 of the Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule (U.S. EPA, 2006b).


## C3A2-1 E STIMATED 

## S HUT 

## -D OWN 

## P ERIOD FOR 

## I NSTALLING 

## C OMPLIANCE 

## E QUIPMENT 

### Installation of some of the compliance technologies consider ed for the regulatory analysis options would require a one-time, temporary shutdown of the facility’s cooling wa ter intake system. Table C3A2-1, below, lists the estimated durations of net system downtime, in weeks, for each of the compliance technology modules considered for compliance with the 316(b) Phase III regulatory options. The net downtime duration accounts for any expected annual period of cooling water system downtime for regular maintenance and repair – the net downtime is the number of weeks the cooling water system would need to be out of service above and beyond any regular maintenance downtime period. Most of the technology modul es are expected to be able to be installed without any additional net system downtime. However, several of the technology modules are expected to require a net

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A2-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A2: Installation Downtime



### downtime ranging from a month or less to just over two months. For a detailed discussion of how facility downtime estimates were derived see Chapter 5 of th e Phase III Technical Development Document (U.S. EPA, 2006, DCN 9-0004)

Table C3A2-1: Estimated Average Cooling Wat er System Downtime by Technology Module Module # Description Net Downtime (Weeks) 1 0 Fish handling and return system 2 0 Fine mesh traveling screens with fish handling and return 3 New larger intake structure with fine mesh, handling and return 0 - 2 4 Passive fine mesh screens with 1.75 mm mesh size at shoreline 7 - 9 5 Fish barrier net 0 6 Gunderboom 0 Relocate intake to submerged offshore with passive fine mesh screen with 1.75 mm 7 mesh size 7 - 9 8 Velocity cap at inlet of offshore submerged 0 9 Passive fine mesh screen with 1.75 mm me sh size at inlet of offshore submerged 0 10 Shoreline tech for submerged offshore 0 11 Double-entry, single-exit with fine mesh and fish handling and return 0 12 Passive fine mesh screens with 0.75 mm mesh size at shoreline 7 - 9 Relocate intake to submerged offshore with passive fine mesh screen with 0.75 mm 13 mesh size 0 14 Passive fine mesh screen at inlet of o ffshore submerged with 0.75 mm mesh size 7 - 9 Source: U.S. EPA analys is, 2006, DCN 9-0004.



## C3A2-2 C ALCULATING THE 

## I MPACT OF 

## I NSTALLATION 

## D OWNTIME ON 

## C OMPLYING 

## F ACILITIES 

### Installation downtime may affect a facility’s business operations in several ways: 1. The facility will be unable to perform production or other business operations that depend on cooling water. 2. The facility will lose revenue from the production an d sale of the goods and services that otherwise would have been produced by the affected producti on operations during the period of downtime. 3. The facility will shed the variable cost of produci ng the goods and services not able to be produced during the period of installation downtime. However, the facility will continue to incur the fixed costs of production associated with the affected operations. 4. If, as part of its cooling water dependent operations, the facility genera tes electricity for its own use, and some part of this self-generated electricity contin ues to be needed during the period of installation downtime, the facility may need to purchase replacement electricity. Together, these effects lead to a loss in pre-tax income, which EPA calculated and used as the cost of installation downtime in its analysis of facility impacts. EPA calcu lated the loss in pre-tax income by first calculating the annual loss in revenue in cooling water dependent operations less the variable production costs associated with those operations plus the cost of purchasing electricity to replace any own-generated electricity that is used by the facility. Second, EPA adjusted this annual pre-tax loss value to reflect the length of net installation downtime as estimated in the engineering analysis of compliance technology requirements. Specific elements of these calculations are summarized below for (1) business effects not associated with electric power generation, and (2) electric power generation-related effects.

C3A2-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A2: Installation Downtime



### Business Effects Not Associated with Electric Power Generation The 316(b) Phase III questionnaire included a series of qu estions aimed at understanding the potential financial effect of temporary or permanent shutdown of a facility’s cooling water intake system. A key data item obtained from the questionnaire response is the fraction of a facility’ s non-electric revenue that depends on cooling water. This information coupled with facility income statement information obta ined from the questionnaire response provided the basis for calculating the income loss in non-electric power-related operations. Steps in the calculation are as follows:
the fraction of cooling water-dependent revenue by the total reported non-electric revenue.
reported on the facility’s income statement provided in the questionnaire, by the fraction of cooling waterdependent revenue, as described above. This approach assumes that the variable production cost structure for cooling water-dependent operations is the same as that for non-cooling water-dependent operations. Since other cost accounts or the services they provide – e.g., labor – might also be curtailed and/or applied to some other beneficial serv ice within the enterprise, the use of materials expense as the only component of facility operating costs that may be shed during a period of installation downtime may not capture all of the offset that may be available at a pa rticular facility, but it is the only expense that would be uniformly available for all facilities unlike the other cost accounts. 1.

2. , as Calculate the annual revenue loss from curt ailment of cooling water-dependent operations by multiplying
Calculate the variable production cost offset to this revenue loss by multiplying materials expense

3. Calculate annual less

4. , by loss in pre-tax income from curtailment of the facilities cooling water intake system from non-electric power-related operations as estimated revenue loss estimated reduction in variable production cost. Calculate pre-tax income loss in non-electric power-related operations, from installation downtime multiplying the annual pre-tax income loss by the frac tion of the year indicated as the net downtime required for installing compliance equipment. Business Effects Associated with Electric Power Generation The analysis of installation downtime costs for cooling water-dependent electric power generation activities is the same in concept as that outlined for non-electric powe r-related operations, with the exception that facilities may need to incur an additional cost for purchasing replacement electricity if some of the facility’s electric power needs were met from its own generation. Key informa tion obtained from facility questionnaires for calculating the income loss in electric power-related operations in cludes: (1) annual electric revenue reported as cooling water dependent, (2) the fuel cost of electric power generation, which is assumed to be shed during the period of curtailed operations, (3) the quantity of electricity consum ed by the facility, and (4) the quantity of electricity generated by the facility. The remaining key input require d for this analysis is the unit price of replacement electricity: for this item, EPA used th e average electricity price for industria l customers by state, using data from the Department of Energy, Energy Information Administ ration, for August, 2004. EPA calculated the pre-tax income loss effect for electric power generation activities as follows. 1.

2. Annual fuel cost of electric power generation EPA

3. ’ s own Annual electric revenue from c ooling water-dependent generation is obtained directly from the facility questionnaire. This value is assumed to be the a nnual revenue loss in electric power generation, from curtailment of cooling water-dependent operations. is obtained directly from the facility questionnaire. assumes that this value is shed duri ng the period of curtailed operations. Calculate self-generated electric ity that is consumed by the facility as the lesser of (a) the facility electricity generation or (b) the electricity used within the facility.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A2-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A2: Installation Downtime



### 4. Calculate the quantity of replacement electricity to be purchased by the facility , by multiplying the quantity of own-generated electricity that is cons umed by the facility by the fraction of non-electric revenue that is cooling water dependent but subject to a maximum reduction in electricity need of 75 percent. That is, the facility is assumed to need re placement electricity in proportion to the fraction of non-electric revenue that is not cooling water-dependent. As the fraction of revenue dependent on cooling water, and thus affected by installation downtime, increases, the need for replacement electricity decreases. However, even in the case where the fracti on of revenue that is c ooling water dependent is very large (e.g., 100 percent), the analysis assumes th at the facility will not shed all of its electricity needs: the facility is assumed to always require 25 percent of its baseline electricity consumption from self-generated electricity. The assignment of the 25 percent minimum electricity replacement need is an estimate that reflects the reality that less electricity is likely to be needed to serve a lower level of operations during a cooling water system shutdown, while also acknowledging that all electricity need cannot be shed, regardless of the reduction in non- electric generating activity. The numerical consequence on imposing the 25 percent electricity requirement floor (as opposed to a floor of zero percent) is very small. 5.

6. Calculate annual less plus

7. , by Calculate the cost of electricity pur chased to replace self-generated electricity used by the facility by multiplying the quantity of replacement electricity by th e average electricity price, by state, for industrial customers. loss in pre-tax income for electric power-related operations as estimated revenue loss from cooling water-dependent generation estimated annual fuel cost of electric power generation cost of electricity purchased to replace own-generated electricity. Calculate pre-tax income loss in electric power-related operations, from installation downtime multiplying the annual pre-tax income loss by the frac tion of the year indicated as the net downtime required for installing compliance equipment. These values are summed to yield the total pre-tax inco me loss to the facility from installation downtime. Under the 50 MGD All Option, 3 manufacturing facilities have non-zero downtime. Of these, 2 have non-zero cost of downtime. The facility with zero downtime cost s reported that none of its revenue was cooling water dependent. Of the 2 facilities with non-zero downtime cost, downtime cost as a fraction of annual revenue ranges from 9.2% to 11.3%. Under the 200 MGD All Opti on, 1 manufacturing facility has non-zero downtime. Downtime cost as a fraction of annual revenue for this facility equals 9.2%. Under the 100 MGD CWB Option, none of the manufacturing facilities have non-zero downtime.


## C3A2-3 C ALCULATING THE 

## C OST TO 

## S OCIETY OF 

## I NSTALLATION 

## D OWNTIME 

### The preceding discussion describes the calculation of the pr e-tax income loss from installation downtime as used in the facility impact analysis. For the analysis of cost to society, the concept of cost of installation downtime differs from that for the private impact analysis. Sp ecifically, under the assumption that the total quantity of goods and services produced and sold by the affected industr ies would not change as a result of the regulation (see Chapter E1 for further detail on the so cial cost analysis framework), th e cost to society from installation downtime is the increase in cost for producing the goods and servi ces that would otherwise have been produced by the affected facilities. That is, other producers are assumed to replace the production of goods and services lost due to installation downtime, and the cost to societ y is the amount, if any, by which the cost of these goods and services exceeds the cost at which the affected facilities would have produced these goods and services.

C3A2-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A2: Installation Downtime



### In concept, the cost to society could vary over a broa d range depending on the structure of, and character of competition in, the production of goods and services in the individual markets affected by the 316(b) Phase III regulation.

f 

### At the low end of this possible range, if the repl acement goods and services can be provided by other producers (or even the same producer but at a time before or after the downtime period) at the same variable production cost as otherwise would have b een incurred by the affected 316(b) Phase III facilities, then the cost to society of installation downtime would be zero. Because the cost for alternative producers is the same as for the producers incurring downtime, society incurs no incremental resource cost when other producers provide the replacement go ods and services. In this case, although the affected 316(b) Phase III facilities might incur a financial impact from installation downtime, this impact – the loss in pre-tax income described in the precedi ng section – becomes a transfer from the producers incurring installation downtime losses to the producers who make up the lost production.

f 

### At the high end of this possible range, the cost to society would be approximately equal to the pre-tax income loss incurred by facilities due to installation down time. That is, the cost to society would again be the lost revenue from installation downtime less the variable cost of producing the goods and services not produced due to the installation downtime. In this case, the variable production cost for other producers to replace the lost goods and services is assumed to be essentially the same as the price received for the sale of the goods and services not produced by the facilities incurring the installation downtime. This assumption is consistent with a competitive market model of increasing marginal production cost, such that the variable production cost of the marginal supplier of goods and services produced and sold in any period is approximately equal to the price received for those goods and services in the market. The likely reality is that the cost to society from installation downtime lies somewhere between these cases. Because EPA lacked specific knowledge of the overall production cost structure of the affected industries and for the numerous goods and services provided by the affected i ndustries, EPA adopted the latter of the two analytic cases outlined above for its analysis. That is, EPA assume d that the cost to society from installation downtime would be the same as that estimated as the pre-tax cost of installation downtime for Manufacturers’ facilities. Thus the cost to society of installation would be lowe r to the extent that the variable production cost for replacement goods and services is less than the selling price of those goods and services.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A2-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A2: Installation Downtime



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C3A2-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s 

# Appendix C3A3: Cost Pass-Through Analysis

I NTRODUCTION 

### This appendix presents the assessment of cost pass-through (CPT) potential for six Primary Manufacturing Industry sectors in which a substantial number of facilities are expected to be subject to the Section 316(b) Phase III regulatory analysis options. Th is analysis considered the following six industry sectors:

f 

### SIC 20: Food and kindred products
f 

### SIC 26: Paper and allied products
f 

### SIC 28: Chemicals and allied products
f 

### SIC 29: Petroleum Refining
f 

### SIC 331: Steel
f 

### SIC 333/5: Aluminum 

## A C ONTENTS PPENDIX
Introduction........................................................C3A3-1 C3A3-1 The Choice of Firm-Specific versus SectorSpecific CPT Coef ficients.....................C3A3-1 C3A3-2 Market Structure Analysis.....................C3A3-3 C3A3-2.1 Industry Concen tration .................C3A3-4 C3A3-2.2 Import Competition ......................C3A3-6 C3A3-2.3 Export Compe tition ......................C3A3-7 C3A3-2.4 Long-Term Industry Growth ........C3A3-8 C3A3-2.5 Conclusions ..................................C3A3-9 References........................................................C3A3-11



### The purpose of the CPT analysis is to estimate the exte nt to which cost increases incurred by facilities in complying with the Section 316(b) Phase III regulatory opti ons can be reasonably expected to be passed on to consumers in the form of higher prices. This appendix begins with a review of approaches for assessing CPT potential associated with market-wide cost increase scenarios. Next, a description of the methodology and specific metrics used to assess CPT potential are discussed and the results for each sector provi ded. Finally, conclusions are presented. From this analysis, EPA concluded that an assumption of zero cost pass-through is appropriate for analyzing the impact of the regulatory analysis options on facilities in the manufacturing industries. Performance of the financial impact analysis under this assumption means that facilities must absorb all compliance-related costs and operating effects (e.g., income loss from facility shutdown during equipment installation) within their baseline cash flow and financial condition. To the extent that facilities would be able to pass on some of the compliance costs to customers through price increases, the analysis overstates the potential impact on complying facilities.


## C3A3-1 T HE 

## C HOICE OF 

## F IRM 

## -S PECIFIC VERSUS 

## S ECTOR 

## -S PECIFIC 

## CPT C OEFFICIENTS 

### One method of examining the ability of a firm to pass-t hrough compliance-related cost increases associated with the Phase III regulation is to review the firm’s historical performance in passing on previous cost increases to consumers. For example, Ashenfelter et al. (1998) estimate the cost pass-through rate facing an individual firm, and distinguish that rate from the rate at which a fi rm passes through cost changes common to all firms in an industry, by regressing the price a firm charges on both its co sts and the costs of another firm in the industry. The estimated firm-specific CPT rate relates a change in the prices charged by a specific firm to a change in its production costs, assuming no changes in the production cost for rival producers of that product. However, estimating firm specific CPT rates is extremely complex. For example, in order to estimate firm-specific CPT rates for every Phase III manufacturing firm included in the sample of Detailed Industry Questionnaire (DQ) respondents, EPA would require, for each firm, detailed in formation on the products sold, the markets in which these products are sold, as well as information identifyi ng major competitors in each market. The Detailed

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A3-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s



### Industry Questionnaire did not obtain this information fro m surveyed facilities. And even if such information were available, the analysis would remain highly challengi ng and subject to significant analytic error. As such, it is neither possible nor practical to develop firm-s pecific CPT coefficients for the sample of Phase III manufacturers. Moreover, even if the Agency possessed the data necessary to estimate firm-specific CPT rates, it is questionable whether these rates would be the appropriate measure of CPT potential for compliance-related cost increases stemming from the Phase III regulation. The Phase III re gulation would force multiple firms in each of the industry sectors considered in this analysis to incur comp liance-related cost increases, which implies that for most firms the cost increases would not only apply to them, but also to several of their competitors. Not surprisingly, previous studies have found that the CPT rate for chang es to an individual firm’s cost differs from the rate at which a firm would pass through cost changes that are comm on to all, or a substantial fraction of, firms in an industry (Ashenfelter et al., 1998). It can be reasonably expected that the higher the share of firms incurring the cost increase, or more appropriately the higher the share of total output produced by such firms, the greater the ability of those firms to pass on a greater portion of those costs to the consumer. In cases where an industry-wide cost shock occurs, an industry-wide CPT rate would be an appropriate and practical way of assessing the potential of all firms in that in dustry to pass through that cost increase to consumers (EPA, 2003). An industry-wide CPT rate provides an estimate of the change in each facility’s output prices as a function of the increase in its production costs, assuming that the same cost increase is experienced by all firms in the industry. Such an industry-wide rate is relatively easier to estimate than firm-specific cost pass-through rates if one assumes that perfect competition exists in the in dustry. Among other things, perfect competition implies the existence of product homogeneity within the indus try, homogeneity of production technology among firms in the industry, and homogeneity of production costs among firms (i.e., pricing is at marginal cost). Under these conditions, the price response to a general industry-wide ch ange in production costs is likely to be industry-wide and similar across all firms. For example, in support of the recently promulgated Metal Products &Machinery (MP&M) industry effluent guidelines, EPA’s Office of Wa ter (OW) estimated industry-specific CPT rates since a large fraction of establishments in these industries were exp ected to be subject to the regulation. EPA estimated these CPT rates by regressing annual output price indices on annual input cost indices for the MP&M industry. The estimated CPT coefficients were validated by a market structure analysis that assessed, for each industry, the potential market power enjoyed by firms in the industry and the consequent implications it had on their ability to pass through compliance-related costs. Industry-wide CPT rates can be estimated for the Ph ase III manufacturing sectors based on the methodology used for deriving industry-wide CPT rates for industries covered by the MP&M regulation. However, because the regulatory analysis options will affect only those faciliti es that operate a CWIS to withdraw cooling water from surface water bodies, only a subset of facilities in each industry sector would incur compliance-related cost increases. As the cost increase associ ated with the regulatory analysis options is not industry-wide, it is questionable whether industry-wide CPT rates are appropriate for estimating the price response of firms in the five industry sectors considered in the analysis of Phase III impacts. If a substantial portion of production in each industry occurs at facilities not subject to the regulation u nder each analysis option, then the use of industry-wide CPT rates may grossly overestimate the ability of firm s in these industries to pass-through compliance-related costs to consumers. To assess the reasonableness of using industry-wide CPT rates in the analysis of impacts to Phase III manufacturers, EPA estimated the percentage of tota l production in each of the six Primary Manufacturing Industries sectors that occurs at facilities that are estimated to be subject to the regulatory analysis options. Value of shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because value of shipments data were not collected using the DQ, these data were not available for the sample of Phase III manufacturing facilities potentially subject to the regulatory analysis options. As such, total revenue, as reported

C3A3- 2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s



### on the DQ, was used as a close approximation to value of shipments for these facilities. EPA estimated the total revenue subject to the regulatory options by multiplying the revenue of facilities (in $2004) in the sample of Phase III manufacturers that were determined to be pot entially subject to each option by their facility sample weights and summing across all facilities. Total value of shipment estimates for each industry were obtained from the 2004 Annual Survey of Manufacturers. Table C3A3-1 summarizes the findi ngs of this analysis.

Total Value of SIC Regulation (Millions 2004$) 50 MGD 200 MGD 100 MGD (Millions 2004$) All All CWB

20 4,973 26 19,070 28 30,215 29 25,388 331 31,895 333/35 Aluminum 5,256 584,908 1% 0% 1% 81,988 23% 1% 5% 357,682 8% 4% 6% 288,084 9% 3% 5%

92,821 34% 26% 29% 18,338 29% 3% 3%

) 

### Table C3A3-1: Proportion of Value of Shipments Potentially Subject to Compliance-Related Costs Associated with the Phase III Regulation ($2004)

Revenue for Proportion of Total Value of Facilities Subject to Shipments Subject to Regulation Industry Sector Phase III Shipments

Food and kindred product Paper and allied products Chemicals and allied products Petroleum Refining Steel
Notes: For the purpose of this analysis, facility revenue was used as an appropriate surrogate in the absence of value of shipm ents for sample facilities. Source: Section 316(b Detailed Industry Questionnaire and 2004 A nnual Survey of Manufacturers.


### As shown in Table C3A3-1, the proportion of total value of shipments estimated subject to the regulation under the regulatory analysis options ranges from 1 percent to 34 percent depending on the industry and option considered. Given that less than 35 percent of the total va lue of shipments in each of the six industries considered in this analysis would be subject to regulation indu ced compliance costs, EPA believes that the theoretical threshold for justifying the use of industry-wide CPT rates in the Phase III impact analysis has not been met. The Agency believes that using industry-wide CPT rates in the analysis of Phase III impacts would overestimate the cost pass-through ability of firms incurring regulation-induced compliance costs, and thus underestimate impacts. At the other end of the spectrum, however, an assumpti on of zero CPT would provide a conservative estimate, as it would assume that all facilities incur one hundred percent of cost impacts. Given the inability to estimate firm-specific CPT rates a nd the finding that the use of industry-wide CPT rates would not be appropriate, EPA next con ducted a market structure analysis to investigate the extent to which firms in the six industry sectors enjoy suffi cient market power to pass compliance-related costs on to consumers in the form of higher prices.


## C3A3-2 M ARKET 

## S TRUCTURE 

## A NALYSIS 

### Information on the competitive structure and market charact eristics of an industry provide insight into the likely ranges of supply and demand elasticities and the sensitivity of output prices to input costs. For example, when input costs increase, the profit-maximizing firm attempts to maintain its profits by increasing output prices, to the extent permitted by market power. The amount of the cost increase that the firm can pass on as higher prices depends on the relative market power of the firm and its cu stomers. The market struct ure analysis described in this section attempts to measure the market power enjoyed by firms in each of the six industries. This analysis is

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A3-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s



### combined with information from industry review documents such as McGraw Hill’s U.S. Industry and Trade Outlook to reach conclusions regarding the CPT ability of firms in each industry. The market structure analysis consists of a review of economic data for the following four indicators of market power: industry concentration; import competition; export competition; and long term growth. Each of these indicators is discussed in detail below. EPA notes that the impact of each of these four indicators of market power varies from industry to industry. Furthermore, the results presented for each indicator must be interpreted with caution because even though for a particular indu stry an indicator may predict high cost pass-through potential, the specific features of the industry may re sult in the indicator having diminished significance in predicting market power. C3A3-2.1 Industry Concentration The extent of concentration among a group of market par ticipants is an important determinant of that group's market power. A group of many small firms typically has less market power than a group of a few large firms, because the latter are in a more advantageous position to collude with each other. All else being equal, highlyconcentrated industries are therefore expected to pass-through a higher proportion of the compliance costs that would result from the Phase III regulation. This analysis uses the Herfindahl-Hirschman Index (HHI) as a measure of market concentration 1 

### . The HHI is calculated by squaring the market share of each firm co mpeting in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty percent, the HHI is 2600 (30 2 

### + 30 2 

### + 20 2 

### + 20 2 

### = 2600). The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Based on the U.S. Department of Justice’s guidelines for evaluating mergers, markets in which the HHI is under 1000 are cons idered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and tho se in which the HHI is in excess of 1800 are considered to be concentrated. The accuracy of any analysis of market power originati ng from industry concentration depends to a large extent on properly defining the relevant market. A well-defined market requires the inclusion of all competitors and the exclusion of all non-competitors. Defining the relevant market too narrowly overstates market power, while defining the market too broadly would underestimate it. The four-digit SIC category, while not a perfect delineation, is most often used by industrial organi zation economists in their studies because, among publicly available data sources, these industries appear to co rrespond most closely to economic markets (Waldman & Jensen, 1997). Therefore, in Table C3A3-2 below, industr y concentration data is presented for each of the fourdigit SIC codes that include at least one potentially re gulated Phase III facility for which DQ data are available.

The Herfindahl-Hirschman Index was chosen because it provid es a more complete picture of industry concentration compared to other measures such as the fo ur-firm and eight-firm concen tration ratios. The HHI uses the market shares of all the firms in the industry, and these market shares are squared in the calculation to place more weight on the larger firms. In contrast, the four- and eight-firm concentration ratios do not use the market share of all firms in the industry, and nor do th ey provide information about the distribution of firm size. For exam ple, if there were a significant change in the market shares among the firms included in the ratio, the value of the concentration ratio would not change.

C3A3- 4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s

SIC a HHI b 

### Table C3A3-2: Herfindahl-Hirschm an Index for Four-Digit SIC NAICS NAICS Description Industry Unconcentrated Markets (HHI < 1,000) 20-- (excluding 311 Food Manufacturing Food and Kindred Products 91 beverage manufacturing) 3317 331210 Iron and Steel Pipes and Tubes Mfg From Purchased Steel 200 Steel 3315 331222 Steel Wire Drawing Steel 223 2869 325199 All Other Basic Organic Chemical Mfg Chemicals and Allied Products 256 2821 325211 Plastics Material and Resin Mf g Chemicals and Allied Products 304 2819 325188 All Other Basic Inorganic Chemical Mfg Chemicals and Allied Products 394 2911 324110 Petroleum Refineries Petroleum Refining 422 3312 331111 Iron and Steel Mills Steel 445 2621 32212 Paper (except newsprint) Mills and Ne wsprint Mills Paper and Allied Products 467 2631 322130 Paperboard Mills Pape r and Allied Products 485 2082, 2084, 3121 Beverage Manufacturing Food and Kindred Products 532 2085, 2086, 2097 3316 331221 Cold-Rolled Steel Shape Mfg Steel 631

2611 322110 Pulp Mills 1106 Moderately Concentrated Markets (1,000 < HHI < 1,800) Paper and Allied Products 2813 325120 Industrial Gas Mfg Chemicals and Allied Products 1225 3334 331312 Primary Aluminum Production Aluminum 1231 3353 331315 Aluminum Sheet, Plate and Foil Mfg Aluminum 1447 2865 325192 Cyclic Crude and Intermediate Mfg Chemicals and Allied Products 1701 Concentrated Markets (1,800 < HHI) 2816 325131 Inorganic Dye and Pigment Mfg Chemicals and Allied Products 1843 2812 325181 Alkalies and Chlorine Mfg Chemicals and Allied Products 2870

a NAICS code represents largest percentage of facili ties and value of shipments within this SIC based on 1997 Bridge Between SIC and NAICS b The 1997 Census of Manufacturers is the most recent concentration ratio data available. Source: Census of Manufacturers 1997.


### As shown in Table C3A3-2, based on their HHI, 12 four-dig it SIC markets can be classified as unconcentrated, 5 can be classified as moderately concentrated, and only 2 can be classified as concentrated. Notably, all 23 of the four-digit SIC categories listed as being concentrated belong to the Chemicals and Allied Products industry. From a market power perspective, Table C3A3-2 seems to suggest that at the four-digit SIC level only two SIC categories are sufficiently concentrated to argue that fi rms may possess sufficient market power to pass-through a portion of their compliance-related costs assuming that comp etitor firms in the same industry do not incur similar cost increases.
To further examine the level of concentration in each of the six industry sectors, EPA decided to analyze HHI at the industry level as well. The Industry-level HHI for each sector was calculated as th e average of each four-digit SIC HHI belonging to that sector, weighted by the value of shipments for that SIC. EPA notes that aggregating HHI for four-digit SIC categories into industry HHI are likel y to yield estimates that in general understate market power. Nonetheless, estimated industry HHI should still provide meaningful insight into market power of firms in the industry because firms in each industry still produ ce similar or related products (for example, paper products, chemicals, etc.). Estimated Industry HHIs are presented below in Table C3A3-3.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A3-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s

SIC Industry HHI 20 147 Food and Kindred Products 29 Petroleum Refining 422 331 Steel 422 28 Chemicals and Allied Products 496 26 Paper and Allied Products 501 333/5 Aluminum 1380 

### Table C3A3-3: Herfindahl-Hir schman Index by Industry

Source: Census of Manufacturers 1997, and U.S. EPA analysis


### Table C3A3-3 reveals that, at the industry level, the estim ated HHI for five of the six industries are quite small, implying that they are unconcentrated markets and with in these industries individual firms do not enjoy much market power. Notably, the Chemicals and Allied Produc ts industry has a low HHI, which suggests that the 4 four-digit SIC categories that were classified as having concentrated markets in reality make up a very small segment of the Chemicals and Allied Products industry. Thus, from the perspective of the Phase III regulatory analysis, the majority of firms in this industry have small market power. In addition, EPA notes that only 8 percent of production in this is industry would potentially be subject to compliance-related cost increases, which suggests that the cost pass-through potential of firms fro m this sector incurring such expenses would be severely curtailed. An important finding in Table C3A3-3 is that the Alumi num industry, which is categorized at the three-digit SIC level, appears to be moderately concentrated. Thus, based solely on an analysis of industry concentration, it would appear that firms in the Aluminum industry might enjoy moderate amounts of market power, which may enable them to pass through costs at a more than negligible rate. Howeve r, as cautioned at the beginning of the market structure analysis, an accurate judgment of the ma rket power enjoyed by firms in an industry must be reserved until all indicators have been analyzed. C3A3-2.2 Import Competition Theory suggests that imports as a percent of domestic sal es are negatively associated w ith market power because competition from foreign firms limits domestic firms’ abilit y to exercise such power. Firms belonging to sectors in which imports make up a relatively large proportion of domestic sales would therefore be at a relative disadvantage in their ability to pass-through costs compared to firms belonging to sectors with lower levels of import penetration, the measure of import competition used in this analysis. Import penetration, the ratio of imports in a sector to the total value of domestic consum ption in that sector, is particularly relevant because foreign producers would not incur costs as a result of the Phase III regulation. In this market structure analysis, EPA assumes that highe r import penetration will gene rally imply that firms are exposed to greater competition from foreign producers and would thus possess less market power to increase prices in response to regulation-induced increases in production costs. EPA estimated import penetration ratios for each industry as total imports in an industry divided by total value of domestic consumption in that industry; where domestic consumption equals do mestic production plus imports minus exports. Import penetration ratios estimated using 1998 census data for the six industry sector s considered in this analysis are presented below in Table C3A3-4.

C3A3- 6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s

SIC Implied Domestic 

### Table C3A3-4: Import Penetration by Industry ($2004)
Industry Imports (Millions) Consumption (Millions) Import Penetration 20 Food and Kindred Products $31,782 $588,644 5.40% 26 Paper and Allied Products $14,682 $87,280 16.82% 28 Chemicals and Allied Products $81,491 $373,962 21.79% 29 Petroleum Refining $33,357 $313,343 10.65% 331 Steel $16,371 $103,297 15.85% 333/5 Aluminum $6,032 $22,026 27.39%

2. Notes: 1. Implied Domestic Consumption = Value of Shipments + Imports - Exports.

Most recent available import data comes from 2002 and is denominated in $2004. Source: 2002 U.S. Bureau of Census data and 2004 Annual Survey of Manufacturers


### The estimated import penetration ratios for the six industries range from 5 percent to 27 percent for the year 2004. The estimated import penetration ratio for the entire U.S. manufacturing sector (SIC 20-39) is 25 percent. Considering that the United States is an open economy, EPA believes it is reasonable to assume that in industries with import penetration ratios close to or above 25- percent domestic firms most likely face stiff competition from foreign firms. Such competition is likely to curtail the market power enjoyed by dom estic firms and, given the scenario that regulation-induced cost increases are not in curred by foreign producers, would limit the ability of domestic firms to pass-through such costs. Thus, b ased on the import penetration ratios presented in Table C3A3-4, firms in all of the industries except Aluminum a ppear to be in a position to pass-through to consumers a significant portion of compliance-related costs associ ated with the Phase III primary regulatory options. However, given the relatively low HHIs for these indust ries EPA believes that existing market competition among domestic firms most likely nullifies any favorable influe nce the lack of foreign competitors would have on increasing the market power of firms in this industry. EPA also highlights the above average import penetration ratio for the Aluminum industry which suggest low market pow er for firms in this industry. With respect to the Aluminum industry, this fact may offset – from a market power perspective – the finding that the industry was identified above as being moderately concentrated. Thus, even though there are relatively few domestic producers in the U.S. Aluminum industry, the notable presence of foreign producers in U.S. markets is likely to markedly reduce their the market power. C3A3-2.3 Export Competition The Phase III regulation would not increase the production co sts of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regul ation-induced increases in production costs. They would therefore have a lower CPT potential, all else being equal. This analysis uses export dependence, defined as the percenta ge of shipments from an industry that is exported, to measure the degree to which a sector is exposed to co mpetitive pressures abroad in export sales. Firms in industries with relatively high export dependence are exp ected to have lesser market power than those in industries with relatively low export dependence due to thei r relatively larger reliance on sales in export markets. Estimated export dependence ratios for the six industry sector s considered in this anal ysis are presented below in Table C3A3-5.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A3-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s

SIC 

### Table C3A3-5: Export Dependence by Industry ($2004)
Industry Exports (Millions) Value of Shipments Export Dependence (Millions) 20 Food and Kindred Products $28,046 $584,908 4.79% 26 Paper and Allied Products $9,390 $81,988 11.45% 28 Chemicals and Allied Products $65,211 $357,682 18.23% 29 Petroleum Refining $8,098 $288,084 2.81% 331 Steel $5,895 $92,821 6.35% 333/5 Aluminum $2,344 $18,338 12.78% Notes: 1. Most recent available export data comes from 2002 and is denominated in $2004. Source: 2002 U.S. Bureau of Census data and 2004 Annual Survey of Manufacturers.


### The estimated export dependence ratios for the six industri es range from 5 percent to 18 percent. The estimated export dependence ratio for the entire U.S. manufacturing sector for the same year is 17 percent. Thus, for all but one industry (Chemicals), the export dependence ratio is below the average for the U.S. manufacturing sector. This finding implies that none of these industries are ch aracterized by strong competitive pressures from foreign firms/markets, and thus market power and CPT potential are not diminished by export dependence. However, it is questionable whether this effect works as strongly in the opposite direction, i.e., firms in an industry will have a comparatively high cost pass-through potential simply b ecause firms in that industry are not active in export markets. From the standpoint of firms gaining market power, EPA believes that the finding of low export dependence diminishes the importance of export competition as an indicator of market power. Thus, the other three indicators must be relied upon to gauge the amount of market power that firms in each industry are expected to hold. For example, even though the Petroleum Refining and Steel industries have extremely low export dependence, the low market concentra tion in these industries leads EPA to be lieve that market power held by individual firms is likely to be quite sm all. In addition, as discussed later in this memo, recent trends in the Steel industry provide good reason to believe th at firms in this industry are unlikely to be able to pass through a notable portion of regulation-induced cost increases given the current business environment they face. C3A3-2.4 Long-Term Industry Growth An industry’s competitiveness and the ability of firms to e ngage in price competition are likely to differ between declining and growing industries. Most studies have found that recent growth in revenue is positively related to profitability (Waldman & Jensen, 1997), which suggests a greater ability to recover costs fully. To examine trends in long-term growth for each of th e six industry sectors considered in this analysis, EPA estimated the average annual growth rate in the valu e of shipments between 1989 and 2004 for each industry using data available from the U.S. Bureau of Census 2 

### . EPA expects firms in sectors with higher growth rates to be better positioned to pass through compliance costs rather than being forced to abso rb such cost increases in order to retain market share and revenue. The results of this analysis are presented in Table C3A3-6.

The period from 1989 to 1998 represents the most recent ten-year period that includes data consistent with the survey period for the Detailed Industry Questionnaire (1996-1998).

C3A3- 8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 2§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s



### Table C3A3-6: Average Annual Growth Rates by Industry Average Annual Growth SIC Industry Rate in Value of Shipments (1989 to 2004) 20 1.0% Food and Kindred Products 26 Paper and Allied Products -2.0% 28 Chemicals and Allied Products 1.0% 29 Petroleum and Coal Products 3.1% 331 Steel 0.3% 333/5 Aluminum -2.6% Source: U.S. Bureau of Census data.



### Table C3A3-6 shows that of the six i ndustries specifically considered for this analysis, two industries experienced negative growth over the 1989 to 2004 time period a nd another experienced only marginal growth. The Petroleum Refining industry experienced the largest growth, displaying an average annual growth rate of 3.1 percent. In the absence of strong growth performance dur ing the analysis period for all six industries, it is unlikely that firms in any of these industries possess si gnificant market power based on growing demand for their products. In effect, the long-term growth performance of all six industries does not support a conclusion that firms in these industries would be in a strong position to pass on a significant portion of their compliance costs.
C3A3-2.5 Conclusions Given that less than 35 percent of the total value of ship ments in each of the six industries considered in this analysis is estimated to be subject to regulation under the regulatory analysis options, and the likelihood that these percentages represent upper bound estimates, the likelihood that firms incurring such costs would be able to pass through to consumers a material portion of 316(b) complia nce costs is small. To validate this hypothesis, EPA undertook the market structure analysis presented in the prev ious section. In general, the weight of evidence from the market structure analysis suggests that firms in a ll six industries are unlikely to possess significant amounts of market power, thereby lending support to EPA’s hypothesis that most firms would not be in a position to passthrough a significant portion of compliance costs. The analysis of individual indicators under the market struct ure analysis did reveal a few exceptions to the general finding of low market power in all industries. However, considering the combined impact of all four indicators of market power together with information on recent economic trends in these industries suggests that on the whole, firms in each of the six industries hold relatively low market power and CPT potential. For example, the estimated HHI for the Aluminum industry indicated that this sector is moderately concentrated, which would potentially allow firms in this industry to pass through a significant portion of their compliance-related costs. In contrast, however, the market structure analysis also found that the domestic Aluminum industry witnessed a sustained decline in production duri ng the 1990s and also faces stiff competition from foreign producers in its U.S. markets. As discussed in the profile of this industry, in the early 1990s the domestic Aluminum industry was affected by reduced U.S. demand and the dissolution of th e Soviet Union, which resulted in dramatic increases in Russian exports of aluminum. The recovery that follow ed was subsequently affected by the economic crises in Asian markets in the second-half of the 1990s, which al ong with growing Russian exports, again resulted in a period of oversupply. Demand for alum inum industry products declined ag ain in 2000 through 2002, reflecting weakness in both the U.S. and world economies, and again resulted in oversupply and declining financial performance. These trends, which are reflected in th e negative average annual growth rate and high import penetration for the domestic Aluminum industry, suggest th at domestic firms in this industry hold relatively low market power and are not in a position to pass through significant portions of their compliance-related cost increases. Overall, the balance of the argument in favor of and against high cost pass-through in the Aluminum

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A3-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s



### industry rests with the indicators that argue against it; th e lack of domestic competition in the industry is more than offset by the existence of stiff competition from fo reign producers and the general decline witnessed by the domestic industry. Similarly, in the case of all other ex ceptions found in the market structure analysis, the weight of evidence – when all four indicators of market power are considered together – rests with the indicators that suggest low market power and CPT potential. Based on the findings of the market structure analysis, EPA decided to assume a zero CPT rate for all six industries in the analysis of Phase III impacts. EPA belie ves that this assumption is reasonable given the results of the market structure analysis and is definitely superi or to using industry-wide CPT rates. In addition, EPA notes that by assuming a CPT rate of zero for all industri es, the analysis of Phase III impacts is less likely to underestimate facility impacts in that the analysis assumes that facilities would incur one hundred percent of compliance costs. Thus, whereas an overstated CPT rate may erroneously underestimate impacts for facilities incurring compliance-related cost increases, the use of a CPT rate of zero errs on the side of caution, thus potentially overstating impacts to affected facilities.

C3A3- 10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s



## R EFERENCES 

### Ashenfelter, Orley; David Ashmore; Jonathan B. Bake r; and Signe-Mary McKernan. (1998), "Identifying the Firm-Specific Cost Pass-Through Rate," FTC Working Paper No. 217, January. McGraw-Hill (1999), U.S. Industry and Trade Outlook ‘99. McGraw-Hill Companies.Waldman, Don E. and Elizabeth J. Jensen (1997), Industrial Organization: Theory and Practice. AddisonWesley.
U.S. Department of Commerce (U.S. DOC). 1989, 1 992, 1997, and 2002. Bureau of the Census. Census of Manufactures

. U.S. Department of Commerce (U.S. DOC). 1988-1991, 199 3-1996, 1998, and 2004. Bureau of the Census. Annual Survey of Manufactures.
U.S. EPA, Office of Water (2003), Effluent Limitations Guidelines and New Source Performance Standards for the Metal Products and Machinery Point Source Category.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A3-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A3: Cost Pass-Through Analysi s



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C3A3- 12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow 

# Appendix C3A4: Adjusting Baseline Facility Cash Flow

I NTRODUCTION 

### This appendix documents EPA’s development and analysis of adjustment factors for the 316(b) Phase III manufacturing industries. This analysis presents an updated version of the analysis conducted for the Proposed Section 316(b) Rule for Phase III Facilities. The analysis incorporates two additional years of data, for 2004 and 2005, which reflect the time span between the Proposed and Final Rules. In addition to these extra years of data, EPA also identified and added to the analysis two business sectors – Beverages and Food Processing – that were not previously included in the Primary Manufacturing Industries. Also, the set of firms included in this analysis differs from that used for the Proposed Rule due to business structural changes at the firm level, such as mergers, acquisitions, or bankruptcies, that occurred between the Proposed and Final Rule. To support its analysis of the potential economic impact of the 316(b) Phase III regulation, EPA collected economic/ financial data for the three years 1996-1998 from a sample of facilities in the manufacturing industries primarily expected to have been subject to the regulation. These facility economic/financial data are used to gauge the potential economic/financial impact of regulatory compliance: the facilities and their financial data serve as models for testing the financial effect of regulatory alternatives. For this analysis to provide valid insight in to the ability of the affected industries to meet regulatory requirements without material adverse impact, the sample facility data should reflect business conditions that might be reasonably anticipated at the time of compliance. 

## C HAPTER 

## C ONTENTS

j Introduction........................................................C3A4-1 C3A4-1 Background: Review of Overall Business Conditions .............................................C3A4-2 C3A4-2 Framing and Executing the Analysis ....C3A4-5 C3A4-2.1 Identifying the Financial Data Concept to Be Analyzed .................................C3A4-5 C3A4-2.2 Selecting Appropriate Data ..........C3A4-5 C3A4-2.3 Selecting Industry Groups and Firms for Use in the Analysis.......................C3A4-7 C3A4-2.4 Structuring the Analysis ...............C3A4-9 C3A4-3 Summary of Findings..........................C3A4-11 C3A4-3.1 Comparison of Findings for Proposed and Final Rule Analysis ....................C3A4-17 C3A4-4 Developing an Ad ustment Concept ...C3A4-18 References........................................................C3A4-21



### In performing its impact analyses using these data, EPA was concerned in two ways that the facility survey data might yield erroneous conclusions.

f 

### First, knowing that U.S. business conditions during the latter half of the 1990s were cyclically strong, EPA was concerned that business conditions during the 316(b) survey period (1996-1998) might be abnormally favorable for some of the six Primary Manufacturing Industries sectors covered in the Phase III analysis. In this case, the business performance an d valuation measures, which are based on survey data, used to assess the burden of regulatory compliance costs might overstate industry’s ability to bear these costs and therefore understate the potential impact of the regulatory analysis options considered for the Phase III regulation.

f 

### Second, apart from the issue of short-term deviation from trend caused by a cyclically strong economy, EPA was also aware from its profile analyses that so me of the industries might be experiencing a longerterm trend of deteriorating performan ce. Using sample facility data that don’t reflect such possible trends

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### would again potentially overstate industry’s ability to bear compliance costs and therefore understate the potential impact of the regulatory analysis op tions considered for the Phase III regulation. Given these concerns, EPA analyzed for the manufactur ing industries (1) whether business conditions were “abnormally favorable” during the survey period and (2) whether business performance over a longer term might be following a non-neutral – in particular , negative – trend. This analysis va lidated EPA’s concerns that use of unadjusted survey data might yield erro neous conclusions from the facility impa ct analysis. From the findings of this analysis, EPA developed a basis for adjusting survey financial data to account for these effects: short-term deviation from trend and non- neutral long-term trend.


## C3A4-1 B ACKGROUND 

## : R EVIEW OF 

## O VERALL 

## B USINESS 

## C ONDITIONS 

### As background for its analysis, EPA re viewed general economic data over the past several years to assess whether business conditions during the survey data collection period of 1996-1998 might be generally perceived as abnormally favorable for the U.S. economy, as a whole. This review confirmed the concern that business conditions in 1996-1998 were ge nerally more favorable than the averag e of conditions over a longer time period. Figure C3A4-1 - Figure C3A4-3 present annual and averag e values for the period 1985-2005 for three measures of general economic performance: Figure C3A4-1: Growth in Real Domestic Product, 1985-2005. This exhibit, based on data published by the Department of Commerce, Bureau of Economic Analys is, focuses on the growth trend of the broad economy, including all sectors. Growth stronger than the aver age trend would indicate a strongly expanding economy and would generally indicate strong business performance. Figure C3A4-2: Capacity Utilization in Manufacturing Industries, 1985-2005. This exhibit, based on U.S. Federal Reserve Bank data, reports the rate of capital utilization for all manufacturing sectors. All else equal, when the rate of capital utilization is higher than th e average trend, demand for manufacturing output is strong and manufacturing business performance would be generally strong. Figure C3A4-3: Growth in Industrial Production, 1985-2005. Like the preceding exhibit, this exhibit is based on data published by the U.S. Federal Reserve Ba nk and reports the rate of growth in the Federal Reserve’s Industrial Production Index, wh ich is a measure of the real output of the manufacturing industries. Growth stronger than the average trend would indicate a strong expansion in the manufacturing industries and would generally indicate strong manufacturing business performance. In each case, the annual values in the period 1996-1998 ar e above the average trend line, indicating stronger overall economic performance in the survey data collec tion period than for the longer period presented in the charts. The data show a consistent yea r-by-year pattern over the 1996-1998 period:

f 

### 1996: The values for 1996 are above the longer-term aver age trend but are the lower than the values for 1997, indicating that manufacturing economy was in an upswing from 1996 to 1997.

f 

### 1997: The values for 1997 are the highest of the values for the three years.

f 

### 1998: The values for 1998 are all lower than the values for 1997 and generally appear to be the beginning of the downswing in economic performance that occurre d in the latter part of the 1990s. In the case of industrial production and capacity utilization in manufacturing industries , 1997 is the peak performance year over the 1990s decade and is followed by a dec line in 1998 and subsequent years leading to the recession period in 2001. In the case of GDP growth , the fall-off in 1998 (from 1997) is followed by one more year of strong growth in 1999. Afterwards, GDP growth turns sharply lower during 2000, the recession year of 2001, and subsequent years. As is widely acknowledged in general business conditions

C3A4-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### analyses, economic weakness during the 2000-2003 period began earlier in the manufacturing industries than in the general economy. Figure C3A4-1: Growth in Real Domestic Product, 1985-2005

19

85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

-1 . 0 % 0. 0% 1. 0% 2. 0% 3. 0% 4. 0% 5. 0%Year to Year Growth in GDP, Percent

Year

Real GDP A v er age Gr ow t h , GDP

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow

8 8 19

5 19 6 19 87 19 88 19 89 19 90 1991 1992 1993 1 9 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

i i

198

5 198 6 91 19 92 19 93 1 994

i a l 

### Figure C3A4-2: Capacity Utilization in Manufacturing Industries, 1985-2005

84. 00

82. 00

78. 00 80. 00Capacity Utilization, Percent

76. 00

74. 00

72. 00

70. 00

Year
Capac t y Ut iliz a t io n A v er age Capac t y Ut iliz a t io n


### Figure C3A4-3: Growth in Industrial Production, 1985-2005

8. 0%

6. 0%

2. 0% 4. 0%Year to Year Growthin Industrial Production

0. 0%

-2 . 0 % 1987 1988 1989 1990 19 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-4 . 0 % Year

Pr oduc ti on A v er age G r ow t h , Indus tr Pr oduc ti on

C3A4-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



## C3A4-2 F RAMING AND 

## E XECUTING THE 

## A NALYSIS 

### The objective of this analysis was to understand (1) th e extent to which the business conditions and financial performance of the Phase III manufacturing industries reflected cyclically favorable conditions during the 316(b) survey period and (2) whether these industries show a non-neutral longer term tr end in economic/financial performance – e.g., deterioration in performance over time independent of cyclical variation. If either or both of these conditions were found, then the data used to test for these conditions would be used to adjust relevant survey data items to a level consistent with normal business conditions and/or the longer term of performance. To meet these objectives, EPA set, as its overall approach, identification and analysis of a financial performance data series for the 316(b) manufacturing industries. This data series would be used to test whether financial performance at the time of the 316(b) survey differed from the longer term trend. At the outset, EPA recognized that, in all likelihood, such a data series would not report financial performance at the level of the individual facility – which is the unit of analysis for the 316(b) facility impact analysis (see Chapter C3: Economic Impact Analysis for Manufacturers ) – but would report performance for individual firms or for some industry aggregate. As a result, EPA would need to infer the trend of perf ormance in facility financial performance from firm- or industry-level performance and, in turn, apply adjustments, if needed, to facility financial data based on analysis of the firm- or industry-level performance. Although the u se of firm- or industry-level information for adjusting facility data necessarily represents a limitation in this anal ysis, EPA judges that the effort is warranted given: (1) the potential for the facility impact analysis to yield erroneous findings if it is based on data that reflect cyclically favorable conditions and (2) the absence of fac ility data to support a more precise analysis. Key steps in framing and executing th e analysis are described below. C3A4-2.1 Identifying the Financia l Data Concept to Be Analyzed EPA determined that the financial data concept to be anal yzed should be equivalent, or close in concept, to the business performance and valuation metrics used in the Phase III impact analysis. For the facility impact analysis, the key financial metric is after-tax, pre-interest cash flow, calculated as income before interest, depreciation and amortization, and adjusted to be on an after-tax basis. In the facility impact analysis, this metric is used to calculate the business value of a sample facility, on both a baseline – i.e., before imposition of compliance costs – and post-compliance basis. Using this, or a closely relate d, measure in the analysis of financial performance at the time of the facility survey would therefore support a direct test of whether and how the survey financial data – to be subsequently used in the facility impact analysis – might reflect cyclically favorable conditions or differ from the longer term trend of financial performance in an analysis. If either or both of these conditions were found, the data would also readily su pport development of a necessary adjustment to offset these potential biases in the survey data. EPA recognized that the after-tax, pre-interest cash flow measure used in the facility impact analysis would very likely not be directly available from financial datasets that might be practically used in this analysis. However, reasonable surrogates for this measure that would likely be available include: after-tax cash flow from operations (net income plus depreciation and amortization); earnings before interest, taxes, depreciation and amortization (EBITDA); net income; and earnings before interest and taxes (EBIT). C3A4-2.2 Selecting Appropriate Data Other key requirements of the data to be used in the analysis include:

f 

### The financial data need to be a time series, pr eferably annual, over a sufficiently long period (and including the survey period) to allow testing of (1) whether survey period business conditions were

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### cyclically favorable; and (2) whether financial pe rformance in the industries exhibits a longer-term, nonneutral trend.

f 

### The data need to be at a sufficient level of indu stry resolution to account for variations in business conditions and performance not only across the six ma nufacturing sectors but also within certain sectors, where there may be substantial variation in performance by important segments. Of particular importance is the ability to segment the chemical s sector into its segments such as basic chemicals, plastic materials and resins, and pharmaceuticals. Based on these requirements, EPA selected the Value Line Investment Survey firm financial dataset as the data source for this analysis. The Value Line dataset meets analysis requirements as follows:

f 

### The general company dataset of the Value Line I nvestment Survey (VL) reports summary financial information for nearly all publicly traded companies in the United States for a 14-year period, 1992-2005, which includes the 1996-1998 Phase III survey period. 1 

### The individual years in this 14-year period may be categorized in three broad categories of economic performance: (1) eight years of “normal” economic performance - 1992-1996, 2000, and 2004-2005; (2) thr ee years of “subnormal” economic performance - 2001-2003; and (3) three years of years of “supra- normal” economic performance - 1997-1999. The 14- year period thus captures reasonable diversity of bus iness conditions before, after, and during the survey period. By including financial results for full-year 20 05, the dataset also comes as close as possible to the present (2006) and thus would provide a basis for adju sting facility baseline financial data to essentially current conditions.

f 

### VL identifies and groups companies in a business c ontent classification scheme that approximates 3-digit SIC or 4-digit NAICS classifications. These business cl assifications support identification of firms within the Phase III manufacturing industries at a level of sector detail sufficient for this analysis. Because (1) the dataset is by company instead of by aggregate groups and (2) the business classifications are defined by practical business content instead of in a rigid SIC or NAICS classification scheme, the VL dataset avoids the challenge confronted elsewhere in the Phase III analysis of the change in economic classification schemes and resulting inconsistency of aggr egated data series over the year of the change. 2

f 

### The VL dataset reports key accounting items that will readily support calculation of a financial metric, after-tax cash flow, that very nearly matches the pr incipal financial metric (after-tax, pre-interest cash flow) underlying the Phase III facility impact analysis. EPA recognizes that the VL dataset, by definition, exclud es firms that are not publicly traded. The studied industries include private, non-publicly traded firms, for which no comparable database of financial information is available. As a result, use of the VL dataset in this an alysis could yield findings that are not representative of the overall industry, including the non-publicly traded firms, to the extent that non-public firms in the studied industries faced materially different business conditions or achieved mate rially different business performance than publicly traded firms in the same industries. Ov erall, EPA expects that the business conditions faced by, and performance achieved by, non-public firms in the studied industries are not likely to have been materially different from those of the public firms. As a result, EPA judges that use of the VL dataset for this analysis is appropriate and likely to yield reasona bly representative findings for to ove rall industries, including publicly traded and non-traded firms.

1 

### At any time, VL reports only 10 years of data for firms in its data serves. The dataset used for this analysis reflects two separate VL datasets that were combined to provide data for the 14 years of analysis.
2 

### As described in the industry profiles, the change from SIC-based to NAICS-based reporting of economic data by federal government and other data sources at around 1997/98 created difficulties in aligning and ensuring consistency of time series data that are organized within these frameworks.

C3A4-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### In addition to the VL dataset, EPA considered a range of other data sources, including:

f 

### Economic and business performance data published by the Federal Reserve, in particular the Federal Reserve Economic Data ( FRED II ) data series compiled by the Federal Reserve Bank of St. Louis.

f 

### The Quarterly Financial Report for Manufacturing, Mi ning, and Trade Corporations (QFR) published by the U.S. Census Bureau.

f 

### Data series from the Bureau of Economic An alysis and data specifically available in The Survey of Current Business

. These data sources were each deficient for the analysis in some material way, including:

f 

### Data being too aggregate to provide the industry sect or and sub-sector level of resolution needed to assess business conditions and trends within the Phase III manufacturing sectors.

f 

### Data items being descriptive of general economic/fin ancial conditions in an industry but not being sufficiently close to the financial performance concept needed for the analysis.

f 

### Data being reported in inconsistent economic classification frameworks ove r the desired analysis period. In addition to the problem of the SIC/NAICS break itsel f, data are sometimes reported at different levels of resolution before and after the SIC/NAICS break – e.g., at a 4-digit or finer level in the NAICS framework but only 2-digit level of resolution in the SIC framework.

f 

### Data not being readily available in an electronic form at needed for efficient pe rformance of the analysis. C3A4-2.3 Selecting Industry Groups and Firms for Use in the Analysis As discussed above, VL organizes firms by industry groups, which, in most instances, approximate 3-digit SIC or 4-digit NAICS classifications. From review of the VL industry groups and the 316(b) Phase III manufacturing industries, EPA selected 12 VL industry groups and the fi rms within these industry groups as candidates for this analysis. Following review of the firms within these industry groups, EPA retained 87 firms for use in this analysis. Key considerations in selecting the firms are as follows:

f 

### The selected VL industry groups are those that most closely correspond to the 316(b) Phase III manufacturing industries.

f 

### Within the industry groups , only those firms whose business operati ons reasonably match the profile of business activities of the 316(b) Phase III manufacturing industries were considered candidates for the analysis. In some industry groups, a substantial number of firms included in the VL industry groups were excluded from the analysis:

 VL includes Aluminum industry firms in its Metals and Mining industry group. However, most firms in this VL industry group are not involved in the Aluminum industry and thus were excluded from the analysis dataset.

 In the Paper and Forest Products group, EPA retained only those fi rms engaged in pulp mill, paper mill and/or paper and paperboa rd manufacturing operations. Fi rms engaged only in timber and lumber production were excluded from the analysis.

f 

### EPA retained only those firms that are based in th e United States or Canada, and for which financial information is available in U.S. dollars.

f 

### After defining an initial set of firms according to these procedures and criteria, EPA retained only those firms for which a full 14 years of data were available.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow

f 

### Finally, EPA excluded firms that had undergone a significant restructuring – e.g., a merger or acquisition – which materially disrupted the continuity of financial reporting. Since the analysis to be performed would start from a time series of cash flow , measured in absolute dollars – as opposed, for example, to a time series of profit percentage valu es – including data from firms whose continuity of financial reporting had been affected by merger or acq uisition activity would tend to bias the analysis. In particular, firms engaging in mergers and acquisitions that were accounted for on a purchase-accounting basis instead of a pooling-of-interests basis, would be likely to show sudden jumps in revenue, net income, and cash flow. These sudden jumps would bias the analysis by suggesting greater business growth than could be reasonably be achieved by the fi rm or facilities within the firm on a simple, organic growth basis. Similarly, large contractions in business volume resulting from divestiture or termination of a line of business would bias the analysis in the do wnward direction. To apply this restriction, EPA examined the year-to-year revenue profiles for all firm s over the 14-year analysis period. EPA researched annual reports and other financia l reporting for those firms showing large increases or decreases from year to year and excluded those firms where a ma terial business event was found that would otherwise disrupt the continuity of financial reporting. EPA followed this rule with only two exceptions. First, EPA kept firms in the analysis when the only business event/d isruption of financial reporting occurred in the last year of financial reporting – 2005. EPA kept these firms in the analysis but excluded the final year of data from the analysis. Second, in its research on on e firm in the paper industry, EPA found that the firm had recorded an unusual, non-recurring stock gain trans action in 1995 that c aused revenue and net income to increase abnormally in that year. Altho ugh the VL net income item used in the analysis generally excluded income from unusual, non-recurri ng events, the VL data series did not exclude income from this transaction. Because EPA had already set aside a substan tial number of firms from the paper industry, EPA decided to keep this firm in the anal ysis but exclude the single year of unusual financial performance from the analysis dataset. 3 

### Applying this restriction substantially reduced the number of firms that were included in the analysis dataset. In particular, for the Aluminum industry, all of the firms in the initial VL dataset were found to have some significant discontinuity of financial reporting. 4 

### EPA organized the 87 firms selected for the analysis in to eight 316(b) Industry Groups. Table C3A4-1, below, lists the VL industry groups, the 316(b) Phase III manufacturing industries and/or industry segments (as discussed in the industry profiles) to which the VL industry gro ups approximately correspond, the 316(b) Industry Groups for this analysis, and the number of VL firms used in the analysis for each industry group.

3 

### EPA considered removing the non-recurring item from the income statement but, becaus e of uncertainty about the correct tax adjustment, rejected this approach.
4 

### Because no Aluminum industry firms c ould be retained in the analysis, EPA wa s unable to develop an after-tax cash flow adjustment factor for facilities in this industry. EPA c onsidered adjusting the pre-event financial statements for the Aluminum industry firms – in effect, converting the purchase-accounting treatment of transactions to a pooling basis – but rejected this approach as requiring too many judgments. However, EPA assessed the potential effect of applying a cash flow adjustment factor to facilities in this industry by testing hypothetical factor values that substantially exceeded the adjustme nts

– both for decrease and increase – estimated and applied for the facilities in other industries. This analysis found that the facility impact analysis results for the Aluminum industry did not change over this wide range of hypothesized cash flow adjustment factors.

C3A4-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### Table C3A4-1: Value Line Industr y Groups Selected for Analysis 316(b) Phase III 316(b) Phase III Value Line Industry 316(b) Industry Number of Firms Manufacturing Industry Group for Group Segment(s) (as relevant) Used in Analysis Industry Analysis Metals and Mining Alumi num Aluminum None

Products 6
Chemical (basic)

Chemical (specialty)

Drug Inorganic Chemicals
Inorganic Chemicals Industrial Chemicals

Resins 15

15

4

6

) 14

Food 7 Food Processing Food Processing Food Processing 20 Source: Paper and Forest Pulp and Paper Mills Pulp and Paper Mills

Chemical (diversified)

Biotechnology Chemicals Industry
Chemicals Industry

Chemicals Indus try
Chemicals Industry Chemicals Industry Organic Chemicals
Organic Chemicals

Plastics Material and Resins
Pharmaceuticals Pharmaceuticals Plastics Material and

Pharmaceuticals Petroleum (integrated) Petroleu m Refining Petroleum Refining Steel (General) Steel (Integrated Steel Steel Steel Beverages Bevera ges Beverages
Value Line Investment Survey, 2005 and U.S. EPA analysis, 2006.


### C3A4-2.4 Structuring the Analysis The general objectives of this analysis were to:

f 

### Test, by 316(b) Industry Group, whether after-tax cash flow performance deviated, during the 316(b) survey data collection years, from normal performance over the 14-year analysis period.

f 

### Test, by 316(b) Industry Group, whether after-tax cash flow performance might be following a nonneutral trend over the 14-year analysis period.

f 

### Given a finding that either or both of these conditions ar e true, to develop an adjustment to baseline aftertax cash flow to account for these effects, and, to yiel d after-tax cash flow values for the facility impact analysis that more closely reflect current financial performance in the 316(b) Phase III industries. The overall approach to the analysis was to analyze, fo r each industry group, the trend of financial performance over the 14-year analysis period and to assess where the i ndustry’s financial performance lay relative to that trend during the 316(b) survey data collection years of 1996-1998. For each industry group, EPA used as analysis observations an index of constant dollar-adjusted after-tax cash flow for each of the firms in the industry group. To analyze the trend, EPA calculated a simple regre ssion of the index values against time. The estimated regression relationship provided a direct measure of th e real (i.e., inflation-adjusted) trend of financial performance for each industry group. The 1996-1998 averag e of index values for each industry group were then compared with the trend values predicted from the es timated regression coefficients – both for the 1996-1998 years and for the end of the analysis period – to determ ine the extent to which 1996-1998 survey values should be adjusted to reflect (1) the deviation from trend at 1996-1998 and (2) the trend from 1996-1998 to the end of the analysis period. Specific steps in this analysis were as follows:

f 

### Calculate After-Tax Cash Flow (ATCF) as Net Profit plus Depreciation for each firm by year . As discussed above, EPA sought to analyze ATCF as a cl ose approximation of the key financial metric –

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### after-tax, pre-interest cash flow – used in the facility impact analysis. EPA calculated ATCF on a yearby-year basis for each firm in the analysis dataset as the sum of the VL data items: Net Profit and Depreciation. In the VL data framework, Net Profit is defined as net income from continuing operations and excluding non-recurring items. Depreciati on includes both non-cash items, depreciation and amortization. To eliminate the effects of inflation in analyzing the trend of financial performance, EPA deflated the ATCF values for all firms to the end of 2005 using the GDP Deflator series publis hed by the Department of Commerce, Bureau of Economic Analysis.
As summarized above, the overall approach of the analysis involved a regression analysis of the trend of ATCF values for the firms in an industry group over the 14-year analysis period. To allow individua l firms’ ATCF values to be combined in a single regression requires eliminating the scale effect of the different sizes of firms. For this reason, the inflation-adjusted ATCF values for each firm were no rmalized to an index series by dividing the yearly values by the average of values for each firm over the 14-year period. EPA used the 14-year average of values for this index calculation instead of the value fo r a single year to prevent anomalously large swings in the index series when the ATCF value for the y ear selected as the base year for the index calculation was very small relative to other values in the 14-year series. In addition, in calculating the index values for the 14-year series, EPA first removed any negati ve values from the series for each firm by adding to each value in the firm’s 14-year series, the absolute va lue of the most negative value for the firm plus one. This adjustment has the effect of “vertically” shifting the ATCF values for a firm so that all values are positive while retaining the mathematical “shape” of th e series for the trend analysis. This adjustment was necessary to prevent the undesirable inversion of the index trend that would occur if a negative index numerator is combined with a positive seri es values in calculating the index series. f



### .

f



### . Adjust ATCF to constant dollar values in 2005, using the GDP deflator

Calculate an index of each company’s ATCF values by year using, as an index numerator, the average ATCF value for the compan y over the 14-year period

The preceding calculations yield a constant dollar series of ATCF indexed to one and with an average value of one over the 14-year analysis period. To calculate the trend indicated by these index ATCF values, EPA estimated a weighted linear regression of the index ATCF values against year by industry group. These regres sions were performed on a revenue-weighted basis – i.e., each ATCF value was weighted by the firm’s revenue value for the year – so that each firm’s individual ATCF trend carries a weight in proportion to its revenue in estimating the trend relationship. As a result, the estimated trend relationship reflects a revenue-weighted average of the ATCF trends of the individual firms, instead of an arithmetic aver age, which would overweight the presence of smaller firms in estimating the trend relationship. The est imated ATCF index coefficient from the regression for each industry indicates the trend in constant dollar AT CF over the analysis period: a negative coefficient indicates declining constant dollar ATCF over the analysis period; a positive coefficient indicates growing constant dollar ATCF over the analysis period. 5 f



### . Regress ATCF index values against year by industry gr oup to calculate the time trend of constant dollar ATCF over the period 1992-2005

f



### .

predicted Calculate the predicted trend of ATCF index values for each industry group Used together, the estimated ATCF index coefficient and regression intercept yield a predicted trend line of ATCF index values for the 14-year period, for each industry group analyzed. Th e actual ATCF index values for an industry group can then be compared with trend line to assess whether the ATCF values during the 1996-1998

5 

### In addition to testing a simple linear model of index ATCF against time, EPA also used a logarithm-adjusted series of the ATCF values to test for an exponential trend in ATCF. The log model provided no improvement in the estimated regression relationships. As a result, EPA used the coefficients estimated from the linear model for its analysis of the ATCF trend.

C3A4-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### survey data collection period deviate from the tr end. The predicted trend line also indicates where the ATCF index values would be at the end of the anal ysis period if the ATCF index values followed the predicted trend.

f 

### Calculate the average of actual ATCF index values by industry group for the 1996-1998 period . The average of actual ATCF values for the 1996-1998 peri od is compared with the predicted trend values to assess the extent to which the actual ATCF index va lues deviate from trend and to provide a basis for estimating the adjustment needed to bring the ATCF values to the trend, or to the predicted trend value at the end of the analysis period. These values were cal culated by, first, averaging ATCF index values over the firms in an industry group using firm revenues as weights, and second, averaging the 1996, 1997, and 1998 ATCF index values for each industry group.


## C3A4-3 S UMMARY OF 

## F INDINGS 

### Table C3A4-2, following page, summarizes key results from the analyses outlined above. Items reported in the table are as follows:

f

f 

### actual Estimated Trend : the revenue-weighted average of annual change in ATCF index values for firms in the industry group over the analysis period, 1992-2005. Th is value is the estimated coefficient of ATCF index against time from the simple linear regression, as described above. Because the trend is estimated from an index series with an average value of one over the analysis period, the estimated trend may also be interpreted as equal approximately to the annual percent change in ATCF index. A negative estimated trend value indicates that ATCF index values decline, on average, over the analysis period; a positive estimated trend value indicates that ATCF index valu es increase, on average, over the analysis period. Average of ATCF Index Values at 1996-1998 : the revenue-weighted average of ATCF index values for firms in the industry analysis set over the 1996-1998 period. The values in this column are compared with values in the next two columns, resp ectively, to assess (1) the extent to which financial performance during the 1996-1998 survey data period deviated from the analysis period trend at 1996- 1998 and (2) the overall change in financial performance from the 1996-1998 survey data period to the end of the analysis period resulting from the combinati on of deviation from analysis period trend and the trend, itself (see following paragraphs for further discussion).

f 

### Average of Predicted Trend Values at 1996-1998 : the average of predicted ATCF index values over the 1996-1998 survey data period as predicted from the estimated regression terms . If ATCF performance for an individual firm or industry matched the industry trend over time, the actual ATCF index values at 1996-1998 would equal this value. Material deviation of the actual ATCF index values from this value suggests, for an industry, that ATCF performance during the 1996-1998 survey data period was: (1) abnormally favorable, if the actual ATCF index values exceed the aver age of predicted values, or (2) abnormally unfavorable, if the actual ATCF index values are less than the average of predicted values.

f 

### Predicted Trend Value at 2005 : the ATCF index value at the end of the analysis period as predicted from the estimated regression terms . This value is the (statistically) e xpected value of ATCF index at 2005 for a firm or for the industry, based on the estimated trend relationship. Material deviation of this value from the Average of Predicted Trend Values at 1996-19 98 indicates a general trend going forward from the 1996-1998 survey data period, which, apart from cyclical deviation, which would further affect ATCF performance for firms in the industry group. For an industry, if this value is less than the Average of Predicted Trend Values at 1996-1998, then financial performance, as indicated by ATCF index, generally deteriorated from 1996-1998 forward to 2005, the end of the analysis period. In addition to the cyclical deviation effect, this “trend” effect might also be taken into account in adjusting ATCF data calculated from the 316(b) survey responses. In th is case, comparison of the average of actual ATCF index values

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow

Group Estimated Average of ATCF Index Values at 1996- 1998 1998 Value at 2005
Aluminum 0.0003 0.995 1.031 1.033 Industrial Chemicals 0.0282 1.042 0.977 1.203 0.0302 1.012 0.968 1.209 0.0328 1.005 0.996 1.259 0.0428 0.922 1.032 1.374 Steel 0.0112 1.237 1.035 1.125 0.0431 0.988 0.947 1.292 Food Processing 0.0433 0.930 0.940 1.286 Source: 

### over the 1996-1998 survey data period with the Pred icted Trend Value at 2005, would indicate the total potential adjustment, accounting for both the cyclical deviation and trend effects.

Table C3A4-2: Key Results from Analysis of Aft er-Tax Cash Flow Trends by 316(b) Industry for 1992-2005 316(b) Phase III Industry Trend Average of Predicted Trend Values at 1996- Predicted Trend

Analysis not undertaken fo r the Aluminum industry Pulp and Paper Mills

Plastics Material and Resins Pharmaceuticals Petroleum Refining
Beverages
U.S. EPA analysis, 2006.


### The following pages present charts, by industry group, of the yearly ATCF index values and the estimated predicted trend values over the analysis period.

Figure C3A4-4: ATCF Index vs. Trend

0.80 1.00

0.00 0.20 1.20 1.40

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5x

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 0.60
0.40 Beverages

YearATCF Inde

Time Trend Index ATCF Food Processing

0.00 0.20 1.20 1.40ATCF Index

Time Trend Index ATCF 1.00
0.80
0.60
0.40

Year

C3A4-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 20060.00 0.50 1.00 1.50 2.00 2.50

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5x

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 § 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow

Petroleum Refining

YearATCF Inde

Time Trend Index ATCF Industrial Chemicals

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60

YearATCF Index

Time Trend Index ATCF

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow

0.00 0.20 0.40 1.40 1.60

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5x Plastics Material and Resins

0.00 0.20 0.40 1.20 1.40

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5x

Steel

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Pulp & Paper Mills

1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 1.20 1.00 1.00 0.80 0.80 0.60 0.60

0.60 0.80 1.00 Pharmaceuticals

YearATCF Inde

Time Trend Index ATCF YearATCF Inde

Time Trend Index ATCF

0.00 0.20 0.40 0.60 1.40 1.60 1.80ATCF Index

Time Trend Index ATCF 0.00 0.20 0.40 1.20 1.40 1.60ATCF Index

Time Trend Index ATCF 1.20 1.00 0.80

Year Year

C3A4-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### By industry, these results indicate the following:

f 

### Pulp and Paper Mills . The analysis indicates a very slight annual increase, approximately 0.03 percent, in constant dollar ATCF over the analysis period, mean ing financial performance im proved slightly over this period. The analysis also indicates that the surv ey data collection years of 1996-1998 showed weaker performance than the predicted trend performance in t hose years. Specifically, the average actual ATCF index value at 1996-98 is 3.5 percent below the predic ted ACTF trend value for those years. With slight positive growth in ATCF over the analysis period, the predicted ATCF index value at the end of the analysis period, 2005, increases slightly from the 1996- 1998 period. As a result, the average actual ATCF index value at 1996-98 is approximately 3.7 per cent below the predicted ACTF trend value in 2005.

f 

### Industrial Chemicals . The analysis for the Industrial Chemical s segment of the Chemicals industry shows a moderate increase, approximately 2.8 percent, in constant dollar ATCF over the analysis period, meaning financial performance improved over this period. In contrast to the finding for the Pulp and Paper Mills industry, the analysis indicates that the Industry Chemicals segment achieved higher financial performance during the survey data collection years of 1996-1998 than the predicted trend performance in those years. Specifically, the aver age actual ATCF index value at 1996-98 is 6.6 percent above the predicted ACTF trend value for those years. Howeve r, with relatively strong positive growth in ATCF, the predicted ATCF index value at the end of the an alysis period, 2005, increases sufficiently to reverse this relationship. As a result, the average actua l ATCF index value at 1996-98 is approximately 13.4 percent below the predicted ACTF trend value in 2005.

f 

### Plastics Material and Resins . This segment of the Chemicals industry also shows a moderate increase, 3.0 percent annually, in constant dollar ATCF over the anal ysis period. Based on this analysis, the Plastic Material and Resins segment, like the Industrial Ch emicals segment, also achieved higher financial performance during the survey data collection years of 1996-1998 than the predicted trend performance in those years. Specifically, the aver age actual ATCF index value at 1996-98 is 4.6 percent above the predicted ACTF trend value for those years. Like th e Industrial Chemicals segment, the Plastic Material and Resins segment exhibits relatively strong positiv e growth in ATCF and the predicted ATCF index value at the end of the analysis period, 2005, increase s sufficiently to reverse this relationship. As a result, by 2005, the average actual ATCF index value at 1996-98 is 16.3 percent below the predicted ACTF trend value in 2005.

f 

### Pharmaceuticals . This third segment of the Chemicals i ndustry also shows a moderate increase, 3.3 percent annually, in constant dollar ATCF over the an alysis period. Financial performance during the survey data collection years very nearly equaled the predicted ATCF index value: the average ATCF index value at 1996-98 is 0.9 percent above the pred icted ACTF trend value for those years. Like the other two segments of the Chemicals industry, the Pharmaceuticals segment exhibits relatively strong positive growth in ATCF over the analysis period. As a result, by 2005, the average actual ATCF index value at 1996-98 is substantially below (20.2 percent) the predicted ACTF trend value in 2005.

f 

### Petroleum Refining . The analysis indicates a strong increase, 4.3 percent annually, in constant dollar ATCF over the analysis period. The analysis also indicates that the Petroleum Refining industry achieved, on average, much weaker financial performan ce during the survey data collection years than the predicted trend performance in those years: the av erage ATCF index value for 1996-1998 is 10.7 percent below the predicted trend value during those years. However, the individual yearly values during 1996- 1998 show considerable volatility rela tive to the trend, suggesting weak confidence in this finding. Like Pharmaceuticals, with strong growth in ATCF over the analysis period, by 2005, the predicted ATCF value is substantially higher than the average ATCF index value at 1996-98: the average ATCF index value at 1996-1998 is 32.9 percent belo w the predicted trend value at 2005.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow

f 

### Steel . The analysis indicates a slight increase, 1.1 pe rcent annually, in constant dollar ATCF over the analysis period. The analysis also indicates that financial performance during the survey data collection years substantially exceeded, by 19.5 percent, tre nd-based predicted performance during those years. With improving trend-based performance through the end of the analysis pe riod, by 2005, the gap between the average ATCF value at 1996-1998 and the predicted trend value at 2005 lessens to 9.9 percent. Steel is the only industry among the analyzed sectors that exhibits higher financial performance than the predicted ATCF index values during the survey data collection years as well as at the end of the analysis period, 2005.

f 

### Beverages . The analysis indicates a strong increase, 4.3 percent annually, in constant dollar ATCF over the analysis period, meaning financial performance improved significantly over this period. The analysis also indicates that the Beverages industry achieved higher financial performance during the survey data collection years of 1996-1998 than the predicted tr end performance in those years. Specifically, the average actual ATCF index value at 1996-98 is 4.3 percent above the predicted ACTF trend value for those years. However, with strong positive growth in ATCF, the predicted ATCF index value at the end of the analysis period, 2005, increases sufficiently to reverse this relati onship. As a result, the average actual ATCF index value at 1996-98 is approximately 23.5 percent below the predicted ACTF trend value in 2005.

f 

### Food Processing . Like the Beverages industry, the analysis of the Food Processing sector indicates a strong increase, 4.3 percent annually, in constant dolla r ATCF over the analysis period, meaning financial performance improved significantly over this period. Th e analysis also indicates that the Food Processing industry achieved, on average, slightly weaker fina ncial performance during the survey data collection years than the predicted trend performance in those years: the average ATCF index value for 1996-1998 is 1.1 percent below the predicted trend value during those years. With strong growth in ATCF over the analysis period, by 2005, the predicted ATCF value is substantially higher than the average ATCF index value at 1996-98: the average ATCF index value at 1996-1998 is 27.7 percent below the predicted trend value at 2005. Table C3A4-3, below, summarizes these findings.

Table C3A4-3: Estimated Relationship Betwee n Actual ATCF at Survey Period and Trend Predicted Values at Survey Period and End of Analysis Period 316(b) Phase III Industry Percentage Difference in Actual Percentage Difference in Actual and Predicted ATCF Index ATCF Index Values at 1996-1998 and Group Values at 1996-1998 Trend Predicted Value at 2005 Aluminum Analysis not undertaken for the Aluminum industry Pulp and Paper Mills -3.5% -3.7% Industrial Chemicals 6.6% -13.4% Plastics Material and Resins 4.6% -16.3% Pharmaceuticals 0.9% -20.2% Petroleum Refining -10.7% -32.9% Steel 19.5% 9.9% Beverages 4.3% -23.5% Food Processing -1.1% -27.7% Positive percentage values indicate that the 1996-1998 Actual ATCF Index Value exceeds the comparison value – i.e., the Predicted ATCF Index Value or the Trend Predicted Value at 2005 – and thus suggests that 1996-1998 survey data may overstate industry’s ab ility to withstand compliance burdens as indicated by the comparison data. Source: U.S. EPA analysis, 2006.

C3A4-16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### From these results, the industries and/or segments wher e financial performance during the 1996-1998 survey data collection period exceeds trend-predicted performance a nd thus for which survey data may overstate the industry’s ability to withstand compliance burdens in comparison to the predicted trend values at 1996-1998 are:

f 

### Industrial Chemicals segment of the Chemicals industry, f 

### Plastics Material and Resins segment of the Chemicals industry, f 

### Pharmaceuticals f 

### Steel industry, and f 

### Beverages. Looking to the end of the analysis period, 2005, the Steel Industry is the only industry and/or segment where financial performance during the 1996-1 998 survey data collection period exceeds trend-predicted performance at 2005, and thus for which survey data may overstate the industry’s ability to withstand compliance burdens at a time closer to the point of regulatory implementation. C3A4-3.1 Comparison of Findings for Proposed and Final Rule Analysis The two additional years of data included in the analysis for the final 316(b) rule affected both the estimated trend lines, and the difference in actual ATCF index values dur ing 1996-1998 and predicted ATCF index values at the end of the analysis period. Table C3A4-4, following page, compares the estimated trend and percentage difference in actual ATCF index values during the 1996-19 98 period and the predicted ATCF index values at the end of each analysis period: 2003 for the Proposed rule, and 2005 for the potential Final rule for existing Phase III facilities. The values presented in th e table below can be found in Table C3A4-2 and Table C3A4-3 of this document and Appendix 4 for the Proposed 316(b) rule (U.S. EPA, November 2004). Overall, inclusion of the two additional years of data resulted in noticeable improvement of business conditions since 2003 across the analyzed industries. In the same way as indicated by the general measures of economic performance such as growth in real domestic product, capacity of utilization, and growth in industrial production, the individual manufacturing sectors also show generally improving trends during 2003-2005. Specifically, all industries but Pulp and Paper Mills show improvement in business performance during these later analysis years. As a result of the improved business performance, for all of the analyzed industry sectors, the estimated time trend remains, or becomes, upward sloping. For the tw o industries – Pulp and Paper Mills and Steel – that showed a negative trend in the analysis for the Proposed Regulation, the estimated analysis period trend reverses to become positive, albeit only slightly so for Pulp and Paper Mills. One of the largest changes occurred in the Industrial Chemicals sector, where a more distinct positive trend reversed the sign of the percentage difference in act ual ATCF index values during the 1996-1998 period and predicted ATCF index values at the end of the analysis period. This trend is also clearly exhibited by the increased percentage difference between actual ATCF inde x values for 1996-1998 and predicted values at the end of the analysis period for the Plastics Material a nd Resins, Petroleum Refining, and Steel industries.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-17§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### Table C3A4-4: Comparison of Key Results from An alyses for the Proposed and Final 316(b) Rule Analysis Periods

Group Proposed Rule Final Rule

Aluminum -0.0004 0.0003 -3.8% -3.7% Industrial Chemicals 0.0012 0.0282 8.4% -13.4% 0.0318 0.0302 -12.3% -16.3% 0.0507 0.0328 -24.1% -20.2% 0.0230 0.0428 -19.9% -32.9% -0.0042 0.0112 24.1% 9.9% N/A 0.0431 N/A -23.5% Food Processing N/A 0.0433 N/A -27.7% Estimated Trend Percentage Difference in Actual ATCF Index Values at 1996-1998 and Trend Predicted Value at the End of Analysis Period 316(b) Phase III Industry

Analysis Analysis Proposed Rule Anal ysis Final Rule Analysis Analysis not undertaken for the Aluminum industry Pulp and Paper Mills

Plastics Material and Resins Pharmaceuticals Petroleum Refining Steel Beverages
Shaded cells indicate a switch in the sign of the observed relationship between the analysis for the Proposed Regulation and th e Final Regulation. In each case, the switc h in sign reflects improved business conditi ons as reported in the additional years of data

Source: since the time of the Propos ed Regulation analysis. U.S. EPA analysis, 2004, 2006.



## C3A4-4 D EVELOPING AN 

## A DJUSTMENT 

## C ONCEPT 

### On the basis of these findings, EPA considered whether a nd how to adjust after-tax cash flow, as derived from the facility survey responses for use in the facility impact analysis. Given that one industry, was found to have financial performance during the survey data collection period that exceeded the predicted trend financial performance for that period or that ex ceeded the predicted trend financial pe rformance at the end of the analysis period, EPA concluded that developmen t and application of an adjustment to baseline after-tax cash flow was warranted. In deciding how to adjust cash flow, EPA c onsidered three primary adjustment concepts: 1. Adjust baseline cash flow to account for deviation fro m predicted trend at the time of the survey data collection. 2. Adjust baseline cash flow to account for deviation fro m predicted trend at the end of the analysis period. 3. Adjust baseline cash flow to a future estimated period of compliance based on the estimated trend of change in constant dollar after-tax cash flow over time. EPA decided to apply the ATCF adjustment according to the second of these three adjustment concepts: adjust baseline cash flow to account for deviation from predicted tre nd at the end of the analysis period. This adjustment concept addresses both concerns that (1) business performance during the survey data collection period diverged from the predicted trend performance during the survey da ta collection period, and (2) business performance from the time of survey data collection period followed a non- neutral trend to the present. EPA considered extending the trend projection to the estimated time of complian ce (concept 3) but rejected this approach since it was deemed speculative in attempting to forecast business perform ance into the future. In addition, the greater the number of years over which ATCF results are projected based on historical trend, the less likely that the predicted changes in ATCF reflect the performance of a static set of facilities and instead reflect capital additions, new facilities, facility closures, etc. For these reasons, EPA deci ded to restrict the adjustment to the end of the ATCF analysis period.

C3A4-18 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



### EPA also considered whether to appl y the indicated adjustment factors asymmetrically – i.e., only to reduce the ATCF values as calculated from facility survey responses – or symmetrically – i.e., both to increase or to reduce the ATCF values as calculated from facility survey r esponses. In the case of asymmetric adjustment, the adjustment would correct for business performance during the survey data collection period that exceeded the predicted trend value – whether for the survey period or some future period – and would thus attempt to avoid overstating the facility’s ability to bear the costs of regul ation compliance without materi al financial impact. In the case of a symmetric adjustment, the adjustment would additionally address the potential that business performance during the survey data collection period fell short of the predicted trend value and would thus attempt to avoid understating the ability of an industry or facility to bear the costs of regulatory compliance without material financial impact. On this question, EPA decided to apply the ATCF ad justment on a symmetric basis, potentially reducing or increasing facility cash flow on the basis of the estimated adjustment factor. EPA based its decision on the principle of avoiding both overstatement and understatement of the ability of facilities in an industry to bear the costs of regulatory compliance without material financial impact. Based on these decisions, EPA calculated th e adjustment factors by dividing the Predicted Trend Value at 2005 by the Average of ATCF Index Values at 1996-1998 , as reported in Table C3A4-2, above. In the facility closure analysis, as described in Chapter C3: Economic Impact Analysis for Manufacturers , facility after-tax cash flow is simply multiplied by the appropriate adjustment factor based on the industry or industry segment to which a facility is assigned. The resulting adjusted ATCF is carried forward in the baseline and post-compliance closure analyses. Where the Predicted Trend Value at 2005 is less than Average of ATCF Index Values at 1996-1998 , the resulting adjustment factor value is less than one and the effect of the ATCF adjustment is to reduce the calculated value of cash flow used in the f acility impact analysis. Where the Predicted Trend Value at 2005 is greater than Average of ATCF Index Values at 1996-1998 , the resulting adjustment factor value is greater than one and the effect of the ATCF adjustment is to increase the calculated value of cash flow used in the facility impact analysis. EPA also used the adjustment factors to adjust the numerator values of the measures used in the facility moderate impact analysis: pre-tax return on assets and interest cove rage ratio. In both cases, the numerators of the measures are closely related to cash flow, but are calculated on a pre- tax basis. As a result, in this case, the ATCF-based adjustment factor does not match as closely in concept the financial measures to which it is applied as is the case for the ATCF measure used in the facility closure anal ysis. Nevertheless, use of the adjustment for these measures is appropriate because the pre-tax measures used in the facility moderate impact analysis will still move closely with the after-tax cash flow measure on which the ad justment factor is based. In addition, it is important that EPA recognize the potential effect of change in fina ncial condition since the survey data collection period in the facility moderate impact analysis as well as in the facility closure analysis. Table C3A4-5, below, summarizes the ad justment factors implemented for each of the industries, and within the chemical industry, for the industry segments. The tabl e also reports the number of baseline and post-compliance closures (under the 50 MGD DIF threshold option, which is the regulatory analysis options with the broadest applicability among the three options considered for Ph ase III existing facilities) estimated with and without application of the ATCF adjustment factor.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-19§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow

Adjustment Factor Baseline Regulatory Baseline Regulatory

Aluminum 1.000 5 0 0 0 0 1.039 41 5 0 5 0

1.154 43 4 0 4 0 1.195 12 0 0 0 0 1.253 2 0 0 0 0 

### Table C3A4-5: Using After-Tax Cash Flow Adjustment Factors in the Facility Closure Analysis Summary Results from Closure Analysis Number of Facilities Analyzed Using Adjustment Factors Not Using Factors

Closures Closures Closures Closures

Pulp and Paper Mills Chemicals Industry Industrial Chemicals Plastics Material and Resins Pharmaceuticals 1.491 17 3 0 4 1 Steel 0.910 27 3 0 3 0 1.308 3 0 0 0 0 1.384 6 0 0 0 0 1.000 4 1 0 1 0 Total 159 16 0 17 1

Source: Petroleum Refining
Beverages Food Processing Other Industries

Shaded cells indicate a change in analytic finding as a result of applying the ATCF Adjustment. Adjustment factors were not developed for the Aluminum industry or Othe r Industries, so the results with use of adjustment factors are necessarily the same as those without use of the factors. All results are sample weighted. The reported totals may differ from the apparent sums of individual data items due to roundin g. U.S. EPA analysis, 2006.


### As reported in Table C3A4-5, only for th e Steel industry is the adjustment fact or less than one, at 0.91. For this industry, the effect of the adjustment factor is to reduce the cash flow values calculated from facility survey responses. As described above, EPA did not calculate an ad justment factor for the Aluminum industry due to data limitations; accordingly, this industry’s “adjustment factor ” is simply 1.000. The adjustment factors for the remaining industries are greater than one, ranging from a va lue of 1.039 for the Pulp and Paper Mills industry to 1.491 for the Petroleum Refining industry. For these industri es, the effect of the adjustment factor is to increase the cash flow values calculated from facility survey responses. In terms of effect on analytic results, the use of the ATCF adjustment factors caused the number of baseline closures to change in only one 316(b) industry group, th e Petroleum Refining industry. For this industry, the increase in cash flow resulting from th e adjustment causes 1 less facility to fail the baseline closure analysis. Under the 50 MGD DIF threshold for existing manufacturing facilities, the use of the ATCF adjustment factors eliminated one regulatory closure, in the Petroleum Refining industry. Because the calculated adjustment factor for this industry is quite large, 1.491, EPA reviewed cl osely the effect of the adjustment factor on the facility closure calculation. In particular, EPA was concerned that the regulatory closure was being eliminated by application of a large ATCF adjustment. From this review, EPA determined that the single Petroleum Refining industry closure, without the ATCF adjustment , is a very marginal closure. Specifically, an ATCF adjustment factor of 1.005 (compared to the calculated 1.491) prov ides a sufficient increase in base line cash flow to eliminate the closure under the compliance requirements of the 50 MGD All Option. Another way of understanding the 1.005 adjustment factor is to calculate the annual tre nd factor (year-to-year change in predicted trend ATCF index) that would yield the 1.005 value. In this case, th e year-to-year change required to generate the 1.005 value is 0.006, or an annual change factor that is very close to zero (approximately 0.06 percent annual average change). Given these findings, EPA concludes that the extent of improvement in cash flow needed to eliminate the regulatory closure in the Petroleum Refining industry is ve ry small and is thus quite plausible within the overall improving business performance trend exhibited by the Petroleum Refining industry.

C3A4-20 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



## R EFERENCES 

### Board of Governors of the Federal Reserve System. Release G.17, Industria l Production and Capacity Utilization: Capacity Utilization: Manufacturing (NAICS) and Industrial Production Index quarterly data series. 2005.
U.S. Department of Commerce. Bureau of Economic Analysis. Table 1.1.6. Real Gross Domestic Product, Chained Dollars . 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2004. Economic Analysis for the Proposed Section 316(b) Rule for Phase III Facilities . EPA-821-R-04-006. November 2004.
U.S. Environmental Protection Agency (U.S. EPA). 2004. Information Collection Request for Cooling Water Intake Structures, Phase II Existing Facility Final Rule . ICR Number 2060.02. February 2004. Value Line Investment Survey. Value Line Publishing, Inc. 220 East 42nd Street, New York, N.Y. 10017-589. 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A4-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analys is for Existing Facilities Appendix C3A4: Adjusting Cash Flow



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C3A4-22 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s 

# Appendix C3A5: Estimating Capital Outlays

for Section 316(b) Phase III Manufacturing Sectors Discounted Cash Flow Analyses

I NTRODUCTION 

### The analysis of economic impacts to Phase III manufacturing facilities associated with the proposed Section 316(b) Regulation involves calculation of the business value of sample facilities on the basis of a discounted cash flow (DCF) analysis of operating cash flow as reported in the detailed industry questionnaires. 1 

### Business value is calculated on a pre- and post-compliance basis and the change in this value serves as an important factor in estimating regulatory impacts in terms of potential facility closures. To be accurate in concept, the business value calculation should recognize cash outlays for capital acquisition as a component of cash flow. However, the Section 316(b) Detailed Industry Questionnaire did not request information from surv eyed facilities on their cash outlays for capital acquisition. Absent this data, EPA developed an estimate of cash outlays for capital acquisition. This appendix describes the methodology EPA used to derive, for each sample facility, an estimate of cash outlays for capital acquisition. 

## A C ONTENTS PPENDIX
C3A5-1 Analytic Concepts Underlying Analysis of Capital Outla ys......................................C3A5-2 C3A5-2 Specifying Variables fo r the Analysis...C3A5-4 C3A5-3 Selecting the Regression Analysis Dataset ....... ......................................................C3A5-7 C3A5-4 Specification of Models to be Tested....C3A5-9 C3A5-5 Model Validation ................................C3A5-13 Attachment C3A5.A: Bibliography of Literature Reviewed for this Analysis .................C3A5-21 Attachment C3A5.B: Historical Variables Contained in the Value Line Investment Survey Dataset ............................................................C3A5-22



### EPA Office of Water (OW) previously identified that the omission of cash outlays for capital acquisition from DCF analyses may lead to overstatement of the busin ess value of sample facilities and, as a consequence, understatement of regulatory impacts in terms of estimat ed facility closures (EPA, 2003). In response to this omission, the Office of Management and Budget suggested the adoption of depreciation expense as a surrogate for cash outlays for capital replacement and additions. However, for several reasons EPA believes depreciation is a poor surrogate. First, depreciation is meant to captu re the consumption/use of previously acquired assets, not the cost of replacing, or adding to, the existing capital b ase. Therefore, depreciation is fundamentally the wrong concept to use as a surrogate for capital outlays for capita l replacement and additions. Second, depreciation is estimated based on the historical asset cost, which may unders tate or overstate the real replacement cost of assets. Third, both book and tax depreciation schedules generally understate the assets’ useful life. Thus, reported depreciation will overstate real depreciation value for r ecently acquired assets that are still in the depreciable asset base, and conversely, understate the real depreciation va lue of assets that have expired from the depreciable asset base but still remain in valuable use. Finally, deprecia tion does not capture the important variations in capital outlays that result from differences in revenue growth and financial performance among firms. Businesses with real growth in revenue will need to expand both thei r fixed and working capital assets to support business growth, and all else being equal, growing businesses will have higher ongoing outlays for fixed and working capital assets. Similarly, the ability of businesses to renew and expand their asset b ase depends on the financial productivity of the deployed capital as indicated by meas ures such as return on assets or return on invested

1 

### This analysis is limited to potentially affected facilities in primary SIC codes 26, 28, 29, and 33.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### capital. As a result, businesses with “strong” asset productiv ity will attract capital for renewal and expansion of their asset base, while businesses with “weak” asset productivity will have di fficulty attracting the capital for renewal and expansion of the business’ asset base. All else being equal, businesses with strong asset productivity will have higher ongoing outlays for capital assets; bus inesses with weak asset productivity will have lower ongoing outlays for capital assets. As an approach to addressing the absence of capital ac quisition cash outlay data to support the Phase III DCF analysis, EPA estimated a regression model of capital ou tlays using reported capital expenditures and relevant explanatory financial and business e nvironment information for public-reporting firms in the original, primary Phase III manufacturing sectors. The resulting estimated mode l is used to estimate capital outlays for facilities in the Phase III sample dataset. The estim ated capital outlay values were then u sed in the DCF analyses to calculate business value of sample facilities and estimate regul atory impacts in terms of facility closures. The approach and regression model described above are based largely on the approach and regression model developed in support of the analysis of economic impacts for the Meta l Products and Machinery Regulation (MP&M), which provides a recent example of the need to address the omission of capital acquisition cash outlay data from a DCF analysis. EPA notes that the facilities /industry sectors examined in the Section 316(b) Phase III analysis are similar to those analy zed in the MP&M analysis: both anal yses estimate impacts to facilities in manufacturing industries only and facilities in SIC 33 are c overed under both regulations. In addition, the Section 316(b) Detailed Industry Questionnaire and the MP&M survey instruments are similar; therefore, similar data are available for Phase III and MP&M survey facilities. As such, EPA relied heavily on prior experience from the MP&M final regulation in estimating the regression model u sed to estimate of capital outlays for facilities in the Phase III sample dataset. This appendix reports the r esults of the effort to estimate capital outlays for Phase III manufacturing facilities, including: an overview of the analytic concepts underl ying the analysis of capital outlays; specific variables included in the regression analysis; summary of data selec tion and preparation; genera l specification of regression models to be tested; and the findings from the regressi on analyses. The model estimation does not include sector information for the Food and Kindred Products industry, which was subsequently added as a primary industry in the Section 316(b) Phase III analysis. 2


## C3A5-1 A NALYTIC 

## C ONCEPTS 

## U NDERLYING 

## A NALYSIS OF 

## C APITAL 

## O UTLAYS 

### On the basis of general economic and financial concepts of investment behavior, EPA began its analysis by outlining a framework relating the level of a firm’s capital outlays to explanatory factors that:

f 

### can be observed for public-reporting firms – either as firm-specific information or general business environment information – and thus be included in a regression analysis; and

f 

### for firm-specific information, are also ava ilable from the Phase III sample facility dataset. To aid in identifying the explanatory concepts and variab les that might be used in the analysis and as well in specifying the models for analysis, EPA reviewed recent studies of the determinants of capital outlays. EPA’s

2 

### Since the estimated regression model for the Phase III fac ilities is based on an earlier model developed for the MP&M final regulation, much of the underlying research involved in the analytic development of the model had been previously completed and was not required to be redone. Nonetheless, in order to present a lucid discussion of the analytic concepts underlying the model and the rationale behind specifying variables for the analysis and specification of the regression model, a complete discussion of how the regression model was developed is presented. During the course of the discussion, instances where prior experience gained during estimating the regression model for the MP&M final regulation had a significant influence in the development of the current model are clearly highlighted.

C3A5-2 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### review of this literature generally c onfirmed the overall approach in seeking to estimate capital outlays and helped to identify additional specific variables that other anal ysts found to contribute important information in the analysis of capital outlays (e.g., the decision to test cap acity utilization as an explanatory variable, see below, resulted from the literature review). Articles reviewed are listed in Attachment C3A5.A to this Appendix C3A5. Table Appendix C3A5-1, beginning below and continuing on the subsequent page, summarizes the conceptual relationships between a firm’s capital outlays and explanatory factors that EPA sought to capture in this analysis. In the table, EPA outlines the concept of influence on capital outlays, the general explanatory variable(s) that EPA identified to capture the concept in a regression analysis, and the hypothesized mathematical relationship (sign of estimated coefficients) between the concept and capital outlays. Table Appendix C3A5-2identifies the specific variables included in the analysis, including any needed manipulations and the correspondence of the variables to Phase III survey information.

Table Appendix C3A5-1: Summary of Factors Influencing Capital Outlays Expected Explanatory Factor/Concept To Be Translation of Concept to Explanatory Variable(s) Relationship Captured in Analysis Availability of attractive opportunities for Historical Return On Assets of establishment as a indicator of investment Positive additional capital investment . A firm’s opportunities and management effectiveness, and, hence, of desirability to owners, or management acting on behalf of expand capital stock and ability to attract capital investment. Use of a owners, should expend cash for capital historical variable implicitly assu mes past performance is indicative of outlays only to the extent that the expected future expectations. return on the capital outlays – whether for replacement of, or additions to, existing capital stock – are sufficient to compensate providers of capital fo r the expected return on alternative, competing investment opportunities, taking into account the risk of investment opportunities.

opportunities

.

favorable. Positive historical

Positive Options EPA identified

expansion.
production

. The Positive Business growth and outlook as a determinant of need for capital expansion and attractiveness of investment All else equal, a firm is more likely to have attractive investment opportunities and need to expand its capital base if the business is growing and the outlook for business performance is Revenue Growth , from the prior time period(s) to the present, provides a measure of business growth and is a potential indicator of need for capital expansion. Use of a historical variable implicitly assumes past performance is indicative of future expectations. Clearly, the theoretical preference is for a forward-looking indicator of business growth and need for capital expansion. include Index of Leading Indicators and current Capacity Utilization , by industry. Higher current Capacity Utilization may presage need for capital
Importance of capital in business All else equal, the more capital intensive the production activities of a business, the greater will be the need for capital outlay to replenish, and add to, the existing capital stock. More capital intensive businesses will spend more in capital outlays to sustain a given level of revenue over time. Capital Intensity of production as measur ed by the production capital required to produce a dollar of revenue pr ovides an indicator of the level of capital outlay needed to sustain and grow production. As an alternative to a firm-specific concept such as Capital Intensity of production, differences in business charac teristics might be captured by an Industry Classification variable.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### Table Appendix C3A5-1: Summary of Factors Influencing Capital Outlays Expected Explanatory Factor/Concept To Be Translation of Concept to Explanatory Variable(s) Relationship Captured in Analysis Life of capital equipment in the business

. All else equal, the shorter the useful life of the capital equipment in a business, the greater will be the need for capital outlay to replenish, and add to, the existing capital stock.

The cost of financial capital . The cost at Preferably, measures of cost-of-capital would be developed separately for Negative which capital – both de bt and equity – is debt and equity. made available to a firm will determine which investment opportunities can be The Cost of Debt Capital , as measured by an appropriate benchmark interest expected to generate sufficient return to rate, provides an indication of the term s of debt availability and how those warrant use of the financial capital for terms are changing over time. Preferab ly, the debt cost/terms would reflect equipment purchases. All else equal, the the credit condition of the firm, whic h could be based on a credit safety higher the cost of financial capital, the fewer rating (e.g., S&P Debt Rating). the investment/capital outlay opportunities that would be expected to be profitable and the lower the level of outlays for replacement of, or additions to, capital stock. No information is available on the actual useful life of capital equipment by Positive, business or industry classi fication. However, the Capital Turnover Rate , as generally, but calculated by the ratio of book depreciatio n to net capital assets, provides an with indicator of the rate at which capi tal is depleted, according to book recognition of accounting principles: the higher the turnover rate, the shorter the life of the the potential capital equipment. However, the measure is imperfect for reasons of both for counterthe inaccuracies of book repor ting as a measure of useful life, and as well the trend effects confounding effects of growth in the a sset base due to business expansion – which will tend to lower the indicated tu rnover rate, all else equal, without a real reduction in life of capital equipment. As above, an alternative to a firm-sp ecific concept, differences in business characteristics might be captured by an Industry Classification variable.

The cost of equity capital is more problematic than the cost of debt capital Negative since it is not directly observable fo r either public-reporting firms or, in particular, private firms in the Phase III dataset. However, a readily available surrogate such as Market-to-Book Ratio provides insight into the terms at which capital markets are providing equity capital to publicreporting firms : the higher the Market-to-Book Ratio, the more favorable the terms of equity availability. The price of capital equipment . The price Index provides an indicator of the ch ange in capital equipment prices. of capital equipment – in particular, how capital equipment prices are changing over time – will influence the expected return from capital outlays. All else equal, when capital equipment prices are increasing, the expected return from incremental capital outlays will decline and vice versa. However, although the generally expected effect of higher capital equipment prices is to remove certain inve stment opportunities from consideration, the potential effect on total capital outlay may be mixed. If expected returns are such that the demand to invest in capital projects is relatively inelastic, the effect of higher prices for capital equipment may be to raise, instead of lower, the total capital outlay for a firm. Source: U.S. EPA analysis, 2004.



## C3A5-2 S PECIFYING 

## V ARIABLES FOR THE 

## A NALYSIS 

### Working from the general concepts of explanatory variab les outlined above, EPA defined the specific explanatory variables to be included in the analysis. A key requirem ent of the regression analysis is that the firm-specific explanatory variables included in the regression analysis later be able to be used as the basis for estimating capital Negative, generally, but with recognition of the potentialfor countertrend effects

C3A5-4 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### expenditures for facilities in the Phase III dataset. As a r esult, in defining the firm-specific variables, it was necessary to ensure that the definiti on of variables selected for the regression analysis using data on publicreporting firms be consistent with the data items available for facilities in the Phase III dataset. Also, EPA’s selection of firm-specific variables was further constrained by the decision to use the Value Line Investment Survey (VL) as the source of firm-specific information for the regression analysis. The decision to use VL as the source of firm-specific data for the analysis was driven by several considerations:

f 

### Reasonable breadth of public-reporting firm coverage. The VL dataset includes 8,500 firms.

f 

### Reasonable breadth of temporal coverage. VL provides data for the most recent 11 years – i.e., 1992- 2002. Although ideally EPA would have preferred a longer time series to include more years not in the “boom” business investment period of the mid- to late-1990s.

f 

### Reasonable coverage of concepts/data needed for analysis. The VL data includes a wide range of financial data that are applicable to the analysis (VL provides 37 data items over the 11 reporting years; see Attachment DB). However, because of the pre-pack aged nature of the VL data, it was not possible to customize any data items to support more precise defin ition of variables in the analysis. In particular, EPA found that certain balance sheet items were not re ported to the level of specificity preferred for the analysis. Overall, though, EPA expects the consequen ce of using more aggregate, less-refined concepts should be minor. The decision to use VL data for the analysis constrained, in some instances, EPA’s choice of variables for the analysis. Table Appendix C3A5-2Table Appendix C3A5-1 reports th e specific definitions of variables included in the analysis (both the dependent variable and explanatory variables), including any needed manipulations, the data source, the Phase III estimation analysis equivalent (eith er the corresponding variable(s) in the Section 316(b) Phase III Detailed Industry Questionnaire or other source outside the questionnaire), and any issues in variable definition.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### Table Appendix C3A5-2: Variables Fo r Capital Expenditure Modeling Analysis

Variable Calculation Equivalent Variables for Regression Analysis Source Phase III Analysis Comment / Issue Dependent Variable Gross Value Line Obtained from VL as Capital None: to be estimated This value and all other dollar values in expenditures Spending per Share. CAPEX based on estimated the regression analysis were deflated to on fixed calculated by multiplying by coefficients. 2002 using 2-digit SIC PPI values. assets: Average Shares Outstanding. CAPEX, includes outlays to replace, and add to, existing capital stock Explanatory Variables Firm-Specific Variables Return On Value Line ROA = Operating Income / From Survey: Revenue Would have preferred an after-tax Assets: ROA Total Assets. Both Operating less Total Operating concept in numerator and a deployed Income, defined as Revenue Expenses (Material & production capital concept in less Operating Expenses Product Costs + denominator. However, VL provides (CoGS+SG&A), and Total Production Labor + Cost no tax value per se and would require Assets were obtained directly of Contract Work + calculation of tax using an estimated tax from VL. Fixed Overhead + rate, which could introduce error. Also R&D + Other Costs & neither VL nor Phase III survey data Expenses) provide sufficient info rmation to get at deployed production capital. Revenue: Value Line REV = Revenues. Revenues From Survey: Revenue In the log-linear formulation this REV directly available from VL. variable captures percent change/growth in revenues. However, the use of the log-linear formulation, eliminates the potential to set the growth term to zero in estimating baseline capital outlays for Phase III facilities.
During the specification of the regression model for the MP&M final regulation, Total Assets was also tested as a scale variable. Since it provided a good, but not as strong, an explanation, as REV it was not included in the final specification. Base d on this previous finding, Total Assets was not considered while specifying the Phase III regression model. Capital Value Line CAPT = Depreciation / Total From Survey: Would have preferred denominator of Turnover Assets. Depreciation and Depreciation / Total net fixed assets instead of total assets

. Rate: CAPT Total Assets directly available Assets However, VL provides detailed balance from VL. sheet information for only the four most recent years. Not possible to separate current assets and intangibles from total assets. Capital Value Line CAPI = Total Assets / From Survey: As above, would have preferred net Intensity: Revenue. Total Assets and Total Assets / Revenue fixed assets instead of total assets , but CAPI Revenue directly available needed data are not available from VL from VL for the full analysis period.

C3A5-6 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### Table Appendix C3A5-2: Variables Fo r Capital Expenditure Modeling Analysis Variables for Regression Analysis Phase III Analysis Variable Source Calculation Equivalent Market-to- Value Line MV/B = average market price N/A (see Book Ratio: of common equity (Price) Comment/Issue) MV/B divided by book value of common equity (Book Value per Share). Price and Book Value per Share directly available from VL.

General Business Environment Variables Interest on Moody’s 10-year, A- Investor rated Services industrial debt: DEBTCST Index of Conference Leading Board Indicators: ILI

Capacity Federal Utilization by Reserve Industry: Board CAPUTIL (Dallas Federal Reserve) Producer Bureau of Price Index Labor series for Statistics capital (BLS) equipment: CAPPRC DEBTCST = annual average Use average of of rates for each data year DEBTCST rates at time of Phase III survey.

Monthly index series Use average of ILI available from Conference values at time of Phase Board. ILI = geometric mean III survey. of current year values.

Monthly index series Use average of available from Federal CAPUTIL values at time Reserve. CAPUTIL = current of Phase III survey. year average value.

Annual average values Use average of CAPPRC available from BLS. values at time of Phase CAPPRC = current year III survey. average value as reported by BLS. Comment / Issue During specification of the MP&M regression model, MV/B was found to highly correlated with other, more important explanatory variables, which makes sense, given that equity terms would be derived from more fundamental factors, such as ROA. Thus, MV/B was omitted from the MP&M regression model. As a result, MV/B was not considered during the specification of the Phase III regression model which eliminated the need to define an approach to use this variable with Phase III survey data.
10-year maturity, industry debt selected as reasonable benchmark for industry debt costs. 10 years became “standard” maturity for industrial debt during 1990s.
During specification of the MP&M regression model, EPA found that ILI and the CAPPRC (see below) are highly correlated. Thus, ILI was omitted from the MP&M regression model. As a result, ILI was not considered during the specification of the Phase III regression model.

BLS reports PPI series for capital equipment based on “consumption bundles” defined for manufacturing and non-manufacturing industries. For this analysis, EPA used th e PPI series based on the manufacturing industry bundle.

C3A5-7 Source: U.S. EPA analysis, 2004.



## C3A5-3 S ELECTING THE 

## R EGRESSION 

## A NALYSIS 

## D ATASET 

### In addition to specifying the variables to be used in the regression analysis, EPA also needed to select the public firm dataset on which the analysis would be performed. As noted above, EPA used the Value Line Investment Survey as the source for public firm data. VL includes over 8,500 publicly traded firms and identifies firms’ principal business both by a broad industry classification (e.g., Paper/Forest) and by an SIC code assignment. Value Line’s SIC code definitions do not match the U.S.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### Census Bureau’s SIC code definitions; however, in mo st instances a Value Line SIC code can be reasonably matched to one or several U.S. Census Bureau defined SI C codes. To build the public firm dataset corresponding to the original Phase III sectors (SIC 26: Paper and allie d products, SIC 28: Chemical s and allied products, SIC 29: Petroleum and coal products, and SIC 33 Primary metal industries), EPA initially selected all firms included in the Value Line SIC code families:

f 

### 2600: Paper/forest products,

f 

### 2640: Packaging and container,

f 

### 2810: Chemical (basic),

f 

### 2813: Chemical (diversified),

f 

### 2820: Chemical (speciality),

f 

### 2830: Biotechnology,

f 

### 2834: Drug,

f 

### 2840: Household products,

f 

### 2844: Toiletries/cosmetics,

f 

### 2900: Petroleum (integrated),

f 

### 3311: Steel (general), and

f 

### 3312: Steel (integrated). This is the same set of data used for analysis of the Proposed rule. Although the Food and Kindred Products sector was ultimately included as a primary sector with in the Section 316(b) Phase III analysis, it was not necessary to re-estimate the model with this additional industry data because the estimated model coefficients do not vary by industry in a statistically significant way. The current model’s applicability across industries is detailed further in the next section of this appendix. In order to derive a dataset of firms whose business activities closely match the activities of firms included in the Phase III sample survey EPA made or attempted to make the following revisions to the initial dataset:

f 

### EPA found that the VL SIC code definition does not include categories that match SIC 331 and SIC 335 (combined together to form the aluminum sector in the Phase III analysis). Since U.S. aluminum companies are generally vertically integrated (S&P , 2001), most aluminum companies own large bauxite reserves and mine bauxite ore. As such, these firm s are classified in VL under SIC 1000: Metals and mining. EPA reviewed the business activities of fi rms listed in SIC 1000: Metals and mining, and included only those firms described as aluminum companies in the regression analysis dataset.

f 

### EPA reviewed the business activities of firms listed in SIC 3400: Metal fabricating, however, no firms whose activities matched those described within the profiles of the Phase III Manufacturing Sectors were found. 3

f 

### EPA reviewed the business activities of firms liste d in SIC 2840: Household products and SIC 2844: Toiletries/cosmetics, and retained only those firms in the dataset whose activiti es matched those described within the profiles of the Phase III Manufacturing Sectors (see footnote 4).

3 

### The profiles only focu s on 4-digit SIC categories repr esented in the sample of facilities which received the Section 316(b) detailed industry questionnaire.

C3A5-8 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s

f 

### EPA deleted firms within SIC 2600: Paper/forest pr oducts whose business activities are solely limited to timber/lumber production. These facilities are unlikely to use cooling water intake structures and therefore fall outside the Phase III Manufacturing Sectors.

f 

### EPA reviewed the business activities of firms liste d in SIC 2830: Biotechnology and SIC 2834: Drug in order to exclude firms that are exclusively research and development (R&D) firms and are unlikely to use cooling water intake structures. However, based on the information provided by Value Line EPA was unable to segregate R&D firms from the rest of the firms listed in these SIC codes.

f 

### EPA only retained firms in the VL dataset if they are situated in the U.S. or Canada, and for whom financial information is av ailable in U.S. dollars. On inspection, EPA found that a substantial number of firms did not have data for the full 11 years of the analysis period. The general reason for the omission of some years of data is that the firms did not become publicly listed in their current operating structure – whether through an initial public offering, spin-off, divestiture of business assets, or other significant corporate restructuring that renders earlier year data inconsistent with more recent data – until after the beginning of the 11-year data period. 4 

### As a result, the omission of observation years for a firm always starts at the beginning of the data analys is period. This systematic front-end truncation of firm observations in the dataset could be expected to bias th e analysis in favor of the capital expenditure behavior nearer the end of the 1990s decade. To avoid this prob lem, EPA removed all firm observations that have fewer than 11 years of data. As a result, the dataset used in th e analysis has a total of 2,244 yearly data observations and represents 204 firms. Table Appendix C3A5-3presents the number of firms by industry classifications.

Table Appendix C3A5-3: Number of Firms by Industry Classifications SIC Industry Classification Number of Firms 26: Paper and allied products 24 28: Chemicals and allied products 136 29: Petroleum and coal products 20 33: Primary metal industries 24 U.S. EPA Analysis, 2004



## C3A5-4 S PECIFICATION OF 

## M ODELS TO BE 

## T ESTED 

### On the basis of the variables listed above and their h ypothesized relationship to capital outlays, EPA specified a time-series, cross sectional model to be tested in the regression analysis. EPA’s dataset consisted of 204 cross sections observed at 11 years (1992 through 2002). Th e general structure of this model was as follows:
CAPEX i,t 

### = 

## f (ROA i,t 

### , REV i,t 

### , CAPT i,t 

### , CAPI i,t 

### , DEBTCST i,t 

### , CAPPRC t 

### , CAPUTIL j,t 

### ) Appendix C3A5-1
Where: CAPEX i,t 

### = capital expenditures of firm i , in time period t ; 5

4 

### When VL adds a firm to its dataset, it fills in the public-repo rted data history for the firm for the lesser of 11 years or th e length of time that the firm has been publicly listed and thus subject to SEC public reporting requirements.
5 

### All dollar values were deflated to 2002 using 2-digit PPI values.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-9§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### t = year (year = 1992, .

. . , 2002); i = firm i ( i = 1, .

. . , 204); j = industry classification j ROA i,t 

### = return on total assets for firm i in year t ; REV i,t 

### = revenue ($ millions) for firm i in year t ; CAPT i,t 

### = capital turnover rate for firm i in year t ; CAPI i,t 

### = capital intensity for firm i in year t ; DEBTCST t 

### = financial cost of capital in year t ; CAPPRC t 

### = price of capital goods in year t ; CAPUTIL j,t 

### = the Federal Reserve Board’s Index of Capacity utilization for a given industry j in year t

. EPA only tested log-linear model specifications for this analysis. 6 

### The main advantage of the log-linear model is that it incorporates directly the concept of percent cha nge in the explanatory vari ables. Specifying the key regression variables as logarithms permitted EPA to estim ate directly as the coefficients of the model, the elasticities of capital expenditures with respect to firm financial characteristics and general business environment factors. The following paragraphs briefly discuss testi ng of the log-linear forms of the model. Parameter estimates are presented for the final log-linear model only. EPA specified a log-linear model, as follows: ln(CAPEX i,t 

### ) = α + Σ [ β x 

### ln(X i,t 

### )] + Σ [ γ y 

### ln(Y t 

### )] + ε Appendix C3A5-2
Where: CAPEX i,t 

### = capital expenditures of firm i , year t ; β x 

### = elasticity of capital expenditures with respect to firm characteristic X; X i,t 

### , = a vector of financial characteristics of firm i , year t ; γ y 

### = elasticity of capital expenditures with respect to economic indicator Y; Y t 

### = a vector of economic indicators, year t ; for CAPUTIL, Y is also differentiated by industry classification
ε = an error term; and ln( x ) = natural log of x

Based on this model, the elasticity of capital expenditures with respect to an explanatory variable, for example, return on assets is calculated as follows:



## CAPEX E 

# ) = d ln 

# ( CAPEX 

# ) CAPEX d 

# ) CAPEX Appendix



## = C3A5-3 

# ( ( d ln 

# ( ROA 

# ) ( ROA d 

# ) ROA

6 

### While specifying the MP&M regression model, EPA tested both linear and log-linear model specifications. The pattern of coefficient significance was found to be better in the lo g-linear model. In addition, the log-linear model offered advantages in terms of retention of early time period observatio ns (by eliminating the need to use percent change variables) and variable specifications, and helped to reduce outlier effects in the model. As a result, EPA selected a log-linear specification as the final regression model for the MP&M final regulation. Based on these reasons and the similarity of industry sectors analyzed for the two regulations, EPA decided to test only log-linear model specifications for the Phase III regression model.

C3A5-10 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### Since logarithmic transformation is not feasible for nega tive and zero values, such values in the VL public firm dataset required linear transformation to be included in the analysis. The following variables in the sample required transformation:

f 

### CAPEX: Eighteen firms in the sample reported zero capital expenditures at least in one time period. EPA set these expenditures to $1.

f 

### REVENUE: Seven firms reported negative revenues in at least one time period. Because these are likely due to accounting adjustments from prior period repor ting, EPA set negative revenues for these firms to $1.

f 

### ROA: the values for return on assets in the public firm sample range from -2.9 to 0.7. Approximately 34 percent of the firms in the dataset reported negative ROAs in at least one year. To address this issue while reducing potential effects of data transforma tion on the modeling results, EPA used the following data transformation approach: 7


### EPA excluded 27 firms with any annual ROA values below the 95th percentile of the ROA distribution (i.e., ROA # - 0.51). EPA used an additive data transformation to ensure that remaining negative ROA values were positive in the logarithm transformation. The add itive transformation was performed by adding 0.51 to all ROA values. As a result of the data transformation procedures outlin ed above, the VL public firm dataset on which the regression model is based was reduced to 177 firms ( 204 - 27 firms) and 1,947 yearly data observations. The analysis tested several specifications of a log-lin ear model, including models with the intercept and slope dummies for different industrial sectors and models with the intercept suppressed. 8 

### Slope dummies were used to test the influence of industry classification on the elasticity of capital expenditures with respect to an explanatory variable: e.g., using the product of an industry classification dummy variable and CAPPRC to test whether certain industries responded differently to change in price of capital equipment over time. Following review of the different models tested, EPA concluded that the estimated coefficients did not vary, significantly, by industry and thus selected the simple log-linear model, with the in tercept and no slope dummies as the basis for the 316(b) Phase III capital expenditures analysis. The results for this model are summarized below. Cross-sectional, time-series datasets typically exhi bit both autocorrelation and group-wise heteroscedasticity characteristics. Autocorrelation is frequently present in economic time series data as the data display a “memory” with the variation not being independent from one period to the next. Heteroscedasticity usually occurs in crosssectional data where the scale of the dependent variable and the explanatory power of the model vary across observations. Not surprisingly, the da taset used in this analysis had both characteristics. Therefore, EPA

7 

### While specifying the MP&M regression model EPA conducted a sensitivity analysis to examine the degree to which the estimated model was affected by this data transformation. Re sults of this analysis showed that the data transformation produces results that are compatible with a model consider ing only positive ROA values and a model considering all ROA values. As a result, the Phase III regression mode l utilized the same data transformation procedure.
8 

### While specifying the MP&M regression model, EPA also te sted specifications that incl uded the following structural modifications: (1) testing contemporary vs. lagged specification of certain explanatory variables: e.g., using prior, instead o f current period revenue, REV, as an explanatory variable; (2) testing scale-normalized specifica tion of the dependent variable: e.g., using CAPEX/REV as the dependent variable instead of simple CAPEX; (3) testing flexible functional forms that included quadratic terms; and (4) testing additional explanatory variables including the index of 10 leading economic indicators (ILI) and market-to-book ratio (M V/B). Because EPA found that these st ructural modifications either did not improve the fit of the MP&M regression model or resulted in the introduction of multicollinearity among variables, these structural modifications were not tested while specifying the Phase III regression model.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-11§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### estimated the specified model using the generalized le ast squares procedure. This procedure involves the following two steps:

f 

### First, EPA estimated the model using simple OLS, ignoring autocorrelation for the purpose of obtaining a consistent estimator of the autocorrelation coefficient ( ρ );

f 

### Second, EPA used the generalized least squares proce dure, where the analysis is applied to transformed data. The resulting autocorrelation adjustment is as follows:
Z i,t 

### = Z i,t 

### - ρ Z i,t-1 

### Appendix C3A5-4
where Z it 

### is either dependent or independent variables.
EPA was unable to correct the estimated model fo r group-wise heteroscedasticity due to computational difficulties. The statistical software used in the analysis (LIMDEP) failed to correct the covariance matrix due to the very large number of groups (i.e., 177 firms) include d in the dataset. Application of other techniques to correct for group-wise heteroscedasticity was not feasible due to time constraints. The estimated coefficients remain unbiased; however, they are not minimum vari ance estimators. Regression results reveal strong systematic elements influencing capital expenditures: the analysis finds both statistically significant and intuitive patterns that influence firm's investment behavior. We find a strong systematic element of capital expenditures variation that allows forecasting of capital expenditu res based on firm and business environment characteristics. Table Appendix C3A5-1 presents model results. The model has a fairly good fit, with adjusted R 2 

### of 0.81. All coefficients have the expected sign and all but one variab le (cost of debt capital) are significantly different from zero at the 95 th 

### percentile.

Table Appendix C3A5-4: Time Series, Cross-Sectional Model Results Variable Coefficient t-Statistics
Constant Ln(ROA) Ln(REV) Ln(CAPT) Ln(CAPI) Ln(DEBTCST) Ln(CAPPRC) Ln(CAPUTIL) Autocorrelation Coefficient

r 21.880 2.618 0.526 3.964 1.129 58.450 0.687 11.085 1.078 18.491 -0.789 -1.605 -5.957 -4.369 1.716 2.842

0.385 18.402 Source: U.S. EPA Analysis


### The empirical results show that among the firm-specifi c variables, the output variable (REV) is a dominant determinant of firms’ investment spending. A positive coe fficient on this variable means that larger firms invest more, all else equal, which is clearly a simple expect ed result. In addition, as expected, firms with higher financial performance and better investment opportunities (ROA) invest more, all else equal: for each one percent increase in ROA, a firm is expected to increase its ca pital outlays by 0.53 percent. Other firm-specific characteristics were also found important and will aid in differentiating the expected capital outlay for Phase III facilities according to firm-specific char acteristics. Firms that require more capital to produce a given level of business activity (i.e., firms that have high capital intensity , CAPI) tend to invest more: a one percent increase in

C3A5-12 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### capital intensity leads to a 1.08 percent increase in cap ital spending. Higher capital turnover/shorter capital life (CAPT) also has a positive effect on investment deci sions: a one percent increase in capital turnover rate translates to a 0.69 percent increase in capital outlays.
The model also shows that current business environment cond itions play an important role in firms’ decision to invest. Negative signs on the capital price (CAPPRC) a nd debt cost (DEBTCST) variables match expectations, indicating that falling (either relatively or absolutely) capital equipment prices and less costly credit are likely to have a positive effect on firms’ capital expenditures. The most influential factor is capital equipment prices for manufacturing facilities. A one percent increase in the cap ital price index (CAPPRC) leads to a 5.96 percent decrease in capital investment. Capacity utilization is also an influential factor: a one percent increase in the Federal Reserve Index of Capacity Utilization for the rele vant industrial sector (CAPUTIL) leads to a 1.7 percent increase in capital investments. The f act that these systematic variables ar e significant in the regression analysis means that EPA will be able to control for economy- a nd industry-wide conditions in estimating capital outlays for Phase III facilities.


## C3A5-5 M ODEL 

## V ALIDATION 

### To validate the results of the regression analysis, EPA used the estimated regression equation to calculate capital expenditures and then compared the resulting estimate of capital expenditures with actual data. EPA used two methods to validate its results:

f 

### EPA used median values for explanatory variables fro m the Value Line data as inputs to estimate capital expenditures and then compared th e estimated value to the median reported capital expenditures, and

f 

### EPA used Phase III survey data to estimate capital ex penditures and then compared the estimated values to depreciation reported in the survey. First, EPA estimated capital expenditures for a hypothe tical firm based on the median values of the four dependent variables from the Value Line data and the re levant values of the three economic indicators. The estimated capital expenditures for this hypothetical firm ar e $43 million. EPA then compared this estimate to the median value of capital expenditures from the Value Line data. The median capital expenditure value in the dataset is $36 million, which provides a close match to the es timated value. This is not surprising since the same dataset was used to estimate the regression model and to calculate the median values used in this analysis. EPA also used Phase III survey data to confirm that th e estimated capital expenditu res seem reasonable. Because the Phase III survey does not pr ovide information on capital expenditures, EPA compared the capital expenditure estimates to the depreciation values reported in the survey. Depreciation had been proposed as a possible surrogate for cash outlays for capital replacements and additions. However, depreciation does not capture important variations in capital outlays that result from differences in firms’ financial performance. For this analysis, EPA chose a repres entative facility from each of the Phase III primary manufacturing sectors for model validation. The selected facility for each sector corresponds as closely as possible to the hypothetical median facility in the sector based on the distribution of f acility revenues and facility return on assets. For each of the facilities, EPA estimated capital expenditures using the estimated regression equa tion and facility financial data. Table Appendix C3A5-5 shows the estimated regr ession coefficients, financial averages for the primary Phase III sectors, estimated facility capit al expenditures, reported facility de preciation, and the comparison of capital expenditures and depreciation. As shown in Table Appendix C3A5-5, the estimated mode l provides reasonable estimates of capital expenditures.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-13§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### Table Appendix C3A5-5: Estimation of Capital Outlays for Phase III Sample Facilities: Median Facilities Selected by Revenue and ROA Percentiles Difference between Pre-Tax Estimated Depreciation Return Capital and Capital

on Revenue Capital Cost Price of Expenditures Depreciation Expenditures Assets ($2004, Turnover Capital of Capital Capacity ($2004, ($2004, ($2004, Sectors (ROA) millions) Rate Intensity Debt Goods Utilization millions) millions) millions) Coefficient 0.53 1.13 0.69 1.08 -0.79 -5.96 1.72 Intercept (21.88) Paper and 0.16 252.00 0.09 0.89 7.71 137. 60 86.24 $19.54 $16.73 ($2.80) allied products Chemicals 0.27 244.59 0.06 1.14 7.71 137. 60 79.36 $15.73 $14.69 ($1.04) and allied products Petroleum 0.22 1516.01 0.05 0.59 7.71 137.60 91.88 $47.03 $66.95 $19.93 and coal products Primary 0.09 458.46 0.04 0.93 7.71 137.60 88.77 $16.07 $19.21 $3.14 metals industries Food and 0.37 292.56 0.06 0.29 7.71 137. 60 80.46 $4.82 $4.52 ($0.30) kindred products Source: U.S. EPA analysis, 2004.


### One of the possible implications of the hypothesized rela tionships and estimated coefficient values from the prior analysis is that a facility’s predicted capital expenditures might be expected to increase relative to the facility’s actual depreciation as the facility’s ROA increases. An extens ion of this hypothesis is that, at lower ROA values, predicted capital expenditures would be less than the depreciation but that at higher ROA values, predicted capital expenditures exceed depreciation. These hypotheses are consistent with the expectation that businesses with higher financial performance will have relatively more attractive investment opportunities and are more likely to attract the capital to undertake those investments. EPA examined whether these relationships occur in the 316(b) sample facilities. Specifically, EPA calculated the predicted capital expenditure for each facility and compared these values to the facilities’ reported depreciation values. To remove the scale effect of revenue, EPA normalized both the predicted capital expenditure and reported depreci ation values by dividing by the three-year average of revenue for each facility. EPA then estimated the simple linear relationship of the resulting revenue-normalized capital expenditure and deprecation values against facility R OA. The five graphs on the following pages present, for each of the five primary two-digit SIC code sect ors, the normalized capital expenditure and deprecation values, and the estimated trend lines for each sector’s de preciation and capital expenditures with respect to ROA. 9 

### The graphs indicate the following:

f 

### The Paper and Allied Products (SIC 26) graph shows depreciation exceeding predicted capital expenditure at low ROA values but this relationship reverses with predicted capital expenditure exceeding depreciation as ROA increases. Thus, the calcula tions for these facilities match the hypothesized relationship.

9 

### For presentation purposes, two outlier facilities were excluded from the graph for SIC 28: Chemicals and allied products, and one outlier facility was excluded from the graph for SIC 26: Paper and allied products.

C3A5-14 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s

f 

### The Chemicals and Allied Products (SIC 28) graph also shows depr eciation exceeding predicted capital expenditure at low ROA values, but again the relationship reverses with predicted capital expenditure exceeding depreciation as ROA increases. This pred icted relationship is observed more strongly for facilities in the Chemicals and Allied Products industry than in the Paper and Allied Products industry.

f 

### The Petroleum and Coal Products (SIC 29) grap h shows predicted capital expenditures exceeding depreciation over the ROA range analyzed. However, th e extent of difference does not materially change as ROA increases.

f 

### The Primary Metal Industries (SIC 33) graph al so shows predicted capital expenditures exceeding depreciation over the ROA range analyzed. Howeve r, unlike for the Petroleum and Coal Products facilities, the amount by which predicted capita l expenditures exceeds depreciation increases as ROA increases, thus matching the hypothesized relationship.

f 

### The Food and Kindred Products (SIC 20) graph also shows that calculations for these facilities match the hypothesized relationship, where predicted capital e xpenditures exceed depreciation over the ROA range analyzed. The consistency of this result, as well as the CAPEX estimation in Table Appendix C3A5-5 above, is notable to the extent that it demonstrates the model’s overall applicability across industries, as facility data from SIC 20 were not used for model specification. In summary, with the exception of facilities in the Petroleum and Coal Products industry, the estimated model produces capital expenditure values that increase relative to reported depreciation with increasing ROA, which matches the hypothesized relationship.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-15§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s

0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18

-0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 Return on Assets u

DEPR CAPEX Linear (DEPR) Linear (CAPEX) 

### Figure Appendix C3A5-1: Comparison of Estimated Ca pital Outlays to Reported Depreciation for Phase III Survey Facilities in the Paper and Allied Products Sector

C a p i t a l O t l a y s & D e p r e c i a t i o n N o r m a l i z e d b y F a c i l i t y R e v e n u e s

Source: U.S. EPA analysis, 2004.

C3A5-16 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14

-0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 Return on Assets



### DEPR 

### CAPEX Linear (DEPR) Linear (CAPEX) 

### Figure Appendix C3A5-2: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase III Survey Facilities in the Ch emicals and Allied Products Sector

C a p i t a l O u t l a y s & D e p r e c i a t i o n N o r m a l i z e d b y F a c i l i t y R e v e n u e s

Source: U.S. EPA analysis, 2004.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-17§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s

0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16

-0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60 Return on Assets i

DEPR CAPEX Linear (DEPR) Linear (CAPEX) 

### Figure Appendix C3A5-3: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase III Survey Facilities in the Pe troleum and Coal Products Sector

C a p t a l O u t l a y s & D e p r e c i a t i o n N o r m a l i z e d b y F a c i l i t y R e v e n u e s

Source: U.S. EPA analysis, 2004.

C3A5-18 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



### 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10

-0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 Return on Assets



### DEPR 

### CAPEX Linear (DEPR) Linear (CAPEX) 

### Figure Appendix C3A5-4: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase III Survey Facilities in the Primary Metal Industries Sector

C a p i t a l O u t l a y s & D e p r e c i a t i o n N o r m a l i z e d b y F a c i l i t y R e v e n u e s

Source: U.S. EPA analysis, 2004.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-19§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay sCapys & DepyyRevenues

( ) ( ) 

### Figure Appendix C3A5-5: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase III Survey Facilities in the Food and Kindred Products Sector

0.00 0.02 0.04 0.06 0.08 0.10 0.12

-0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 Return onAssetsital Outlareciation Normalized bFacilit

DEPR CAPEX Linear DEPR Linear CAPEX

Source: U.S. EPA analysis, 2004.

C3A5-20 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



## A TTACHMENT 

## C3A5.A: B IBLIOGRAPHY OF 

## L ITERATURE 

## R EVIEWED FOR THIS 

## A NALYSIS 

### As noted above, EPA relied on previous studies of investme nt behavior to select critical determinants of firms’ capital expenditures. Empirical results from these studies suggest that investment is most sensitive to quantity variables (output or sales), return-over-cost, and capital utilization (R. Chirinko). Empirical results from more recent studies further found that increasing depreciation rates and capital equipment prices were of first-order importance in the equipment investment behavior in the 1990 (T. Tevlin, K. Whelan). Specifically, declining prices of micro-processor based equipment played a crucial role in the investment boom in the 1990. Chirinko, Robert S. 1993. “Business Fixed Investment Spending: A Critical Survey of Modeling Strategies, Empirical Results and Policy Implications.” Journal of Economic Literature 31, no. 4: 1875-1911. Goolsbee, Austan. 1997. “The Business Cycle, Fina ncial Performance, and the Re tirement of Capital Goods.” University of Chicago, Graduate School of Business Working Paper. Greenspan, Alan. 2001. “Economic Developments.” Remarks before the Economic Club of New York, New York, May 24. Kiyotaki, Nobuhiro and Kenneth D. West. 1996. “Business Fixed Investment And The Recent Business Cycle In Japan.” National Bureau of Ec onomic Research Working Paper 5546. McCarthy, Jonathan. 2001. “Equipment Expenditures since 1995: The Boom and the Bust.” Current Issues In Economics And Finance 7, no. 9: 1-6. Opler, Tim and Lee Pinkowitz, Rene Stulz and Rohan Williams on. 1997. “The Determinants and Implications of Corporate Cash Holdings.” Working paper, Oh io State University College of Business. Tevlin, Stacey and Karl Whelan. 2000. “Explaining the Investment Boom of the 1990s.” Board of Governors of the Federal Reserve System Finance and Economics Discussion Paper no. 2000-11 Uchitelle, Louis. 2001. “Wary Spending by Companies Cools Economy.” New York Times , May 14, p. A1.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A5-21§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A5: Estimating Capital Outlay s



## A TTACHMENT 

## C3A5.B: H ISTORICAL 

## V ARIABLES 

## C ONTAINED IN THE 

## V ALUE 

## L INE 

## I NVESTMENT 

## S URVEY 

## D ATASET 

### All variables are provided for 10 years (except where a firm has been publicly listed for less than 10 years):

f 

### Price of Common Stock
f 

### Revenues
f 

### Operating Income
f 

### Operating Margin
f 

### Net Profit Margin
f 

### Depreciation
f 

### Working Capital
f 

### Cash Flow per share
f 

### Dividends Declared per share
f 

### Capital Spending per share
f 

### Revenues per share
f 

### Average Annual Price-Earnings Ratio
f 

### Relative Price-Earnings Ratio
f 

### Average Annual Dividend
f 

### Return Total Capital
f 

### Return Shareholders Equity
f 

### Retained To Common Equity
f 

### All Dividends To Net Worth
f 

### Employees
f 

### Net Profit
f 

### Income Tax Rate
f 

### Earnings Before Extras
f 

### Earnings per share
f 

### Long Term Debt
f 

### Total Loans
f 

### Total Assets
f 

### Preferred Dividends
f 

### Common Dividends
f 

### Book Value
f 

### Book Value per share
f 

### Shareholder Equity
f 

### Preferred Equity
f 

### Common Shares Outstanding
f 

### Average Shares Outstanding
f 

### Beta
f 

### Alpha
f 

### Standard Deviation

C3A5-22 Internal Draft – Deliberative, Pr edecisional – Do not Quote, Cite , or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A6: Summary of Moderate Impac ts 

# Appendix C3A6: Summary of Moderate Impact Threshold Values by Industry

I NTRODUCTION 

### Facilities subject to moderate impacts from the regulation under the regulatory analysis options are expected to experience financial stress short of closure. This analysis uses two financial indicators – (1) Pre-Tax Return on Assets (PTRA) and (2) Interest Coverage Ratio (ICR) – to test whether facilities might experience such stress. These threshold values were calculate d at the industry-level and compared to pre- and post-compliance PTRA and ICR values for sample facilities to determine if facilities choosing to remain in business after promulgation of e ffluent guidelines would experience moderate impacts on their ability to attract and finance new capital. The si x industries considered in this analysis are: Paper, Chemicals, Petroleum, Steel, Aluminum, Food (the “Pri mary Manufacturing Industries”), and Other Industries. The remainder of this appendix describes the sources and methodology used to derive industry-specific moderate impact threshold values. 

## A C ONTENTS PPENDIX
Introduction........................................................C3A6-1 C3A6-1 Developing Threshold Values for Pre-Tax Return on Assets (PTRA) .....................C3A6-2 C3A6-2 Developing Threshold Values for Interest Coverage Ratio (ICR) ...........................C3A6-2 C3A6-3 Summary of Results ..............................C3A6-3 References..........................................................C3A6-5



### EPA calculated the thresholds using inco me and financial structure informati on by 4-digit SIC code from the Risk Management Association (RMA) Annual Statement Studies for eight years 1994-2001 (RMA, 2002; RMA, 2001; RMA, 1998) 1 

### . This source provides quartile values derived fro m statements of commercial bank borrowers and loan applicants for firms having less than $250 million in total assets. These criteria may introduce bias, since firms with particularly poor financial statements might be less likely to apply to banks for loans, and some types of firms may be more likely to use bank financing than others. However, the RMA data offers the advantage of being available by 4-digit SIC codes and for quartile ranges. RMA did not provide data for all 4-digit SIC codes associated with an in-scope Section 316(b) facility. In particular, RMA had no years of data available for SIC codes associated with sample facilities in the Aluminum and Food industries. For the Aluminum industry, EPA applied a combined Steel/Aluminum industry value to facilities in those industries. For the Food industry, EPA applied values calculated using RMA data for SIC 20 (Twenty-two 4-digit SIC codes). The 4-digit SIC code data were consolidated into we ighted industry averages, weighted by 1997 value of shipments from the Economic Censuses (U.S. DOC, 1997). For each industry and impact measure, a separate threshold was calculated. The use of the RMA data fo r calculating the threshold values for pre-tax return on assets and interest coverage ratio is outlined below.

1 

### Thresholds for the Food indu stry were calculated using five years of data – 1997-2001 – because older data for this industry are unavailable from RMA.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A6-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A6: Summary of Moderate Impac ts



### C3A6-1 

## D EVELOPING 

## T HRESHOLD 

## V ALUES FOR 

## P RE 

## -T AX 

## R ETURN ON 

## A SSETS 

## (PTRA)
Pre-tax return on total assets measures management’s effectiveness in employing the capital resources of the business to produce income. A low ratio may indicate that a borrower would have difficulty financing treatment investments and continuing to attract investment. The following data from Risk Management Association Annual Statement Studies were used to calculate PTRA:

f 

### % Profit Before Taxes / Total Assets 25th 

### Ratio of profit before taxes divided by total assets and multiplied by 100 for the lowest quartile of values in each 4-digit SIC code.

f 

### Operating Profit Gross profit minus operating expenses.

f 

### Profit Before Taxes Operating profit minus all other expenses (net). RMA provides a measure of pre-tax return on assets that approximates the measure EPA defined for the moderate impact analysis. As defined by RMA, this measure is the ratio of pre-tax income to assets, designated ROA RMA 

### : ROA RMA 

### = Pre-Tax Income (EBT) / ASSETS 25th 

### However, as defined by EPA for its analysis, the numerator of the PTRA measure requires the use of earnings before interest and taxes (EBIT) instead of pre-tax income (EBT). Defined as EBIT, the PTRA numerator will capture all return from assets, whether going to debt or e quity. To derive a pre-tax, total return value, EPA adjusted RMA’s measure of PTRA using the median per centage values of EBIT and EBT available from RMA. This adjustment yields the PTRA measure that EPA u sed in the moderate impact analysis, designated ROA 316(b) 

### : ROA 316(b) 

### = ROA RMA 

### * EBIT / EBT Negative values are included in the weighted-industry PTRA av erages but a different method is used to adjust the ROA values reported in RMA to the value used in the mode rate impact analysis. Specifically, using only those observations (i.e., 4-digit SIC code and year combinati ons) with positive values for % Profit Before Taxes / Total Assets, Operating Profit, and Profit Before Taxes, EPA calculated an adjustment factor by subtracting the difference between ROA 316(b) 

### and ROA RMA 

### as follows:
ROA 316(b) 

### -ROA RMA 

### = adjustment factor. Those values were consolidated into industry-specific ad justment factors, weighted by 1997 value of shipments from the Economic Censuses (U.S. DOC, 1997). Each negative PTRA observation from RMA was adjusted by its industry specific adjustment factor to approximate the measure used in the moderate impact analysis:
ROA RMA 

### + industry specific adjustment factor = ROA 316(b) 

### The industry specific adjustment factors average 0.41 a nd range from 0.12 for Paper to 0.55 for the combined Steel/Aluminum industry.


## C3A6-2 D EVELOPING 

## T HRESHOLD 

## V ALUES FOR 

## I NTEREST 

## C OVERAGE 

## R ATIO 

## (ICR) Interest coverage ratio measures a business’ ability to meet current in terest payments and, on a pro-forma basis, to meet the additional interest payments for new debt. A high ratio may indicate that a borrower would have little difficulty in meeting the interest obligations of a loan. This ratio serves as an indicator of a firm's capacity to take on additional debt, as might be required to fi nance installation of compliance technology. The following data from Risk Management Association Annual Statement Studies were used to calculate ICR:

C3A6-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A6: Summary of Moderate Impac ts

f 

### EBIT/Interest 25th 

### Ratio of earnings (profit) befo re annual interest expense and taxes (EBIT) divided by annual interest expense for the lowest quartile of values in each 4-digit SIC code.

f 

### % Depr., Dep., Amort./Sales med 

### Median ratio of annual deprecia tion, amortization and depletion expenses divided by net sales and multiplied by 100.

f 

### Operating Profit Gross profit minus operating expenses. RMA provides a measure of interest coverage that approximates the measure that EPA defined for the moderate impact analysis. As defined by RMA, this measure is th e ratio of earnings before interest and taxes to interest, designated ICR RMA 

### : ICR RMA 

### = EBIT / INTEREST 25th 

### However, as defined by EPA for its analysis, the nume rator of the ICR measure requires the use of earnings before interest, taxes, depreciation, and amortization (EBITDA) instead of earnings before interest and taxes (EBIT). Defined this way, the ICR numerator will include all operating cash flow that could be used for interest payments. To derive the desired ICR value (designated ICR 316(b) 

### ), EPA adjusted the RMA value as outlined below:
ICR 316(b) 

### = EBITDA / INTEREST Therefore, ICR 316(b) 

### = ICR RMA 

### * (EBIT + DA) / EBIT
or ICR 316(b) 

### = ICR RMA 

### * {1+ [(DA / SALES) / (EBIT / SALES)]} For consistency of calculation, EPA used the median values available from RMA for the adjusting both the numerator (DA / SALES) and denominator (EBIT / SALES) terms. 2


### EPA used the same method as described above to adjust the negative ICR values reported in RMA to the value used in the moderate impact analysis. Including only those observations with positive values for EBIT/Interest, % Depr., Dep., Amort./Sales, and Operating Profit, an adjust ment factor was calculated by subtracting the difference between ICR 316(b) 

### and ICR RMA 

### as follows:
ICR 316(b) 

### -ICR RMA 

### = adjustment factor. An industry specific adjustment factor was calculated for ICR values similar to the PTRA. Each negative ICR observation from RMA was adjusted by its industry specific adjustment factor to approximate the measure used in the moderate impact analysis:
ICR RMA 

### + industry specific adjustment factor = ICR 316(b) 

### The industry specific adjustment factors average 0.66 and range from 0.55 for Petroleum to 0.70 for Paper and the combined Steel/Aluminum industry.

C3A6-3 

## S UMMARY OF 

## R ESULTS 

### Table C3A6-1 reports the resulting threshold values for PTRA and ICR by industry. The PTRA values range from 1.6 percent for Food industries to 2.9 percent fo r Chemicals. The ICR values range from 2.0 for Food industries to 2.4 for Chemicals.

2 

### Numerator (% Depr., Dep., Amort./Sales) is available fo r quartile values; denominator (Operating Profit) only for median values.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A6-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A6: Summary of Moderate Impac ts

th

Paper

Petroleum

Other Industries 2.1% 2.2 2.9% 2.4 2.1% 2.2 2.0% 2.1 1.6% 2.0 1.8% 2.0 Source: 

### Table C3A6-1: Summary of Moderate Impact Thresholds by Industry based on 25 percentile value of firms reporting data to RMA Industry

Chemicals

Steel/Aluminum Food & Beverage Pre-Tax Return on Assets (PTRA) Interest Coverage Ratio (ICR)

RMA, 1998; RMA, 2001; RMA, 2002; U.S. Ec onomics Census, 1997; U. S. EPA Analysis, 2006.

C3A6-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A6: Summary of Moderate Impac ts



## R EFERENCES


### U.S. Department of Commerce. 1997. Bureau of the Census. Census of Manufacturers, Census of Transportation, Census of Wholesa le Trade, Census of Retail Trad e, Census of Service Industries. Risk Management Association (RMA). 2002. Annual Statement Studies 2001-2002. Risk Management Association (RMA). 2001. Annual Statement Studies 2000-2001. Risk Management Association (RMA). 1998. Annual Statement Studies 1997-1998

.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A6-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A6: Summary of Moderate Impac ts



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C3A6-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A7: Baseline Closure Rates 

# Appendix C3A7: Analysis of Baseline Closure Rates

A C ONTENTS 

## I

A NNUAL 

## E STABLISHMENT 

## C LOSURES


### EPA used dynamic data The SBA data report numbers of

Nevertheless, EPA believes the SBA data can

questionnaires.

Manufacturing Industries (1990-2002)

Range Closing Average 11.1% 5.4% 7.8% 6.6% 18.7% 6.6% 9.2% 6.8% Aluminum 0.0% 6.8% Food 0.0% 8.1% 9.4% 6.7%

Source: 

### PPENDIX NTRODUCTION Introduction........................................................C3A7-1 

### This appendix presents info rmation on the closure of establishments in the Primary Manufacturing Industries. C3A7-1 Annual Establishment Closures ............C3A7-1 References..........................................................C3A7-2 

## C3A7-1 from the U.S. Small Business Administration (SBA) to estimate the rate at which facilities in the Primary Manufacturing Industries leave thei r industry each year. establishments starting up, closing, expanding employm ent and contracting employment each year from 1989 through 2002 (the latest year currently available). EPA compared the percent of facilities predicted to close in the baseline closure analysis to typical closure rates in the six Primary Manufacturing Industries. The SBA data are organized by 3-digit SIC code for years 1990 through 1998, and 4-digit NAICS code for years 1999 through 2002. As a result, it is not possible to compile a series of data consistently aligned with the industries profiled. provide a general measure of establishment closures for comparison for the broad industry segments. Table C3A7-1 shows the percentage of facilities potentially subject to the regulatory analysis options assessed as baseline closures, i.e. the facilities were found to be in severe financial distress ab sent any regulatory compliance costs and were likely to close. The table also presents the range and average of closure rates for each of the six Primary Manufacturing Industries. As reported in the table, between 1.4 percent and 14.4 percent of all facilities in these industries close annually. The estimated baseline closure rates for facilities in the Paper and Petroleum industries are higher than the observed closure rates in th ese industries, as reported in SBA data. However, EPA’s baseline closure rates are estimated from sample survey data and are thus subject to the statistical uncertainty of the sample survey. EPA judges that the individual sample facility anal yses accurately represent the baseline financial condition of the facilities, based on the da ta provided by facilities in their detailed facility

Table C3A7-1: Predicted Baseline Closures a nd Annual Percentage of Closures for Primary

Sector Percent of 316(b) Facilities Assessed as Baseline Closures Percent of Establishments

Paper 1.4% - 9.8% Chemicals 2.3% - 11.0% Petroleum 3.3% - 10.6% Steel 4.6% - 14.4% 2.3% - 12.5% 3.6% - 13.3% Total Primary Manufacturing Industries 1.4% - 14.4%
U.S. SBA, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A7-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A7: Baseline Closure Rates



## R EFERENCES


### U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge Between NAICS and SIC. Available at: http://www.census.gov/epcd/ec97brdg/.
U.S. Small Business Administration (SBA). 2006. Firm Size Data . Dynamic data, by births, deaths, growth, and decline (text files). Downloaded March 22, 2006. Available at: http://www.sba.gov/advo/research/data.html.

C3A7-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions 

# Appendix C3A8: Analysis of Other Regulations

I NTRODUCTION 

### Public comments on the proposed Phase III regulation argued that the manufacturers analysis should account for other environmental regulations that were recently or will soon be promulgated, potentia lly imposing additional costs beyond those reflected in the survey financial statements. The after-tax cash flow (ATCF) adjustment analysis, which EPA undertook to bring the estimates of cash flow forward fro m the time of the survey (1996-1998) to the time of the regulatory analysis (2005), accounts implicitly for additional regulatory costs incurred through 2005. However, it does not capture the impact of new regulations that came into effect during this period and for which costs had not yet been incurred, or fully incurred, by 2005. 

## A C ONTENTS PPENDIX
Introduction........................................................C3A8-1 C3A8-1Methodology .........................................C3A8-3 C3A8-2 Results...................................................C3A8-5 References..........................................................C3A8-6



### To account for potential costs that had not been fully incurred by 2005, EPA researched additional regulatory requirements that might apply to facilities in the Prim ary Manufacturing Industries or the Food and Kindred Products industry (i.e., the “316(b) Ma nufacturing Industries”), whose costs we re not likely to have been captured in the ATCF adjustment analysis. This research identif ied 13 regulations that apply to the 316(b) Manufacturing Industries and could result in additional costs to 316(b) manufacturing facilities. 1 

### Table C3A8-1 below summarizes these regulations (referre d to hereafter as “other regulations”). The following discussion uses both the regulation number presented in the first column and the abbr eviated regulation name, bolded in the second column.

1 

### The methodology used to identify the 13 other regulations is discussed in detail in a memorandum to the record, Identifying Additional EPA Regulations That May Affect 316(b) Facilities

.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A8-1§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions

No. Regulation Date Summary Compliance Date 1 11/04

; 9/07

2 11/03 11/06

3 04/02

; Final Rule requirements 4 (Non-Gasoline); 02/04 HAPs for new and existing 02/07; 02/14 for some roof Final Rule operations storage tanks 5 04/03 Coke Ovens 04/06

6 05/03 Integrated ; Final 05/06
Rule 7 07/02 07/05 Maximum Achievable Control
Rule Production. 8

Point 11/02 10/05

9 06/02 Sets emission limits for HAPs for

operations 10 10/03 Site HAPs from site remediation ; 10/06 Remediation 11 04/03 Sets emission limits for HAPs for 04/06
Rule 12 12/03
Emissions from Alkali Plants 12/06

13 From 08/04 nonroad diesel engines and 2007-2014,
reduction in sulfur content 

### Table C3A8-1: Regulations Potent ially Affecting 316(b) Manufacturers Effective 316(b) Industries Affected National Emission Standards for Sets emission limits for several Pulp and paper mills, Not later than Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers and Process Heaters Final Rule hazardous air pollutants (HAPs) for boilers and process heaters petroleum refineries, chemical manufacturers, and steel works (blast furnaces); potentially others National Emission Standards for Sets emission limits for several Chemical manufacturers Not later than Hazardous Air Pollutants: HAPs for miscellaneous organic Miscellaneous Organic Chemical Manufacturing ; Final Rule chemical manufacturers

National Emission Standards for Sets emission limits for several Petroleum refineries Not later than Hazardous Air Pollutants for Petroleum Refineries : Catalytic HAPs for catalytic cracking units, catalytic reforming units, and 4/07; 12/09 for some refineries Cracking Units, Catalytic Reforming sulfur recovery limits, as well as that meet Units, and Sulfur Recovery Units associated by-pass lines certain

National Emission Standards for Hazardous Air Pollutants: Organic Liquids Distribution Sets emission limits for several organic liquids distribution Chemical manufacturers, petroleum refineries; potentially others Not later than

National Emission Standards for Sets emission limits for several Integrated steel mills Not later than Hazardous Air Pollutants for : Pushing, Quenching, and HAPs for coke ovens Battery Stacks; Final Rule National Emission Standards for Sets emission limits for several Integrated steel mills Not later than Hazardous Air Pollutants: Iron and Steel Manufacturing HAPs for integrated iron and steel manufacturing facilities

National Emission Standards for Sets emission limits for four Chemical manufacturers, Not later than Hazardous Air Pollutants: Generic source categories: Cyanide certain segments Technology ; Final Rules and Proposed Chemicals Manufacturing, Carbon Black Production, Ethylene Production, and Spandex
Effluent Limitations Guidelines, Pretreatment Sta ndards, and New Source Performance Standards for the Iron and Steel Manufacturing Source Category; Final Rule Revises CWA effluent limitations guidelines and standards for wastewater discharges from the iron and steel manufacturing industry Steel manufacturers Not later than

National Emission Standards for Chemical manufacturers Not later than Hazardous Air Pollutants: Cellulose Products Manufacturing ; Final Rule cellulose products manufacturing 06/05; except 06/10 for rayon

National Emission Standards for Sets emission limits for several Chemical manufacturers, Not later than Hazardous Air Pollutants: primary aluminum ; Final Rule potentially others National Emission Standards for Chemical manufacturers Not later than Hazardous Air Pollutants: Hydrochloric Acid Production ; Final hydrochloric acid production facilities

National Emission Standards for Sets emission limits for mercury Chemical manufacturers Not later than Hazardous Air Pollutants: Mercury Mercury Cell Chlor- ; Final Rule for mercury cell chlor-alkali plants

Control of Emissions of Air Pollution Nonroad Diesel Engines and Fuel ; Final Rule Sets new emission standards for
reduces sulfur content of nonroad Petroleum refineries (for production of lower sulfur content diesel fuel) with staged
diesel fuel. Source: Rule preambles and supporting ma terials. See reference section.

C3A8-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions



### To account for potential impacts of these other regulati ons on 316(b) manufacturing facilities, EPA determined to which 316(b) industry sectors, based on SIC code, each regul ation applies and extracted the estimated per facility costs for facilities in the identified sect ors. These costs were added to the free cash flow analysis for each 316(b) facility that is likely to be regulated by one of the 13 regulations (see also Chapter C3, Section 2.2). EPA then determined if the potential costs asso ciated with these regulations would a ffect either the baseline or the postcompliance determination of impact for each facility. The remainder of this appendix discusses the methodology used for this analysis and the findings.


## C3A8-1 M ETHODOLOGY


###  Determination of applicability to 316(b) manufacturing facilities EPA first identified which of the in-scope manufacturing facilities would potentially in cur costs as a result of each of the 13 other regulations. This de termination was based on the SIC codes or NAICS codes specified in either the preamble or the supporting documents of each regula tion. When a rule only specified NAICS codes, EPA identified all SIC codes associated with each NAICS code . All 316(b) manufacturing facilities in each 4-digit SIC sector subject to a given regulation are assumed to incu r costs under that regulation. For three of the 13 other regulations (No. 5, 6, and 7), the supporting document s identified specific facilities that are regulated under the rule. For these three rules, EPA assumed that only th ose 316(b) manufacturing facility identified by the rule would incur compliance costs. EPA’s assumption about the applicability of the 10 regulations that did not identify sp ecific facilities covered by the rule – i.e., that a 316(b) facility will incur costs under the regulation, if it belongs to an SIC code that is subject to that regulation – is likely to ove rstate the additional cost burden as a result of these regulations. Rules often only affect a specific part of an industry sector, de pending, for example, on specific emission or discharge characteristics, or existing pollution control technology. It is therefore likely that not all 316(b) facilities in a given SIC code subject to a rule would actually incur costs under that rule. However, little information is available on those technical characteristics of 316(b) manufacturing facilities that would determine the applicability of the regulations to these facilities. EPA th erefore made the conservative assumption that all 316(b) manufacturing facilities in the SIC codes covered by the ot her regulations would incur costs under those rules.
 Extraction of facility-level costs EPA considered several analytic a pproaches of applying the costs of the 13 other regulations to 316(b) manufacturing facilities that might be affected by them. Considered approaches included application of costs based on (1) model facilities, (2) average per facility co st, and (3) maximum per facility cost, if a range was provided. These costs might be based on the overall cost of a regulation or might be broken out by SIC code or another definition of industry sector. In addition, different concepts of co st were considered, including industry compliance costs and changes in producer surplus. Ultimately, the cost application approach selected for each regulation depended on the level of detail that was available in the regulatory materials; however, EPA always used the method that would result in the most precise application of costs. In general, the model facility approach proved not feasible since insufficient information was available on how to map 316(b) facilities to specific mode ls used in a regulation. EPA also decided not to apply a maximum per facility cost, if a range of per facility costs was provided. This approach would yield an upper-bound estimate but would, in most cases, significantly overstate the actual cost likely borne by each facility and would therefore not provide a good indication of the a dditional burden. EPA therefore calculated the average cost per facility for each regulation. This average cost was either calculated for each affected SIC code, if possible, or for the rule as a whole. Finally, EPA used the average loss in pro ducer surplus, if available. Change in producer surplus is the best indicator of burden on co mplying facilities since it takes into account the ability of

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A8-3§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions



### passing-through compliance costs to customers and any r esulting changes in prices and quantities sold. If changes in producer surplus were not available, EPA used industry pre-tax, annualized compliance costs. Table C3A8-2 summarizes the cost application method that was used for each of the 13 other regulations and the resulting per facility costs that were applied to 3 16(b) manufacturing facilities in the relevant sectors.

Table C3A8-2: Per Facility Cost of Regulations that Affect 316(b) Industries a No. Regulation Cost Application Method 1 NESHAP 3⁄4 3⁄4 3⁄4

2
NESHAP 3⁄4 3⁄4 3⁄4 $372,000

3 2911 3⁄4 $0 NESHAP

4 NESHAP 3⁄4 3⁄4 3⁄4 5 Coke Ovens NESHAP 3⁄4 $2,646,700 3⁄4 3⁄4 6 3⁄4 $708,400 3⁄4 3⁄4 7 3⁄4 3⁄4 3⁄4 3⁄4 8 3312 3⁄4 $50,300 ELG 3⁄4 3⁄4 9 3⁄4 $521,400 3⁄4 3⁄4 10 3⁄4 $569,000 3⁄4 3⁄4 11 3⁄4 $101,100 3⁄4 3⁄4 12 Plants NESHAP 2812 3⁄4 3⁄4 3⁄4 $209,200

13 2911 3⁄4 3⁄4 3⁄4 $124,535 Affected 316(b) SIC Codes Per Facility Cost (Pre-Tax; $2004) Boilers and Process Heaters 1011, 2046, 2085, 2611, 2621, 2631, 2676, 2812, 2813, 2819, 2821, 2823, 2833, 2865, 2869, 2911, 3312, 3313, 3315, 3317, 3334, 3353, 3421, 3724 Average cost per facility By 2-digit SIC code Change in producer surplus SIC 10 – $364,600 SIC 20 – $221,400 SIC 26 – $210,300 SIC 28 – $166,600 SIC 29 – $32,600 SIC 33 – $396,800 SIC 34 – $161,900 SIC 37 – $219,400 Miscellaneous Organic Chemical Manufacturing 2812, 2813, 2819, 2821, 2823, 2833, 2865, 2869 Average cost per facility Total rule Industry compliance costs Petroleum Refineries The analysis predicted a gain in producer surplus as a result of the rule. Organic Liquids Distribution 2821, 2865, 2869, 2911 Average cost per facility By 2-digit SIC code Industry compliance costs SIC 28 – $63,625 SIC 29 – $21,036
3312 (specific facilities are Average cost per facility identified) By 4-digit SIC code Change in producer surplus Integrated Iron and Steel 3312 (specific facilities are Average cost per facility Manufacturing NESHAP identified) By 4-digit SIC code Change in producer surplus Generic Maximum Achievable Control Technology NESHAP 2819, 2869 (speci fic facilities are identified) 2819: average cost per facility 2869: maximum cost per facility By 2-digit SIC code Industry compliance costs SIC 2819 – $193,700 SIC 2869 – $1,662,400

Iron and Steel Manufacturing Average cost per facility Total rule Industry compliance costs Cellulose Products 2821, 2823, 2869 Average cost per facility Manufacturing NESHAP Total rule Industry compliance costs Site Remediation NESHAP 2819, 2821, 2865, 2869, 2911 Average cost per facility Total rule Industry compliance costs Hydrochloric Acid 2819, 2821, 2869 Average cost per facility Production NESHAP Total rule Industry compliance costs Mercury Cell Chlor-Alkali Average cost per facility By 4-digit SIC code Industry compliance costs Nonroad Diesel Engines and Fuel Emissions Standards Average cost per facility By 4-digit SIC code Change in producer surplus Source: EPA analysis of rule preambles and supp orting materials. Se e reference section.

C3A8-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions



### The per facility costs identified in Table C3A8-2 were then aggregated for each 316(b) manufacturing facility (based on SIC code or individual facility identification) , converted to a post-tax value, and subtracted from baseline adjusted after-tax cash flow (see discussion of the impact analysis method in Chapter C3: Economic Impact Analysis for Manufacturers ). For all 316(b) facilities that were operational in the baseline under each primary analysis option, EPA determined if the addition of the cost of complying with the 13 other regulations would cause the facility to (1) fail the baseline test and become a “baseline closure” or (2) fail the postcompliance impact test and be considered a “severe impact” of the analysis option.


## C3A8-2 R ESULTS


###  Baseline analysis Of the 70 sample manufacturing facilities 2 

### that are operational in the baseline and have a design intake flow of at least 50 MGD, the smallest DIF applicability threshold of all three regulatory analys is options, onl y one facility would experience financial difficulty in the baseline (i.e., before incurring Phase III compliance costs) if it incurred the additional costs of the other regulations. This facility is a petroleum refinery with very low baseline profitability. EPA estimates that this facility might be subj ect to regulations #1, 3, 4, 10, and 13 and incur a total cost of $447,000 (post-tax) as a result of these regulations. None of the other sample facilities would be affected in the baseline as a result of complying with the other regulations.
 Post-compliance analysis The post-compliance analysis sets aside facilities consid ered baseline closures. Of the 69 remaining sample manufacturing facilities (i.e., those that are not considered a baseline closure after applying the costs of the other regulations), no facility would experience a severe imp act as a result of incurring both Phase III compliance costs and the costs of the other regulations. This analysis shows that consideration of other regulat ions that might affect 316(b) manufacturing facilities would have a minimal effect on the results of EPA’s facility im pact analysis conducted in support of the Phase III rule.

2 

### This analysis excludes one facility with zero revenues in the baseline.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A8-5§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions



## R EFERENCES


### U.S. Environmental Protection Agency (U.S. EPA). 2006. Memorandum to the record: Identifying Additional EPA Regulations That May Affect 316(b) Facilities . June 1, 2006.
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers a nd Process Heaters; Final Rule. 69 FR 55218. September 13, 2004. (Rule #1)
U.S. Environmental Protection Agency (U.S. EPA). Econom ic Impact Analysis of the Industrial Boilers and Process Heaters NESHAP. EPA-452/R-04-011. February 2004. (Rule #1)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Miscellaneous Organic Chemical Manufacturing; Final Ru le. 68 FR 63857. November 10, 2003. (Rule #2)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants for Petroleum Refineries: Catalytic Cracking, Catalytic Performing, and Sulfur Plant Units; Final Rule. 67 FR 17762. April 11, 2002. (Rule #3)
U.S. Environmental Protection Agency (U.S. EPA). Ec onomic Impact Analysis for the Petroleum Refineries (Catalytic Cracking, Catalytic Performing, and Sulfur Plant Units) NESHAP. A-97-36. December 1997. (Rule #3)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Organic Liquids Distribution (Non-Gasoline); Final Ru le. 69 FR 5038. February 3, 2004. (Rule #4)
U.S. Environmental Protection Agency (U.S. EPA). Economic Impact Analysis of Air Pollution Regulations: NESHAP for Organic Liquids Distribution. EPA-452/R-02-017. August 2003. (Rule #4)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants for Coke Ovens: Pushing, Quenching, and Battery Stacks; Final Rule. 68 FR 18008. April 14, 2003. (Rule #5)
U.S. Environmental Protection Agency (U.S. EPA). Econom ic Impact Analysis of Final Coke Ovens NESHAP. EPA 452/R-02-008. September 2002. (Rule #5)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Integrated Iron and Steel Manufacturing; Final Rule. 68 FR 27646. May 20, 2003. (Rule #6)
U.S. Environmental Protection Agency (U.S. EPA). Economic Impact Analysis of Final Integrated Iron & Steel NESHAP. EPA 452/R-02-009. September 2002. (Rule #6)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Generic Maximum Achievable Control Technology; Final Rules and Proposed Rule. 67 FR 46259. July 12, 2002. (Rule #7)
U.S. Environmental Protection Agency (U.S. EPA). Economic Impact Analysis for the Proposed Cyanide Manufacturing NESHAP. EPA-452/D-00-004. May 2000. (Rule #7)
U.S. Environmental Protection Agency (U.S. EPA). Efflue nt Limitations Guidelines, Pretreatment Standards, and New Source Performance Standards for the Iron and Steel Manufacturing Point Source Category; Final Rule. 67 FR 64216. October 17, 2002. (Rule #8)

C3A8-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions



### U.S. Environmental Protection Agency (U.S. EPA). Econom ic Impact Analysis of the Final Effluent Guidelines and Standards for the Iron & Steel Manufacturing Poin t Source Category. EPA-821-R-02-006. April 2002. (Rule #8)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Cellulose Products Manufacturing; Final Rule. 67 FR 40044. June 11, 2002. (Rule #9)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Site Remediation; Final Rule. 68 FR 58172. October 8, 2003. (Rule #10)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Site Remediation. EPA-452/R-03- 016. August 2003. (Rule #10)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Hydrochloric Acid Production; Final Rule. 68 FR 19076. April 17, 2003. (Rule #11)
U.S. Environmental Protection Agency (U.S. EPA). Econom ic Impact Analysis of the Hydrochloric Acid (HCl) Production NESHAP – Final Report. EPA 453/ R-03-001. February 2003. (Rule #11)
U.S. Environmental Protection Agency (U.S. EPA). National Emission Standards for Hazardous Air Pollutants: Mercury Emissions from Mercury Cell Chlor-Alkali Plants ; Final Rule. 68 FR 70904. December 19, 2003. (Rule #12)
U.S. Environmental Protection Agency (U.S. EPA). Control of Emissions of Air Pollution From Nonroad Diesel Engines and Fuel; Final Rule. 69 FR 38958. June 29, 2004. (Rule #13)
U.S. Environmental Protection Agency (U.S. EPA). Final Regulatory Analysis: Control of Emissions from Nonroad Diesel Engines. EPA 420-R-04-007. May 2004. (Rule #13)

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Q uote, Cite, or Distribute C3A8-7§ 316(b) Final Rule: Phase III – EA, Part C: Economic Analysis for Existing Facilities Appendix C3A8: Analysis of Other Regulat ions



# T HIS 

# P AGE 

# I NTENTIONALLY 

# L EFT 

# B LANK

C3A8-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis 

# Chapter D1: Regulatory Flexibility Analysis

I NTRODUCTION 

### The Regulatory Flexibility Act (RFA) requires EPA to consider the economic impact a proposed rule would have on small entities. The RFA requires an agency to prepare a regulatory flexibility analysis for any notice-and-comment rule it promulgates, unless the Agency certifies that the rule “will not, if promulgated, have a significant economic impact on a substantial number of small entities” (The Regulatory Flexibility Act, 5 U.S.C. § 605(b)). Small entities include small businesses, small organizations, and small govern mental jurisdictions. For assessing the impacts of the proposed regulation proposal on small entities, a small entity is defined as: (1) a small business as defined by the Small Business Administration’s (SBA) regulations at 13 CFR 121.201; (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 wh ich is independently owne d and operated and is not dominant in its field. 

## C HAPTER 

## C ONTENTS
Introduction............................................................ D1-1 D1-1 Analysis of New Offshore Oil and Gas Extraction F acilities .................................. D1-2 D1-1.1 Small Entity Determination .............. D1-2 D1-1.2 Percentage of Small Entities Regulated .......................................................... D1-4 D1-1.3 Sales Test for Small Entities............. D1-4 D1-2 Analysis of Manufacturers ........................ D1-5 D1-2.1 Small Entity Determination .............. D1-5 D1-2.2 Percentage of Small Entities Regulated ........................................................ D1-10 D1-2.3 Sales Test for Small Entities........... D1-10 D1-3 Summary of Regulatory Flexibility Analysis.... ........................................................ D1-10 References............................................................ D1-12



### To evaluate the potential impact of this rule on small entities, EPA identified the domestic parent entity of each facility potentially subject to Phase III regulation, and determined its size. EPA then used a “sales test” to assess the potential severity of economic impact on small entities. The test compares annualized compliance cost to total entity sales revenues. This analysis uses three cost-to-revenue ranges to report the estimated number and percentage of small entities incurring compliance costs: less than 1%; at least 1% but less than 3%; and at least 3%. EPA assumed that small entities with costs of 3% of revenues or more might be significantly impacted as a result of the proposed rule. In this chapter, EPA presents findings for the regulatory an alysis options considered fo r existing facilities: the “50 MGD All Waterbodies option,” the “200 MGD All Waterbodies option,” and the “100 MGD for Certain Waterbodies option.” These options all require the sam e reduction in impingement and entrainment (I&E), and differ only by design intake flow (DIF) applicability thr eshold and waterbody type. As a result, the number of facilities that would be required to meet the national cat egorical requirements varies among the three options: the 50 MGD All option has the broadest applicability, and would apply national categorical requirements to 144 facilities. The 200 MGD All option would apply national categorical requirements to 30 facilities, while the 100 MGD CWB option would apply national categorical requireme nts to 24 facilities. In addition to the analyses for these regulatory analysis options, EPA evaluated eight other supplementary options. Results for these supplementary analyses are presented in Appendix 1 to this chapter. Although EPA has decided to retain permitting author ities’ best professional judgment for Phase III existing facilities, EPA is promulgating section 316(b) requirements for Phase III new offshore oil and gas extraction facilities (also abbreviated as “new OOGE facilities”). These final requirements are based on a 2 MGD DIF applicability threshold and would apply to an estimat ed 124 new offshore oil and gas extraction facilities.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D1-1§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



### EPA’s analysis found that the final rule would not have a significant economic impact on a substantial number of small entities. This determination is based on the fi nding that this rule would apply national categorical requirements to only one small entity in the new offs hore oil and gas extraction industry segment. EPA estimates that this entity would incur annualized after-tax compliance costs of less than 0.1% of annual sales revenues. The sections that follow detail this analysis for new offshore oil and gas facilities as well as the existing manufacturing facilities considered in developmen t of the final Phase III Section 316(b) rule.


## D1-1 A NALYSIS OF 

## N EW 

## O FFSHORE 

## O IL AND 

## G AS 

## E XTRACTION 

## F ACILITIES 

### This section discusses EPA’s analysis of potential small entity impacts of the final regulation on the new offshore oil and gas extraction industry segment. The final Ph ase III regulation for new offshore oil and gas extraction facilities is based on a 2 MGD DIF applicability threshol d and would regulate an estimated 124 new offshore oil and gas extraction facilities. D1-1.1 Small Entity Determination EPA used the information on existing small entities in the offshore oil and gas extraction industry to estimate the number of small entities associated with new facilities. EPA identified only 25 small entities currently operating mobile offshore drilling units or platforms in 2006 that c ould potentially be regulated by the final option for new facilities, should they construct new MODUs or plat forms similar to those currently in operation.
D1-1.1.1 Mobile Offsho re Drilling Units (MODUs) EPA first identified the operating companies of existing MODUs operating in the Gulf of Mexico and the number of rigs owned by each company. EPA then linked these ope rating companies to their domestic parent companies. EPA identified 24 parent firms potentially affected by the final rule for new facilities (see Table B2-2 in Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry ). These affiliations were determined primarily on the basis of Security and Exchange Commission (SEC) data using the FreeEdgar database, on which all filings of publicly held firms are available (SEC, 2006). The 10-K reports were the primary sources used to collect this information. The 10-K annual reports generally list si gnificant subsidiaries of the parent company and are the source of income statement and balance sheet information used for characterizing financial conditions at a firm. The subsidiary lists were used to confirm ownership relationships.
EPA identified the NAICS code for each of the domestic parent companies currently operating a MODU in the Gulf of Mexico and the SBA size standard for each code . Table D1-1 shows that of the 24 parent entities operating MODUs in the Gulf of Mexico, none could be cl early identified as small. Only one of three firms presumed small currently operate MODUs of the type iden tified as likely to have DIFs of 2 MGD or more. EPA noted at proposal that only large firms are building new M ODUs. Current data also indicate that only large firms are building new MODUs. EPA received no comments indi cating that small businesses in this segment of the oil and gas industry will be affected by the final rule.

D1-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006c § 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



### Table D1-1: NAICS Classifica tion of MODU Parent Companies Total Number of SIC code NAICS code NAICS Description SBA Definition of Small Firms a Small Large
1311 211111 Crude Petroleum and Natural Gas Extraction 500 employees 0 1
2911 324110 Petroleum Refineries 1,500 0 1 2810 325110 Industrial Chemical Mfgs. 1,000 b 0 1 1381 213111 Drilling Oil and Gas Wells 500 employees 0 11
1389 213112 Support Activities for Oil and Gas Operations $6.5 million in revenues 0 1

6799 Several NAICS Various, related to misc. $6.5 million in revenues c 0 1 investment firms

a Does not include five foreign firms and three potentially smal l, unknown firm for which NAICS or SIC codes could not be locate d in publicly available data. b Specific NAICS not listed in SBA definitions; larges t employment definition from NAICS 325 used here. All three NAICS matched to SIC 6799 are listed $6.5 million in revenues. Source: SEC, 2006; 13 CFR Part 121, Census, 2006 

### EPA estimates that 80 jack-up MODUs, 20 semi-submersibl e MODU, and three drillships will be built during the entire 20-year period of analysis, for a total of 103 new sources (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry for a detailed discussion of the estimated number of new MODUs). EPA estimates that no small entities will be building new MODUs potentially subject to Phase III regulation. D1-1.1.2 Platforms
 Gulf of Mexico At proposal, EPA determined, based on data from the Bureau of Land Management ’s Minerals Management Service (MMS), that, on average, one potentially regulate d structure is built per year in the deepwater portion of the Gulf of Mexico. EPA therefore estimates that 20 st ructures will be constructed over the time frame of the analysis. With the exception of a few sub-sea comple tions, which do not operate potentially regulated CWIS; only large firms have built structures in the deepwater Gu lf of Mexico. EPA reviewed the current status of deepwater structures (see Chapter B2: Profile of the Offsho re Oil and Gas Extraction Industry). The structures built between 2003 and 2006 were all constructed by large firms. This trend is likely to continue, given the resources required to construct deep-sea structures, which sometimes exceed $1 billion dollars (EPA 821-B-00- 012). Therefore, all of these structures are assumed to be constructed by large firms. EPA determined that it was unlikely that any platforms with DIFs of 2 MGD or more would be constructed outside of the deepwater Gulf and has not changed the count of small businesses operating with in the shallow water Gulf of Mexico from proposal. EPA received no comments indicating that small businesses in this segment of the oil and gas industry will be affected by the final rule.
 California At proposal, EPA did not project any platforms off the California coast to be constructed during the time period of evaluation. Therefore, no small entities owning platforms in this area would be affected by this rule. EPA has not changed this assessment. EPA received no comments indica ting small businesses in this segment of the oil and gas industry will be affected by the final rule.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D1-3§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



###  Alaska In Cook Inlet, Alaska, only one new platform has been cons tructed in the last 16 years. Most new exploration and development in this region takes place from existing infr astructure or from onshore locations. No definitive plans appear to be in place for any new platforms in State wate rs. In Federal waters, lowe r Cook Inlet is a source of potential activity, since MMS completed a lease bid in April 20 04. No activity in this region was noted since that time, however. Given the long lead times between lease bid to operation, it may be unlikely that this lease bid will result in new platforms during the time frame of the anal ysis. To be conservative, however, EPA assumes that one such platform might be constructed in either Federa l or State waters and begin operation in 2014. In other Federal areas in the Alaska region, little new activity is underway. BP has dropped plans for its Liberty project in the Beaufort Sea area. The only other activity that has taken place in recent years in Federal waters is an exploratory well drilled in the Beaufort Sea in 2003. No further activity has been noted since that time. MMS has completed lease sales in the Beaufort Sea in 2003 and 2005; however, the time frame for development, if any is undertaken, is likely to be beyond the time frame of this anal ysis. Because the most recently installed platform in Cook Inlet was built by a small entity, EPA projects that one small entity in Alaska would potentially be affected by the rule. This platform is estimated to have a DIF of greater than 2 MGD. In summary, EPA projects that 20 new deepwater platforms in the Gulf of Mexico and one new platform in Cook Inlet would be potentially regulated under the final rule. All new platforms expected to be built in the Gulf of Mexico are assumed to be owned by large entities. The one new platform expected to be built in Cook Inlet is assumed to be owned by a small entity. For more info rmation on oil and gas platforms, including profiles and projections for the number and type of ne w facilities estimated to begin operation, see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry. D1-1.2 Percentage of Small Entities Regulated Due to the capital requirements for constructing a new MODU or platform with a DIF of 2 MGD or more, very few small businesses are expected to be affected by the final rule. For existing offshore oil and gas extraction facilities, EPA identified three (presumed) sma ll businesses operating MODUs, 21 small businesses operating platforms in the shallow Federal Gulf of Mexico wa ters, and one small business operating a platform in Cook Inlet, Alaska for a total of 25 small businesses. EPA estimat es one small entity would potentially be subject to the final rule for new offshore oil and gas extraction facilities. Therefore, one of 25 identified small entities in the offshore oil and gas extraction industry (4%) is est imated to be subject to Phase III regulation.
D1-1.3 Sales Test for Small Entities There are no small entities projected to build new MODUs or deepwater platforms in the Gulf of Mexico that are potentially subject to the final rule. In Alaska, Forest O il is considered the likeliest type of firm to build an Alaska platform during the time frame of the analysis. Fo rest Oil, which has had employment hovering near 500 employees, (458 at the end of 2003 and 506 at the end of 2004; currently the company reports fewer than 500 employees) is considered, for the sake of modeling pur poses, a small business that might be large enough to construct a platform in Alaska. The SBA definition of a small entity in the Crude Petroleum and Natural Gas Extraction industry is less than 500 employees. In 20 04, Forest Oil reported revenues of $913 million. The annualized pre-tax costs of compliance applied to all known affected or potentially affected structures owned by Forest Oil are $0.3 million and the annualized after-tax co sts are $0.2 million. The cost-to-revenue ratio for the one small entity projected to be in scope of the final ru le is therefore approximately 0.032% pre-tax or 0.021% after-tax.

D1-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



## D1-2 A NALYSIS OF 

## M ANUFACTURERS 

### EPA’s 2000 Section 316(b) Detailed Industry Questionnaire (U.S. EPA, 2000) identified sample facilities in the six Primary Manufacturing Industries – Paper, Chemicals, Petroleum, Aluminum, Steel, and Food – estimated to be subject to regulation for Phase III existing facilities under the three regulatory analysis options. This section considers the effect of these options on facilities in th e six Primary Manufacturing Industries, as well as facilities in Other Industries that are potentially subject to regul ation under the analysis options. EPA excluded baseline closure facilities from this analysis (see Chapter C3: Economic Impact Analysis for Manufacturers for more information). Although EPA’s sample-based data for the Primary Ma nufacturing Industries support specific estimates of the number of small entity-owned facilities, these data do not support a specific estimate of the number of small entities that own these facilities. As a result, EPA estim ated the number of small entities owning facilities in the Primary Manufacturing Industries as a range, based on alte rnative assumptions about the ownership of regulated manufacturing facilities by small entities. D1-2.1 Small Entity Determination The small entity determination for Manufactur ers facilities was conducted in two steps: 1. For each analysis option, identif y the domestic parent entity of the sample facilities in the Primary Manufacturing Industries and the additional known facilities in Other Industries. 2. For each analysis option, determine the size of the entities owning the sample facilities in the Primary Manufacturing Industries and the additional known facilities in Other Industries.
D1-2.1.1 Identification of Domestic Parent Entities The RFA analysis is conducted at the highest level of domestic ownership, referred to as the “domestic parent entity” or “domestic parent firm.” EPA gathered information on the domestic parent firm in the Detailed Industry Questionnaire. In instances where a response was not provided, EPA used several other data sources to determine the domestic parent firm including the Screener Questionnaire , corporate websites, and Dun & Bradstreet data (D&B, 2003).
D1-2.1.2 Size Determination of Domestic Parent Entities EPA identified the size of each entity owning a potentially regulated Manufacturers facility using Small Business Administration (SBA) size threshold guidelines. 1 

### These thresholds define the minimum firm-level employment or revenue size, by industry (by 6-digit NAICS code), below which a business qualifies as a small business under SBA guidelines. To determine the entity size, EPA used data from the Detailed Industry Questionnaire , as well as the Screener Questionnaire , corporate websites, the U.S. Secur ities and Exchange Commission’s (SEC) FreeEdgar database, corporate websites, and Dun & Bradstreet data (SEC, 2004; D&B, 2003). EPA started with the unique firm-level, 4-digit SIC cod es for firms that own existing facilities potentially subject to Phase III regulation under the regulatory analysis opti ons (see Table D1-2). EPA used information from the Economic Census, 1997 Economic Census: Bridge Between NAICS and SIC , to determine 1997 NAICS Codes classifications for these firms. EPA also used an additional Economic Cens us publication/dataset, 1997 NAICS Matched to 2002 NAICS , to bring the data forward to NAICS 2002 so that the most current small business thresholds could be used (Census, 2003).

1 

### The SBA website provides the most recent size thres holds at http://www.sba.gov/ size/sizetable2002.html.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D1-5§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



### The SBA small business size standards changed from a SIC code-based system to a NAICS code-based system on October 1, 2000. However, because EPA structured its data collection effort for existing facilities before these changes, its survey data collection was based on the SI C code framework. In addition, as part of the data collection, EPA confirmed the SIC code assignment of the survey facilities but did not request the NAICS classification of the facilities. In its analysis for th e proposed Phase III regulation, EPA therefore used the SICbased size criteria for determining whether a firm owning a 316(b) facility would be classi fied as small or large. For this small entity analysis, however , EPA revised its approach to use the NAICS code-based size criteria for determining whether a firm owning a 316(b) facility would be classified as small or large. In many instances, substituting the NAICS-based criterion was straightforward: the SIC either mapped to a single NAICS code or the SIC code mapped to more than one NAICS code and the multiple NAICS codes all have the same size criterion. Some of the 316(b) facility SIC codes, though, map to mo re than one NAICS code and the size criteria for these multiple NAICS code varies. In these instances, the determination of an appropriate NAICS code and the associated small entity size criterion is ambiguous. To be conservative in its analysis, in these ambiguous instances – i.e., a single SIC code maps to more than one NAICS code and the size criteria for the NAICS codes vary – EPA used the higher/highest of the NAICS-based si ze thresholds for the small entity size determination. Using the higher/highest of the NAICS-based size thr esholds for the comparison provides a more conservative test of the chance that a firm would be classified as small . As a result, the analysis may overstate the presence of small entity-owned facilities among the set of facilities pot entially subject to the Phase III regulation under each analysis option. Table D1-2, following page, presents the unique firm-level 4-digit SIC codes and corresponding SBA size standards used to determine the size of entities that ow n Manufacturers facilities determined to be potentially subject to Phase III regulation.

D1-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis

SIC Code SIC Description SBA Size Standard 

### Table D1-2: Unique 4-Digit Firm-Level SIC Codes and SBA Size Standards for Manufacturers a

1011 Iron Ores 500 Employees 1311 Crude Petroleum and Natural Gas 500 Employees 2011 Meat Packing Plants 500 Employees 2046 Wet Corn Milling 750 Employees 2061 Cane Sugar, Except Refining 500 Employees 2062 Cane Sugar Refining 750 Employees 2063 Beet Sugar 750 Employees 2075 Soybean Oil Mills 1,000 Employees 2211 Broadwoven Fabric Mills, Cotton 1,000 Employees 2421 Sawmills and Planing Mills, General 500 Employees 2611 Pulp Mills 750 Employees 2621 Paper Mills 750 Employees 2631 Paperboard Mills 750 Employees 2653 Corrugated and Solid Fiber Boxes 500 Employees 2673 Plastics, Foil, and Coated Paper Bags 500 Employees 2679 Converted Paper and Paperboard Products, NEC 500 Employees 2711 Newspapers: Publishing, or Publishing and Printing 500 Employees 2812 Alkalies and Chlorine 1,000 Employees 2813 Industrial Gases 1,000 Employees 2819 Industrial Inorganic Chemicals, NEC 1,000 Employees 2821 Plastics Material and Synthetic Resins, and Nonvulcanizable Elastomers 750 Employees 2824 Manmade Organic Fibers, Except Cellulosic 1,000 Employees 2833 Medicinal Chemicals and Botanical Products 750 Employees 2834 Pharmaceutical Preparations 750 Employees 2851 Paints, Varnishes, Lacquers, Enamels, and Allied Products 500 Employees 2869 Industrial Organic Chemicals, NEC 1,000 Employees 2873 Nitrogenous Fertilizers 1,000 Employees 2874 Phosphatic Fertilizers 500 Employees 2891 Adhesives and Sealants 500 Employees 2899 Chemicals and Chemical Preparations, NEC 1000 Employees 2911 Petroleum Refining 1,500 Employees 3312 Steel Works, Blast Furnaces (Including Coke Ovens), and Rolling Mills 1,000 Employees 3313 Electrometallurgical Products, Except Steel 750 Employees 3315 Steel Wiredrawing and Steel Nails and Spikes 1,000 Employees 3316 Cold-Rolled Steel Sheet, Strip, and Bars 1,000 Employees 3317 Steel Pipe and Tubes 1,000 Employees 3334 Primary Production of Aluminum 1,000 Employees 3353 Aluminum Sheet, Plate, and Foil 750 Employees 3421 Cutlery 500 Employees 3714 Motor Vehicle Parts and Accessories 1,000 Employees 3728 Aircraft Parts and Aux iliary Equipment, NEC 1,000 Employees 3999 Manufacturing Industries, NEC 500 Employees 5153 Grain and Field Beans 500 Employees 5171 Petroleum Bulk Stations and Terminals $11.5 Million 6141 Personal Credit Institutions $165.0 Million (Assets) 6719 Offices of Holding Companies, NEC $6.5 Million

Source: NAICS-based size criteria were assigned to SIC codes as described in accompanying text. U.S. EPA Analys is, 2006; U.S. SBA, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D1-7§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



### As discussed in Chapter C3, EPA est imated the number of small entities owning facilities in the manufacturing industries as a range, based on alternative assumptions a bout the possible ownership of potentially regulated manufacturing facilities by small entities. EPA considered two cases based on the sample weights developed from the facility survey. These cases provide a range of estimates for (1) the number of firms incurring compliance costs and (2) the costs incurred by any firm owning a regulated facility. Chapter C3: Economic Impact Analysis for Manufacturers provides a more detailed description of these cases. Case 1: Upper bound estimate of number of firms owni ng facilities that face requirements under each primary analysis option; lower bound estimate of total compliance costs that a firm may incur. For this case, EPA assumed (1) that a firm owns only the regulated sample facility(ies) that it is known to own from the sample analysis and (2) that this pattern of ownership, observed for samp led facilities and their owning firms, extends over the facility po pulation represented by the sample facilities. This case minimizes the possibility of multi-facility ownership by a single firm and thus maximizes the count of affected firms, but also minimizes the potential cost burden to any single firm. Case 2: Lower bound estimate of number of firms owning facilities that face requirements under each primary analysis option; upper bound estimate of total compliance costs that a firm may incur. For this case, EPA inverted the prior assumption and assumed that any firm owning a regulated sample facility(ies) owns the known sample facility(ies) and a ll of the sample weight associated with the sample facility(ies). This case minimizes the count of affected fi rms, while tending to maximize the potential cost burden to any single firm. Data in the rest of this section are presented by the indust ry sector of the firm. EPA determined firm sector based on the sample facilities owned by the firm. If all of the sampled facilities owned by th e firm are in the same industry sector, then that industry sector was assigned to th e firm. If sample facilities owned by the firm are in more than one industry sector, then the firm was assigned to the “multiple industri es” firm sector. One known facility in the Other Industries group was found to be owned by a firm that owns facilities in the Primary Manufacturing Industries. This firm is included in th e data reported for multiple industries. The remaining entities that were found to own facilities in Other Industries are presented separately. The number of entities in Primary Manufacturing Industr ies that would be required to meet the national categorical requirements set by the regulatory analysis options varies by option based on the DIF applicability threshold and waterbody type specified in the opti on. Under the 50 MGD All option, between 50 (Case 2 estimate) and 116 (Case 1 estimate) Primary Manufacturing Industries firms would potentially be subject to Phase III regulation. Under the 200 MGD All option, the number of firms potentially regulated is between 17 (Case 2) and 29 (Case 1). Finally, the 100 MGD CWB option woul d potentially regulate between 14 (Case 2) and 25 (Case 1) entities. EPA determined that no firms owni ng potentially regulated 3 16(b) manufacturing facilities would be small. Table D1-3 on the following page presen ts the total number of firms with facilities potentially subject to the national categorical requirements, as well as the number and percentage of those firms determined to be small. The data are shown for the three regulatory analysis options under the two ow nership cases described above.

D1-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis

Total Small Percentage of Firms that Total Small Percentage of Firms that Firms Firms are Small Firms Firms are Small

Paper 26 0 0% 13 0 0% 42 0 0% 12 0 0% Petroleum 12 0 0% 10 0 0% 19 0 0% 8 0 0% Aluminum 3 0 0% 1 0 0% Food 6 0 0% 2 0 0% 8 0 0% 4 0 0%

a,b 116 0 0% 50 0 0%

Additional firms that own known

a 2 0 0% 2 0 0%

Paper 3 0 0% 2 0 0% 4 0 0% 3 0 0% Petroleum 4 0 0% 4 0 0% 10 0 0% 3 0 0% Aluminum 0 0 0% 0 0 0% Food 3 0 0% 1 0 0% 5 0 0% 4 0 0%

a,b 29 0 0% 17 0 0%

Additional firms that own known

a 0 0 0% 0 0 0%

Paper 2 0 0% 1 0 0% 9 0 0% 4 0 0% Petroleum 5 0 0% 4 0 0% 7 0 0% 2 0 0% Aluminum 0 0 0% 0 0 0% Food 0 0 0% 0 0 0% 4 0 0% 3 0 0%

a,b 25 0 0% 14 0 0%

Additional firms that own known

a 1 0 0% 1 0 0%

a
b Source: 

### Table D1-3: Number of Firms by Firm Sector and Size (assuming two different ownership cases)

Firm Sector Case 1: Upper bound estimate of number of firms owning facilities that face requirements under the regulatory analysis Case 2: Lower bound estimate of number of firms owning facilities that face requirements under the regulatory analysis

Number of Number of Number of Number of

50 MGD All option

Chemicals

Steel

Multiple Industries Firms that own facilities in Primary Manufacturing Industries

facilities in Other Industries 200 MGD All option

Chemicals

Steel

Multiple Industries Firms that own facilities in Primary Manufacturing Industries

facilities in Other Industries 100 MGD CWB option

Chemicals

Steel

Multiple Industries Firms that own facilities in Primary Manufacturing Industries

facilities in Other Industries Excludes firms whose only sample facilities close in the baseline. Individual numbers may not add up to totals due to independent rounding. U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D1-9§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



### D1-2.2 Percentage of Small Entities U nder the Regulatory Analysis Options As part of its assessment of the small entity impact of the regulatory analysis op tions on Manufacturers, EPA estimated the percentage of all small entities in the Pr imary Manufacturing Industries that would be expected to be subject to the national requirements for the three regulatory analysis options. Because the analysis of facilities in Other Industries is not based on a statistically valid sample, EPA could not estimate the number of entities in Other Industries that would be subject to the regulatory requirements of the regulatory analysis options, nor the percentage that are small entities. From its prior analysis of the use of cooling water in industries other than the electric power industry, EPA judges the overall effect and coverage of Phase III regulation in the Other Industries to be minor in relation to the effect and covera ge in the six Primary Manufacturing Industries. EPA used the Statistics of U.S. Businesses (SUSB) published by the Small Business Administration to estimate the total number of manufacturing establishments owned by small firms in each of the six Primary Manufacturing Industries. EPA included all of the SIC industry groups with a sample facility in the six Primary Manufacturing Industries. Based on the SUSB reporting framework, EPA considered all establishments owned by a firm with 500 or fewer employees to be a small entity-owned establis hment. This assumption will tend to underestimate the number of small entity-owned establishments in these indus try groups because the SBA small entity size criterion is greater than 500 employees for some SIC codes. Underestimating the total number of small entities would result in an overestimate of the percentage of small en tities in these industries that are potentially subject to Phase III regulation under each option. EPA estimated that 31,963 entities within the six Primar y Manufacturing Industries are small. However, since no small entity is expected to be subject to national re quirements under the three regulatory analysis options, the percentage of all small entities subject to Phase III regulation is zero.
D1-2.3 Sales Test for Small Entities In addition to considering the fraction of small entities in each of the affected Manufacturers industries that would be potentially subject to Phase III regulation, EPA also asse ssed the extent of economic/financial impact on small entities by comparing estimated compliance costs to estimated entity revenue (also referred to as the “sales test”). The analysis is based on the ratio of estimated annuali zed after-tax compliance costs to annual revenue of the entity. For this analysis, EPA judges that entities for which annualized compliance costs equal or exceed 3% of revenue, might experience a significant economic/financial impact as a result of the regulatory requirements under the three regulatory analysis options. EPA included the following compliance cost categories in this analysis: pilot study capital costs; one-time technology costs of complying with the regulatory require ments; one-time costs of installation downtime; annual operating and maintenance costs; and permitting costs (in itial permit costs, annual monitoring costs, and permit re-issuance costs). A detailed summary of how these costs were developed is presented in Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities and Chapter C3: Economic Impact Analysis for Manufacturers . EPA collected revenue data for the small entities in EPA’s Detailed Industry Questionnaire

. In the Manufacturers segment, EPA determined that no small entities would face regulatory requirements under any of the three regulatory analysis options; theref ore, no small entities would incur compliance costs or significant economic impact under these options.


## D1-3 S UMMARY OF 

## R EGULATORY 

## F LEXIBILITY 

## A NALYSIS 

### The RFA analysis, conducted in examining regulatory op tions for existing facilities, is summarized in Table D1-4. Only one small entity would be subject to the national categorical requirements for new offshore oil and gas extraction facilities under the final rule. This small entity is estimated to incur compliance costs of less than

D1-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



### 0.1% of annual revenues. Although EPA is not promulgating a rule for Phase III existing facilities, this analysis shows that no small entity would have been impacted by any of the three regulatory analysis options considered for existing facilities. As a result of this analysis, EPA concluded that the final rule for new offshore oil and gas extraction facilities will not have a significant economic impact on a substantial number of small entities

Small Entities to Regulation Percentage of Small Entities

Regulation 0-1% 1-3% >3%

New OOGE Facilities 25 1 4.2% 1 - - 31,963

- 0.0%

- - - Source: 

### Table D1-4: Summary of Small Enti ty Impact Ratio Ranges by Sector

Industry Total Number of Number of Small Entities Owning Facilities Potentially Subject Subject to Compliance Cost/Annual Revenues

Manufacturers U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D1-11§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D1: Regul atory Flexibility Analysis



## R EFERENCES 

### Dun and Bradstreet (D&B). 2003. Data ex tracted from D&B Webspectrum over 2002 and 2003. Regulatory Flexibility Act. Pub. L. 96-354, Sept. 19, 1980, 94 Stat. 1164 (Title 5, Sec. 601 et seq.).
U.S. Census Bureau (Census). 2003. 1997 NAICS Matched to 2002 NAICS . May 2003. Available at: http://www.census.gov/epcd/naics02/NAICS97toNAICS02.xls.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures

. U.S. Environmental Protection Agency (U.S. EPA). 1999a. Information Collection Request (ICR), Detailed Industry Questionnaires: Phase II Cooling Water In take Structures & Watershed Case Study Short Questionnaire. August 1999.
U.S. Environmental Protection Agency (U.S. EPA). 1999b. Revised Interim Guidance for EPA Rulewriters: Regulatory Flexibility Act as ame nded by the Small Business Regulat ory Enforcement Fairness Act. March 29, 1999.
U.S. Securities and Exchange Commission (SEC). 20 04. FreeEdgar Database. Accessed between 1999 and 2004. Available at: www.freeedgar.com.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards matched to North American Industry Classification System. Available at: http://www.sba.gov/size/sizetable2002.html

D1-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Economic Analyses Appendix D1A: Summary Results for Supplemental Option s 

# Appendix D1A: Summary of Results for Supplemental Options

I NTRODUCTION 

### This appendix presents the results of the RFA analysis for the supplemental options evaluated in development of the final rule. For all options, facility counts and other results only include those Phase III existing facilities that are (1) non-baseline closures and (2) estimated to be within the regulatory scope of the evaluated option. See Chapter C3: Economic Impact Analysis for Manufacturers for more information on baseline closures and counts of facilities subject to national categorical requirements under each option. See the main body of this chapter for a description of data sources and methodologies used in these analyses. 

## A C ONTENTS

PPENDIX
Introduction......................................................... D1A-1 D1A-1 Summary of Results ............................... D1A-1



## D1A-1 S UMMARY OF 

## R ESULTS 

### In Table D1A-1, following page, the evaluated supplemen tal options for existing facilities are presented in order of increasing stringency (e.g., the most stringent supple mental option evaluated being I&E requirements on all waterbodies). As discussed in the main chapter, the estim ates of the total number of regulated small entities and the percentage of all small entities subject to Phase III regulation exclude consideration of entities in Other Industries within the Manufacturers segment (see secti on D1-1.2). However, the estimated number of small entities incurring costs in the three cost-to-revenue ranges includes the known number of small entities owning known facilities in Other Industries. As this analysis is conducted at the firm level, not the facility level, and a single firm may own multiple facilities with varying DIFs, results for manufacturers are not broken out by the 2- 50 MGD and 50+ flow ranges.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D1A-1§ 316(b) Final Rule: Phase III – EA, Part D: Additional Economic Analyses Chapter D1A: Summary Results for Supplemental Options

c Percentage of Small Entities Small Entities 0-1% 1-3% >3% to Regulation Regulation

a,b 31,963 13 13 0 0 13 9 4 0 Total c 26 <0.001% 22 4 0

a,b 31,963 13 13 0 0 13 7 5 1 Total c 26 <0.001% 20 5 1

a,b 31,963 13 13 0 0 13 6 4 3 Total c 26 <0.001% 19 4 3

a

b
; include Industries.

Source: 

### Table D1A-1: Summary of Small Entity Impact Ra tio Ranges for Existing Fa cilities by Regulatory Segment (Facilities with DIF of at least 2 MGD) Number of Small Compliance Cost/Annual Total Number of Entities Owning Revenues Industry Facilities Subject Subject to
I-only Everywhere Option Manufacturers < 0.001% Electric Generators 543 - 1,295 1.0% - 2.4% 32,506 – 33,258 I&E Like Phase II Option Manufacturers < 0.001% Electric Generators 543 - 1,295 1.0% - 2.4% 32,506 – 33,258 I&E Everywhere Options Manufacturers < 0.001% Electric Generators 543 - 1,295 1.0% - 2.4% 32,506 – 33,258 For Manufacturers, the more conservative cost analysis (Case 2 estimate) is presented, which is likely to overstate the compli ance costs that would be incurred by any single small entity but may understate the number of small entities incurring compliance co sts. For Manufacturers, the “Total Number of Small Entities” and th e “Number of Small Entities Owning Facilities Potentially Subjec t to Regulation” exclude entities in Other Industries the numbers presented in the cost-to-revenue ranges known entities in Other
Individual numbers may not sum to repor ted totals due to independent rounding. U.S. EPA Analysis, 2006.

D1A-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis 

# Chapter D2: UMRA Analysis

I NTRODUCTION 

### Title II of the Unfunded Mandates Reform Act of 1995, Pub. L. 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and Tribal governments and the private sector. Under UMRA section 202, EPA generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that might result in expenditures by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. Before promulgating a regulation for which a written statement is needed, UMRA section 205 generally requires EPA to identify and consider a reasonable number ofregulatory alternatives and adopt the least costly, most costeffective, or least burdensome alternative that achieves the objectives of the rule. The provisions of section 205 do not apply when they are inconsistent with applicable law. Moreover, section 205 allows EPA to adopt an alternative other than the least costly , most cost-effective, or least burdensome alternative if the Administrator publishes with the rule an explanation why that alte rnative was not adopted. Before EPA establishes any regulatory requirements that might significantly or uniquely affect small governments, including Tribal governments, it must have developed under section 203 of the UMRA a small government agency plan. The plan must provide for notifying potentially affected small governments, enabling officials of affected small governments to have meaningful and timely input in the development of EPA regulatory proposals with significant intergovernmental mandates, and inform ing, educating, and advising small governments on compliance with regulatory requirements. 

## C HAPTER 

## C ONTENTS
Introduction............................................................ D2-1 D2-1 Analysis of Impacts on Government Entities .... .......................................................... D2-2 D2-1.1 Compliance Costs for GovernmentOwned Fac ilities ............................... D2-3 D2-1.2 Administrative Costs for New Offshore Oil and Gas Extraction Facilities ...... D2-3 D2-1.3 Administrative Costs for Existing Facilities ........................................... D2-5 D2-1.4 Impacts on Small Governments...... D2-10 D2-2 Compliance Costs for the Private Sector. D2-10 D2-3 Summary of UMRA Analysis ................. D2-10 References............................................................ D2-12



### Today’s final rule applies Section 316(b) requirements to new offshore oil and gas extraction facilities (also abbreviated as “new OOGE facilities”) in Phase III. These requirements are based on a 2 MGD DIF applicability threshold and will apply to an estimated 124 new offs hore oil and gas extraction facilities. Under today’s regulation, none of the potential Phase III existing facilities will be subject to national categorical requirements. EPA has decided that Phase III existing facilities should continue to be permitted on a case-by-case best professional judgment basis. In addition to presenting findings for th e Final Regulation described above, this chapter also presents findings for the three regulatory analysis options for existing facilities that were co-proposed with the Final Regulation: the “50 MGD for All Waterbodies” option (the “50 MGD All” option), the “200 MGD for All Waterbodies” option (the “200 MGD All” option), and the “100 MGD for Cert ain Waterbodies” option (the “100 MGD CWB” option). These regulatory analysis options all require the same reduction in impingement and entrainment (I&E), and differ only by applicability criteria defined on the basis of design intake flow (DIF) and waterbody type. All of these options would also apply 316(b) requirements to new offshore oil and gas extraction facilities based on a 2 MGD applicability threshold. Throughout this UMRA analysis, EPA pr esents cost estimates for the final rule promulgated today, as well as for the three regulatory options considered in preparation for this rule.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D2-1§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis

f 

### Final Regulation: EPA estimates the total annualized after-t ax costs of compliance for the Final Regulation to be $1.9 million ($2004) for the estimated 124 new offshore oil and gas extraction facilities. All of these direct facility costs are incurred by the private sector. No facility owned by State and local governments is subject to the national requirements under the final rule. Additionally, State and local permitting authorities will not incur costs to administer the rule for new offshore oil and gas extraction facilities because these facilities are under Federal ju risdiction not under State jurisdiction. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is approximately $1.5 million in 2013.

f 

### 50 MGD for All Waterbodies option for existing facil ities and final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized after-tax costs of compliance for the final rule to be $32.8 million ($2004). All of these direct facility costs are incurred by the private sector (including 146 Manufacturing facilities and 124 new offshore oil and g as extraction facilities). No facility owned by State and local governments is expected to be subject to the national requirements under the final rule. Additionally, State and local permitting authorities are estimated to incur $0.6 million annually to administer the rule, including labor costs to write permits and to conduct compliance monitoring and enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is appr oximately $132.1 million in 2011.

f 

### 200 MGD for All Waterbodies option for existing fac ilities and final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized after-tax costs of compliance for this option to be $17.9 million ($2004). All of these direct facility costs are incurred by the private sector (including 31 manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by State and local governments is expected to be subj ect to the national requirements under this evaluated option. Additionally, State and local permitting auth orities are estimated to incur $0.2 million annually to administer this option, including labor costs to wr ite permits and to conduct compliance monitoring and enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is approximately $78 million in 2010.

f 

### 100 MGD for Certain Waterbodies option for existing facilities and final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized after-t ax costs of compliance for this option to be $13.0 million ($ 2004). All of these direct facility costs are incurred by the private sector (including 23 manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by State and local governments is expected to be subj ect to the national requirements under this evaluated option. Additionally, State and local permitting auth orities are estimated to incur $0.2 million annually to administer this option, including labor costs to wr ite permits and to conduct compliance monitoring and enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is approximately $79 million in 2011. Given these findings, EPA has determined that this rule does not contain a Federal mandate that may result in expenditures of $100 million or more in any one year, for State, local, and Tribal governments, in the aggregate, or the private sector. This chapter contains information on compliance and administrative costs, and on impacts on small governments. In addition, the appendix to this chapter presents summary results for the supplemental regulatory options consider ed during the development of the pro posed regulation and the final Phase III regulation.


## D2-1 A NALYSIS OF 

## I MPACTS ON 

## G OVERNMENT 

## E NTITIES 

### Governments may incur two types of costs as a result of this final rule: 1. Direct costs to comply with the rule for facilities owned by government entities, and

D2-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### 2. Administrative costs to implement the rule. Both types of costs are disc ussed on the following pages. D2-1.1 Compliance Costs for Government-Owned Facilities The Electric Generating Industry is the only industry segment potentially subject to Phase III regulation with government-owned facilities. None of the facilities in th e manufacturers or new offshore oil and gas extraction facility segment are owned by a government. Therefor e, no government-owned facility would incur compliance costs under the Final Regulation or the regulatory analysis options.
D2-1.2 Administrative Cost s for New Offshore Oil and Gas Extraction Facilities For new facilities in the offshore oil and gas extraction industry, NPDES permitting is consolidated under General Permits, which are administered by EPA Regional offices. No States are involved in these permitting activities. Thus, States would incur no costs for new facility perm itting. Three EPA Regions (Region 6, Region 4, and Region 10) are expected to be the only entities responsible for permitting. Because States are not involved in the section 316(b) permitting for new offshore oil and gas ex traction facilities, the Federal government would incur no costs for State oversight. The affected EPA Regions would incur three types of costs for implementing the final rule: (1) start-up activities, (2) activities associated with the initial General Permit containing the new section 316(b) requirements and subsequent permit renewals, and (3) annual activities. These activities and their timing assumptions are discussed below. The timing of these costs and how they are discounted and annualized are documented in the Oil and Gas 316(b) Compliance Cost Model (see DCN 7-4018). For more information on the methods used for discounting and cost annualization, see Chapter B1: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas Extraction Facilities

. It should be noted that costs incurred by the Federal govern ment are not part of the UMRA analysis, but are part of the social cost analysis presented in Chapter E1: Summary of Social Costs and Chapter B3: Economic Impact Analysis for the Offshore Oil and Gas Extraction Industry of this EA. D2-1.2.1 Start-Up Activities Start-up activities are not considered incremental to existing Regional permitting activities (U.S. EPA, 2004). D2-1.2.2 Initial Post-Promulgation P ermitting and Repermitting Activities Initial permitting and repermitting activities relate to the revi ew of data collected for the regional studies and the individual data submitted by facilities that plan to be pe rmitted (or re-permitted) under the General Permits in the three EPA Regions. Table D2-1and Table D2-2present the individual activities and their costs for Regions 4, 6, and 10. These costs are on a per facility basis, i.e., the regions incur these costs for each facility that is permitted under their general permits (see DCN 7-4018, which illustr ates how these costs are aggregated and assigned to the regions). Table D2-1 presents the permit issuance activities and their related costs. The per facility initial permitting cost of approximately $12,600 woul d be incurred in 2012 for facilities br ought on-line or launched between 2007 and 2012 (Region 6) and in 2014 for facilities brought on-line or launched between 2007 and 2014 (Region 4 and 10). In later years, these costs are assumed to be incurred in the year of compliance of each new facility. The burden of repermitting is expected to be smaller than the burde n of initial permitting, approximately $3,300 per facility, because the permitting authority is already familiar with th e facility’s case and the type of information the facility would provide. Repermitting costs are incurred in 5-y ear intervals after the initial post-promulgation permit.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D2-3§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### Table D2-1: Federal Government Costs for Perm it Issuance Activities (Per Facility Permitted under General Permits; $2004) Activity First PostPromulgation Permit Repermitting Review Source Water Physical Data $297 $116 Review CWIS Data $893 $266 Review Source Water Body Flow Information $297 $116 Review CWIS Velocity Information $1,335 $417 Review Design and Construction Technology Plan $1,480 $420 Review Regional Monitoring Study Design and Sampling Plans $1,480

- Review Regional Monitoring Study $2,848

- Review Source Water Baseline Bi ological Characterization Study $1,335 $870 Determine Monitoring Frequency $297 $116 Determine Record Keeping and Reporting Frequency $297 $116 Consider Public Comments $1,335 $417 Issue Permit $272 $66 Permit Record Keeping $133 $25 ODCs Lump Sum $318 $318 Total a $12,620 $3,264

a Individual numbers may not add up to total due to independent rounding. Source: U.S. EPA, 2006.



### D2-1.2.3 Annual Activities
Annual costs are associated with the activities that must be undertaken by the regions each year for each active facility operating under the applicable General Permit. These activities also include a one-time cost for determining monitoring frequency reduction. This cost is assigned only to facilities operating at the time the decision about monitoring frequency reduction is made (assu med to occur at the end of the initial two years of monitoring, which is 2013 for the Region 6 permit and 2015 for the Region 4 and Region 10 permits). Table D2-2 outlines these activities a nd their associated costs.

Table D2-2: Federal Government Cost s for Annual Activities (Per Facility Permitted under General Permits; $2004)

Activity Annual Costs Review of Yearly Status Report $697 Compliance Tracking $596 Determination on Monitoring Frequency Reduction a $0 a Record Keeping $141 ODCs Lump Sum $31 Total b $1,464

a One-time cost of $464 incurred only by those facilities operating in 2013 (Region 6) or 2014 (Regions 4 and 10). b Individual numbers may not sum to total due to independent rounding. Source: U.S. EPA, 2006.

D2-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### D2-1.3 Administrative Cost s for Existing Facilities The requirements of section 316(b) are implemented th rough the National Pollutant Discharge Elimination System (NPDES) permit program. Forty-five States and one Territory currently have NPDES permitting authority under section 402(c) of the Clean Water Act (C WA). EPA estimates that States and Territories would have incured three types of costs associated with implem enting the requirements of the three regulatory analysis options for existing facilities: (1) start-up activities, (2) permitting activities associated with the initial NPDES permit containing the new section 316(b) requirements and subsequent permit renewals, and (3) annual activities. 1 

### EPA estimates that the total costs for these activities under the three regulatory analysis options would be between $0.16 million and $0.64 million, annualized over 30 years at a 7% discount rate. Table D2-3presents the estimated annualized costs of the three major admini strative activities under the “50 MGD All”, the “200 MGD All,” and the “100 MGD All” options.

Table D2-3: - Annualized Government Administrative Costs (millions, $2004) Activity 50 MGD All Option 200 MGD All Option 100 MGD CWB Option Start-Up Activities $0.01 $0.01 $0.01 Permitting Activities $0.45 $0.11 $0.14 Annual Activities $0.18 $0.04 $0.04 Total $0.64 $0.16 $0.19 Source: U.S. EPA Analysis, 2006.


### Based on the specific permitting requirements of each facility (see Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities ), EPA calculated total government costs of implementing the regulatory analysis options by adding the cost of start-up activities to the aggregate cost s for each facility’s first post-promulgation permit, repermitti ng activities, and annual activities. The maximum one-year undiscounted implementation cost incurred by governments under the th ree regulatory analysis options is approximately $2.3 million in 2011 (“50 MGD All” option). EPA notes that th e annualized cost of administrative activities depends on when they are incurred. If facilities reach compliance later than assumed in this analysis, permitting authorities’ administrative activities would also occur in la ter years. As a result, the annualized costs of the options to permitting authorities would be lower because admi nistrative costs incurred in later years have lower present values. D2-1.3.1 Start-Up Activities Forty-five States and one Territory with NPDES permitti ng authority would be expected to undertake start-up activities to prepare for administering these regulatory anal ysis options. Start-up activities include reading and understanding the rule, mobilization and planning of the resources required to address the rule’s requirements, and training technical staff on how to review materials s ubmitted by facilities and make determinations on the Phase III requirements for each facility’s NPDES permit. In add ition, permitting authorities would be expected to incur other direct costs, e.g., for purchasing supplies and c opying. Table D2-4shows the total start-up costs EPA estimated permitting authorities to incur. Each permitti ng authority would incur start-up costs of $4,000 under each analysis option. EPA assumes that all permitting au thorities would incur the initial start-up activities at the beginning of 2007, the year the Phase III requirements would take effect.

1 

### The costs associated with implemen ting Phase III requirements are documented in EPA’s Information Collection Request (U.S. EPA, 2003).

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D2-5§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### Table D2-4: Government Costs of Start-Up Activities (per Permitting Authority; $2004) Start-Up Activity Start-Up Costs Read and Understand Rule $1,007 Mobilization/Planning $1,750 Training $1,257 Other Direct Costs $50 Total $4,064 Source: U.S. EPA, 2006.


### D2-1.3.2 Initial Post-Promulgation P ermitting and Repermitting Activities Permitting authorities would be required to implem ent the Phase III requirements by adding compliance requirements to each facility’s NPDES permit. Perm itting activities include incorporating section 316(b) requirements into the first post-promulgation permit and making modifications, if necessary, to each subsequent permit. For this analysis, EPA assumed that each comp lying facility’s first permit containing the new section 316(b) requirements would be issued between 2010 and 2014. 2 

### Repermitting activities would take place every five years after initial permitting. The regulatory analysis options require facilities to subm it the same type of inform ation for their initial postpromulgation permit and for each permit renewal applicati on. Therefore, the type of administrative activities required by the initial post-promulgation and each subseque nt permit are similar. EPA identified the following major activities associated with State permitting activities: reviewin g submitted documents and supporting materials, verifying data sources, consulting with facilities and the interested public, determining specific permit requirements, and issuing the permit. Table D2-5 presen ts the State permitting activities and associated costs, on a per permit basis. The permitting costs do not vary by type of facility to be permitted (however, the costs associated with permitting facilities with (a) a recirculating system or a wedgewire screen in the baseline or (b) a facility installing a new wedgewire screen are less). The bur den of repermitting is expected to be smaller than the burden of initial permitting because the permitting authority is already familiar with the facility’s case and the type of information the facility would provide. Two of the permitting activities presented within Table D2-5 pertain only to facilities opting for a site-specific determination of best technolog y available (BTA). An authorized State is able to permit a facility to opt for a sitespecific determination if it can demonstrate that th e proposed technology would result in environmental performance within a watershed that is comparable to the reductions in im pingement and entrainment mortality that would otherwise be achieved unde r the regulatory analysis options.

2 

### For an explanation of how the compliance years were assign ed to facilities subject to Phase III regulation, see Chapter C1.

D2-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006c § 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### Table D2-5: Government Perm itting Costs (per Permit; $2004) First Post-Promulgation Activity Permit Repermitting Review Source Water Physical Data $299 $117 Review CWIS Data $898 $267 Review CWS Operation Narrative $898 $267 Review Proposal for Collection of Information for Comprehensive Demonstration Study $1,342 $420 Review Source Water Body Flow Information $299 $117 Review Design and Construction Technology Plan $1,487 $423 Review Impingement Mort ality Monitoring Results $4,409 $1,323 Review Entrainment Characterization Monitoring Results $4,409 $1,323 Review Baseline Characterization M onitoring Results and Study Findings $13,063 $3,935 Review Pilot Study for New Impi ngement & Entrainment Technology $1,342



### - Review Restoration Measures a $2,369 $711 Review Technology Installation a nd Operation Plan & Verification Monitoring Plan $1,079 $321 Determine Monitoring Frequency $299 $117 Determine Record Keeping and Reporting Frequency $299 $117 Considering Public Comments $1,342 $420 Issuing Permit $273 $66 Permit Record Keeping $134 $25 Other Direct Costs $310 $310 Total Cost (without site specific determination) b $34,551 $10,279 Review Information to S upport Site-Specific Determ ination of BTA $47,380 $14,214 Establish Requirements for Site -Specific Technology $1,198 $332 Site-Specific Costs c $48,578 $14,546 Total Cost (with site specific determination) b $83,129 $24,825

a Assumed to apply to only 10% of facilities. Only 10% of the per permit costs of $23,690 and $7,107 is accounted for in this framework. b Individual numbers may not add up to total due to independent rounding. Cost incurred only for permits of faci lities conducting site-spe cific demonstrations. Source: U.S. EPA, 2006.


### As shown in Table D2-5, initial post-pr omulgation permits that do not require a site-specific determination of BTA are expected to impose an average per permit cost of $34,600 on the issuing permitting authority. For initial post-promulgation permits that include a site-specific dete rmination, the State administ rative costs associated with the site-specific determination are estimated to incr ease by $48,600, resulting in total per permit costs of approximately $83,000. The State administrative cost for a permit renewal that do es not include a site-specific determination is $10,000. For facilities that conduct a site-speci fic determination, the cost per permit imposed on the permitting authority increases by $14,500, resulting in an averag e repermitting cost of almost $25,000. Permitting authorities also incur costs associated with review of verification studies conducted at facilities. In addition to reviewing the studies, permitting authorities must modify permits in case of unfavorable study results. In total, verification study review is expected to cost permitting authorities $800 per permit. Table D2-6 lists the components of verification study review.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D2-7§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### Table D2-6: Government Costs of Verification Study Review (per Permit; $2004) Activity Post-Promulgation Permit Costs Review of Verification Studies $234 Permit Modification Due to Unfavorable Results $533 Recordkeeping $25 Other Direct Costs $10 Total $802 Source: U.S. EPA, 2006.


### Finally, State governments may incur costs associated with alternative regulatory requirements. States may adopt in their NPDES programs, alternative regulatory requirem ents to reduce impingement mortality and entrainment within a watershed. If these States demonstrate to the Admi nistrator that the reductions are comparable to what would otherwise be achieved under rule, the Admini strator would approve these alternative regulatory requirements. For the final Phase II rule, EPA estimated that 10 regulatory permitting authorities would incur costs associated with alternative re gulatory requirements. For this analysis, EPA assumed that those States interested in adopting alternative regulatory requirements would have done so under the Phase II rule. As a result, EPA assumes that these States would incur no additional co sts for establishing alternative regulatory requirements under the regulatory analysis options. Table D2-7 reports the cost of each component of establishing alternative regulatory requirements.

Table D2-7: Government Costs of Al ternative Regulatory Requirements (per Permitting Authority; $2004) Activity Post-Promulgation Permit Costs Document Alternative Regulatory Requirements $1,402 Document Environmental Condit ions within Watershed $1,869 Include Supporting Historic al Studies, Calculatio ns, and Analyses $3,652 Submit Documentation $100 Recordkeeping $142 Other Direct Costs $100 Total a $7,264

a Individual numbers may not add up to total due to independent rounding. Source: U.S. EPA, 2006.



### D2-1.3.3 Annual activities In addition to the start-up and permitting activities discu ssed above, permitting authorities would have to perform certain annual activities to ensure the continued implementation of the requirements of the regulatory analysis options. These annual activities include reviewing bi annual status reports, tracking compliance, making determinations on monitoring frequenc y reduction, and record keeping.
Table D2-8 outlines the annual activities necessary for each permit, along with th eir estimated costs. These costs begin with the issuance of the first permit following prom ulgation of the rule. A total cost of approximately $1,600 is estimated for each permit per year.

D2-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### Table D2-8: Government Costs fo r Annual Activities (per Permit; $2004) Annual Activity Annual Costs Review of Biannual Status Report a $350 Compliance Tracking $599 Determination of Monito ring Frequency Reduction $467 Record Keeping $142 Other Direct Costs $30 Total b $1,588

a This is a cost that is incurred once every two years. Therefore, only half of the total review cost of $701 is accounted for in this annual framework. b Individual numbers may not sum to total due to independent rounding. Source: U.S. EPA, 2006.


### The Federal government would likely incur costs for reviewing and validating pr oper implementation of the section 316(b) elements of States’ NPDES permits that ar e issued after promulgation of one of the analysis opitons. Table D2-9 outlines the annual activities associated with reviewing a permit issued after promulgation of a rule, along with the estimated cost of each activity. EPA estimates a cost of approximately $2,600 per permit for post-promulgation review. Costs incurred by the Fede ral government are not part of the UMRA analysis but are part of the social cost analysis presented in Chapter E1 of this EA.
Table D2-9: Federal Government Permit Program Oversight Activities (per Permit; $2004)

a

Other Direct Costs ) b $150 $117 $117 $117 $117 $150 $350 $117

$35 $150 $117 $134

$50 $1,721

$701 $150 $851 $2,572

a
b

Source: Annual Activity Review Source Water Physical Data Review CWIS Data Review CWS Operation Narrative Review Proposal for Collection of Informa tion for Comprehensive Demonstration Study Review Source Water Body Flow Information Review Design and Construction Technology Plan Review Impingement Mortal ity Study and/or Entrainment Characterization Study Review Pilot Study for New Impi ngement & Entrainment Technology Review Restoration Measures Review Technology Installation and Opera tion Plan & Verification Monitoring Plan Review the Monitoring Frequency Permit Record Keeping
Total Cost (without site specific determination Review Information to Support Site -Specific Determination of BTA Review the Established Requirement s for Site-Specific Technology Site-Specific Costsc Total Cost (with site specific determination)b Post-Promulgation Permit Costs

Assumed to apply to only 10% of facilities. Only 10% of th e per permit cost of $350 is acc ounted for in this framework. Applies only to certain facilities, according to site specific determination of BTA Compliance Schedule. Individual numbers may not add up to total due to independent rounding. U.S. EPA, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D2-9

c§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### D2-1.4 Impacts on Small Governments EPA’s analysis also considered whether the final rule may significantly or uniquely affect small governments (i.e., governments with a population of less than 50,000). As described earlier, the Electric Generating Industry is the only industry segment with government-owned f acilities; governments own no facilities in either the Manufacturers or new offshore oil and gas extraction facility segments. No government-owned facility exceeds the 50 MGD DIF applicability threshold (the smallest DIF applicability threshold of the three regulatory analysis options). Therefore, no government-owned facility w ould incur compliance costs under the Final Regulation or the three regulatory analysis options. As no faciliti es owned by small governments are subject to national requirements under the regulatory analysis options, EP A has determined that the Final Regulation and the regulatory analysis options contain no regulatory requirem ents that might significantly or uniquely affect small governments.


## D2-2 C OMPLIANCE 

## C OSTS FOR THE 

## P RIVATE 

## S ECTOR 

### The only compliance costs incurred by the private sec tor result from facilities complying with the Final Regulation or the regulatory analysis options. These options all requir e the same reduction in impingement and entrainment (I&E), and differ only by ap plicability threshold, which is based on the facilities’ design intake flow and waterbody type. These direct facility costs already include the cost to facilities of obtaining their NPDES permits. The methodology for determining compliance costs for Phase III new offshore oil and gas extraction facilities is presented in Chapter B1: Summary of Cost Categories and Key A nalysis Elements for New Offshore Oil and Gas Extraction Facilities; the methodology for Phase III existing facilities is presented in Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities of this EA. EPA determined that all facilities subject to national categorical requirements under the three regulatory analysis options to be owned by private entities. Private sector costs for the Final Regulation for Phase III ne w facilities and for the regulatory analysis options for Phase III existing facilities (discounted at a 7% rate) are as follows:

f 

### Under the Final Regulation for new offshore oil and gas extraction facilities, 124 facilities are estimated to incur annualized compliance costs of $1.9 million and a maximum one-year cost of $1.5 million in 2013.

f 

### Under the 50 MGD for All Waterbodies option for existing facilities and the Final Regulation for new offshore oil and gas extraction facilities , 270 facilities are estimated to incur annualized compliance costs of $32.8 million and a maximum one-year cost of $132.1 million in 2011.

f 

### Under the 200 MGD for All Waterbodies option for existin g facilities and the Final Regulation for new offshore oil and gas extraction facilities , 155 privately-owned facilities are estimated to incur annualized compliance costs of $17.9 million and a maximu m one year cost, in 2010, of $78 million.

f 

### Under the 100 MGD for Certain Waterbodies option for existing facilities and the Final Regulation for new offshore oil and gas extraction facilities , 147 privately-owned facilities are estimated to incur annualized compliance costs of $13.0 million and a ma ximum one year cost, in 2011, of $79 million.


## D2-3 S UMMARY OF 

## UMRA A NALYSIS 

### EPA estimates that the final rule will not result in a ggregate expenditures of at least $100 million for State and local governments as well as the private sector in any one year. Table D2-9, following page, summarizes the after-tax compliance costs for facilities, and the costs to implement the rule for permitting authorities, under the final rule and the regulatory analysis options.

D2-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



### Table D2-10: Summary of UMRA Costs (millions, $2004)

Compliance Total Compliance Total Costs Costs Costs Costs

Government Sector n/a n/a n/a n/a n/a n/a
Private Sector $1.9 n/a $1.9 $1.5 n/a $1.5

Government Sector $0.0 $0.6 $0.6 $0.0 $2.3 $2.3
Private Sector $32.8 n/a $32.8 $132.1 n/a $132.1

Government Sector $0.0 $0.2 $0.2 $0.0 $0.8 $0.8 $17.9 n/a $17.9 $77.9 n/a $77.9

Government Sector $0.0 $0.2 $0.2 $0.0 $1.2 $1.2 $13.0 n/a $13.0 $79.5 n/a $79.5 Source: Total Annualized Cost Maximum One-Year Cost Facility Government Facility Government Sector Implementation Implementation
Final Rule for New Offshore Oil and Gas Extraction Facilities
(excl. Federal)
50 MGD for All Waterbodies Option for Existing Fa cilities / Final Rule for New OOGE Facilities
(excl. Federal)
200 MGD for All Waterbodies Option for Existing Fa cilities / Final Rule for New OOGE Facilities
(excl. Federal) Private Sector 100 MGD for Certain Waterbodies Option for Existing Facilities / Final Rule for New OOGE Facilities
(excl. Federal) Private Sector U.S. EPA Analysis, 2006.


### Costs for new offshore oil and gas extraction facilities and the three regulatory analysis options for Phase III existing facilities are as follows:

f 

### The Final Regulation would impose no annual costs on State and local governments, and $1.9 million on the private sector. Maximum one-year costs are estimated to be approximately $1.5 million for the private sector. This maximum annual cost value is estimated to occur in 2013.

f 

### The 500 MGD for All Waterbodies option for existing facilities and the Final Regulation for new offshore oil and gas extraction facilities Final Regulation would impose annual costs of $0.6 million on State and local governments (in implementation cost s only), and $32.8 million on the private sector. Maximum one-year costs under this option would be approximately $2.3 million for government entities, and $132.1 million for the private sector. Both of these maximum annual cost values would occur in 2011.

f 

### The 200 MGD for All Waterbodies option for existing facilities and the Final Regulation for new offshore oil and gas extraction facilities would impose annual costs of $0.2 million on State and local governments (in implementation costs only), and $17.9 million on the private sector. Maximum one-year costs under this option are approximately $0.8 milli on for government entities in 2011, and $78 million for the private sector in 2010.

f 

### The 100 MGD for Certain Waterbodies option for existing facilities and the Final Regulation for new offshore oil and gas extraction facilities would impose annual costs of $0.2 million on State and local governments (in implementation costs only), and $13.0 million on the private sector. Maximum one-year costs under this option are approximately $1.2 million for government entities and $79 million for the private sector, both of which are estimated to occur in 2011.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D2-11§ 316(b) Final Rule: Phase III – EA, Part D: Add itional Economic Analyses Chapter D2: UMRA Analysis



## R EFERENCES


### U.S. Environmental Protection Agency (U.S. EPA). 2006. Information Collection Request for Cooling Water Intake Structures at Phase III Facilities (Final Rule) . ICR Number 2169.01. June 2006.

D2-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Economic Analyses Appendix D2A: Summary of Costs 

# Appendix D2A: Summary Results for Supplemental Options

A C ONTENTS 

## I

D2A-1 S UMMARY OF 

## R

supplemental options).

Compliance Total Compliance Total Costs Costs Costs Costs

Government Sector $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1.8 n/a $1.8 $712.2 n/a $712.2

Government Sector $1.4 $0.1 $1.5 $2.3 $0.1 $2.4 $1.0 n/a $1.0 $1.2 n/a $1.2

Government Sector n/a $0.5 $0.5 n/a $1.7 $1.7 $19.2 n/a $19.2 $471.5 n/a $471.5

Government Sector n/a $0.4 $0.4 n/a $1.2 $1.2 $20.6 n/a $20.6 $123.3 n/a $123.3 Source: 

### PPENDIX NTRODUCTION Introduction......................................................... D2A-1 

### This appendix presents the results of the UMRA analysis for the supplemental options considered for Phase III D2A-1 Summary of Results ............................... D2A-1 

### existing facilities, combined with the final rule for new offshore oil and gas extraction facilities. For all options, results only include those Phase III existing facilities that are (1) non-baseline closures and (2) subject to national categorical requirements under the option. See the main bod y of this chapter for a description of data sources and methodologies used in these analyses.

ESULTS 

### Table D2A-1 below, presents results for the I-only Ever ywhere supplemental option. Table D2A-2 and Table D2A-3, following page, present results under the I&E Like Phase II option and I&E Everywhere option, respectively. The other supplemental options for Phase III existing facilities, co mbined with the final rule for new offshore oil and gas extraction facilities, are presented in order of increasing stringency (e.g., the most stringent option in terms of regulatory requirements is the I&E Everywhere option, compared to the other evaluated

Table D2A-1: Summary of UMRA Costs for the I-only Everywhere option (millions, $2004) Total Annualized Cost Maximum One-Year Cost Facility Government Facility Government Sector Implementation Implementation
Final rule for New OOGE Facilities
(excl. Federal) Private Sector For Electric Generators with a DIF of 2 – 50 MGD
(excl. Federal) Private Sector For Manufacturers with a DIF of 2 – 50 MGD
(excl. Federal) Private Sector For Manufacturers with a DIF of 50 MGD or greater
(excl. Federal) Private Sector U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D2A-1§ 316(b) Final Rule: Phase III – EA, Part D: Additional Economic Analyses Appendix D2A: Summary of Costs

Compliance Total Compliance Total Costs Costs Costs Costs

Government Sector $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1.8 n/a $1.8 $712.2 n/a $712.2

Government Sector $2.0 $0.1 $2.2 $3.0 $0.2 $3.2 $1.3 n/a $1.3 $1.6 n/a $1.6

Government Sector n/a $0.8 $0.8 n/a $2.6 $2.6 $30.7 n/a $30.7 $491.3 n/a $491.3

Government Sector n/a $0.6 $0.6 n/a $2.4 $2.4 $31.0 n/a $31.0 $138.6 n/a $138.6 Source:

Compliance Total Compliance Total Costs Costs Costs Costs

Government Sector $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1.8 n/a $1.8 $712.2 n/a $712.2

Government Sector $2.5 $0.2 $2.7 $3.6 $0.2 $3.8 $5.5 n/a $5.5 $25.2 n/a $25.2

Government Sector n/a $1.2 $1.2 n/a $4.0 $4.0 $50.7 n/a $50.7 $596.4 n/a $596.4

Government Sector n/a $0.8 $0.8 n/a $3.1 $3.1 $37.3 n/a $37.3 $190.3 n/a $190.3 Source: 

### Table D2A-2: Summary of UMRA Costs for the I&E Like Phase II option (millions, $2004) Total Annualized Cost Maximum One-Year Cost Facility Government Facility Government Sector Implementation Implementation
Final rule for New OOGE Facilities
(excl. Federal) Private Sector For Electric Generators with a DIF of 2 – 50 MGD
(excl. Federal) Private Sector For Manufacturers with a DIF of 2 – 50 MGD
(excl. Federal) Private Sector For Manufacturers with a DIF of 50 MGD or greater
(excl. Federal) Private Sector U.S. EPA Analysis, 2006.


### Table D2A-3: Summary of UMRA Costs for the I&E Everywhere option (millions, $2004) Total Annualized Cost Maximum One-Year Cost Facility Government Facility Government Sector Implementation Implementation
Final rule for New OOGE Facilities
(excl. Federal) Private Sector For Electric Generators with a DIF of 2 – 50 MGD
(excl. Federal) Private Sector For Manufacturers with a DIF of 2 – 50 MGD
(excl. Federal) Private Sector For Manufacturers with a DIF of 50 MGD or greater
(excl. Federal) Private Sector U.S. EPA Analysis, 2006.

D2A-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements 

# Chapter D3: Other Administrative Requirements

I NTRODUCTION 

### This chapter presents several other analyses conducted in developing this final rule. These analyses address the requirements of Executive Orders and other legislation and regulations applicable to the Phase III regulation.


## D3-1 E XECUTIVE 

## O RDER 

## 12866: R EGULATORY 

## P LANNING AND 

## R EVIEW 

### Under Executive Order 12866 (58 FR 51735, October 4, 1993), the Agency must determine whether the regulatory action is “significant” and therefore subject to OMB review and the requirements of the Executive Order. The order defines a “significant regulatory action” as one that is likely to result in a rule that may:

f 

### have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or Tribal governments or communities; or

f 

### create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;
or

f 

### materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or 

## C HAPTER 

## C ONTENTS 

## :
Introduction............................................................ D3-1 D3-1 Executive Order 12866: Regulatory Planning and Review................................................ D3-1 D3-2 Paperwork Reduction Act of 1995 ............ D3-1 D3-3 Executive Order 13132: Federalism.......... D3-2 D3-4 Executive Order 13175: Consultation and Coordination With Indian Tribal Governments .......................................................... D3-3 D3-5 Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks.......................................................... D3-4 D3-6 Executive Order 13211: Actions Concerning Regulations That Signifi cantly Affect Energy Supply, Distributio n, or Use ..................... D3-4 D3-6.1 Existing Manufacturing Facilities .... D3-5 D3-6.2 New Offshore Oil and Gas Extraction Facilities ........................................... D3-5 D3-7 National Technology Transfer and Advancement Act of 1995 ........................ D3-6 D3-8 Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations D3-6 D3-9 Executive Order 13158: Marine Protected Areas ......................................................... D3-6 References.............................................................. D3-8

f 

### raise novel legal or policy issues arising out of legal ma ndates, the President’s priorities, or the principles set forth in the Executive Order. Pursuant to the terms of Executive Order 12866, EPA determ ined that this final rule is a “significant regulatory action.” As such, this action was submitted to OMB for review. Changes made in response to OMB suggestions or recommendations are documented in the public record.


## D3-2 P APERWORK 

## R EDUCTION 

## A CT OF 

## 1995 The Paperwork Reduction Act of 1995 (PRA) (superseding the PRA of 1980) is implemented by the Office of Management and Budget (OMB) and requires that agen cies submit a supporting statement to OMB for any information collection that solicits the same data from more than nine parties. The PRA seeks to ensure that

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D3-1§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements



### Federal agencies balance their need to collect information with the paperwork burden imposed on the public by the collection.
The definition of “information collection” includes activiti es required by regulations, such as permit development, monitoring, record keeping, and reporti ng. The term “burden” refers to th e “time, effort, or financial resources” the public expends to provide information to or for a Federa l agency, or to otherwise fulfill statutory or regulatory requirements. PRA paperwork burden is measured in terms of annual time and financial resources the public devotes to meet one-time and recurring information requests (44 U.S.C. 3502(2); 5 C.F.R. 1320.3(b)). Information collection activities may include:

f 

### reviewing instructions;

f 

### using technology to collect, process, and disclose information;

f 

### adjusting existing practices to comply with requirements;

f 

### searching data sources;

f 

### completing and reviewing the response; and

f 

### transmitting or disclosing information. Agencies must provide information to OMB on the parti es affected, the annual reporting burden, the annualized cost of responding to the information collection, and whether the request significan tly impacts a substantial number of small entities. An agency may not conduct or sponsor, and a person is not required to respond to, an information collection unless it displays a currently valid OMB control number. EPA’s estimate of the information collection require ments imposed by the final Phase III regulation are documented in the Information Collection Request (ICR) , which accompanies this regulation (U.S. EPA, 2006).


## D3-3 E XECUTIVE 

## O RDER 

## 13132: F EDERALISM 

### Executive Order 13132 (64 FR 43255, August 10, 1999) requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local o fficials in the development of regulatory policies that have federalism implications.” Policies that have federalism implications are defined in the Executive Order to include regulations that have “substa ntial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” Under section 6 of Executive Order 13132, EPA may not issu e a regulation that has federalism implications, that imposes substantial direct compliance costs, and that is not required by statute unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by State and local governments or unless EPA consults with State and local officials early in the process of developing the regulation. EPA also may not issue a regulation that has federalism implications and that preempts State law, unless the Agency consults with State and local officials early in the process of developing the regulation.
This final rule does not have federalism implications. It would not have subs tantial direct effects on the States, on the relationship between the national government a nd the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132. Rather, this final rule would result in no additional administrative costs on States that have an authorized NPDES program since EPA is not promulgating a rule for Phase III existing f acilities. For the three regulatory analysis options considered in developing a regulation for Phase III existing facilities, EPA estimated that States would have been subject to the following annual burden if EPA were promulgating a rule for Phase III existing facilities:

D3-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements

f 

### 50 MGD for All Waterbodies option: 20,263 hours with a cost of $920,995 ($912,975 in labor costs and $8,020 in non-labor costs);

f 

### 200 MGD for All Waterbodies option: 7,396 hours with a cost of $333,825 ($330,995 in labor costs and $2,830 in non-labor costs);

f 

### 100 MGD for Certain Waterbodies option: 8,362 hours with a cost of $380,960 ($378,647 in labor costs and $2,313 in non-labor costs). It is noted that States do not incur any burden hours and co sts to administer the final rule for the new offshore oil and gas extraction facilities because the EPA Regions admini ster their permits; as these facilities are outside the jurisdictional waters of the States. The final national cooling water intake structure requi rements would be implemented through permits issued under the NPDES program. Forty-five States and one territo ry are currently authorized pursuant to section 402(b) of the CWA to implement the NPDES program. In Stat es not authorized to implement the NPDES program, EPA issues NPDES permits. Under the CWA, States are not re quired to become authorized to administer the NPDES program. Rather, such authorization is available to Stat es if they operate their programs in a manner consistent with section 402(b) and applicable re gulations. Generally, these provisions require that State NPDES programs include requirements that are as stringent as Federal program requirements. States retain the ability to implement requirements that are broader in scope or more stringe nt than Federal requirements. (See section 510 of the CWA.) EPA does not expect this final rule to have substantial direct effects on either authorized or nonauthorized States or on local governments because it would not change how EPA and the States and local governments interact or their respective authority or responsibilities for implem enting the NPDES program. For purposes of this rule, the relationship and distribution of power and responsibilities between the Federal government and the State and local governments are established under the CWA (e.g., sections 402(b) and 510); nothing in this rule alters that. Thus, the requirements of section 6 of the Executive Order do not apply to this rule. Although section 6 of Executive Order 13132 does not apply to this rule, EPA did consult extensively with State governments and representatives of local governments in de veloping definitions and c oncepts relevant to the section 316(b) rulemaking and this final rule. These c onsultations – which included meetings with, and presentations to, State and local officials in a range of venues – aided in developing the proposed and final Phase III regulation. These consultations are documente d in the EA for the proposed Phase III regulation ( Economic Analysis for the Proposed Sec tion 316(b) Rule for Phase III Facilities , November 2004, EPA-821-R04-006) and in the public record.


## D3-4 E XECUTIVE 

## O RDER 

## 13175: C ONSULTATION AND 

## C OORDINATION 

## W ITH 

## I NDIAN 

## T RIBAL 

## G OVERNMENTS 

### Executive Order 13175 (65 FR 67249, November 6, 2000) requires EPA to develop an accountable process to ensure “meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications.” “Policies that have tribal implications” is defined in the Executive Order to include regulations that have “substantial direct effects on one or more Indian Tribes, on the rela tionship between the Federal government and the Indian Tribes, or on the distribution of pow er and responsibilities between the Federal government and Indian Tribes.” The Phase III final regulation does not have tribal implications. It would not have substantial direct effects on tribal governments, on the relationship between the Federal government and Indian Tribes, or on the distribution of power and responsibilities between the Federal government and Indian Tribes, as specified in Executive Order 13175. EPA’s analyses show that no fac ility subject to Phase III regulation is owned by tribal

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D3-3§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements



### governments. The Phase III final regulation does not aff ect Tribes in any way in the foreseeable future. Accordingly, the requirements of Executive Order 13175 do not apply to this rule.


## D3-5 E XECUTIVE 

## O RDER 

## 13045: P ROTECTION OF 

## C HILDREN FROM 

## E NVIRONMENTAL 

## H EALTH 

## R ISKS AND 

## S AFETY 

## R ISKS 

### Executive Order 13045 (62 FR 19885, April 23, 1997) app lies to any rule that (1) is determined to be “economically significant” as defined under Executive Order 12866 and (2) concerns an environmental health or safety risk that EPA has reason to believe might have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health and safety effects of the planned rule on children and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency. EPA considers the Phase III final regulation to be a significant rule under Executive Order 12866. However, it does not c oncern an environmental health or safety risk that would have a disproportionate effect on children. Th erefore, it is not subject to Executive Order 13045.


## D3-6 E XECUTIVE 

## O RDER 

## 13211: A CTIONS 

## C ONCERNING 

## R EGULATIONS 

## T HAT 

## S IGNIFICANTLY 

## A FFECT 

## E NERGY 

## S UPPLY 

## , D ISTRIBUTION 

## , OR 

## U SE 

### Executive Order 13211, (“Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001)) requires EPA to pr epare a Statement of Energy Effects when undertaking regulatory actions identified as “significant energy ac tions.” For the purposes of Executive Order 13211, “significant energy action” means: “any action by an agency (normally published in the Fede ral Register) that promulgates or is expected to lead to the promulgation of a proposed rule or regul ation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking: (1) (i) 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 (OIRA) as a significant energy action.” For those regulatory actions identified as “significant energy actions,” a Statement of Energy Effects must include a detailed statement relating to (1) any adverse effects on en ergy supply, distribution, or use (including a shortfall in supply, price increases, and increased use of foreign supplies) and (2) reasonable alternatives to the action with adverse energy effects and the expected effects of such alternatives on energy supply, distribution, and use. Today’s final rule does not constitute a “significant ener gy action” as defined in Executive Order 13211 because it is not likely to have a significant adverse effect on the s upply, distribution, or use of energy. The final rule contains no compliance requirements that would:

f 

### reduce crude oil supply in excess of 10,000 barrels per day;

f 

### reduce fuel production in excess of 4,000 barrels per day;

f 

### reduce coal production in excess of 5 million tons per day;

f 

### reduce electricity production in excess of 1 billion kilowatt hours per day or in excess of 500 megawatts of installed capacity;

D3-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements

f 

### increase energy prices in excess of 10 percent;

f 

### increase the cost of energy distribution in excess of 10 percent;

f 

### significantly increase dependence on foreign supplies of energy; or

f 

### have other similar adverse outcomes, particularly unintended ones. Of the potential significant adverse effe cts on the supply, distribution, or use of energy (listed above) only a few potentially apply to this final rule. Regulation of new offshore oil and gas facilities might affect (1) the production of oil and gas, (2) energy prices, and (3) th e dependence on foreign supplies of energy. If EPA were promulgating a rule for Phase III existing facilities, regula tion of existing manufacturing facilities could lead to (1) reduced electricity production and, (2) because the rule will apply to facilities in the petroleum refinery sector, could lead to reduced refining capacity and therefore reduced domestic fuel production. Potential energy effects associated with the regulation of new offshore oil a nd gas extraction facilities and existing manufacturing facilities are described in the following two subsections.
D3-6.1 New Offshore Oil and Gas Extraction Facilities This rule applies only to new offshore oil and gas extrac tion facilities and not existing ones. Hence the rule would have no impact on existing production of oil and gas, ener gy prices, installed capacity, nor would it significantly increase dependence on foreign supplies of energy. EPA’s analysis identified no barriers to entry or energy effects. EPA therefore concludes that the final rule would not significantly affect new offshore oil and gas production, energy prices, or depende nce on foreign supplies of energy. Based on these analyses for regulated existing and new facilities, EPA concludes that this final rule will not cause
a Significant Adverse Effect and does not constitute a Significant Energy Action within the meaning of Executive Order 13211. As a result, EPA did not prepare a Statement of Energy Effects. D3-6.2 Existing Manufacturing Facilities As documented at Proposal, EPA considered the potential impact of the Phase III regulation on power production in manufacturing facilities. While facilities in the manuf acturing industry segments generate electricity, their contribution to the overall supply of electricity is insigni ficant (less than 0.02%); ther efore, compliance with the regulatory analysis options considered for Phase III exis ting facilities regulation by this industry segment would not perceptibly affect the supply, distribution, or use of energy. Based on comments received at Proposal, in its analysis fo r the final regulation, EPA examined the potential for the regulation to cause a “significant adve rse effect” on the Nation’s energy economy through its potential impact on petroleum refining operations. EPA performed this analysis in accordance with guidance for implementing Executive Order 13211 (“Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use”). Specifically, EPA examined whether the shut-down of refinery operations for installing compliance equipment could cause a substantial share of total U.S re finery capacity to be out of service during technology installation. Among the three primary options consid ered for Phase III existing facilities, the 50 MGD for All Waterbodies option is the broadest in scope. From it’s anal ysis of this option, EPA concluded that the annualized loss in refining capacity from the due to installation w ould amount to approximately 1,800 barrels per day or approximately a 0.01% loss in total U.S. refining capacity. Relative to total U.S. refinery capacity, this impact is minimal and less than the OMB defined threshold of 4,00 0 barrels per day of fuel production for a Significant Adverse Effect under Executive Order 13211. 1

1 

### This analysis is documented in the public record for the Phase III final regulation.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D3-5§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements



## D3-7 N ATIONAL 

## T ECHNOLOGY 

## T RANSFER AND 

## A DVANCEMENT 

## A CT OF 

## 1995 Section 12(d) of the National Technology Transfer a nd Advancement Act (NTTAA) of 1995, Pub L. No. 104- 113, Sec. 12(d) directs EPA to use voluntary consensus standards in its regulatory activities unless doing so would be inconsistent with applicable la w or otherwise impractical. Voluntary consensus standards are technical standards (e.g., materials specifications, test methods , sampling procedures, and business practices) that are developed or adopted by voluntary consensus standard bodies. The NTTAA directs EPA to provide Congress, through the Office of Management and Budget (OMB), explanations when the Agency decides not to use available and applicable vol untary consensus standards.
This final rule does not involve such technical standard s. Therefore, EPA is not considering the use of any voluntary consensus standards.


## D3-8 E XECUTIVE 

## O RDER 

## 12898: F EDERAL 

## A CTIONS TO 

## A DDRESS 

## E NVIRONMENTAL 

## J USTICE IN 

## M INORITY 

## P OPULATIONS AND 

## L OW 

## -I NCOME 

## P OPULATIONS 

### Executive Order 12898 (59 FR 7629, February 11, 1994) requires that, to the greatest extent practicable and permitted by law, each Federal agency must make achiev ing environmental justice part of its mission. E.O. 12898 provides that each Federal agency must conduct its programs, policies, and activities that substantially affect human health or the environment in a manner th at ensures such programs, policies, and activities do not have the effect of (1) excluding persons (including p opulations) from participation in, or (2) denying persons (including populations) the benefits of, or (3) subjecting persons (includi ng populations) to discrimination under such programs, policies, and activities because of their race, color, or national origin. Today’s final rule requires that the location, design, cons truction, and capacity of cooling water intake structures (CWIS) at Phase III facilities reflect the best technology av ailable for minimizing adverse environmental impact. For several reasons, EPA does not expect that this final ru le would have an exclusiona ry effect, deny persons the benefits of the participation in a program, or subject persons to discrimination because of their race, color, or national origin. In fact, because EPA expects that this final rule would help to preserve the health of aquatic ecosystems located in reasonable proximity to Phase III facilities, it believes that all populations, including minority and low-income populations, w ould benefit from improved environmen tal conditions as a result of this rule.


## D3-9 E XECUTIVE 

## O RDER 

## 13158: M ARINE 

## P ROTECTED 

## A REAS 

### Executive Order 13158 (65 FR 34909, May 31, 2000) requi res EPA to “expeditiously propose new science-based regulations, as necessary, to ensure appropriate levels of protection for the marine environment.” EPA may take action to enhance or expand protection of existing ma rine protected areas and to establish or recommend, as appropriate, new marine protected areas. The purpose of the Executive Order is to protect the significant natural and cultural resources within the marine environment, wh ich means “those areas of coastal and ocean waters, the Great Lakes and their connecting waters, and submerged la nds thereunder, over which the United States exercises jurisdiction, consistent with international law.” EPA expects that the Final Section 316(b) Rule for Phase III Facilities would advance the objective of Executive Order 13158. Marine protected areas (MPAs) include designated areas with varying levels of protection, from fishery closure areas, to aquatic National Parks, Marine Sanctuaries, and Wildlife Refuges (NOAA, 2002). The Departments of Commerce and the Interior are developing an inventory of MPAs in the U.S. that are protected and managed under Federal, State, Territorial, Tribal, or local laws. Th is list has not been completed, but it currently includes 32 Federal sites in the New England region, 31 in the Middl e Atlantic region, 43 in the South Atlantic region, 45 in the Gulf of Mexico region, 12 in the Caribbean region, 15 in the Great Lakes region, and 46 in the U.S. West

D3-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements



### Coast region. Examples of marine protected areas include the Great Bay National Wildlife Refuge in New Hampshire, the Cape Cod Bay Northern Right Whale Critical Habitat in Massachusetts, the Narragansett Bay National Estuarine Research Reserve in Rhode Island, Everglades National Park and the Tortugas Shrimp Sanctuary in Florida, and the Point Reyes National Seashore in California. Marine protected areas can help address problems related to the depletion of marine resources by prohibiting, or severely curtailing, activities that are permitted or regulat ed by law outside of marine protected areas. Such activities include oil exploration, dredging, dumping, fishi ng, certain types of vessel traffic, and the focus of section 316(b) rulemaking, the impingement and entrainm ent of aquatic organisms by cooling water intake structures. Impingement and entrainment affects many kinds of aqua tic organisms, including fish, shrimp, crabs, birds, sea turtles, and marine mammals. Aquatic environments are harmed both directly and indirectly by impingement and entrainment of these organisms. In addition to the harm that results from the direct removal of organisms by impingement and entrainment, there are the indirect effects on aquatic food webs that result from the impingement and entrainment of organisms that serve as pr ey for predator species. There are also cumulative impacts that result from multiple intake structures operating in the same local area, or when multiple intakes affect individuals within the same popula tion over a broad geographic range. Decreased numbers of aquatic organisms resulting from th e direct and indirect effects of impingement and entrainment can have a number of consequences for ma rine resources, including impairment of food webs, disruption of nutrient cycling and energy transfer within aquatic ecosystems, loss of native species, and reduction of biodiversity. By reducing the impingement and entrainment of aquatic organisms, this final rule would not only help protect individual species but also the overall ma rine environment, thereby advancing the objective of Executive Order 13158 to protect marine areas.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute D3-7§ 316(b) Final Rule: Phase III – EA, Part D: Additional Econom ic Analyses Chapter D3: Other Administrative Requirements



## R EFERENCES 

### Executive Office of the President. 2001. Executive Order 13211. “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use.” 66 FR 28355. May 22, 2001.
Executive Office of the President. 2000a. Executive Or der 13175. “Consultation and Coordination with Indian Tribal Governments.” 65 FR 67249, November 6, 2000.
Executive Office of the President. 2000b. Executive Or der 13158. “Marine Protected Areas.” 65 FR 34909, May 31, 2000.
Executive Office of the President. 1999. Executive Orde r 13132. “Federalism.” 64 FR 43255. August 10, 1999.
Executive Office of the President. 1997. Executive Or der 13045. “Protection of Children from Environmental Health Risks and Safety Risks.” 62 FR 19885, April 23, 1997.
Executive Office of the President. 1994. Executive Orde r 12898. “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Po pulations.” 59 FR 7629, February 11, 1994.
Executive Office of the President. 1993. Executive Or der 12866. “Regulatory Planning and Review.” 58 FR 51735. October 4, 1993. National Oceanic and Atmospheric (NOAA) and U.S. Department of Commerce. 2002. Marine Protected Areas of the United States. http://mpa.gov/welcome.html. Accessed 2/22/02. National Technology Transfer and A dvancement Act of 1995. 1995. Public Law 104-113. Available at: http://standards.gov/standards_gov/index.cfm?do=documents.NTTAA Paperwork Reduction Act (PRA). 44 U.S.C. 3501 et seq.
U.S. Department of Commerce (U.S. DOC), Bureau of the Census. 2000. 2000 Census of Population and Housing

. U.S. Department of Commerce (U.S. DOC), Bureau of the Census. 1998. 1998 Small Area Income and Poverty Estimates

. U.S. Department of the Interior (U.S. DOI), Fish a nd Wildlife Service, and U.S. Department of Commerce, Bureau of the Census. 1997. 1996 National Survey of Fishing, Hunting, and Wildlife-Associated Recreation

. U.S. Environmental Protection Agency (U.S. EPA). 2006. Information Collection Request for Cooling Water Intake Structures at Phase III Facilities (Final Rule) . ICR Number 2169.01. June 2006.

D3-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts 

# Chapter E1: Summary of Social Costs

I NTRODUCTION 

### This chapter presents EPA’s estimates of the costs to society associated with the op tions evaluated for the Final Regulation for Phase III facilities. The social costs of regulatory actions are the opportunity costs to society of employing scarce resources to reduce environmental damages. The social costs of regulation include both monetary and non-monetary outlays made by society. Monetary outlays include the resource costs of compliance, government administrative costs, and other adjustment costs, such as the cost of relocating displaced workers. Non-monetary outlays, some of which can be assigned monetary values, include losses in consumers’ and producers’ surplus in affected product markets, the adver se effects of involuntary unemployment, possible loss of time (e.g., delays in investment decisions), and possible adverse impacts on the rate of innovation. 

## C HAPTER 

## C ONTENTS

E1-1

E1-2 E1-3 E1-4 Introduction.............................................................E1-1 Costs of Compliance by Regulated Industry Segment .....................................................E1-2 State and Federal Administrative Costs .....E1-4 Total Social Cost........................................E1-5 Limitations and Uncertainties ..................E1-10 Glossary ................................................................E1-11 References.............................................................E1-12



### EPA’s estimates of social costs for the evaluated sect ion 316(b) Phase III options include three components: 1. Direct costs of complying with the regulation within each regulated industry segment, 2. Cost to State governments in administering the regulation, and 3. Cost to the Federal government in administering the regulation. This chapter presents the social cost analysis for the Phase III final regula tion, which applies national performance standards to new offshore oil and gas extraction facilities (also abbreviated as “new OOGE facilities”). The final requirements for this industry segment are based on a 2 MGD DIF applicability th reshold and apply to an estimated 124 new offshore oil and gas extraction facilities. This chapter also presents costs for Phase III existing facilities under three regulatory analysis options: facilities w ith a design intake flow of 50 MGD or more that are located on any source waterbody type (“50 MGD All Wate bodies” option), facilities with a design intake flow of 200 MGD or more that are located on any source wate rbody type (“200 MGD for All Waterbodies” option), and facilities with a design intake flow of 100 MGD or more that are located on certain waterbody types (“100 MGD for Certain Waterbodies” option). These options differ w ith regard to: (1) their design intake flow (DIF) applicability thresholds: 50, 100 and 200 MGD, respectively; and (2) the type of waterbodies to which they would apply: the options with the 50 and 200 MGD applicability thresholds would apply to all waterbody types while the option with the 100 MGD applicability threshold w ould apply only to facilities withdrawing cooling water from certain waterbody types (i.e., an ocean, estuary, tidal river/stream or one of the Great Lakes). For the purposes of analysis, facilities meeting these applicability criteria would be required to meet similar performance standards, including a 80-95% reduction in impingement mortality and a 60-90% reduction in entrainment. For the purposes of analysis, facilities not meeting the appli cability criteria set forth under each option would continue to be subject to permit requirements based on Best Professional Judgment (BPJ). The number of facilities required to meet the national requirements would vary depending on the applicability threshold considered. Among the three options considered, the 50 MGD for A ll Waterbodies option applies the national categorical requirements to the largest number of facilities, with the 200 MGD for All Waterbodies and the 100 MGD for All Waterbodies applying to successively smaller numbers of facilities.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1-1§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



## E1-1 C OSTS OF 

## C OMPLIANCE BY 

## R EGULATED 

## I NDUSTRY 

## S EGMENT 

### The compliance costs used to estimate total social costs differ in their consideration of taxes from those in Part B: Economic Analysis for Phase III Existing Facilities , and Part C: Economic Analysis for Phase III New Offshore Oil and Gas Extraction Facilities , which were calculated for the purpo se of estimating the private costs and impacts of the evaluated options. For the impact anal yses, compliance costs are me asured according to their effect on the financial performance of the regulated faciliti es and firms. The analyses therefore explicitly consider the tax deductibility of compliance outlays. 1 

### In the analysis of costs to soci ety, however, these compliance costs are considered on a pre-tax basis. The costs to society are the full value of the res ources used, whether they are paid for by the regulated facilities or by all taxpayers in the form of lost tax revenues. EPA included no costs for facilities that were assessed as baseline closures or that are subject to permit specifications based on best professional judgment (BPJ), in stead of the national categorical requirements of the Final rule or the regulatory analysis options for ex isting facilities. However, EPA’s estimates do include compliance costs for facilities estimated to close because of the rule. 2 

### This approach may overstate the social costs of compliance, to the extent that the net economic loss to society in facility closures is less than the estimated cost to society of compliance. 3 

### To assess the cost to society of comp lying with Phase III regulation, EPA estimated the costs to facilities for the labor, equipment, materials, and other economic resources n eeded to comply with each evaluated option. In this analysis, EPA assumed that the market prices for labor, equipment, materials, and other compliance resources represent the opportunity costs to society for use of those resources in regulatory compliance. EPA estimates that the offshore oil and gas extraction i ndustry segment would not incur cost from installation downtime because only new offshore oil and gas extraction f acilities would be regulated under this final rule. The potential disruption in ongoing business operation estimated for existing Manufacturers is not relevant for new facilities. For the analysis of installation downtime in the Manufactur er’s segment, EPA assumed that the cost of society is equal to the increase in production cost for providing the electricity or other replacement goods and services not provided by the facilities that incur downtime in reachi ng compliance with the 316(b) Phase III regulation. For Manufacturers, this cost is approximated as the lost revenue from installation downtime less the variable cost of producing goods and services not produced due to the installation downtime. Implicit in this assumption is that the variable production cost of replacing the lost goods a nd services are essentially the sa me as the price received for the sale of the electricity or other goods and ser vices not produced by the facilities incurring the installation downtime. For the goods and services not produced by affected Manufacturers facilities, this assumption is consistent with a competitive market model of increasing marginal production cost, such that the production cost of the “last” or highest cost goods and services produced a nd sold in any period is approximately equal to the price received for those goods and services in the market . For Manufacturers – which do not necessarily produce and sell goods in orderly markets and where, as a result, the cost of producing replacement goods and services may be less than selling price – this assumption may overst ate the cost to society of installation downtime (see

1 

### Because government facilities and cooperatives are not subject to income taxes, their costs are not adjusted for taxes.
2 

### To the extent such impacts occur under any of the options analyzed.
3 

### Including costs for regulatory closures yields an estimat e of social costs assuming that all facilities, except those assessed as baseline closures, would incur the costs of regulatory compliance and continue to operate post-regulation. Calculating costs as if all facilities continue operating will overstate social costs if the social cost of compliance is great er than the net economic loss to society from facility closure. Wh ether this result will hold depends, in part, on the difference between social and private discount rate s, and the marginal cost to society to replace the lost prod uction of goods and services in closing facilities.

E1-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



### discussion in Appendix B3A2: Calculation of Installation Downtime Cost ). Absent specific knowledge of the overall production cost structure of the affected industri es, EPA adopted this assumption for its analysis of the social cost of the regulatory analysis options considered for Phase III regulation. Finally, EPA assumes in its social cost analysis that n one of the evaluated options would affect the aggregate quantity of goods and services sold to consumers by produ cers in the affected industry segments. The resource costs of compliance therefore manifest only as a reduction in the total of producers’ surplus and consumers’ surplus , with no change in the quantity of goods and servi ces produced and consumed. In the impact analyses, specific assumptions are made about the distribution of this effect between producers and consumers (i.e., the impact analyses of all analyzed section 316(b) Phase III i ndustry segments – new offshore oil and gas extraction facilities and manufacturers – assume that all complian ce costs are absorbed by complying businesses with no increase in prices to consumers). However, for the social cost analysis, the distribution of this effect between producers and consumers is irrelevant. Given the very small impact of the options on total costs within the industry segments, EPA believes the assumption of no e ffect on total quantity of goods and services produced and consumed is reasonable. Table E1-1, following page, summarizes total direct fac ility costs for the Final Regulation for new offshore oil and gas extraction facilities as well as the costs of the regulat ory analysis options considered for existing facilities, which are defined as the Final Regulation for th e new offshore oil and gas extraction facilities combined with the primary analysis alternatives for ex isting facilities. As described in Chapter C1: Summary of Cost Categories and Key Analysis Elements for Existing Facilities and Chapter B1: Summary of Cost Categories and Key Analysis Elements for New Offshore O il and Gas Extraction Facilities , costs were first tallied on an as-incurred, year-byyear basis over the total time period of analysis, consider ing the latest year in which any affected facility is assumed to reach compliance (2026 for new offshore oil a nd gas extraction facilities, 2014 for existing facilities) and for a period of 30 years in which facilities are assumed to continue complia nce, for the purposes of the social cost analysis. Thus, for the social cost analysis, the analysis period extends to 2055 for new facilities and to 2043 for existing facilities. 4 

### These profiles of costs by year were then discounted to the assumed year when this final rule would take effect, beginning of year 2007, at tw o values of the discount rate, 3% and 7%. These discount rate values reflect guidance from the Office of Manage ment and Budget (OMB) regulatory analysis guidance document, Circular A-4 (OMB, 2003). After calculating th e present value of these cost streams, EPA calculated their constant annual equivalent value (annualized value) using the annualization formula presented in Chapter C1 , again using the two values of the discount rate, 3% and 7%. At a 3% discount rate, EPA estimates annualized direct costs of compliance of $3.5 million under the Phase III final regulation. The three regulatory analysis options considered resulted in annualized direct costs of compliance of $41.1 million (50 MGD All option), $22.8 million (200 MGD All Option) and $17.9 million (100 MGD CWB Option). At a 7% discount rate, these costs amount to $2.9 million (final rule), $41.2 million (50 MGD All Option), $22.9 million (200 MGD All Option), and $16.8 million (100 MGD CWB Option).

4 

### Tables E1-6 through E1-8 below present the time profiles of regulatory costs for the three regulatory analysis options for existing facilities, combined with the final rule for new offshore oil and gas extraction facilities.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1-3§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



### Table E1-1: Summary of Annualized Direct Co sts by Industry Segments (millions, $2004) 50 MGD All for Existing 200 MGD All for Existing 100 MGD CWB for Existing

Facilities and for New Facilities and Final Facilities and Final OOGE Facilities (2 MGD Regulation for New OOGE Regulation for New OOGE All) Facilities (2 MGD All) Facilities (2 MGD All) 3% 7% 3% 7% 3% 7% New Oil & Gas Facilities $3.5 $2.9 $3.5 $2.9 $3.5 $2.9 Existing Manufacturing Facilities Primary Manufacturing Industries $36.3 $37.1 $18.8 $19.5 $13.7 $13.3
Other Industries $1.3 $1.2 $0.5 $0.4 $0.7 $0.7 Total Existing Facilities a $37.6 $38.3 $19.3 $20.0 $14.4 $13.9 Total Direct Facility Costs a $41.1 $41.2 $22.8 $22.9 $17.9 $16.8

a Individual numbers may not add up to totals due to independent rounding. Source: U.S. EPA Analysis, 2006.



## E1-2 S TATE AND 

## F EDERAL 

## A DMINISTRATIVE 

## C OSTS 

### Social costs also include costs to State and Federal governments of administering the permitting and compliance monitoring activities under the final regulation. State and Federal permitting authorities incur costs to administer the rule, including labor costs to write permits and to conduct compliance monitoring and enforcement activities. Chapter D2: UMRA Analysis presents more information on State and Federal implementation costs. EPA’s estimate of State and Federal government cost for administering the final rule is $0.44 million at a 3% discount rate and $0.34 million at a 7% discount rate. When the regulatory analysis options for existing facilities are included, EPA estimates administrative costs of $1.09 million at a 3% discount rate under the 50 MGD All option. The 200 MGD and 100 MGD options resulted in administrative costs of $0.61 million and $0.64 million at a 3% discount rate, respectively. At a 7% disc ount rate, these costs amount to $0.99 million (50 MGD All Option), $0.50 million (200 MGD All Option), and $0.54 million (100 MGD CWB Option). Table E1-2: Summary of Annualized Government Costs (millions, $2004) Final Regulation for New OOGE Facilities (2 MGD All) 3% 7% New OOGE Facilities: State Admin. Costs n/a n/a Federal Admin. Costs $0.44 $0.34 Total New OOGE Facilitie s Administrative Cost $0.44 $0.34

a Individual numbers may not add up to totals due to independent rounding.

E1-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



### Table E1-3: Summary of Annualized Government Costs (millions, $2004) 50 MGD All for Existing 200 MGD All for Existing 100 MGD CWB for Existing Facilities and Final Facilities and Final Facilities and Final Regulation for New OOGE Regulation for New OOGE Regulation for New OOGE

Facilities (2 MGD All) Facilities (2 MGD All) Facilities (2 MGD All)

3% 7% 3% 7% 3% 7% Existing Facilities: State Admin. Costs $0.63 $0.64 $0.16 $0.16 $0.19 $0.19 Federal Admin. Costs $0.01 $0.01 <$0.01 < $0.01 < $0.01 < $0.01 Total Existing Facilities Administrative Cost a $0.64 $0.65 $0.17 $0.16 $0.19 $0.19
New OOGE Facilities: State Admin. Costs n/a n/a N/a n/a n/a n/a Federal Admin. Costs $0.44 $0.34 $0.44 $0.34 $0.44 $0.34 Total New OOGE Facilities Administrative Cost $0.44 $0.34 $0.44 $0.34 $0.44 $0.34
Total Gov. Administrative Costs a $1.09 $0.99 $0.61 $0.50 $0.64 $0.54

a Individual numbers may not add up to totals due to independent rounding. Source: U.S. EPA Analysis, 2006.



## E1-3 T OTAL 

## S OCIAL 

## C OST 

### Table E1-4 and Table E1-5 combine the information presented above by industry segment and major cost category – direct facility costs and administrative costs – and reports the total social costs of the final rule and the three alternative options considered discounted at a 3% a nd 7% rate. At 3% and 7% discount rates, the estimated total annualized social costs of the final rule are $3.9 and $3.2 million, respectively. When the regulatory analysis options for existing facilities are included, the estimated to tal annualized social costs at a 3% discount rate are $42.0 million for the 50 MGD All option, $23.2 million fo r the 200 MGD All Option, and $18.3 million for the 100 MGD CWB Option. At a 7% discount rate the estimat ed total annualized social costs are $42.1 million for the 50 MGD All Option, $23.2 million for the 200 M GD All Option, and $17.2 million for the 100 MGD CWB Option (all values in 2003$). As shown in Table E1-5, following page, existing facilities (Manufacturers) account for the substantial ma jority of total social cost under the three regulatory analysis options. At a 3% discount rate, annualized pre-tax costs per facility in the Manufacturers segment amount to $262,000 for the 50 MGD All option, $628,000 for the 200 MGD All option, and $633,000 for the 100 MGD CWB option. At a 7% discount rate, annualized pre-tax costs in the manufacturers segment amount to $267,000 for the 50 MGD All option, $650,000 for the 200 MGD All option, and $ 614,000 for the 100 MGD CWB option. Becau se the 200 MGD option and the 100 MGD option apply national categorical requirements to a smaller number of facilities than the 50 MGD All option, they result in a lower total national cost but a higher cost per regulated facility. Facilities that are subject to the national requirements of the 200 MGD option and the 100 MGD option incur the same compliance costs as under the 50 MGD All option; however, the average costs per regulated facility are higher under the 200 MGD and 100 MGD options because only the higher flow, and therefore highe r cost, facilities incur costs under these options. For facilities in the new offshore oil a nd gas extraction industry segment, per facility costs under the final rule are approximately $32,000 at a 3% discount rate and $26,000 at a 7% discount rate.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1-5§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



### Table E1-4: Summary of Annualized Social Costs (millions, $2004)

New OOGE Facilities: $3.5 $2.9 $0.4 $0.3 $3.9 $3.2 3% 7%

a Source: 

### Table E1-5: Summary of Annualized Social Costs (millions, $2004)

MGD All) and for New All) 3% 7% 3% 7% 3% 7%

$37.6 $38.3 $19.3 $20.0 $14.4 $13.9

Costs $0.6 $0.6 $0.2 $0.2 $0.2 $0.2 $38.2 $39.0 $19.5 $20.2 $14.6 $14.1 New OOGE Facilities: $3.5 $2.9 $3.5 $2.9 $3.5 $2.9

Costs $0.4 $0.3 $0.4 $0.3 $0.4 $0.3

Cost $3.9 $3.2 $3.9 $3.2 $3.9 $3.2 $42.1 $42.2 $23.4 $23.4 $18.5 $17.4

a Source: Total Direct Facility Costs Total Government Administrative Costs Total New OOGE Fac ilities Social Cost Final Regulation for New OOGE Facilities (2 MGD All)

Individual numbers may not add up to totals due to independent rounding. U.S. EPA Analysis, 2006.

Final Regulation for Existing Facilities (50 200 MGD All for Existing 100 MGD CWB for Existing Facilities and Final Facilities and Final OOGE Facilities (2 MGD Regulation for New OOGE Regulation for New OOGE Facilities (2 MGD All) Facilities (2 MGD All)

Existing Facilities: Total Direct Facility Costs Total Government Administrative
Total Existing Facilities Social Cost

Total Direct Facility Costs Total Government Administrative

Total New OOGE Fa cilities Social

Total Social Cost Individual numbers may not add up to totals due to independent rounding. U.S. EPA Analysis, 2006.


### Table E1-6 through Table E1-8, beginning at page E1-7 , provide additional detail on the compliance cost calculations. The tables compile, for the three regulatory analysis options for existing facilities, and for the final rule for new offshore oil and gas extraction facilities, the time profiles of costs incurred by the regulated industry segments, administrative costs, and total costs. The ta bles also report the calculated present and annualized values of costs at 3% and 7% discount rates. Time profiles fo r the supplemental options analyzed for existing facilities are presented in the appendix to this chapter.

E1-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts

Year Total Administrative Costs Total Facilities Administrative Costs Total

2007 $3.0 $0.2 $3.2 $2.0 $0.0 $2.0 $5.2 2008 $12.1 $0.0 $12.1 $1.9 $0.0 $1.9 $13.9 2009 $17.5 $0.0 $17.5 $1.9 $0.0 $1.9 $19.4 2010 $136.7 $1.3 $138.0 $1.2 $0.0 $1.2 $139.2 2011 $92.7 $2.4 $95.2 $1.8 $0.0 $1.8 $96.9 2012 $57.7 $1.1 $58.8 $2.0 $0.5 $2.5 $61.3 2013 $57.9 $1.1 $59.0 $2.4 $0.2 $2.5 $61.5 2014 $18.6 $0.4 $19.0 $2.2 $0.7 $2.9 $21.9 2015 $21.3 $0.5 $21.8 $1.9 $0.3 $2.2 $24.0 2016 $16.0 $0.9 $16.8 $1.8 $0.3 $2.1 $18.9 2017 $16.9 $0.5 $17.3 $4.4 $0.5 $4.9 $22.2 2018 $13.2 $0.4 $13.7 $2.9 $0.3 $3.2 $16.9 2019 $17.7 $0.2 $17.9 $4.0 $0.6 $4.6 $22.5 2020 $38.1 $0.5 $38.6 $3.1 $0.4 $3.5 $42.1 2021 $91.1 $0.9 $92.0 $3.1 $0.4 $3.5 $95.5 2022 $21.3 $0.5 $21.7 $5.1 $0.7 $5.9 $27.6 2023 $57.8 $0.4 $58.2 $3.2 $0.4 $3.6 $61.8 2024 $18.5 $0.2 $18.8 $4.8 $0.7 $5.5 $24.3 2025 $21.3 $0.5 $21.8 $3.2 $0.5 $3.7 $25.5 2026 $16.0 $0.9 $16.8 $3.2 $0.5 $3.6 $20.5 2027 $16.9 $0.5 $17.3 $5.2 $0.8 $6.0 $23.3 2028 $13.2 $0.4 $13.7 $3.1 $0.3 $3.4 $17.1 2029 $17.7 $0.2 $17.9 $4.4 $0.7 $5.1 $23.0 2030 $38.1 $0.5 $38.6 $3.1 $0.3 $3.4 $42.0 2031 $91.1 $0.9 $92.0 $3.1 $0.3 $3.4 $95.4 2032 $21.3 $0.5 $21.7 $5.5 $0.8 $6.2 $27.9 2033 $57.8 $0.4 $58.2 $3.1 $0.3 $3.4 $61.6 2034 $18.5 $0.2 $18.8 $4.9 $0.7 $5.6 $24.4 2035 $21.3 $0.5 $21.8 $3.1 $0.3 $3.4 $25.2 2036 $16.0 $0.9 $16.8 $3.1 $0.3 $3.4 $20.2 2037 $16.9 $0.5 $17.3 $4.2 $0.7 $4.9 $22.2 2038 $13.2 $0.4 $13.7 $2.0 $0.3 $2.3 $16.0 2039 $12.2 $0.2 $12.5 $3.2 $0.6 $3.8 $16.3 2040 $10.1 $0.1 $10.2 $1.9 $0.3 $2.2 $12.4 2041 $4.8 $0.1 $4.9 $1.9 $0.3 $2.1 $7.0 2042 $3.5 $0.0 $3.5 $3.9 $0.5 $4.4 $7.9 2043 $0.3 $0.0 $0.3 $1.8 $0.2 $2.0 $2.3 2044 $2.6 $0.4 $3.0 $3.0 2045 $1.7 $0.2 $1.8 $1.8 2046 $1.6 $0.2 $1.8 $1.8 2047 $2.2 $0.3 $2.5 $2.5 2048 $0.6 $0.1 $0.7 $0.7 2049 $1.1 $0.2 $1.3 $1.3 2050 $0.3 $0.1 $0.4 $0.4 2051 $0.2 $0.1 $0.3 $0.3 2052 $1.5 $0.1 $1.7 $1.7 2053 $0.1 $0.0 $0.2 $0.2 2054 $0.6 $0.1 $0.7 $0.7 2055 $0.0 $0.0 $0.1 $0.1 PV 3% $759.6 $13.0 $772.6 $70.6 $9.0 $79.5 $852.1 Annualized 3% $37.6 $0.64 $3.5 $0.44 $3.9 $42.2 PV 7% $509.1 $8.62 $517.8 $38.8 $4.5 $43.3 $561.1 Annualized 7% $38.3 $0.65 $2.9 $0.34 $3.3 $42.3 Source: 

### Table E1-6: Time Profile of Compliance Costs for the 50 MGD All Waterbodies Option for Existing Facilities and the Final Rule for New OOGE Facilities (millions; $2004)

Existing Facilities (Manufacturers) New OOGE Facilities Facilities

$38. 3
$39. 0 U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1-7§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts

Year Total Administrative Costs Total Facilities Administrative Costs Total
2007 $0.0 $0.2 $0.2 $2.0 $0.0 $2.0 $2.2 2008 $2.6 $0.0 $2.6 $1.9 $0.0 $1.9 $4.5 2009 $3.1 $0.0 $3.1 $1.9 $0.0 $1.9 $5.0 2010 $108.9 $0.0 $108.9 $1.2 $0.0 $1.2 $110.1 2011 $43.9 $0.8 $44.7 $1.8 $0.0 $1.8 $46.4 2012 $6.7 $0.1 $6.8 $2.0 $0.5 $2.5 $9.4 2013 $47.7 $0.5 $48.1 $2.4 $0.2 $2.5 $50.6 2014 $5.5 $0.1 $5.7 $2.2 $0.7 $2.9 $8.6 2015 $8.3 $0.1 $8.4 $1.9 $0.3 $2.2 $10.6 2016 $5.9 $0.3 $6.1 $1.8 $0.3 $2.1 $8.2 2017 $7.9 $0.1 $8.0 $4.4 $0.5 $4.9 $12.9 2018 $5.9 $0.2 $6.0 $2.9 $0.3 $3.2 $9.2 2019 $5.5 $0.1 $5.6 $4.0 $0.6 $4.6 $10.1 2020 $14.1 $0.0 $14.2 $3.1 $0.4 $3.5 $17.6 2021 $43.9 $0.3 $44.2 $3.1 $0.4 $3.5 $47.7 2022 $8.3 $0.1 $8.4 $5.1 $0.7 $5.9 $14.3 2023 $47.6 $0.2 $47.8 $3.2 $0.4 $3.6 $51.4 2024 $5.5 $0.1 $5.6 $4.8 $0.7 $5.5 $11.1 2025 $8.3 $0.0 $8.4 $3.2 $0.5 $3.7 $12.1 2026 $5.9 $0.3 $6.1 $3.2 $0.5 $3.6 $9.7 2027 $7.9 $0.1 $8.0 $5.2 $0.8 $6.0 $13.9 2028 $5.9 $0.2 $6.0 $3.1 $0.3 $3.4 $9.4 2029 $5.5 $0.1 $5.6 $4.4 $0.7 $5.1 $10.6 2030 $14.1 $0.0 $14.2 $3.1 $0.3 $3.4 $17.6 2031 $43.9 $0.3 $44.2 $3.1 $0.3 $3.4 $47.6 2032 $8.3 $0.1 $8.4 $5.5 $0.8 $6.2 $14.6 2033 $47.6 $0.2 $47.8 $3.1 $0.3 $3.4 $51.2 2034 $5.5 $0.1 $5.6 $4.9 $0.7 $5.6 $11.2 2035 $8.3 $0.0 $8.4 $3.1 $0.3 $3.4 $11.8 2036 $5.9 $0.3 $6.1 $3.1 $0.3 $3.4 $9.5 2037 $7.9 $0.1 $8.0 $4.2 $0.7 $4.9 $12.9 2038 $5.9 $0.2 $6.0 $2.0 $0.3 $2.3 $8.3 2039 $5.5 $0.1 $5.5 $3.2 $0.6 $3.8 $9.3 2040 $5.2 $0.0 $5.3 $1.9 $0.3 $2.2 $7.4 2041 $2.6 $0.0 $2.6 $1.9 $0.3 $2.1 $4.7 2042 $2.4 $0.0 $2.4 $3.9 $0.5 $4.4 $6.8 2043 $0.1 $0.0 $0.1 $1.8 $0.2 $2.0 $2.1 2044 $2.6 $0.4 $3.0 $3.0 2045 $1.7 $0.2 $1.8 $1.8 2046 $1.6 $0.2 $1.8 $1.8 2047 $2.2 $0.3 $2.5 $2.5 2048 $0.6 $0.1 $0.7 $0.7 2049 $1.1 $0.2 $1.3 $1.3 2050 $0.3 $0.1 $0.4 $0.4 2051 $0.2 $0.1 $0.3 $0.3 2052 $1.5 $0.1 $1.7 $1.7 2053 $0.1 $0.0 $0.2 $0.2 2054 $0.6 $0.1 $0.7 $0.7 2055 $0.0 $0.0 $0.1 $0.1 PV 3% $390.0 $3.2 $393.2 $70.6 $9.0 $79.5 $472.8 Annualized 3% $19.3 $0.16 $3.5 $0.44 $3.9 $23.4 PV 7% $265.2 $2.2 $267.4 $38.8 $4.5 $43.3 $310.7 Annualized 7% $20.0 $0.16 $2.9 $0.34 $3.3 $23.4 Source: 

### Table E1-7: Time Profile of Compliance Costs for th e 200 MGD for All Waterbodies Option for Existing Facilities and the Final Rule for New OOGE Facilities (millions; $2004)

Existing Facilities (Manufacturers) New OOGE Facilities
Facilities

$19. 5
$20. 1 U.S. EPA Analysis, 2006.

E1-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



### Table E1-8: Time Profile of Compliance Costs fo r the 100 MGD for Certain Waterbodies Option for Existing Facilities and the Final Rule for New OOGE Facilities (millions; $2004) Existing Facilities (Manufacturers) New OOGE Facilities Year Facilities Administrative Costs Total Facilities Administrative Costs Total Total

2007 $0.4 $0.2 $0.6 $2.0 $0.0 $2.0 $2.6 2008 $5.2 $0.0 $5.2 $1.9 $0.0 $1.9 $7.1 2009 $5.1 $0.0 $5.1 $1.9 $0.0 $1.9 $7.1 2010 $14.7 $0.1 $14.8 $1.2 $0.0 $1.2 $15.9 2011 $55.6 $1.2 $56.8 $1.8 $0.0 $1.8 $58.6 2012 $5.7 $0.1 $5.9 $2.0 $0.5 $2.5 $8.4 2013 $36.3 $0.3 $36.6 $2.4 $0.2 $2.5 $39.1 2014 $4.3 $0.1 $4.5 $2.2 $0.7 $2.9 $7.4 2015 $8.8 $0.1 $8.8 $1.9 $0.3 $2.2 $11.0 2016 $4.3 $0.4 $4.7 $1.8 $0.3 $2.1 $6.8 2017 $5.6 $0.1 $5.7 $4.4 $0.5 $4.9 $10.6 2018 $4.3 $0.1 $4.4 $2.9 $0.3 $3.2 $7.6 2019 $4.3 $0.0 $4.4 $4.0 $0.6 $4.6 $8.9 2020 $12.8 $0.1 $12.9 $3.1 $0.4 $3.5 $16.3 2021 $54.7 $0.4 $55.1 $3.1 $0.4 $3.5 $58.6 2022 $6.0 $0.1 $6.1 $5.1 $0.7 $5.9 $12.0 2023 $36.3 $0.1 $36.4 $3.2 $0.4 $3.6 $40.0 2024 $4.3 $0.0 $4.4 $4.8 $0.7 $5.5 $9.9 2025 $8.8 $0.1 $8.8 $3.2 $0.5 $3.7 $12.5 2026 $4.3 $0.4 $4.7 $3.2 $0.5 $3.6 $8.3 2027 $5.6 $0.1 $5.7 $5.2 $0.8 $6.0 $11.7 2028 $4.3 $0.1 $4.4 $3.1 $0.3 $3.4 $7.8 2029 $4.3 $0.0 $4.4 $4.4 $0.7 $5.1 $9.4 2030 $12.8 $0.1 $12.9 $3.1 $0.3 $3.4 $16.3 2031 $54.7 $0.4 $55.1 $3.1 $0.3 $3.4 $58.5 2032 $6.0 $0.1 $6.1 $5.5 $0.8 $6.2 $12.3 2033 $36.3 $0.1 $36.4 $3.1 $0.3 $3.4 $39.8 2034 $4.3 $0.0 $4.4 $4.9 $0.7 $5.6 $10.0 2035 $8.8 $0.1 $8.8 $3.1 $0.3 $3.4 $12.2 2036 $4.3 $0.4 $4.7 $3.1 $0.3 $3.4 $8.1 2037 $5.6 $0.1 $5.7 $4.2 $0.7 $4.9 $10.6 2038 $4.3 $0.1 $4.4 $2.0 $0.3 $2.3 $6.7 2039 $3.9 $0.0 $4.0 $3.2 $0.6 $3.8 $7.8 2040 $3.8 $0.0 $3.9 $1.9 $0.3 $2.2 $6.0 2041 $1.0 $0.0 $1.0 $1.9 $0.3 $2.1 $3.1 2042 $0.8 $0.0 $0.9 $3.9 $0.5 $4.4 $5.2 2043 $0.1 $0.0 $0.1 $1.8 $0.2 $2.0 $2.1 2044 $2.6 $0.4 $3.0 $3.0 2045 $1.7 $0.2 $1.8 $1.8 2046 $1.6 $0.2 $1.8 $1.8 2047 $2.2 $0.3 $2.5 $2.5 2048 $0.6 $0.1 $0.7 $0.7 2049 $1.1 $0.2 $1.3 $1.3 2050 $0.3 $0.1 $0.4 $0.4 2051 $0.2 $0.1 $0.3 $0.3 2052 $1.5 $0.1 $1.7 $1.7 2053 $0.1 $0.0 $0.2 $0.2 2054 $0.6 $0.1 $0.7 $0.7 2055 $0.0 $0.0 $0.1 $0.1 PV 3% $290.3 $3.8 $294.1 $70.6 $9.0 $79.5 $373.6 Annualized 3% $14.4 $0.19 $3.5 $0.44 $3.9 $18.5 PV 7% $184.8 $2.6 $187.4 $38.8 $4.5 $43.3 $230.7 Annualized 7% $13.9 $0.20 $2.9 $0.34 $3.3 $17.4 Source: $14. 6
$14. 1 U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1-9§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



## E1-4 L IMITATIONS AND 

## U NCERTAINTIES


### EPA did not include in its estimate of social costs th e cost associated with unemployment that may result from facility closures. Potential unemployment-related costs would include the cost of administering unemployment programs for workers who are projected to lose employment (but not the cost of unemployment benefits, which are a transfer payment within societ y); and an estimate of the amount that workers would be willing to pay to avoid involuntary unemployment. However, from its facility impact analysis, EPA estimates that no facilitieswould close as a result of the final rule. EPA also did not recognize any possible savings in unemploymentrelated costs from jobs created by the rule as a negativ e cost (benefit) of the regulation. Accordingly, EPA estimates a zero cost of unemployment for the final rule. Another key uncertainty factor in the analysis of costs to society is EPA’s estimate of the cost of installation downtime in Manufacturers facilities. As described above , EPA adopted the assumption that the production cost for replacing the goods and services not provided by comply ing facilities due to installation downtime would be approximately equal to the price received for those goods and services in the market. To the extent that these replacement goods and services are produced at a cost less than selling price, this assumption would overstate the cost to society of installation downtime. The amount of potential overstatement is not known.

E1-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



## G LOSSARY 

### consumer surplus: The value that consumers derive from goods a nd services above the price they have to pay to obtain the goods and services. opportunity cost: The lost value of alternative uses of resources (capital, labor, and raw materials) used in regulatory compliance. producer surplus: The difference between what producers’ ear n on their output and the economic costs of producing that output, including a normal return on capital. social cost: The costs incurred by society as a whole as a result of the final rule. Social costs do not include costs that are transfers among parties that do not represent a new cost overall.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1-11§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis C hapter E1: Summary of Social Co sts



## R EFERENCES 

### Office of Management and Budget (OMB). 2003. Circul ar A-4, Regulatory Analysis. September 17, 2003. Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

E1-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns 

# Appendix E1A: Summary of Results for Supplemental Options

I NTRODUCTION 

### This appendix presents the social cost results for additional options that EPA analyzed for potential Phase III existing facilities in developing the Phase III regulation (the “Supplemental Options”). These options include:

f 

### For Electric Generator facilities with a DIF of 2 MGD or greater, but less than 50 MGD: 

## C HAPTER 

## C ONTENTS
Introductio n..........................................................E1A-1 E1A-1 Costs of Compliance by Regulated Industry Segment ..................................................E1A-1 E1A-2 State and Federal Administrative Costs ..E1A-2 E1A-3 Total Social Cost.....................................E1A-3



### Impingement-only requirements fo r all facilities on all waterbodies; Phase II-like requirements for all facilities on all waterbodies; and Impingement and Entrainment requireme nts for all facilities on all waterbodies.

f 

### For Manufacturing facilities with a DIF of 2 MGD or greater, but less than 50 MGD: Impingement-only requirements fo r all facilities on all waterbodies; Phase II-like requirements for all facilities on all waterbodies; and Impingement and Entrainment requireme nts for all facilities on all waterbodies.

f 

### For Manufacturing facilities with a DIF of 50 MGD or greater: Impingement-only requirements fo r all facilities on all waterbodies; Phase II-like requirements for all facilities on all waterbodies ( the Final Regulation ); and Impingement and Entrainment requireme nts for all facilities on all waterbodies. The “Impingement-only requirements for all facilities on all waterbodies” and “Impingement and Entrainment requirements for all facilities on all waterbodies” opt ions are bounding cases applyi ng lower and upper bound uniform requirements – Impingement-only requirements and Impingement and Entrainment requirements – regardless of specific facility circumstances. Because the Supplemental Options include options with an applicability threshold of less than 50 MGD, the analysis and reported costs for these options include costs for Electric Generators in addition to Manufacturers. For all options, facility counts and other results only incl ude those potential Phase III existing facilities that are (1) non-baseline closures and (2) subject to national categorical requirements under the option. See Chapter C3: Economic Impact Analysis for Manufacturers for more information on baseline closures and counts of facilities subject to national categorical requirements under each option. See the main body of this chapter for a description of data sources and methodologies used in these analyses.


## E1A-1 C OSTS OF 

## C OMPLIANCE BY 

## R EGULATED 

## I NDUSTRY 

## S EGMENT 

### Table E1A-1, following page, summarizes total direct facility costs for the five other options evaluated for existing facilities, at a 3% and a 7% discount rate. For a description of this analysis, see Section E1-1 above.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1A-1§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-1: Summary of Annualized Direct Costs by Regulated Industry Segments Existing Facilities (millions, $2004)

$2.1 $3.0 $7.9 $20.9 $34.0 $55.3 $24.6 $37.6 $45.3

a $47.6 $74.6 $108.5

$2.0 $2.9 $8.6 $22.0 $36.3 $59.1 $25.6 $38.3 $45.4

a $49.6 $77.5 $113.1

a Source:



## E1A-2 S TATE AND 

## F EDERAL 

## A C OSTS



### 2 above.

(millions, $2004)

$0.10 $0.15 $0.20 $0.00 $0.00 $0.00 Total Government Admin. Costs a,b $0.10 $0.15 $0.20

$0.56 $0.80 $1.24 $0.01 $0.02 $0.02 Total Government Admin. Costs a,b $0.58 $0.82 $1.26 Manufacturers 50+ MGD $0.40 $0.57 $0.77 $0.01 $0.01 $0.01 Total Government Admin. Costs a,b $0.41 $0.58 $0.78

a
b Source: I-only Everywhere I&E Like Phase II I&E Everywhere 3 % Discount Rate Electric Generators Manufacturers 2-50 MGD Manufacturers 50+ MGD Total Direct Facility Costs

Electric Generators Manufacturers 2-50 MGD Manufacturers 50+ MGD Total Direct Facility Costs 7% Discount Rate

Individual numbers may not add up to totals due to independent rounding. U.S. EPA Analysis, 2006.



### DMINISTRATIVE 

### Table E1A-2 and Table E1A-3, following page, present annualized costs to State and Federal governments of administering the permitting and compliance monitoring activities for the supplemental options evaluated for existing facilities at the 3% and 7% discount rates, respec tively. For a description of this analysis, see section E1-

Table E1A-2: Summary of Annualized Government Costs for Existing Facilities at 3% Discount Rate

I-only Everywhere I&E Like Phase II I&E Everywhere Electric Generators 2 – 50 MGD State Admin. Costs Federal Admin. Costs
Manufacturers 2 – 50 MGD State Admin. Co sts Federal Admin. Co sts

State Admin. Co sts Federal Admin. Co sts
Individual numbers may not add up to totals due to independent rounding. Excludes State start-up costs of $8, 987 not attributable to industry segments. U.S. EPA Analysis, 2006.

E1A-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### (millions, $2004)

$0.10 $0.14 $0.20 $0.00 $0.01 $0.01 Total Government Admin. Costs a,b $0.10 $0.15 $0.20

$0.54 $0.80 $1.22 $0.02 $0.02 $0.03 Total Government Admin. Costs a,b $0.56 $0.82 $1.24 Manufacturers 50+ MGD $0.39 $0.58 $0.79 $0.01 $0.01 $0.01 Total Government Admin. Costs a,b $0.40 $0.59 $0.80

a
b Source:



## E1A-3 T OTAL 

## S C OST



### For a

(millions, $2004)

$2.1 $3.0 $7.9 $0.1 $0.2 $0.2

a $2.2 $3.2 $8.1

$20.9 $34.0 $55.3

$0.6 $0.8 $1.3

a $21.5 $34.8 $56.6 Manufacturers 50+ MGD $24.6 $37.6 $45.3

$0.4 $0.6 $0.8

a $25.0 $38.2 $46.1

a Source:



### Table E1A-3: Summary of Annualized Government Costs for Existing Facilities at 7% Discount Rate

I-only Everywhere I&E Like Phase II I&E Everywhere Electric Generators 2 – 50 MGD State Admin. Costs Federal Admin. Costs
Manufacturers 2 – 50 MGD State Admin. Co sts Federal Admin. Co sts

State Admin. Co sts Federal Admin. Co sts
Individual numbers may not add up to totals due to independent rounding. Excludes State start-up costs of $13,664 not attributable to industry segments. U.S. EPA Analysis, 2006.



### OCIAL 

### Table E1A-4 and Table E1A-5 present the total social co sts of the supplemental options evaluated for existing facilities, including direct facility costs and government administrative costs, at a 3% and a 7% discount rate, respectively. Table E1A-6 through Table E1A-13 present the time profiles for the five other options. description of these analyses, see section E1-3 above. Table E1A-4: Summary of Annualized Social Cost s for Existing Facilities at 3% Discount Rate

I-only Everywhere I&E Like Phase II I&E Everywhere Electric Generators 2 – 50 MGD Total Direct Facility Costs Total Government Administ rative Costs Total Social Cost Manufacturers 2 – 50 MGD Total Direct Facility Costs Total Government Administ rative Costs Total Social Cost
Total Direct Facility Costs Total Government Administ rative Costs Total Social Cost Individual numbers may not add up to totals due to independent rounding. U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1A-3§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-5: Summary of Annualized Social Cost s for Existing Facilities at 7% Discount Rate (millions, $2004) I-only Everywhere I&E Like Phase II I&E Everywhere Electric Generators 2 – 50 MGD Total Direct Facility Costs $2.0 $2.9 $8.6 Total Government Administ rative Costs $0.1 $0.1 $0.2 Total Social Cost a $2.1 $3.0 $8.8 Manufacturers 2 – 50 MGD Total Direct Facility Costs $22.0 $36.3 $59.1 Total Government Administ rative Costs $0.6 $0.8 $1.2 Total Social Cost a $22.5 $37.1 $60.3 Manufacturers 50+ MGD Total Direct Facility Costs $25.6 $38.3 $45.4 Total Government Administ rative Costs $0.4 $0.6 $0.8 Total Social Cost a $26.0 $39.0 $46.2

a Individual numbers may not add up to totals due to independent rounding. Source: U.S. EPA Analysis, 2006.

E1A-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-6: Time Profile of Compliance Costs for Existing Electric Generators with DIF of 2 to 50 MGD Under the I-only Everywhere Option (millions, $2004) Year Cost of Compliance for Existing Generators Administrative Costs Total Cost
2007 $0.2 $0.0 $0.2 2008 $0.9 $0.0 $0.9 2009 $1.6 $0.0 $1.6 2010 $2.4 $0.3 $2.7 2011 $3.9 $0.1 $4.0 2012 $3.3 $0.2 $3.6 2013 $1.9 $0.2 $2.1 2014 $3.3 $0.2 $3.5 2015 $1.2 $0.1 $1.3 2016 $1.6 $0.1 $1.7 2017 $1.5 $0.1 $1.5 2018 $1.8 $0.1 $1.8 2019 $1.7 $0.1 $1.8 2020 $1.9 $0.1 $2.0 2021 $3.1 $0.1 $3.2 2022 $2.8 $0.1 $2.9 2023 $2.0 $0.1 $2.1 2024 $3.0 $0.1 $3.1 2025 $1.2 $0.1 $1.3 2026 $1.6 $0.1 $1.7 2027 $1.5 $0.1 $1.5 2028 $1.8 $0.1 $1.8 2029 $1.7 $0.1 $1.8 2030 $1.9 $0.1 $2.0 2031 $3.1 $0.1 $3.2 2032 $2.8 $0.1 $2.9 2033 $2.0 $0.1 $2.1 2034 $3.0 $0.1 $3.1 2035 $1.2 $0.1 $1.3 2036 $1.6 $0.1 $1.7 2037 $1.5 $0.1 $1.5 2038 $1.8 $0.1 $1.8 2039 $0.8 $0.1 $0.9 2040 $0.6 $0.0 $0.6 2041 $0.5 $0.0 $0.5 2042 $0.3 $0.0 $0.3 2043 $0.2 $0.0 $0.2 PV 3% $43.1 $2.1 $45.2 Annualized 3% $2.1 $0.1 $2.2 PV 7% $27.0 $1.36 $28.4 Annualized 7% $2.0 $0.1 $2.1 Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1A-5§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-7: Time Profile of Compliance Costs for Existing Electric Generators with DIF of 2 to 50 MGD Under the I&E Like Phase II Option (millions, $2004) Year Cost of Compliance for Existing Generators Administrative Costs Total Cost
2007 $0.2 $0.0 $0.2 2008 $1.4 $0.0 $1.4 2009 $2.1 $0.0 $2.1 2010 $3.9 $0.4 $4.3 2011 $4.9 $0.2 $5.1 2012 $4.1 $0.3 $4.4 2013 $2.6 $0.3 $2.9 2014 $5.2 $0.4 $5.6 2015 $2.2 $0.2 $2.3 2016 $2.3 $0.1 $2.3 2017 $2.2 $0.1 $2.3 2018 $2.5 $0.1 $2.7 2019 $2.4 $0.1 $2.5 2020 $3.3 $0.1 $3.4 2021 $3.2 $0.1 $3.3 2022 $3.5 $0.1 $3.6 2023 $2.8 $0.1 $2.9 2024 $4.5 $0.1 $4.6 2025 $2.2 $0.1 $2.3 2026 $2.3 $0.1 $2.3 2027 $2.2 $0.1 $2.3 2028 $2.5 $0.1 $2.7 2029 $2.4 $0.1 $2.5 2030 $3.3 $0.1 $3.4 2031 $3.2 $0.1 $3.3 2032 $3.5 $0.1 $3.6 2033 $2.8 $0.1 $2.9 2034 $4.5 $0.1 $4.6 2035 $2.2 $0.1 $2.3 2036 $2.3 $0.1 $2.3 2037 $2.2 $0.1 $2.3 2038 $2.5 $0.1 $2.7 2039 $1.4 $0.1 $1.6 2040 $1.1 $0.0 $1.1 2041 $0.9 $0.0 $0.9 2042 $0.6 $0.0 $0.6 2043 $0.4 $0.0 $0.4 PV 3% $61.1 $3.0 $64.1 Annualized 3% $3.0 $0.2 $3.2 PV 7% $38.1 $1.98 $40.1 Annualized 7% $2.9 $0.1 $3.0 Source: U.S. EPA Analysis, 2006.

E1A-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-8: Time Profile of Compliance Costs for Existing Electric Generators with DIF of 2 to 50 MGD Under the I&E Everywhere Option (millions, $2004) Year Cost of Compliance for Existing Generators Administrative Costs Total Cost
2007 $0.3 $0.0 $0.3 2008 $1.8 $0.0 $1.8 2009 $3.4 $0.0 $3.4 2010 $40.4 $0.6 $40.9 2011 $41.7 $0.2 $41.9 2012 $5.3 $0.5 $5.8 2013 $5.0 $0.3 $5.4 2014 $6.3 $0.5 $6.8 2015 $3.3 $0.2 $3.5 2016 $4.2 $0.1 $4.3 2017 $3.3 $0.2 $3.5 2018 $4.0 $0.1 $4.1 2019 $3.7 $0.2 $3.9 2020 $7.6 $0.2 $7.8 2021 $5.8 $0.1 $5.9 2022 $4.7 $0.2 $4.9 2023 $5.4 $0.1 $5.5 2024 $5.6 $0.2 $5.7 2025 $3.3 $0.2 $3.5 2026 $4.2 $0.1 $4.3 2027 $3.3 $0.2 $3.5 2028 $4.0 $0.1 $4.1 2029 $3.7 $0.2 $3.9 2030 $7.6 $0.2 $7.8 2031 $5.8 $0.1 $5.9 2032 $4.7 $0.2 $4.9 2033 $5.4 $0.1 $5.5 2034 $5.6 $0.2 $5.7 2035 $3.3 $0.2 $3.5 2036 $4.2 $0.1 $4.3 2037 $3.3 $0.2 $3.5 2038 $4.0 $0.1 $4.1 2039 $2.5 $0.2 $2.7 2040 $1.9 $0.0 $1.9 2041 $1.5 $0.0 $1.6 2042 $0.9 $0.0 $0.9 2043 $0.5 $0.0 $0.5 PV 3% $158.7 $4.1 $162.8 Annualized 3% $7.9 $0.2 $8.1 PV 7% $113.8 $2.69 $116.5 Annualized 7% $8.6 $0.2 $8.8 Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1A-7§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-9: Time Profile of Compliance Costs fo r Existing Manufacturers with DIF of 2 to 50 MGD Under the I-only Everywhere Option (millions, $2004) Year Cost of Compliance for Existing Manufacturers Administrative Costs Total Cost
2007 $0.4 $0.0 $0.4 2008 $5.0 $0.0 $5.0 2009 $9.6 $0.0 $9.6 2010 $21.3 $0.5 $21.8 2011 $27.8 $1.1 $28.9 2012 $177.5 $1.8 $179.3 2013 $14.0 $1.3 $15.3 2014 $10.7 $0.8 $11.5 2015 $12.3 $0.4 $12.6 2016 $13.7 $0.5 $14.2 2017 $11.9 $0.7 $12.6 2018 $8.1 $0.5 $8.6 2019 $7.4 $0.4 $7.8 2020 $15.9 $0.3 $16.3 2021 $23.8 $0.5 $24.3 2022 $19.5 $0.7 $20.2 2023 $13.8 $0.5 $14.3 2024 $10.7 $0.4 $11.0 2025 $12.3 $0.3 $12.6 2026 $13.7 $0.5 $14.2 2027 $11.9 $0.7 $12.6 2028 $8.1 $0.5 $8.6 2029 $7.4 $0.4 $7.8 2030 $15.9 $0.3 $16.3 2031 $23.8 $0.5 $24.3 2032 $19.5 $0.7 $20.2 2033 $13.8 $0.5 $14.3 2034 $10.7 $0.4 $11.0 2035 $12.3 $0.3 $12.6 2036 $13.7 $0.5 $14.2 2037 $11.9 $0.7 $12.6 2038 $8.1 $0.5 $8.6 2039 $6.0 $0.4 $6.3 2040 $5.5 $0.2 $5.7 2041 $4.0 $0.1 $4.2 2042 $2.1 $0.1 $2.2 2043 $0.7 $0.0 $0.7 PV 3% $422.6 $11.7 $434.3 Annualized 3% $20.9 $0.6 $21.5 PV 7% $291.5 $7.43 $298.9 Annualized 7% $22.0 $0.6 $22.5 Source: U.S. EPA Analysis, 2006.

E1A-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-10: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 2 to 50 MGD Under the I&E Like Phase II Option (millions, $2004) Year Cost of Compliance for Existing Manufacturers Administrative Costs Total Cost
2007 $1.7 $0.0 $1.7 2008 $8.4 $0.0 $8.4 2009 $14.8 $0.0 $14.8 2010 $63.9 $0.9 $64.8 2011 $127.8 $2.4 $130.2 2012 $187.5 $2.7 $190.3 2013 $21.3 $2.0 $23.3 2014 $18.1 $1.0 $19.0 2015 $18.6 $0.5 $19.1 2016 $19.9 $0.6 $20.5 2017 $17.7 $0.9 $18.6 2018 $14.5 $0.6 $15.1 2019 $14.7 $0.4 $15.1 2020 $25.9 $0.5 $26.4 2021 $32.6 $0.6 $33.2 2022 $29.1 $0.9 $29.9 2023 $21.6 $0.6 $22.2 2024 $17.9 $0.4 $18.4 2025 $18.6 $0.5 $19.0 2026 $19.9 $0.6 $20.5 2027 $17.7 $0.9 $18.6 2028 $14.5 $0.6 $15.1 2029 $14.7 $0.4 $15.1 2030 $25.9 $0.5 $26.4 2031 $32.6 $0.6 $33.2 2032 $29.1 $0.9 $29.9 2033 $21.6 $0.6 $22.2 2034 $17.9 $0.4 $18.4 2035 $18.6 $0.5 $19.0 2036 $19.9 $0.6 $20.5 2037 $17.7 $0.9 $18.6 2038 $14.5 $0.6 $15.1 2039 $11.1 $0.4 $11.5 2040 $9.5 $0.2 $9.7 2041 $6.2 $0.1 $6.4 2042 $3.1 $0.1 $3.1 2043 $0.9 $0.0 $1.0 PV 3% $686.0 $16.5 $702.5 Annualized 3% $34.0 $0.8 $34.8 PV 7% $481.5 $10.85 $492.3 Annualized 7% $36.3 $0.8 $37.1 Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1A-9§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-11: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 2 to 50 MGD Under the I&E Everywhere Option (millions, $2004) Year Cost of Compliance for Existing Manufacturers Administrative Costs Total Cost
2007 $2.0 $0.0 $2.0 2008 $10.4 $0.0 $10.4 2009 $18.3 $0.0 $18.3 2010 $73.7 $1.5 $75.2 2011 $136.9 $2.6 $139.6 2012 $196.5 $4.1 $200.6 2013 $317.4 $3.3 $320.7 2014 $28.2 $1.7 $29.9 2015 $26.8 $0.8 $27.6 2016 $30.3 $0.9 $31.1 2017 $28.2 $1.4 $29.6 2018 $23.0 $1.0 $24.0 2019 $24.6 $0.8 $25.4 2020 $38.3 $0.8 $39.1 2021 $43.0 $0.8 $43.8 2022 $39.5 $1.4 $40.9 2023 $29.7 $1.0 $30.7 2024 $27.9 $0.8 $28.7 2025 $26.8 $0.8 $27.6 2026 $30.3 $0.8 $31.1 2027 $28.2 $1.4 $29.6 2028 $23.0 $1.0 $24.0 2029 $24.6 $0.8 $25.4 2030 $38.3 $0.8 $39.1 2031 $43.0 $0.8 $43.8 2032 $39.5 $1.4 $40.9 2033 $29.7 $1.0 $30.7 2034 $27.9 $0.8 $28.7 2035 $26.8 $0.8 $27.6 2036 $30.3 $0.8 $31.1 2037 $28.2 $1.4 $29.6 2038 $23.0 $1.0 $24.0 2039 $19.2 $0.8 $20.0 2040 $15.9 $0.4 $16.2 2041 $12.0 $0.3 $12.2 2042 $6.6 $0.2 $6.8 2043 $2.4 $0.1 $2.5 PV 3% $1,117.1 $25.4 $1,142.5 Annualized 3% $55.3 $1.3 $56.6 PV 7% $784.5 $16.50 $801.0 Annualized 7% $59.1 $1.2 $60.3 Source: U.S. EPA Analysis, 2006.

E1A-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-12: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 50 MGD or Greater Under the I-Only Ev erywhere Option (millions, $2004) Year Cost of Compliance for Existing Manufacturers Administrative Costs Total Cost
2007 $1.6 $0.0 $1.6 2008 $8.2 $0.0 $8.2 2009 $12.2 $0.0 $12.2 2010 $119.7 $0.7 $120.5 2011 $40.3 $1.3 $41.6 2012 $53.6 $0.7 $54.3 2013 $29.2 $0.8 $30.0 2014 $12.9 $0.4 $13.2 2015 $16.2 $0.4 $16.6 2016 $11.8 $0.5 $12.3 2017 $11.6 $0.3 $12.0 2018 $9.5 $0.3 $9.8 2019 $12.0 $0.2 $12.2 2020 $26.8 $0.3 $27.2 2021 $38.8 $0.5 $39.3 2022 $16.4 $0.3 $16.7 2023 $29.1 $0.3 $29.4 2024 $12.8 $0.2 $13.0 2025 $16.2 $0.3 $16.5 2026 $11.8 $0.5 $12.3 2027 $11.6 $0.3 $12.0 2028 $9.5 $0.3 $9.8 2029 $12.0 $0.2 $12.2 2030 $26.8 $0.3 $27.2 2031 $38.8 $0.5 $39.3 2032 $16.4 $0.3 $16.7 2033 $29.1 $0.3 $29.4 2034 $12.8 $0.2 $13.0 2035 $16.2 $0.3 $16.5 2036 $11.8 $0.5 $12.3 2037 $11.6 $0.3 $12.0 2038 $9.5 $0.3 $9.8 2039 $8.5 $0.2 $8.7 2040 $7.1 $0.1 $7.2 2041 $3.2 $0.1 $3.3 2042 $2.3 $0.0 $2.3 2043 $0.2 $0.0 $0.2 PV 3% $496.3 $8.3 $504.6 Annualized 3% $24.6 $0.4 $25.0 PV 7% $340.3 $5.35 $345.7 Annualized 7% $25.6 $0.4 $26.0 Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E1A-11§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E1A: Supplemental Optio ns



### Table E1A-13: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 50 MGD or Greater Under the I&E Every where Option (millions, $2004) Year Cost of Compliance for Existing Manufacturers Administrative Costs Total Cost
2007 $3.3 $0.0 $3.3 2008 $14.2 $0.0 $14.2 2009 $21.5 $0.0 $21.5 2010 $58.0 $2.1 $60.0 2011 $166.6 $3.2 $169.8 2012 $64.7 $1.3 $66.0 2013 $116.3 $1.7 $118.1 2014 $28.1 $0.7 $28.9 2015 $26.3 $0.6 $26.9 2016 $20.0 $0.8 $20.9 2017 $21.8 $0.4 $22.2 2018 $18.6 $0.6 $19.1 2019 $23.8 $0.3 $24.1 2020 $45.6 $0.6 $46.2 2021 $101.4 $0.8 $102.3 2022 $28.0 $0.4 $28.4 2023 $66.1 $0.6 $66.7 2024 $28.0 $0.3 $28.4 2025 $26.3 $0.6 $26.9 2026 $20.0 $0.8 $20.8 2027 $21.8 $0.4 $22.2 2028 $18.6 $0.6 $19.1 2029 $23.8 $0.3 $24.1 2030 $45.6 $0.6 $46.2 2031 $101.4 $0.8 $102.3 2032 $28.0 $0.4 $28.4 2033 $66.1 $0.6 $66.7 2034 $28.0 $0.3 $28.4 2035 $26.3 $0.6 $26.9 2036 $20.0 $0.8 $20.8 2037 $21.8 $0.4 $22.2 2038 $18.6 $0.6 $19.1 2039 $16.7 $0.3 $17.0 2040 $13.2 $0.2 $13.4 2041 $6.8 $0.1 $6.9 2042 $5.0 $0.1 $5.1 2043 $0.8 $0.0 $0.8 PV 3% $914.7 $15.9 $930.6 Annualized 3% $45.3 $0.8 $46.1 PV 7% $603.3 $10.76 $614.0 Annualized 7% $45.4 $0.8 $46.2 Source: U.S. EPA Analysis, 2006.

E1A-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits 

# Chapter E2: Summary of Benefits

I NTRODUCTION 

### This chapter summarizes EPA’s analysis of the benefits of the three regulatory analysis options for Phase III existing facilities, the “50 MGD for All Waterbodies” option (“50 MGD All”), the “200 MGD for All Waterbodies” option (“200 MGD All”), and the “100 MGD for Certain Waterbodies” option (“100 MGD CWB”). The chapter presents the total monetary va lue of regional and national baseline losses and benefits for the regulatory analysis options. Benefits results for the supplemental options analyzed by EPA in developing the proposed and final Phase III regulation are presented in the appendix to this chapter. 

## C HAPTER 

## C ONTENTS

E2-1 E2-2

E2-3 E2-4 Introduction.............................................................E2-1 Calculating Losses and Benefits ................E2-1 Summary of Baseline Losses and Expected Reductions in I&E......................................E2-1 Time Profile of Benefits.............................E2-3 Total Annualized Monetary Value of Losses and Benefits ...............................................E2-9 References.............................................................E2-14



### The Regional Benefits Assessment for the Final S ection 316(b) Rule for Phase III Facilities (RBA) provides greater detail on the methods and data used in the re gional analyses (U.S. EPA, 2006). See Chapter A1 for a discussion of the methods used to estimate impingement and entrainment (I&E), and see Chapters A2 through A9 for discussion of the methods used to estimate the value of I&E losses and the benefits of the options evaluated for the final rule. The results of the regional anal yses are presented in Parts B through H of the RBA. EPA does not project benefits for facilities that have not yet been built because to do so would require projecting where these facilities would be built and/or operate. Theref ore, the benefits estimates presented in this section are underestimates because they do not reflect benefits asso ciated with reducing I&E at new offshore oil and gas extraction facilities.


## E2-1 C ALCULATING 

## L OSSES AND 

## B ENEFITS 

### EPA’s analysis of national baseline losses and benefits under the evaluated options includes 629 sample-weighted facilities in seven case study regions, excluding facilities that are expected to close in the baseline. The Agency calculated baseline losses by summing losses from all 629 fac ilities. EPA’s estimates of benefits are based on only those facilities that have requirements under each option. Quantifying and monetizing reductions in I&E due to the evaluated options considered for the final rule is challenging. As described in Chapters A3 and A6 of the RBA, EPA estimated non-use values qualitatively and, as a result, the estimated total benefits of the evalua ted options reflect use values only. The RBA discusses specific limitations and uncertainties associated with est imation of commercial and recreational benefits at the regional level. National benefit estimates, which are b ased on the regional estimates, are subject to the same uncertainties. The overall effect of these uncertainties is of unknown magnitude and direction (i.e., the estimates may over- or understate the anticipated national-level of use benefits); however, EPA has no data to indicate that the results for any of the benefit categories are atypical or unreasonable.


## E2-2 S UMMARY OF 

## B ASELINE 

## L OSSES AND 

## E XPECTED 

## R EDUCTIONS IN 

## I&E Based on the results of the regional analyses, EPA calcu lated total baseline I&E losses and the amount by which these losses would be reduced under each of the evaluate d options. Losses are presented using two measures of I&E:

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2- 1§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### 1. Age-one equivalent losses – the number of individua l fish of different ages impinged and entrained by facility intakes, expressed as age-one equivalents; and 2. Foregone fishery yield – pounds of commercial harves t and numbers of recreational fish and shellfish that are not harvested due to I&E, including indirect losses of harvested species due to losses of forage species. Table E2-1 presents baseline I&E losses for both measur es. As reported in Table E2-1, EPA estimates total national losses of age-one equivalents for all 629 faciliti es of 265 million fish. Nationwide, EPA estimates that 9.6 million pounds of fishery yield per year is foregone under current rates of I&E. Approximately 33% of all age-one equivalent losses, or 86.4 million fish, occur in th e Mid-Atlantic region. The Gulf of Mexico region has the highest foregone fishery yields with approximately 7.5 million pounds, followed by the Mid-Atlantic region with approximately 0.7 milli on pounds. More detailed di scussions of the I&E losses in each region are provided in Parts B through H of the RBA.

Table E2-1: Total Annual Baseline I&E Losses for Potential Phase III Ex isting Facilities by Region (thousands) Region Age-One Equivalents Foregone Fishery Yield (lbs) California 1,710 121 North Atlantic 2,310 11 Mid-Atlantic 86,400 682 South Atlantic 42,100 391 Gulf of Mexico 35,800 7,450 Great Lakes 31,500 374 Inland 65,100 609 National Total 265,000 9,640 Reflects all existing facilities potentially subject to the Phase III regulation as define d during the regulation’s development, and thus includes all manufacturing and electric power genera ting with design intake flow as low as 2 MGD. Source: U.S. EPA Analysis, 2006.


### To gauge the expected benefits of the regulatory anal ysis options, EPA estimated the extent to which these options would reduce the estimated baseline losses. These avoided losses are based on the expected reductions in I&E at each facility from implementation of the required compliance technologies. Table E2-2 reports, by region and option, the expected percentage reductions in I&E, and the estimated quantities of reduction in (1) losses in age-one equivalents and (2) foregone fishery yield. At the national level, EPA estimates that the 50 MGD All option would reduce age-one equivalent losses by 98.2 milli on fish and fishery yield loss by 4.8 million pounds. In comparison, the 200 MGD All option and the 100 M GD CWB option apply to smaller numbers of facilities and would result in slightly smaller reductions in I&E. The 200 MGD All option would reduce age-one equivalent losses by 74.5 million fish and fishery yi eld losses by 3.3 million pounds. The 100 MGD All option would reduce age-one equivalent losses by 71.1 million fish and fishery yield lo sses by 4.5 million pounds. The study regions show substantial va riation in the estimated reductions in I&E losses and avoided losses in ageone equivalents and foregone fishery yi eld. As reported in Table E2-2, the largest percentage reductions in I&E occur in the Gulf of Mexico for the 50 MGD option, the 100 MGD CWB, and 200 MGD options, with 51% and 58% in the 50 MGD and the 100 MGD option, and 30% and 42% in the 200 MGD option. In terms of avoided age-one equivalent losses, the Mid- Atlantic region accounts for the largest reductions for the 50 MGD All, the 200 MGD All, and 100 MGD CWB options, with 45%, 53%, and 55%, respectively.

E2-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### On the basis of avoided losses in fishery yield, the Gulf of Mexico generates the greatest benefits under each of the three options. This region account for 88%, 88%, and 93% of the avoided fishery yield losses achieved by the 50 MGD All, the 200 MGD All, and 100 MGD CWB options, respectively.
More detailed discussions of re gional benefits are provided in Parts B through H of the RBA.

Table E2-2: Expected Reduction in I&E for Phase III Existing Facilities by Option and Region Number of Region Facilities Installing Technology Impingement Entrainment Age-One Equivalents (thousands) Foregone Fishery Yield (thousands; lbs) 50 MGD All Option California 1 37% 28% 474 33 North Atlantic 4 0% 40% 910 4 Mid-Atlantic 3 23% 53% 44,500 212 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 7 51% 58% 19,400 4,200 Great Lakes 18 42% 45% 13,300 160 Inland 78 39% 15% 19,700 155 National Total 111 98,200 4,770 200 MGD All Option California b 0 0% 0% 0 0 North Atlantic 1 0% 8% 193 1 Mid-Atlantic 2 16% 47% 39,400 163 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 3 30% 42% 12,500 2,900 Great Lakes 7 30% 36% 9,650 119 Inland 13 23% 13% 12,700 107 National Total 27 74,500 3,290 100 MGD CWB Option California b 0 0% 0% 0 0 North Atlantic 3 0% 32% 736 4 Mid-Atlantic 2 16% 47% 39,400 163 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 7 51% 58% 19,400 4,200 Great Lakes 10 36% 40% 11,600 141 Inland c 0 0% 0% 0 0 National Total 22 71,100 4,510

a No I&E reductions are expected in the S outh Atlantic region because all potentially regulated facilities in this region withd raw less than 50 MGD and therefore would not be required to install t echnologies to comply with th e regulatory anal ysis options. b No I&E reductions are expected in the Ca lifornia region because all potentially regu lated facilities in this region withdraw less than 100 MGD and therefore would not be required to install tec hnologies to comply with the 200 MGD All and the 100 MGD CWB options. The 100 MGD CWB option would not apply national categorical requirements to facilities located on freshwater rivers and lakes/reservoirs. Thus, no I&E reductions are expected at the potentially regulated facilities in the Inland region. Source: U.S. EPA Analysis, 2006.



## E2-3 T IME 

## P ROFILE OF 

## B ENEFITS 

### To account for the difference in timing of benefits and co sts, EPA developed a time prof ile of total benefits from all Phase III facilities that reflects when benefits from each facility would be realized. For each study region,

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2- 3 c§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### EPA first calculated the undiscounted commercial and recrea tional fishing benefits from the expected annual I&E reductions under the regulator y analysis options, based on the assumptions that all facilities in each region have achieved compliance with the rule and that benefits are realized immediately following compliance. Then, since there are regulatory and biological time lags between promulgation of the rule and the realization of benefits, EPA created a time profile of benefits that takes into account the fact that benefits do not begin immediately. The development of the time profile of benefits is discussed in detail in Chapter A8: Discounting Benefits

. Table E2-3, following page, provides the time profile of the monetary value of baseline I&E losses for existing Phase III facilities, by region. EPA developed similar tim e profiles for monetary benefits for the regulatory analysis options (see Table E2-4 throug h Table E2-6, beginning page E2-6).

E2-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### Table E2-3: Time Profile of Mean Monetary Value of Total Baseline I&E Losses (thousands; $2004) a

Year California North Atlantic MidAtlantic South Atlantic Gulf of Mexico Great Lakes Inland National Total 2007 $0 $0 $0 $0 $345 $128 $125 $598 2008 $14 $5 $39 $142 $690 $256 $249 $1,396 2009 $29 $11 $77 $285 $2,759 $1,025 $997 $5,182 2010 $115 $43 $308 $1,138 $3,104 $1,153 $1,121 $6,982 2011 $129 $49 $347 $1,280 $3,277 $1,217 $1,184 $7,482 2012 $136 $51 $366 $1,352 $3,449 $1,281 $1,246 $7,881 2013 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2014 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2015 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2016 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2017 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2018 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2019 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2020 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2021 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2022 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2023 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2024 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2025 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2026 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2027 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2028 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2029 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2030 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2031 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2032 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2033 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2034 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2035 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2036 $143 $54 $385 $1,423 $3,449 $1,281 $1,246 $7,981 2037 $143 $54 $385 $1,423 $3,104 $1,153 $1,121 $7,384 2038 $129 $49 $347 $1,280 $2,759 $1,025 $997 $6,585 2039 $115 $43 $308 $1,138 $690 $256 $249 $2,799 2040 $29 $11 $77 $285 $345 $128 $125 $999 2041 $14 $5 $39 $142 $172 $64 $62 $499 2042 $7 $3 $19 $71 $0 $0 $0 $100 2043 $0 $0 $0 $0 $0 $0 $0 $0 2044 $0 $0 $0 $0 $0 $0 $0 $0 2045 $0 $0 $0 $0 $0 $0 $0 $0 2046 $0 $0 $0 $0 $0 $0 $0 $0 2047 $0 $0 $0 $0 $0 $0 $0 $0 2048 $0 $0 $0 $0 $0 $0 $0 $0 PV 3% b $2,646 $999 $7,109 $26,260 $65,575 $24,350 $23,685 $150,625 Annualized 3% c $135 $51 $363 $1,340 $3,346 $1,242 $1,208 $7,685 PV 7% b $1,553 $586 $4,172 $15,411 $39,979 $14,845 $14,440 $90,986 Annualized 7% c $125 $47 $336 $1,242 $3,222 $1,196 $1,164 $7,332

a Because EPA estimated non-use benefits qualitatively, the tota l monetary value of I&E losses includes only losses in use valu es. b The present value (PV) is es timated by discounting individual annual valu es to 2007, using the stated discount rate. Annualized benefits represent the value of all benefits generated over the time fram e of the analysis, discounted to 2007, and then annualized over a 30-year period. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2- 5 c§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### Table E2-4: Time Profile of Mean Total Use Benefits - 50 MGD All Option (thousands; $2004) a North South Gulf of National Year Inland Total California Atlantic Atlantic Atlantic b 2007 $0 $0 $0 $0 $0 $0 $0 $0 2008 $0 $0 $0 $0 $0 $0 $0 $0 2009 $0 $0 $0 $0 $0 $0 $0 $0 2010 $0 $0 $0 $0 $0 $3 $6 $9 2011 $3 $0 $2 $0 $0 $30 $29 $64 2012 $7 $1 $3 $0 $165 $75 $84 $335 2013 $27 $3 $22 $0 $330 $249 $195 $825 2014 $30 $11 $36 $0 $1,320 $315 $235 $1,946 2015 $32 $13 $96 $0 $1,484 $460 $291 $2,377 2016 $33 $19 $125 $0 $1,567 $495 $313 $2,552 2017 $33 $20 $133 $0 $1,649 $507 $318 $2,662 2018 $33 $21 $139 $0 $1,649 $518 $322 $2,683 2019 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2020 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2021 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2022 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2023 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2024 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2025 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2026 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2027 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2028 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2029 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2030 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2031 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2032 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2033 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2034 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2035 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2036 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2037 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2038 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2039 $33 $21 $141 $0 $1,649 $518 $323 $2,685 2040 $33 $21 $141 $0 $1,649 $515 $316 $2,676 2041 $30 $21 $139 $0 $1,649 $488 $294 $2,622 2042 $27 $20 $138 $0 $1,484 $444 $238 $2,351 2043 $7 $18 $119 $0 $1,320 $269 $127 $1,860 2044 $3 $10 $105 $0 $330 $203 $87 $739 2045 $2 $8 $45 $0 $165 $58 $31 $309 2046 $0 $2 $16 $0 $82 $23 $10 $133 2047 $0 $1 $8 $0 $0 $11 $4 $24 $0 e $0 e 2048 $0 $2 $0 $0 $0 $2 PV 3% c $565 $336 $2,244 $0 $27,050 $8,543 $5,389 $44,128 Annualized 3% d $29 $17 $115 $0 $1,380 $436 $275 $2,251 PV 7% c $296 $165 $1,090 $0 $13,631 $4,341 $2,786 $22,308 Annualized 7% d $24 $13 $88 $0 $1,098 $350 $224 $1,798

a b

d

e Source: c MidMexico Great Lakes

Because EPA estimated non-use benefits qualitatively, th e monetary value of benefits includes use values only. No I&E reductions are expected in the S outh Atlantic region because all potentially regulated facilities in this region withd raw less than 50 MGD and therefore would not be required to inst all technologies to comply with this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, an d then annualized over a 30-year period. Positive non-zero value less than $500. U.S. EPA Analysis, 2006.

E2-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### Table E2-5: Time Profile of Mean Total Use Benefits - 200 MGD All Option (thousands; $2004) a North South Gulf of Year Atlantic b Inland National California b Atlantic Atlantic Total 2007 $0 $0 $0 $0 $0 $0 $0 $0 2008 $0 $0 $0 $0 $0 $0 $0 $0 2009 $0 $0 $0 $0 $0 $0 $0 $0 2010 $0 $0 $0 $0 $0 $0 $3 $3 2011 $0 $0 $0 $0 $0 $19 $20 $39 2012 $0 $0 $0 $0 $106 $38 $52 $197 2013 $0 $0 $9 $0 $213 $172 $142 $536 2014 $0 $0 e $20 $0 $851 $210 $163 $1,245 2015 $0 $1 $76 $0 $958 $337 $203 $1,575 2016 $0 $4 $102 $0 $1,011 $366 $215 $1,698 2017 $0 $4 $110 $0 $1,064 $376 $218 $1,772 2018 $0 $4 $116 $0 $1,064 $386 $221 $1,790 2019 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2020 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2021 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2022 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2023 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2024 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2025 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2026 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2027 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2028 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2029 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2030 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2031 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2032 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2033 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2034 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2035 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2036 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2037 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2038 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2039 $0 $4 $117 $0 $1,064 $386 $221 $1,792 2040 $0 $4 $117 $0 $1,064 $386 $218 $1,789 2041 $0 $4 $117 $0 $1,064 $367 $201 $1,753 2042 $0 $4 $117 $0 $958 $348 $169 $1,595 2043 $0 $4 $108 $0 $851 $214 $78 $1,256 2044 $0 $4 $97 $0 $213 $176 $58 $547 2045 $0 $4 $41 $0 $106 $49 $17 $217 2046 $0 $1 $15 $0 $53 $20 $5 $94 $0 e 2047 $0 $7 $0 $0 $10 $3 $20 $0 e 2048 $0 $1 $0 $0 $0 $0 $2 PV 3% c $0 $69 $1,849 $0 $17,451 $6,324 $3,693 $29,386 Annualized 3% d $0 $4 $94 $0 $890 $323 $188 $1,499 PV 7% c $0 $32 $889 $0 $8,794 $3,191 $1,912 $14,817 Annualized 7% d $0 $3 $72 $0 $709 $257 $154 $1,194

a b

d

e Source: c MidMexico Great Lakes

Because EPA estimated non-use benefits qualitatively, th e monetary value of benefits includes use values only. No I&E reductions are expected in the S outh Atlantic region because all potentially regulated facilities in this region withd raw less than 200 MGD and therefore would not be required to in stall technologies to comply with this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, an d then annualized over a 30-year period. Positive non-zero value less than $500. U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2- 7§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### Table E2-6: Time Profile of Mean Total Use Benefits - 100 MGD CWB Option (thousands; $2004) a North Mid- South Gulf of Great National Lakes Inland c Year California b Atlantic Atlantic Atlantic b Mexico Total 2007 $0 $0 $0 $0 $0 $0 $0 $0 2008 $0 $0 $0 $0 $0 $0 $0 $0 2009 $0 $0 $0 $0 $0 $0 $0 $0 2010 $0 $0 $0 $0 $0 $3 $0 $3 2011 $0 $0 $0 $0 $0 $28 $0 $28 2012 $0 $1 $0 $0 $165 $66 $0 $232 2013 $0 $3 $9 $0 $330 $223 $0 $564 2014 $0 $10 $20 $0 $1,320 $267 $0 $1,618 2015 $0 $12 $76 $0 $1,484 $403 $0 $1,976 2016 $0 $15 $102 $0 $1,567 $435 $0 $2,120 2017 $0 $17 $110 $0 $1,649 $445 $0 $2,221 2018 $0 $17 $116 $0 $1,649 $456 $0 $2,238 2019 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2020 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2021 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2022 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2023 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2024 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2025 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2026 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2027 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2028 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2029 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2030 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2031 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2032 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2033 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2034 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2035 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2036 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2037 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2038 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2039 $0 $17 $117 $0 $1,649 $456 $0 $2,239 2040 $0 $17 $117 $0 $1,649 $453 $0 $2,237 2041 $0 $17 $117 $0 $1,649 $428 $0 $2,212 2042 $0 $16 $117 $0 $1,484 $390 $0 $2,007 2043 $0 $14 $108 $0 $1,320 $233 $0 $1,675 2044 $0 $7 $97 $0 $330 $189 $0 $622 2045 $0 $5 $41 $0 $165 $52 $0 $263 2046 $0 $2 $15 $0 $82 $21 $0 $119 2047 $0 $0 f $7 $0 $0 $10 $0 $18 2048 $0 $0 f $1 $0 $0 $0 $0 $2 PV 3% d $0 $274 $1,849 $0 $27,050 $7,513 $0 $36,687 Annualized 3% e $0 $14 $94 $0 $1,380 $383 $0 $1,872 PV 7% d $0 $136 $889 $0 $13,631 $3,816 $0 $18,472 Annualized 7% e $0 $11 $72 $0 $1,098 $308 $0 $1,489 a Because EPA estimated non-use benefits qualitatively, th e monetary value of benefits includes use values only. b No I&E reductions are expected in the S outh Atlantic region because all potentially regulated facilities in this region with draw less than 100 MGD and therefore would not be required to install technologies to comply with this option.
c The 100 MGD CWB option would not apply national categori cal requirements to facilities located on freshwater rivers and lakes/reservoirs. Thus, no I&E reductions are expected at the potentially regulated facilities in the Inland region. d The present value (PV) is estimated by discounting indivi dual annual values to 2007, using the stated discount rate. e Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, a nd then annualized over a 30-year period. f Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

E2-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



## E2-4 T OTAL 

## A NNUALIZED 

## M ONETARY 

## V ALUE OF 

## L OSSES AND 

## B ENEFITS 

### EPA used the profiles of benefits, by region, to calculate a total present value of benefits and then to calculate a constant annual equivalent value (annualized value) of the present value. EPA performed the calculations of present value and annualized value using two discount rate va lues: a real rate of 3% and a real rate of 7%. Although the total period for analysis of benefits extends from 2007 through 2048, a 42-year period, EPA annualized the value of benefits over 30 years, which is the assumed length of each facility’s compliance period for the social cost an alysis, as described in Chapter E1: Summary of Social Costs . Using the same annualization period as in the cost analysis is necessary to provide a conceptually and mathematica lly consistent comparison of annualized benefit and cost values. EPA estimated mean values, as well as lower and upper bound values reflecting uncertainty in the recreational benefits estimates. Table E2-7 presents the value of baseline I&E losses for each region and for the nation as a whole. Table E2-8 and Table E2-9 present I&E losse s for each region and the nation under the Phase III Final Regulation, 200 MGD All, and 100 MGD CWB options, discounted at 3% and 7%, respectively. Because EPA did not estimate non-use benefits quantitatively, the monetary value of national losses and benefits presented in these tables reflects only use values. 1 

### As described in Chapter A3 of the RBA, the Agency was not able to monetize any benefits for 97.4% of the age-one equivale nt losses of all commercial, recreational, and forage species analyzed for the evaluated optio ns for existing facilities. This means that the estimates of losses and benefits presented in this section represent the losses a nd benefits associated with 2.6% of the total age-one equivalents lost due to I&E by cooling water intake structures. Table E2-7 reports the monetized value of baseline losses as outlined above. EPA estimates the national value of these losses at $1.3 million in commercial fishing losses and $6.4 million in recreational fishing losses (2004$, discounted to 2007 at 3%). The total use value of fishery resources lost is $7.7 million per year, with lower and upper bounds of $5.0 million and $12.6 million, respectively ( 2004$, discounted at 3%). At a 7% discount rate, EPA estimates total annual national value of losses at $1.3 million in commercial fishing losses and $6.1 million in recreational fishing losses (2004$). The total use valu e of fishery resources lost, discounted at 7%, is $7.3 million per year, with lower and uppe r bounds of $4.8 million and $12.0 m illion, respectively (2004$). Total monetized losses are greatest in the Gulf of Mexico regi on. More detailed discussions of the valuation of recreational and commercial fishing losses under the baselin e conditions in each region are provided in Parts B through H of the RBA.

1 

### See Chapter A6 of the RBA for a detailed description of the qualitative non-use benefits from reduced I&E.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2- 9§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits

c a

Region b
Low High Low High

California $0 - $54 $42 $81 $155 $97 $135 $209 $0 - $1 $26 $50 $95 $27 $51 $97 Mid-Atlantic $0 - $84 $142 $279 $569 $226 $363 $653 $0 - $168 $769 $1,246 $2,042 $0 - $990 $1,255 $2,356 $4,544 $2,245 $3,346 $5,533 $0 - $97 $786 $1,145 $1,679 $883 $1,242 $1,776 Inland c n/a $670 $1,208 $2,194 $670 $1,208 $2,194 National Total $0 -$1,320 $3,689 $6,365 $11,278

California $0 - $50 $39 $75 $143 $89 $125 $194 $0 - $1 $24 $46 $88 $25 $47 $90 Mid-Atlantic $0 - $78 $131 $258 $527 $209 $336 $605 $0 - $156 $712 $1,155 $1,893 Gulf of Mexico $0 - $953 $1,209 $2,269 $4,376 $2,162 $3,222 $5,328 $0 - $94 $757 $1,103 $1,617 $850 $1,196 $1,710 Inland c $0 $645 $1,164 $2,113 $645 $1,164 $2,113 National Total $0 -$1,263 $3,517 $6,070 $10,757

a

b th th

Source: 

### Table E2-7: Summary of Monetary Values of Baseline I&E Losses (thousands; $2004) Annualized Use Value of Baseline I&E Losses Commercial

Fishing Recreational Fishing Total Use Value Mean Mean 3% discount rate

North Atlantic

South Atlantic 

### $936 $1,414 $2,210 Gulf of Mexico Great Lakes 

### $5,009 $7,658 $12,597 7% discount rate

North Atlantic

South Atlantic 

### $868 $1,311 $2,049

Great Lakes 

### $4,780 $7,332 $12,020 All losses presented in this table are annualized. These estim ated annualized losses represent the value of all losses genera ted over the time frame of the analysis, di scounted to 2007, and then annualized over a 30-year period. The total monetizable value of I&E reductions includes use benefits only. EPA evaluated non-use benefits qualitatively. A range of recreational fishing benefits is provided, based on the Krinsky and Robb technique to estimated the 95 and 5 percentile limits on the marginal value per fish predicted by EPA’s meta-analysis (see ch apter A5 of the RBA). Commercial fishing benefits are computed based on a region- and species-specific range of gross revenue (see Chapter A4 of the RBA). To calculate the total use value columns (low, mean, and high), the high-end value for comme rcial fishing benefits is added to the lo w, mean, and high values for recreational fishing benefits, respectively. No significant commercial fishing takes place in the Inland region. Thus, this region is excluded from the commercial fishin g analysis. U.S. EPA Analysis, 2006.


### Tables E2-8 and E2-9 present EPA’s estimates of the national and regional values of avoided I&E losses (all values are in 2004$, discounted at 3% and 7% to beginni ng of year 2007, and annualized over a 30-year period). National values of avoided I&E losses at a 3% discount rate are as follows:

f 

### For the 50 MGD All option, a mean value of $2.3 million per year, with lower and upper bounds of $1.4 million and $3.8 million (see Table E2-8);

f 

### For the 200 MGD All option, a mean value of $1.5 m illion per year, with lower and upper bounds of $1.0 million and $2.5 million (see Table E2-8); and

f 

### For the 100 MGD CWB option, a mean value of $1.9 million per year, with lower and upper bounds of $1.2 million and $3.1 million (see Table E2-8). The 7% discount rate calculations yield smaller values as follows:

f 

### For the 50 MGD All option, a mean value of $1.8 million per year, with lower and upper bounds of $1.1 million and $3.0 million (see Table E2-9);

E2-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits

f 

### For the 200 MGD All option, a mean value of $1.2 m illion per year, with lower and upper bounds of $0.8 million and $2.0 million (see Table E2-9); and

f 

### For the 100 MGD CWB option, a mean value of $1.5 million per year, with lower and upper bounds of $1.0 million and $2.5 million (see Table E2-9). The majority of the use benefit value is attributable to benefits to recreational anglers from improved catch rates. As shown in Tables E2-8 and E2-9, use benefits are largest in the Gulf of Mexico for the 50 MGD All option, 100 MGD CWB option, and the 200 MGD All option. More detailed discussions of regional benefits under each option are provided in Parts B through H of the RBA.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2- 11c § 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



### Table E2-8: Summary of Monetized Benefits by Option (thousands; $2004; discounted at 3%) a
Annualized Annualized Recreational Fishing Total Annualized Value of Monetized Benefits Impingement and Entrainment Reductions b Region Commercial Fishing Benefits Low Mean High Low Mean High 50 MGD All Option California $0 - $8 $11 $21 $40 $19 $29 $48 North Atlantic $0 - $0 g $9 $17 $33 $9 $17 $33 Mid-Atlantic $0 - $18 $48 $96 $198 $67 $115 $216 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 - $283 $589 $1,097 $2,101 $872 $1,380 $2,384 Great Lakes $0 - $11 $292 $425 $624 $302 $436 $634 Inland d n/a $152 $275 $501 $152 $275 $501 National Total $0 -$321 $1,101 $1,931 $3,496 $1,421 $2,251 $3,816 200 MGD All Option California e $0 $0 $0 $0 $0 $0 $0 North Atlantic $0 - $0 g $2 $3 $7 $2 $4 $7 Mid-Atlantic $0 - $15 $40 $80 $164 $55 $94 $179 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 - $188 $382 $702 $1,328 $570 $890 $1,516 Great Lakes $0 - $8 $216 $315 $462 $224 $323 $470 Inland d n/a $104 $188 $343 $104 $188 $343 National Total $0 -$211 $744 $1,288 $2,303 $955 $1,499 $2,514 100 MGD CW B Option California e $0 $0 $0 $0 $0 $0 $0 North Atlantic $0 - $0 g $7 $14 $27 $7 $14 $27 Mid-Atlantic $0 - $15 $40 $80 $164 $55 $94 $179 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 - $283 $589 $1,097 $2,101 $872 $1,380 $2,384 Great Lakes $0 - $9 $257 $374 $548 $266 $383 $558 Inland d,f n/a $0 $0 $0 $0 $0 $0 National Total $0 -$308 $892 $1,564 $2,840 $1,200 $1,872 $3,148

a All benefits presented in this table are annualized. These annualized benefits represent the value of all losses generated o ver the time frame of the analysis, discounted to 2007 , and then annualized over a 30-year period. b The total monetizable value of I&E reductions includes use benefits only. EPA evaluated non-use benefits qualitatively. A range of recreational fishing benefits is provided, based on the Krinsky and Robb technique to estimated the 95th and 5th percentile lim its on the marginal value per fish predicted by EPA’s meta-analysis (see ch apter A5 of the RBA). Commercial fishing benefits are computed based on a region- and species-specific range of gross revenue (see Chapter A4 of the RBA). To calculate the total use value c olumns (low, mean, and high), the high-end value for commercial fishing benefits is added to the low, mean, and high values for recrea tional fishing benefits, respectively. No I&E reductions are expected in the South Atlantic region because all potentially regulated facilities in this region with draw less than 50 MGD and therefore would not be required to install t echnologies to comply with th e regulatory anal ysis options. d No significant commercial fishing takes place in the Inland region. Thus, this region is excluded from the commercial fishing analysis.

e No I&E reductions are expected in the California region beca use all potentially regulated facilities in this region withdraw less than 100 MGD and therefore would not be required to install tec hnologies to comply with the 200 MGD All and the 100 MGD CWB options. f The 100 MGD CWB option would not apply national categori cal requirements to facilities located on freshwater rivers and lakes/reservoirs. Thus, no I&E reductions are expected at the potentially regulated facilities in the Inland region.
g Denotes a positive value less than $500. Source: U.S. EPA Analysis, 2006.

E2-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits

c a

Region Benefits b
Low High Low High

California $0 - $7 $9 $17 $33 $16 $24 $39 $0 - $0 g $7 $13 $25 $7 $13 $25 Mid-Atlantic $0 - $14 $37 $74 $152 $51 $88 $166 $0 $0 $0 $0 $0 $0 $0 $0 - $225 $468 $873 $1,672 $694 $1,098 $1,898

$0 - $9 $234 $341 $500 $243 $350 $509 Inland d n/a $124 $224 $409 $124 $224 $409 National Total $880 $1,543 $2,792 $1,135 $1,798 $3,047

California e $0 $0 $0 $0 $0 $0 $0 $0 - $0 g $1 $3 $5 $1 $3 $5 Mid-Atlantic $0 - $11 $30 $60 $125 $42 $72 $136

c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 - $150 $304 $559 $1,057 $454 $709 $1,207 $0 - $6 $172 $251 $368 $178 $257 $374 Inland d n/a $85 $154 $280 $85 $154 $280 National Total $0 -

California e $0 $0 $0 $0 $0 $0 $0 $0 - $0 g $6 $11 $21 $6 $11 $21 Mid-Atlantic $0 - $11 $30 $60 $125 $42 $72 $136

c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 - $225 $468 $873 $1,672 $694 $1,098 $1,898 $0 - $7 $206 $300 $440 $213 $308 $447 Inland d,f n/a $0 $0 $0 $0 $0 $0 National Total $710 $1,244 $2,258 $955 $1,489 $2,502

a

b

d

e
options. f

g Source: 

### Table E2-9: Summary of Monetized Benefits by Option (thousands; $2004; discounted at 7%)
Annualized Commercial Fishing Benefits Annualized Recreational Fishing Total Annualized Value of Monetized Impingement and Entrainment Reductions Mean Mean 50 MGD All Option

North Atlantic

South Atlanticc Gulf of Mexico Great Lakes

$0 -$255 200 MGD All Option

North Atlantic

South Atlantic

Great Lakes


### $167 $593 $1,027 $1,835 $760 $1,194 $2,002 100 MGD CWB Option

North Atlantic

South Atlantic

Great Lakes

$0 -$244 All benefits presented in this table are annualized. These annualized benefits represent the value of all losses generated o ver the time frame of the analysis, discounted to 2007 , and then annualized over a 30-year period. The total monetizable value of I&E reductions includes use benefits only. EPA evaluated non-use benefits qualitatively. A range of recreational fishing benefits is provided, based on the Krinsky and Robb technique to estimated the 95th and 5th percentile lim its on the marginal value per fish predicted by EPA’s meta-analysis (see ch apter A5 of the RBA). Commercial fishing benefits are computed based on a region- and species-specific range of gross revenue (see Chapter A4 of the RBA). To calculate the total use value c olumns (low, mean, and high), the high-end value for commercial fishing benefits is added to the low, mean, and high values for recrea tional fishing benefits, respectively. No I&E reductions are expected in the South Atlantic region because all potentially regulated facilities in this region with draw less than 50 MGD and therefore would not be required to install t echnologies to comply with th e regulatory anal ysis options. No significant commercial fishi ng takes place in the Inland region, and thus th is region is excluded from the commercial fishi ng benefits analysis. No I&E reductions are expected in the California region beca use all potentially regulated facilities in this region withdraw less than 100 MGD and therefore would not be required to install tec hnologies to comply with the 200 MGD All and the 100 MGD CWB
The 100 MGD CWB option would not apply national categori cal requirements to facilities located on freshwater rivers and lakes/reservoirs. Thus, no I&E reductions are expected at the potentially regulated facilities in the Inland region. Denotes a positive value less than $500. U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2- 13§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Bene fits, and Benefit-Cost Analysis Chapter E2: Summary of Benefits



## R EFERENCES


### U.S. Environmental Protection Agency (U.S. EPA). 2006. Regional Analysis for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-002. June 2006.

E2-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options 

# Appendix E2A: Summary of Results for Supplemental Options

I NTRODUCTION 

## A PPENDIX 

## C ONTENTS 

### This appendix supplements Chapter E2 by presenting the Introduction..........................................................E2A-1 

### results of the benefits analysis for eight supplemental E2A-1 Summary of Expected Reductions in I&E ........ 

### options evaluated for potential Phase III existing facilities. ........................................................E2A-1 

### For all options, facility counts and other results only E2A-2 Time Profile of Benefits..........................E2A-3 

### include those potential Phase III existing facilities that are E2A-3 Total Annualized Monetary Value of Benefits . 

### (1) non-baseline closures and (2) subject to national ......................................................E2A-12 

### categorical requirements under the option. See the main body of this chapter for a description of methodologies used in this analysis. 

## E2A-1 S UMMARY OF 

## E XPECTED 

## R EDUCTIONS IN 

## I&E Table E2A-1 presents the number of facilities with tec hnology requirements under the supplemental options, by region, and EPA’s estimates of the percentage by which I&E would be reduced under each option. The table also presents estimates of regional and national reductions in I&E losses under each option, expressed as age-one equivalents lost and foregone fishery yields.

Table E2A-2: Expected Reductions in I&E for Existing Phase III Facilities by Option
Number of Age-One Foregone Region Facilities Installing Technology Impingement Entrainment Equivalents (thousands) Fishery Yield (thousands; lbs) “Electric Generators 2-50 MGD I-only Everywhere” Option California 0 0% 0% 0 0 North Atlantic 0 0% 0% 0 0 Mid-Atlantic 1 1% 0% 27 3 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 0 0% 0% 0 0 Great Lakes 3 1% 0% 303 3 Inland 14 1% 0% 473 3 National Total 19 802 9 “Electric Generators 2-50 MGD I&E like Phase II” Option California 0 0% 0% 0 0 North Atlantic 0 0% 0% 0 0 Mid-Atlantic 1 1% 0% 27 3 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 0 0% 0% 0 0 Great Lakes 3 1% 1% 327 4 Inland 15 1% 0% 509 4 National Total 20 863 10

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -1§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-2: Expected Reductions in I&E for Existing Phase III Facilities by Option
Number of Age-One Foregone Facilities Installing Equivalents Fishery Yield Region Technology Impingement Entrainment (thousands) (thousands; lbs) “Electric Generators 2-50 MGD I&E Everywhere” Option California 0 0% 0% 0 0 North Atlantic 0 0% 0% 0 0 Mid-Atlantic 2 1% 2% 1,480 6 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 0 0% 0% 0 0 Great Lakes 3 1% 1% 331 4 Inland 16 1% 1% 802 8 National Total 22 2,610 18 “Manufacturers 2-50 MGD I-only Everywhere” Option California 3 37% 0% 10 0 North Atlantic 0 0% 0% 0 0 Mid-Atlantic 3 4% 0% 150 18 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 4 3% 0% 543 48 Great Lakes 16 2% 0% 698 7 Inland 126 8% 0% 3,320 21 National Total 152 4,720 94 “Manufacturers 2-50 MGD I&E like Phase II” Option California 3 37% 28% 481 34 North Atlantic 0 0% 0% 0 0 Mid-Atlantic 3 4% 3% 2,310 22 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 4 3% 2% 855 162 Great Lakes 16 2% 1% 732 8 Inland 140 8% 2% 3,660 27 National Total 166 8,040 252 “Manufacturers 2-50 MGD I& E Everywhere” Option California 3 37% 31% 534 38 North Atlantic 0 0% 0% 0 0 Mid-Atlantic 3 4% 3% 2,310 22 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 4 3% 2% 855 162 Great Lakes 16 2% 2% 764 9 Inland 142 8% 7% 4,880 44 National Total 168 9,340 275 “Manufacturers 50+ MGD I-only Everywhere” Option California 1 37% 0% 10 0 North Atlantic 0 0% 0% 0 0 Mid-Atlantic 2 23% 0% 1,000 118 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 5 51% 0% 10,400 917 Great Lakes 15 42% 0% 11,700 109 Inland 74 38% 0% 16,200 105 National Total 97 39,400 1,250

E2A -2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-2: Expected Reductions in I&E for Existing Phase III Facilities by Option
Number of Age-One Foregone Facilities Installing Equivalents Fishery Yield Region Technology Impingement Entrainment (thousands) (thousands; lbs) “Manufacturers 50+ MGD I& E Everywhere” Option California 1 37% 28% 474 33 North Atlantic 4 0% 40% 910 4 Mid-Atlantic 3 23% 53% 44,500 212 South Atlantic a 0 0% 0% 0 0 Gulf of Mexico 7 51% 58% 19,400 4,200 Great Lakes 18 42% 46% 13,400 161 Inland 94 38% 37% 24,600 228 National Total 127 103,000 4,840

a No I&E reductions are expected in the South Atlantic region be cause all potentially regulated facilities in this region alread y meet the national categorical requirements in the base line and therefore would not be required to install technologies to comply with th ese options. Source: U.S. EPA Analysis, 2006.



## E2A-2 T IME 

## P ROFILE OF 

## B ENEFITS 

### Table E2A-3 through Table E2A-4 below provide the time pr ofiles of regional benefits for the eight supplemental options.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -3§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-5: Time Profile of Mean Total Use Benefits - “Electric Generators 2-50 MGD I-only Everywhere” Option (thousands; 2004$) a North Mid- South Gulf of Great National Year California Atlantic Atlantic Atlantic b Mexico Lakes Inland Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $0 $0 $0 2012 $0 $0 $0 2013 $0 $0 $0 2014 $0 $0 $0 2015 $0 $0 $0 e 2016 $0 $0 $0 e 2017 $0 $0 $1 2018 $0 $0 $1 2019 $0 $0 $1 2020 $0 $0 $1 2021 $0 $0 $1 2022 $0 $0 $1 2023 $0 $0 $1 2024 $0 $0 $1 2025 $0 $0 $1 2026 $0 $0 $1 2027 $0 $0 $1 2028 $0 $0 $1 2029 $0 $0 $1 2030 $0 $0 $1 2031 $0 $0 $1 2032 $0 $0 $1 2033 $0 $0 $1 2034 $0 $0 $1 2035 $0 $0 $1 2036 $0 $0 $1 2037 $0 $0 $1 2038 $0 $0 $1 2039 $0 $0 $1 2040 $0 $0 $1 2041 $0 $0 $1 2042 $0 $0 $1 2043 $0 $0 $1 2044 $0 $0 $1 2045 $0 $0 $1 2046 $0 $0 $1 2047 $0 $0 $0 e 2048 $0 $0 $0 e $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 e $0 e $0 $0 $0 e $1 $1 $0 $0 $1 $2 $3 $0 $0 $4 $4 $7 $0 $0 $4 $5 $10 $0 $0 $6 $6 $12 $0 $0 $8 $6 $14 $0 $0 $8 $6 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $7 $16 $0 $0 $9 $6 $16 $0 $0 $8 $6 $15 $0 $0 $8 $4 $13 $0 $0 $5 $3 $9 $0 $0 $4 $1 $7 $0 $0 $3 $1 $5 $0 $0 $1 $0 e $2 $0 $0 $0 e $0 e $1 $0 $0 $0 e $0 e $0 e PV 3% c $0 $0 $15 Annualized 3% d $0 $0 $1 PV 7% c $0 $0 $7 Annualized 7% d $0 $0 $1 $0 $0 $142 $109 $267 $0 $0 $7 $6 $14 $0 $0 $71 $57 $135 $0 $0 $6 $5 $11

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alread y meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, an d then annualized over a 30-year period.
e Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

E2A -4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-6: Time Profile of Mean Total Use Be nefits - “Electric Generators 2-50 MGD I&E like Phase II” Option (thousands; 2004$) a North Mid- South Gulf of Great National Year California Atlantic Atlantic Atlantic b Mexico Lakes Inland Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $0 $0 $0 2012 $0 $0 $0 2013 $0 $0 $0 2014 $0 $0 $0 2015 $0 $0 $0 e 2016 $0 $0 $0 e 2017 $0 $0 $1 2018 $0 $0 $1 2019 $0 $0 $1 2020 $0 $0 $1 2021 $0 $0 $1 2022 $0 $0 $1 2023 $0 $0 $1 2024 $0 $0 $1 2025 $0 $0 $1 2026 $0 $0 $1 2027 $0 $0 $1 2028 $0 $0 $1 2029 $0 $0 $1 2030 $0 $0 $1 2031 $0 $0 $1 2032 $0 $0 $1 2033 $0 $0 $1 2034 $0 $0 $1 2035 $0 $0 $1 2036 $0 $0 $1 2037 $0 $0 $1 2038 $0 $0 $1 2039 $0 $0 $1 2040 $0 $0 $1 2041 $0 $0 $1 2042 $0 $0 $1 2043 $0 $0 $1 2044 $0 $0 $1 2045 $0 $0 $1 2046 $0 $0 $1 2047 $0 $0 $0 e 2048 $0 $0 $0 e $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 e $0 e $0 $0 $1 $1 $1 $0 $0 $1 $3 $4 $0 $0 $5 $4 $9 $0 $0 $6 $6 $12 $0 $0 $7 $7 $15 $0 $0 $11 $7 $18 $0 $0 $11 $8 $19 $0 $0 $11 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $8 $20 $0 $0 $12 $7 $20 $0 $0 $11 $7 $19 $0 $0 $10 $4 $16 $0 $0 $7 $3 $11 $0 $0 $6 $1 $8 $0 $0 $4 $1 $6 $0 $0 $1 $0 e $2 $0 $0 $1 $0 e $1 $0 $0 $0 e $0 e $0 e PV 3% c $0 $0 $15 Annualized 3% d $0 $0 $1 PV 7% c $0 $0 $7 Annualized 7% d $0 $0 $1 $0 $0 $187 $128 $330 $0 $0 $10 $7 $17 $0 $0 $93 $67 $167 $0 $0 $8 $5 $13

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alread y meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, an d then annualized over a 30-year period.
e Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -5 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-7: Time Profile of Mean Total Use Benefits - “Electric Generators 2-50 MGD I&E Everywhere” Option (thousands; 2004$) a North Mid- South Gulf of Great National Inland Year California Atlantic Atlantic Atlantic b Mexico Lakes Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $0 $0 $0 $0 e $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1 $1 $0 $0 $1 $2 $2 2012 $0 $0 2013 $0 $0 $1 2014 $0 $0 $2 2015 $0 $0 $3 2016 $0 $0 $3 2017 $0 $0 $4 2018 $0 $0 $4 2019 $0 $0 $4 2020 $0 $0 $4 2021 $0 $0 $4 2022 $0 $0 $4 2023 $0 $0 $4 2024 $0 $0 $4 2025 $0 $0 $4 2026 $0 $0 $4 2027 $0 $0 $4 2028 $0 $0 $4 2029 $0 $0 $4 2030 $0 $0 $4 2031 $0 $0 $4 2032 $0 $0 $4 2033 $0 $0 $4 2034 $0 $0 $4 2035 $0 $0 $4 2036 $0 $0 $4 2037 $0 $0 $4 2038 $0 $0 $4 2039 $0 $0 $4 2040 $0 $0 $4 2041 $0 $0 $4 2042 $0 $0 $4 2043 $0 $0 $4 2044 $0 $0 $2 2045 $0 $0 $2 2046 $0 $0 $2 2047 $0 $0 $0 e 2048 $0 $0 $0 e $0 $0 $1 $6 $8 $0 $0 $5 $9 $14 $0 $0 $6 $13 $21 $0 $0 $8 $15 $25 $0 $0 $11 $16 $29 $0 $0 $11 $16 $31 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $16 $32 $0 $0 $12 $15 $32 $0 $0 $11 $15 $30 $0 $0 $11 $10 $25 $0 $0 $7 $7 $18 $0 $0 $6 $3 $11 $0 $0 $4 $1 $8 $0 $0 $1 $1 $3 $0 $0 $1 $0 e $1 $0 $0 $0 e $0 e $0 e PV 3% c $0 $0 $70 Annualized 3% d $0 $0 $4 PV 7% c $0 $0 $34 Annualized 7% d $0 $0 $3 $0 $0 $195 $270 $534 $0 $0 $10 $14 $27 $0 $0 $97 $140 $271 $0 $0 $8 $11 $22

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alrea dy meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, a nd then annualized over a 30-year period.
e Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

E2A -6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-8: Time Profile of Mean Total Use Be nefits - “Manufacturers 2-50 MGD I-only Everywhere” Option (thousands; 2004$) a North Mid- South Gulf of Great National Inland Year California Atlantic Atlantic Atlantic b Mexico Lakes Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $0 $0 $0 2012 $0 $0 $1 2013 $0 $0 $1 2014 $0 $5 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1 $0 e $1 $0 $0 $2 $2 $3 $0 $5 $7 $7 $19 $0 $9 $12 $14 $36 $0 $37 $18 $26 $85 $0 e 2015 $0 e $0 $5 2016 $1 $0 $5 2017 $1 $0 $6 2018 $1 $0 $6 2019 $1 $0 $6 2020 $1 $0 $6 2021 $1 $0 $6 2022 $1 $0 $6 2023 $1 $0 $6 2024 $1 $0 $6 2025 $1 $0 $6 2026 $1 $0 $6 2027 $1 $0 $6 2028 $1 $0 $6 2029 $1 $0 $6 2030 $1 $0 $6 2031 $1 $0 $6 2032 $1 $0 $6 2033 $1 $0 $6 2034 $1 $0 $6 2035 $1 $0 $6 2036 $1 $0 $6 2037 $1 $0 $6 2038 $1 $0 $6 2039 $1 $0 $6 2040 $1 $0 $6 2041 $1 $0 $6 2042 $1 $0 $5 2043 $1 $0 $5 2044 $1 $0 $1 2045 $1 $0 $1 2046 $0 e $0 $0 e 2047 $0 e $0 $0 2048 $0 e $0 $0 $0 $42 $19 $35 $102 $0 $44 $20 $42 $113 $0 $47 $20 $44 $118 $0 $47 $20 $45 $119 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $46 $120 $0 $47 $20 $45 $119 $0 $47 $18 $44 $117 $0 $42 $13 $39 $101 $0 $37 $9 $32 $84 $0 $9 $3 $20 $35 $0 $5 $1 $10 $18 $0 $2 $0 e $3 $7 $0 $0 $0 $1 $2 $0 $0 $0 $0 e $0 e PV 3%c $23 $0 $94 Annualized 3%d $1 $0 $5 PV 7%c $11 $0 $47 Annualized 7%d $1 $0 $4 $0 $768 $340 $745 $1,969 $0 $39 $17 $38 $100 $0 $387 $177 $373 $995 $0 $31 $14 $30 $80

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alrea dy meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, a nd then annualized over a 30-year period.
e Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -7 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-9: Time Profile of Mean Total Use Benefits - “Manufacturers 2-50 MGD I&E like Phase II” Option (thousands; 2004$) a North Mid- South Gulf of Great National Inland Year California Atlantic Atlantic Atlantic b Mexico Lakes Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $0 $0 $0 2012 $0 $0 $1 2013 $0 $0 $2 2014 $3 $0 $9 2015 $7 $0 $10 2016 $27 $0 $10 2017 $31 $0 $11 2018 $32 $0 $11 2019 $34 $0 $11 2020 $34 $0 $11 2021 $34 $0 $11 2022 $34 $0 $11 2023 $34 $0 $11 2024 $34 $0 $11 2025 $34 $0 $11 2026 $34 $0 $11 2027 $34 $0 $11 2028 $34 $0 $11 2029 $34 $0 $11 2030 $34 $0 $11 2031 $34 $0 $11 2032 $34 $0 $11 2033 $34 $0 $11 2034 $34 $0 $11 2035 $34 $0 $11 2036 $34 $0 $11 2037 $34 $0 $11 2038 $34 $0 $11 2039 $34 $0 $11 2040 $34 $0 $11 2041 $34 $0 $11 2042 $34 $0 $10 2043 $34 $0 $9 2044 $31 $0 $2 2045 $27 $0 $1 2046 $7 $0 $1 2047 $3 $0 $0 2048 $2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1 $1 $1 $0 $0 $2 $2 $4 $0 $7 $8 $8 $25 $0 $15 $14 $18 $48 $0 $58 $21 $32 $124 $0 $66 $23 $44 $148 $0 $69 $23 $52 $182 $0 $73 $24 $54 $192 $0 $73 $24 $55 $195 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $24 $56 $197 $0 $73 $23 $55 $196 $0 $73 $22 $54 $193 $0 $66 $16 $47 $173 $0 $58 $10 $38 $149 $0 $15 $3 $23 $74 $0 $7 $1 $12 $49 $0 $4 $1 $4 $15 $0 $0 $0 $2 $5 $0 $0 $0 $0 e $2 PV 3%c $525 $0 Annualized 3%d $27 $0 PV 7%c $245 $0 Annualized 7%d $20 $0 $178 $0 $1,195 $404 $910 $3,211 $9 $0 $61 $21 $46 $164 $89 $0 $602 $210 $457 $1,604

$7 $0 $49 $17 $37 $129

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alrea dy meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, a nd then annualized over a 30-year period.
e Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

E2A -8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-10: Time Profile of Mean Total Use Benefits - “Manufacturers 2-50 MGD I&E Everywhere” Option (thousands; 2004$) a North Mid- South Gulf of Great National Inland Year California Atlantic Atlantic Atlantic b Mexico Lakes Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $0 $0 $0 2012 $0 $0 $1 2013 $0 $0 $2 2014 $4 $0 $9 2015 $8 $0 $10 2016 $30 $0 $10 2017 $34 $0 $11 2018 $36 $0 $11 2019 $38 $0 $11 2020 $38 $0 $11 2021 $38 $0 $11 2022 $38 $0 $11 2023 $38 $0 $11 2024 $38 $0 $11 2025 $38 $0 $11 2026 $38 $0 $11 2027 $38 $0 $11 2028 $38 $0 $11 2029 $38 $0 $11 2030 $38 $0 $11 2031 $38 $0 $11 2032 $38 $0 $11 2033 $38 $0 $11 2034 $38 $0 $11 2035 $38 $0 $11 2036 $38 $0 $11 2037 $38 $0 $11 2038 $38 $0 $11 2039 $38 $0 $11 2040 $38 $0 $11 2041 $38 $0 $11 2042 $38 $0 $10 2043 $38 $0 $9 2044 $34 $0 $2 2045 $30 $0 $1 2046 $8 $0 $1 2047 $4 $0 $0 2048 $2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1 $1 $2 $0 $0 $2 $4 $6 $0 $7 $9 $14 $32 $0 $15 $16 $30 $62 $0 $58 $24 $53 $148 $0 $66 $26 $72 $181 $0 $69 $27 $85 $221 $0 $73 $28 $89 $234 $0 $73 $28 $90 $237 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $28 $91 $240 $0 $73 $27 $90 $238 $0 $73 $25 $87 $234 $0 $66 $18 $77 $208 $0 $58 $12 $61 $178 $0 $15 $4 $38 $92 $0 $7 $2 $19 $59 $0 $4 $1 $6 $19 $0 $0 $0 $2 $6 $0 $0 $0 $1 $3 PV 3% c $581 $0 Annualized 3% d $30 $0 PV 7% c $271 $0 Annualized 7% d $22 $0 $178 $0 $1,195 $465 $1,487 $3,906 $9 $0 $61 $24 $76 $199 $89 $0 $602 $243 $747 $1,953

$7 $0 $49 $20 $60 $157

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alrea dy meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, a nd then annualized over a 30-year period. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -9 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-11: Time Profile of Mean Total Use Be nefits - “Manufacturers 50+ MGD I-only Everywhere” Option (thousands; 2004$) a North Mid- South Gulf of Great National Inland Year California Atlantic Atlantic Atlantic b Mexico Lakes Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $0 $1 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3 $4 $7 $0 $0 $14 $20 $35 $0 e 2012 $0 e $0 $3 2013 $1 $0 $10 2014 $1 $0 $14 2015 $1 $0 $17 2016 $1 $0 $33 2017 $1 $0 $36 2018 $1 $0 $37 2019 $1 $0 $38 2020 $1 $0 $38 2021 $1 $0 $38 2022 $1 $0 $38 2023 $1 $0 $38 2024 $1 $0 $38 2025 $1 $0 $38 2026 $1 $0 $38 2027 $1 $0 $38 2028 $1 $0 $38 2029 $1 $0 $38 2030 $1 $0 $38 2031 $1 $0 $38 2032 $1 $0 $38 2033 $1 $0 $38 2034 $1 $0 $38 2035 $1 $0 $38 2036 $1 $0 $38 2037 $1 $0 $38 2038 $1 $0 $38 2039 $1 $0 $38 2040 $1 $0 $38 2041 $1 $0 $37 2042 $1 $0 $36 2043 $0 e $0 $28 $0 e $0 $90 $41 $58 $191 $0 $180 $117 $134 $442 $0 $718 $164 $162 $1,059 $0 $808 $292 $201 $1,320 $0 $853 $318 $216 $1,422 $0 $898 $329 $220 $1,485 $0 $898 $339 $223 $1,499 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $339 $223 $1,501 $0 $898 $337 $219 $1,494 $0 $898 $326 $204 $1,466 $0 $808 $299 $165 $1,309 $0 $718 $223 $89 $1,059 2044 $0 $24 $0 $180 $176 $61 $441 $0 e 2045 $0 $21 2046 $0 $0 $5 2047 $0 $0 $3 2048 $0 $0 $1 $0 $90 $47 $22 $180 $0 $45 $21 $7 $78 $0 $0 $10 $3 $16 $0 $0 $0 $0 e $2 PV 3% c $25 $0 Annualized 3% d $1 $0 PV 7% c $13 $0 Annualized 7% d $1 $0 $608 $0 $14,728 $5,538 $3,731 $24,630 $31 $0 $751 $283 $190 $1,257 $296 $0 $7,422 $2,777 $1,928 $12,435

$24 $0 $598 $224 $155 $1,002

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alrea dy meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, a nd then annualized over a 30-year period.
e Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

E2A -10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-12: Time Profile of Mean Total Use Benefits - “Manufacturers 50+ MGD I&E Everywhere” Option (thousands; 2004$) a North Mid- South Gulf of Great National Inland Year California Atlantic Atlantic Atlantic b Mexico Lakes Total 2007 $0 $0 $0 2008 $0 $0 $0 2009 $0 $0 $0 2010 $0 $0 $0 2011 $3 $0 $2 2012 $7 $1 $3 2013 $27 $3 $22 2014 $30 $11 $36 2015 $32 $13 $96 2016 $33 $19 $125 2017 $33 $20 $133 2018 $33 $21 $139 2019 $33 $21 $141 2020 $33 $21 $141 2021 $33 $21 $141 2022 $33 $21 $141 2023 $33 $21 $141 2024 $33 $21 $141 2025 $33 $21 $141 2026 $33 $21 $141 2027 $33 $21 $141 2028 $33 $21 $141 2029 $33 $21 $141 2030 $33 $21 $141 2031 $33 $21 $141 2032 $33 $21 $141 2033 $33 $21 $141 2034 $33 $21 $141 2035 $33 $21 $141 2036 $33 $21 $141 2037 $33 $21 $141 2038 $33 $21 $141 2039 $33 $21 $141 2040 $33 $21 $141 2041 $30 $21 $139 2042 $27 $20 $138 2043 $7 $18 $119 2044 $3 $10 $105 2045 $2 $8 $45 2046 $0 $2 $16 2047 $0 $1 $8 2048 $0 $0 e $2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3 $10 $13 $0 $0 $30 $43 $78 $0 $165 $75 $130 $381 $0 $330 $251 $288 $920 $0 $1,320 $318 $343 $2,057 $0 $1,484 $464 $423 $2,513 $0 $1,567 $500 $454 $2,698 $0 $1,649 $512 $461 $2,809 $0 $1,649 $523 $467 $2,833 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $523 $468 $2,835 $0 $1,649 $520 $457 $2,822 $0 $1,649 $492 $425 $2,757 $0 $1,484 $448 $338 $2,454 $0 $1,320 $272 $179 $1,915 $0 $330 $205 $125 $779 $0 $165 $59 $44 $322 $0 $82 $23 $14 $138 $0 $0 $11 $6 $26 $0 $0 $0 $1 $3 PV 3% c $565 $336 Annualized 3% d $29 $17 PV 7% c $296 $165 Annualized 7% d $24 $13 $2,244 $0 $27,050 $8,622 $7,822 $46,640 $115 $0 $1,380 $440 $399 $2,380 $1,090 $0 $13,631 $4,381 $4,050 $23,613 $88 $0 $1,098 $353 $326 $1,903

a Because EPA estimated non-use benefits only qualitatively, the monetary value of benefits includes use values only. b No I&E reductions are expected in the Sout h Atlantic region because all potentially regulated facilities in this region alrea dy meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. The present value (PV) is estimated by discounting individu al annual values to 2007, us ing the stated discount rate. d Annualized benefits represent the value of all benefits generated over the time fr ame of the analysis, discounted to 2007, a nd then annualized over a 30-year period.
e Positive non-zero value less than $500. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -11 c§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



## E2A-3 T OTAL 

## A NNUALIZED 

## M ONETARY 

## V ALUE OF 

## B ENEFITS 

### Table E2A-13 and Table E2A-14 present EPA’s estimates of the value of national and regional reductions in I&E under the supplemental options analyzed in developing the proposed and final regulation, using 3% and 7% discount rates. The tables show that benefits to recreati onal anglers account for the majority of use benefits for all supplemental options. National use bene fits are largest in the Gulf of Mexico region under all eight options. More detailed discussions of regional benefits under each option are provided in Sections B through H of the RBA.

Table E2A-15: Summary of Monetized Bene fits for Existing Phase III Facilities a 

### (thousands; 2004$; discounted at 3%)

Annualized Use Benefits of I&E Reductions Annualized Recreational Fishing Total Use Value b Commercial Region Low Mean High Low Mean High Fishing “Electric Generators 2-50 MGD I-only Everywhere” Option California $0 $0 $0 $0 $0 $0 $0 North Atlantic $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $0 e $0 e $1 $1 $0 e $1 $1 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 $0 $0 $0 $0 $0 $0 Great Lakes $0 $5 $7 $10 $5 $7 $11 Inland d n/a $3 $6 $10 $3 $6 $10 National Total $0 - $0 e $8 $13 $22 $9 $14 $22 “Electric Generators 2-50 MGD I& E like Phase II” Option California $0 $0 $0 $0 $0 $0 $0 North Atlantic $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $0 e $0 e $1 $1 $0 $1 $1 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 $0 $0 $0 $0 $0 $0 Great Lakes $0 - $0 e $6 $9 $14 $7 $10 $14 Inland d n/a $4 $7 $12 $4 $7 $12 National Total $0 - $0 e $10 $16 $27 $11 $17 $27 “Electr ic Generators 2-50 MGD I& E Everywhere ” Option California $0 $0 $0 $0 $0 $0 $0 North Atlantic $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $1 $2 $3 $6 $2 $4 $7 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 $0 $0 $0 $0 $0 $0 Great Lakes $0 - $0 e $7 $10 $14 $7 $10 $14 Inland d n/a $8 $14 $25 $8 $14 $25 National Total $0 - $1 $16 $26 $45 $17 $27 $46

E2A -12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-15: Summary of Monetized Bene fits for Existing Phase III Facilities a 

### (thousands; 2004$; discounted at 3%)

b Region Mean High Mean High

California $0 $1 $1 $2 $1 $1 $2 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $1 $2 $4 $8 $3 $5 $9

c $0 $0 $0 $0 $0 $0 $0 $0 - $6 $16 $33 $70 $22 $39 $76 $0 - $0 e $12 $17 $25 $12 $17 $25 Inland d n/a $21 $38 $70 $21 $38 $70 National Total $0 - $7 $51 $93 $174 $59 $100 $181

California $0 - $8 $10 $19 $37 $18 $27 $44 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $2 $4 $7 $15 $5 $9 $17

c $0 $0 $0 $0 $0 $0 $0 $0 - $12 $26 $49 $96 $38 $61 $108 $0 - $0 e $14 $20 $29 $14 $21 $30 Inland d $0 $26 $46 $85 $26 $46 $85 National Total $0 - $22 $79 $142 $262 $101 $164 $284

California $0 - $8 $11 $21 $41 $20 $30 $49 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $2 $4 $7 $15 $5 $9 $17

c $0 $0 $0 $0 $0 $0 $0 $0 - $12 $26 $49 $96 $38 $61 $108 $0 - $1 $16 $23 $34 $16 $24 $35 Inland d n/a $42 $76 $138 $42 $76 $138 National Total $0 - $22 $99 $177 $324 $121 $199 $346

California $0 $1 $1 $2 $1 $1 $2 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $6 $13 $25 $49 $19 $31 $55

c $0 $0 $0 $0 $0 $0 $0 $0 - $115 $307 $636 $1,339 $422 $751 $1,454

$0 - $7 $190 $276 $403 $197 $283 $410 Inland d n/a $105 $190 $348 $105 $190 $348 National Total $0 - $128 $616 $1,129 $2,142 $744 $1,257 $2,270 Annualized Use Benefits of I&E Reductions Annualized Recreational Fishing Total Use Value Commercial Low Low

Fishing “Manufacturers 2-50 MGD I-only Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Manufacturers 2-50 MGD I&E like Phase II” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Manufacturers 2-50 MGD I&E Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Manufacturers 50+ MGD I-only Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -13c § 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-15: Summary of Monetized Bene fits for Existing Phase III Facilities a 

### (thousands; 2004$; discounted at 3%)

Annualized Use Benefits of I&E Reductions Annualized Recreational Fishing Total Use Value b Commercial Region Low Mean High Low Mean High Fishing “Manufacturers 50+ MGD I&E Everywhere” Option California $0 - $8 $11 $21 $40 $19 $29 $48 North Atlantic $0 -$0 e $9 $17 $33 $9 $17 $33 Mid-Atlantic $0 - $18 $48 $96 $198 $67 $115 $216 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 - $283 $589 $1,097 $2,101 $872 $1,380 $2,384 Great Lakes $0 - $11 $295 $429 $629 $305 $440 $640 Inland d n/a $221 $399 $725 $221 $399 $725 National Total $0 - $321 $1,172 $2,059 $3,726 $1,493 $2,380 $4,046

a All benefits presented in this table are annualized. These annualized benefits represent the value of all benefits generate d over the time frame of the analysis, discounted to 2007, and then annualized over a 30-year period. b The total monetizable value of I&E reductions includes use benefits only. EPA evaluated non- use benefits only qualitativel y. A range of recreational fishing benefits is provided, based on the Krinsky and Robb technique to estimated the 95th and 5th percentile limits on the marginal value per fish predicted by EPA’s meta-analysis (see chapter A5 of the RBA). Commercial fishing benefits are computed based on a region- and species-specif ic range of gross revenue (see Chapter A4 of the RBA). To calculate the total use value columns (low, mean, and high), the high-end value for commercial fishing benefits is added to the low, mean, and high values for recrea tional fishing benefits, respectively. No I&E reductions are expected in the S outh Atlantic region because all potentially regulated facilities in this region alre ady meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h these options. d No significant commercial fish ing takes place in the Inland region, and thus this region is excluded from the commercial fis hing benefits analysis. e Denotes a positive value less than $500. Source: U.S. EPA Analysis, 2006.


### Table E2A-16: Summary of Monetized Bene fits for Existing Phase III Facilities a 

### (thousands; 2004$, discounted at 7%)
Annualized Use Benefits of I&E Reductions Total Use Value b Commercial Annualized Recreational Fishing Region Low Mean High Low Mean High Fishing “Electric Generators 2-50 MGD I-only Everywhere” Option California $0 $0 $0 $0 $0 $0 $0 North Atlantic $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 e $0 - $0 e $0 e $0 e $1 $1 $1 South Atlantic c $0 $0 $0 $0 $0 $0 $0 Gulf of Mexico $0 $0 $0 $0 $0 $0 $0 Great Lakes $0 - $0 e $4 $6 $8 $4 $6 $8 Inland d n/a $3 $5 $8 $3 $5 $8 National Total $0 - $0 e $7 $11 $17 $7 $11 $18

E2A -14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options



### Table E2A-16: Summary of Monetized Bene fits for Existing Phase III Facilities a 

### (thousands; 2004$, discounted at 7%)

Region b
Mean High Mean High

California $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $0 e $0 e $0 e $1 $0 e $1 $1

c $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 - $0 e $5 $7 $11 $5 $8 $11 Inland d n/a $3 $5 $10 $3 $5 $10 National Total $0 - $0 e $8 $13 $21 $9 $13 $22

California $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $0 e $1 $2 $5 $2 $3 $5

c $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 - $0 e $5 $8 $11 $5 $8 $11 Inland d n/a $6 $11 $21 $6 $11 $21 National Total $0 - $1 $13 $21 $36 $13 $22 $37

California $0 $0 e $1 $2 $0 $1 $2 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $1 $2 $3 $6 $2 $4 $7

c $0 $0 $0 $0 $0 $0 $0 $0 - $5 $13 $26 $56 $18 $31 $60 $0 - $0 e $10 $14 $20 $10 $14 $21 Inland d n/a $17 $30 $55 $17 $30 $55 National Total $0 - $6 $41 $74 $139 $47 $80 $144

California $0 - $6 $7 $14 $27 $13 $20 $33 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $1 $3 $6 $12 $4 $7 $13

c $0 $0 $0 $0 $0 $0 $0 $0 - $9 $21 $39 $77 $30 $49 $86 $0 - $0 e $11 $17 $24 $12 $17 $25 Inland d n/a $20 $37 $67 $20 $37 $67 National Total $0 - $17 $63 $113 $207 $79 $129 $224

California $0 - $6 $8 $16 $30 $14 $22 $36 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $1 $3 $6 $12 $4 $7 $13

c $0 $0 $0 $0 $0 $0 $0 Annualized Use Benefits of I&E Reductions Annualized Commercial

Fishing Recreational Fishing Total Use Value Low Low “Electric Generators 2-50 MGD I&E like Phase II” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Electric Generators 2-50 MGD I&E Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Manufacturers 2-50 MGD I-only Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Manufacturers 2-50 MGD I&E like Phase II” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Manufacturers 2-50 MGD I&E Everywhere” Option

North Atlantic

South Atlantic

June 1, 2006 Internal Draft – De liberative, Predecisional – Do not Quote, Cite, or Distribute E2A -15§ 316(b) Final Rule: Phase III – EA, Part E : Social Costs, Benefits, and Benefit-Cost Analysis Appendix E2A : Supplemental Options

c a

Region b
Mean High Mean High

Inland d $0 - $9 $0 - $0 e

n/a $21 $13 $33 $39 $77 $19 $28 $60 $109 $30 $49 $14 $20 $33 $60 $86 $28 $109 National Total $0 - $17 $78 $140 $256 $96 $157 $273

California $0 $1 $1 $2 $1 $1 $2 $0 $0 $0 $0 $0 $0 $0 Mid-Atlantic $0 - $5 $10 $19 $38 $15 $24 $43

c $0 $0 $0 $0 $0 $0 $0 $0 - $92 $244 $506 $1,066 $336 $598 $1,157 $0 - $5 $151 $219 $319 $156 $224 $324 Inland d n/a $86 $155 $284 $86 $155 $284 National Total $0 - $102 $491 $900 $1,709 $593 $1,002 $1,811

California $0 - $7 $9 $17 $33 $16 $24 $39 $0 - $0 e $7 $13 $25 $7 $13 $25 Mid-Atlantic $0 - $14 $37 $74 $152 $51 $88 $166

c $0 $0 $0 $0 $0 $0 $0 $0 - $225 $468 $873 $1,672 $694 $1,098 $1,898

$0 - $8 $236 $345 $505 $245 $353 $514 Inland d n/a $181 $326 $593 $181 $326 $593 National Total $0 - $255 $939 $1,648 $2,980 $1,194 $1,903 $3,235

a
b

To

d

e 

### Table E2A-16: Summary of Monetized Bene fits for Existing Phase III Facilities (thousands; 2004$, discounted at 7%)
Annualized Use Benefits of I&E Reductions Annualized Recreational Fishing Total Use Value Commercial

Fishing Low Low
Gulf of Mexico Great Lakes

“Manufacturers 50+ MGD I-only Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

“Manufacturers 50+ MGD I&E Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes

All benefits presented in this table are annualized. These annualized benefits represent the value of all benefits generate d over the time frame of the analysis, discounted to 2007, and then annualized over a 30-year period. The total monetizable value of I&E reductions includes use benefits only. EPA evaluated non- use benefits only qualitativel y. A range of recreational fishing benefits is provided, based on the Krinsky and Robb technique to estimated the 95th and 5th percentile limits on the marginal value per fish predicted by EPA’s meta-analysis (see chapter A5 of the RBA). Commercial fishing benefits are computed based on a region- and species-specif ic range of gross revenue (see Chapter A4 of the RBA). calculate the total use value columns (low, mean, and high), the high-end value for commercial fishing benefits is added to the low, mean, and high values for recrea tional fishing benefits, respectively. No I&E reductions are expected in the S outh Atlantic region because all potentially regulated facilities in this region alre ady meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h these options. No significant commercial fish ing takes place in the Inland region, and thus this region is excluded from the commercial fis hing benefits analysis. Denotes a positive value less than $500. Source: U.S. EPA Analysis, 2006.

E2A -16 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs 

# Chapter E3: Comparison of Benefits and Social Costs

I NTRODUCTION 

## C HAPTER 

## C ONTENTS 

### This chapter compares total monetized benefits and social Introduction.............................................................E3-1 

### costs for the regulatory analys is options considered in E3-1 Comparison of Benefits and Social Costs by 

### developing in the final regulation, the “50 MGD for All Option ........................................................E3-1 

### Waterbodies” option (“50 MGD All”), the “200 MGD for E3-2 Incremental Analysis of Benefits and Social 

### All Waterbodies” option (“200 MGD All”), and the “100 Costs...........................................................E3-6 

### MGD for Certain Waterbodies” option (“100 MGD E3-3 Break-Even Analysis of Potential Non-Use 

### CWB”). Benefits and costs are compared on two bases: (1) Benefits ......................................................E3-7 

### for each of the options anal yzed and (2) incrementally Glossary ................................................................E3-11 

### across options. For more information on the analysis of References.............................................................E3-12 

### social costs and benefits, see Chapter E1: Summary of Social Costs and Chapter E2: Summary of Benefits

. Results for the eight supplemental options are presented in Appendix E3A to this chapter. This comparison of benefits and costs is presented only for Phase III existing facilities. New offshore oil and gas extraction facilities were excluded from the comparison of benefits and costs because EPA was unable to estimate benefits for this industry segment. Table E3-1, below, summarizes compliance action assumpti ons for the regulatory analysis options based on the performance standard each facility would need to meet (depending on each facility’s waterbody type, design intake flow, capacity utilization, and annual intake flow as a percent of s ource waterbody mean annual flow) and its baseline technologies in-place.

Table E3-1: Number of Existing Pha se III Facilities by Compliance Action a Facility Compliance Action 50 MGD All 200 MGD All 100 MGD CWB Total Facilities Potentially Subject to Regulation (excluding 515 515 515 baseline closures) Facilities Subject to Best Professional Judgment 368 484 491 Facilities Subject to National Categorical Requirements 146 31 23 No compliance action b 35 5 1 Impingement controls only 60 5 0 Impingement and entrainment controls 51 21 22

a Alternative less stringent requi rements based on site-specific assessments of costs, or costs and benefits are allowed. Esti mation of compliance responses is unc ertain because the number of fa cilities requestin g alternative less stringent requirements based on these sitespecific assessments is unknown. b These facilities meet compliance requirements in the baseline and thus would require no action to comply with the regulation. Source: U.S. EPA Analysis, 2006.



## E3-1 C OMPARISON OF 

## B ENEFITS AND 

## S OCIAL 

## C OSTS BY 

## O PTION 

### The preceding chapters, Chapter E1: Summary of Social Costs and Chapter E2: Summary of Benefits , present estimates of total social cost and benefit for the three re gulatory analysis options and eight supplemental options

June 1, 2006 Internal Draft – Deliberat ive, Predecisional – Do not Quote, Cite, or Distribute E3- 1§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



### evaluated in developing the 316(b) Phase III regulation. Based on these values of estimated benefits and social costs, EPA calculated the cost-benef it ratio to society of each option.
As documented in Chapter E2: Summary of Benefits , the monetized benefit values developed by EPA for the 316(b) Phase III regulation, and included in the cost-ben efit ratios presented in this chapter, include only use benefit values for commercial and recreational fishing. EPA was unable, at this time, to estimate a monetized value of non-use benefits from reduced impingement and entrainment (I&E). EPA has estimated (subject to the limitations and uncertainties noted in Sections A4-12 and A5-5 of the Regional Analysis Document) the use benefits associated with the two main categories of use benefits (commercial and recreational) shown in Figure A3-1 of the Regional Analysis Document. As Table A3-1 of the Regional Analysis Document shows, the complete assessment of these two use benefit categories values the 2.6% of baseline I&E losses that would have been eventually harvested by commercial and recreational fishers. Use values other than commercial and recreational fishing, such as subsistence fishing and ot her near-water recreation, have not been monetized; the former would only be positive for harvested species, while the latter could be positive for forage species as well. Nonetheless, EPA expects that the largest u se-value categories have been captured.
EPA was unable to estimate non-use benefits associated with losses to any categories of species; Table A3-1 shows that 19.4 percent of national baseline I&E losses are in commercial and recreational species, while 80.6 percent are in forage species, and shows regional variation in the breakdown of species type. Non-use values are not necessarily the same for forage species and commercial and recreational species. Given the absence of any empirical evidence to support an assumption that use values and non-use values are similar on a per-fish basis, it would not be correct to use the values estimated for 2 to 3 percent of baseline fish losses and extrapolate to all fish losses prevented by the re gulatory analysis options. As a result, the monetized benefit values that are compared with the estimated valu es of total social cost in this cost-benefit comparison represent a partial estimate of the true benefits of the given option. Table E3-2, below, presents EPA’s estimates of use benef its and social costs for the regulatory analysis options for existing facilities, at 3% and 7% discount rates. At a 3% discount rate, EPA estimates that social costs exceed monetized use benefits by $36.0 million under the 50 MGD All option, $18.0 million under the 200 MGD All option, and $12.7 million under the 100 MGD CWB option. This results in mean co st-benefit ratios for the 50 MGD, 200 MGD, 100 MGD options of 17.0, 13.0, and 7.8, respectively. At a 7% discount rate, social costs exceed use benefits by $37.2 million under the 50 MGD All option, $19.0 million under the 200 MGD All option, and $12.6 million under the 100 MGD CWB option. At 7% discount, this results in mean cost-benefit ratios for the 50 MGD, 200 MGD, 100 MGD options of 21.7, 16.9, and 9.5, respectively. These values are all in dollars as of 2004 and are based on the discounting of costs and benef its to the beginning of the year 2007, the assumed date when the rule would take effect.

E3-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs

Option a Cost-Benefit Ratios Based on Use Benefits Only b
Low High Low High

50 MGD All $1.4 $2.3 $3.8 $38.3 200 MGD All $1.0 $1.5 $2.5 $19.5 100 MGD CWB $1.2 $1.9 $3.1 $14.6

50 MGD All $1.1 $1.8 $3.0 $39.0 200 MGD All $0.8 $1.2 $2.0 $20.1 100 MGD CWB $1.0 $1.5 $2.5 $14.1

a

b Source: 

### Table E3-2: Total Benefits, Social Costs, and Cos t-Benefit Ratios for Existing Phase III Facilities by Option (millions; $2004)

Total Monetized Use Benefits Total Social Costs

Mean Mean 3% discount rate 

### 26.9 17.0 10.0 20.4 13.0 7.7 12.1 7.8 4.6 7% discount rate 

### 34.4 21.7 12.8 26.5 16.9 10.1 14.8 9.5 5.6 The total monetizable value of I&E reductions includes use bene fits only. EPA evaluated non-use benefits qualitatively. The range (low, mean, and high) of annualized use values is computed by ad ding the high end value for commer cial fishing benefits (based on assumed producer surplus of 40% of gross revenue) to the low, mean, and high values from recrea tional fishing benefits, respect ively (see Chapter A4 of the RBA). Cost-benefit ratios are computed by dividing total annualized costs by total annual use benefits. U.S. EPA Analysis, 2006.


### The regulatory analysis options are expected to provide benefits that were not accounted for in the benefits analysis. These benefits include reduced I&E losses of fish, shellfish, and other aquatic organisms, which, in turn, increase the numbers of individuals present, increase local and regional fishery populations (a subset of which was accounted for in the benefits analysis), and ultimatel y contribute to the enhanced environmental functioning of affected waterbodies (rivers, lakes, estuaries, and oceans) and associated ecosystems. See Chapter A6 of the Regional Benefits Assessment for the Final S ection 316(b) Rule for Phase III Facilities (RBA) for a detailed description of the qualitative non-use benef its from reduced I&E (U.S. EPA, 2006). Table E3-3, below, and Table E3-4, following page, present cost-benefit ra tios for existing Phase III facilities by option and region, discounted at 3% and 7%, respectivel y. As reported in Table E3-3 and Table E3-4, EPA estimates that costs are largest relative to benefits in the North Atlantic region for each of the three regulatory analysis options. Conversely, costs outweigh benefits by the least amount in the Gulf of Mexico region for all three regulatory analysis options.

June 1, 2006 Internal Draft – Deliberat ive, Predecisional – Do not Quote, Cite, or Distribute E3- 3§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs

a Option North South Gulf of Great National California Atlantic b Lakes Inland Atlantic Total Low 50 MGD All 21.2 225.8 18.3 na 7.7 32.2 113.4 26.9 200 MGD All n/a 261.1 14.6 na 6.2 19.7 96.9 20.4 100 MGD CWB n/a 212.4 14.6 na 7.7 19.8 n/a 12.1 Mean 50 MGD All 14.0 118.6 10.7 na 4.9 22.3 62.8 17.0 200 MGD All n/a 137.2 8.5 na 4.0 13.7 53.7 13.0 100 MGD CWB n/a 111.6 8.5 na 4.9 13.8 n/a 7.8 High 50 MGD All 8.4 62.0 5.7 na 2.8 15.4 34.4 10.0 200 MGD All n/a 71.7 4.5 na 2.3 9.4 29.5 7.7 100 MGD CWB n/a 58.3 4.5 na 2.8 9.5 n/a 4.6

a
b

Source:

a Option California North Atlantic South Atlantic b Gulf of National Total Low 50 MGD All 26.6 282.8 22.9 n/a 9.6 40.5 145.3 34.4 200 MGD All n/a 324.1 17.7 n/a 7.6 23.0 131.9 26.5 100 MGD CWB n/a 265.6 17.7 n/a 9.6 23.4 n/a 14.8 Mean 50 MGD All 17.5 148.6 13.4 n/a 6.1 28.1 80.4 21.7 200 MGD All n/a 170.3 10.3 n/a 4.9 16.0 73.0 16.9 100 MGD CWB n/a 139.6 10.3 n/a 6.1 16.2 n/a 9.5 High 50 MGD All 10.6 77.6 7.1 n/a 3.5 19.3 44.1 12.8 200 MGD All n/a 89.0 5.4 n/a 2.9 11.0 40.1 10.1 100 MGD CWB n/a 72.9 5.4 n/a 3.5 11.1 n/a 5.6

a
b

Source: 

### Table E3-3: Cost-Benefit Ratios for Existing Phase III Facilities by Option and Region (discounted at 3%) Cost-Benefit Ratios Based on Use Benefits Only
Mid-Atlantic Mexico

Cost-benefit ratios are calculat ed by dividing total annualized costs by total annual use benefits. No benefits or costs are expected in the South Atlantic region be cause all potentially regulated facilities in this region wi thdraw less than 50 MGD and therefore would not be required to install t echnologies to comply with th e regulatory anal ysis options. U.S. EPA Analysis, 2006.



### Table E3-4: Cost-Benefit Ratios for Existing Phase III Facilities by Option and Region (discounted at 7%) Cost-Benefit Ratios Based on Use Benefits Only
Mid-Atlantic Mexico Great Lakes Inland

Cost-benefit ratios are calculat ed by dividing total annualized co sts by total annual use benefits. No benefits or costs are expected in the South Atlantic region be cause all potentially regulated facilities in this region wi thdraw less than 50 MGD and therefore would not be required to install t echnologies to comply with th e regulatory anal ysis options. U.S. EPA Analysis, 2006.


### Table E3-5, following page, provides additional detail on net benefits. Table E3-5 compiles for the three regulatory analysis options the time pr ofiles of benefits and costs as presented in the preceding chapters. The table also reports the calculated present and annualized valu es of benefits and costs at 3% and 7% discount rates.

E3-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



### Table E3-5: Time Profile of Benefits and Social Costs for Existing Phase III Facilities (millions; $2004)

Year Benefits O&G) Benefits O&G) Benefits O&G) 2007 $0.00 $3.2 $0.00 $0.2 $0.00 $0.6 2008 $0.00 $12.1 $0.00 $2.6 $0.00 $5.2 2009 $0.00 $17.5 $0.00 $3.1 $0.00 $5.1 2010 $0.01 $138.0 $0.00 $108.9 $0.00 $14.8 2011 $0.06 $95.2 $0.04 $44.7 $0.03 $56.8 2012 $0.33 $58.8 $0.20 $6.8 $0.23 $5.9 2013 $0.83 $59.0 $0.54 $48.1 $0.56 $36.6 2014 $1.95 $19.0 $1.25 $5.7 $1.62 $4.5 2015 $2.38 $21.8 $1.57 $8.4 $1.98 $8.8 2016 $2.55 $16.8 $1.70 $6.1 $2.12 $4.7 2017 $2.66 $17.3 $1.77 $8.0 $2.22 $5.7 2018 $2.68 $13.7 $1.79 $6.0 $2.24 $4.4 2019 $2.69 $17.9 $1.79 $5.6 $2.24 $4.4 2020 $2.69 $38.6 $1.79 $14.2 $2.24 $12.9 2021 $2.69 $92.0 $1.79 $44.2 $2.24 $55.1 2022 $2.69 $21.7 $1.79 $8.4 $2.24 $6.1 2023 $2.69 $58.2 $1.79 $47.8 $2.24 $36.4 2024 $2.69 $18.8 $1.79 $5.6 $2.24 $4.4 2025 $2.69 $21.8 $1.79 $8.4 $2.24 $8.8 2026 $2.69 $16.8 $1.79 $6.1 $2.24 $4.7 2027 $2.69 $17.3 $1.79 $8.0 $2.24 $5.7 2028 $2.69 $13.7 $1.79 $6.0 $2.24 $4.4 2029 $2.69 $17.9 $1.79 $5.6 $2.24 $4.4 2030 $2.69 $38.6 $1.79 $14.2 $2.24 $12.9 2031 $2.69 $92.0 $1.79 $44.2 $2.24 $55.1 2032 $2.69 $21.7 $1.79 $8.4 $2.24 $6.1 2033 $2.69 $58.2 $1.79 $47.8 $2.24 $36.4 2034 $2.69 $18.8 $1.79 $5.6 $2.24 $4.4 2035 $2.69 $21.8 $1.79 $8.4 $2.24 $8.8 2036 $2.69 $16.8 $1.79 $6.1 $2.24 $4.7 2037 $2.69 $17.3 $1.79 $8.0 $2.24 $5.7 2038 $2.69 $13.7 $1.79 $6.0 $2.24 $4.4 2039 $2.69 $12.5 $1.79 $5.5 $2.24 $4.0 2040 $2.68 $10.2 $1.79 $5.3 $2.24 $3.9 2041 $2.62 $4.9 $1.75 $2.6 $2.21 $1.0 2042 $2.35 $3.5 $1.60 $2.4 $2.01 $0.9 2043 $1.86 $0.3 $1.26 $0.1 $1.68 $0.1 2044 $0.74 $0.55 $0.62 2045 $0.31 $0.22 $0.26 2046 $0.13 $0.09 $0.12 2047 $0.02 $0.02 $0.02 2048 $0.00 $0.00 $0.00 PV 3% $44.13 $772.6 $29.39 $393.2 $36.69 $294.1 Annualized 3% $2.25 $38.3 $1.50 $19.5 $1.87 $14.6 PV 7% $22.31 $517.8 $14.82 $267.4 $18.47 $187.4 Annualized 7% $1.80 $39.0 $1.19 $20.1 $1.49 $14.1 50 MGD All 200 MGD All 100 MGD CWB Monetized Total Cost (excl. Monetized Total Cost (excl. Monetized Total Cost (excl.

Source: U.S. EPA Analysis, 2006. 

### To facilitate consistent comparis on of costs and benefits for Phase II and Phase III, 50 MGD All Waterbodies option, these values are reported in Table E3-7, all in 2004$.

June 1, 2006 Internal Draft – Deliberat ive, Predecisional – Do not Quote, Cite, or Distribute E3- 5c § 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



### Table E-6: Comparison of Break-Even Analysis by Regions for 316(b) Phase II and Phase III Regulations (2004$, discounted at 3%) a,b
Total Social Costs Option Total Value of Use Benefits (millions) (millions) Phase II Final Rule Phase III 50 MGD All Phase II Final Rule Phase III 50 MGD All d California $34.73 $0.40 $3.12 $0.03 North Atlantic $15.70 $2.03 $1.51 $0.02 Mid-Atlantic $72.52 $1.22 $47.29 $0.11 South Atlantic c $10.62 $0.0 $7.42 $0.0 Gulf of Mexico $26.72 $6.74 $7.27 $1.38 Great Lakes $69.36 $9.74 $14.85 $0.44 Inland $192.91 $17.26 $3.13 $0.27

National Total $447.25 $38.27

a Phase II regional benefit and cost estimates are unweighted; Phase II total national estimates are sample-weighted. Phase II I regional benefit and cost estimates are sample-weighted. b Phase II regional benefit and cost estimates have been inflated from 2002$ to 2004$. No benefits or costs are expected in the South Atlantic region under Phase III because all potentially regulated facilities i n this region withdraw less than 50 MGD and therefore would not be required to install technologies to comply with the regulatory analysis op tions. d Mean value of total use benefits from the estimated range, as described in Chapter E2 of the EA and Chapter I1 of the RBA). Source: U.S. EPA Analysis (2004, 2006). $87.02 $2.25



## E3-2 I NCREMENTAL 

## A NALYSIS OF 

## B ENEFITS AND 

## S OCIAL 

## C OSTS 

### In addition to comparing benefits and costs for each primary analysis option, as presented in the preceding section, EPA also analyzed the benefits and costs of the options on an incremental basis. The comparison in the preceding section addresses the simple quantitative relations hip between estimated benefits and costs for each option by itself: for a given option, which is greater – cost s or benefits – and by how much in relative terms? In contrast, incremental analysis looks at the differential re lationship of benefits and costs across options and poses a different question: as increasingly more costly options are considered, by what amount do benefits, costs, and net benefits change from option to option? It is important to emphasize that this incremental analysis does not look at the change in cost-benefit ratios across options, but rather, the actual cost s and benefits. Analyzing cost-benefit ratios incrementally is not particularly valuable because it would only present the change in the relative relationship between costs and benefits across the different op tions. The most valuable interpretation of an incremental analysis of cost-benefit ratios would be to look for instances where the ratio changes from below 1 to above 1 in order to determine which option is optimal at the margin of stringency. Since all of the regulatory options considered here have a cost-benefit ratio greater than 1, an incremental analysis based on actual net benefits is more applicable. Incremental benefit-cost an alysis provides insight into the net gain to society from imposing increasingly more costly requirements and may aid regulatory decision-makers in choosing among a set of regulatory proposals that otherwise have a similar qu antitative relationship between benefits and costs based on a one-option-at-a-time comparison. The Agency conducted the incremental benefit-cost analysis by calculating, for each option, the change in net benefits, from option to option, in moving from the least st ringent option to successively more stringent options. As described previously, the regulatory analysis options – the 50 MGD All, the 200 MGD All, and 100 MGD CWB options – differ in terms of design intake flow (D IF) applicability threshold and affected waterbodies. Thus, the difference in benefits and costs across the opti ons derives from the number of facilities each option is expected to cover and what types of waterbodies are affect ed. As reported in Table E3-8, at a 3% discount rate,

E3-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



### the incremental change in net benefits in moving fro m the 100 MGD CWB option to the 200 MGD All option is -$5.3 million, and from the 200 MGD All option to the 50 MGD All option, is -$18.0 million. Thus, for both incremental steps, calculated net benefits become in creasingly more negative but the step from the 200 MGD All option to the 50 MGD All option is more costly to society, on a net benefit basis, than the step from the 100 MGD CWB option to the 200 MGD All option. The same pattern of change occurs for the analysis under a 7% discount rate: the incremental change in net benefits in moving from the 100 MGD CWB option to the 200 MGD All option is -$6.3 million, and from the 200 MGD All option to the 50 MGD All option, is -$18.3 million.

c b c Option a Mean High Mean High

100 MGD CWB -$13.4 -$12.7 -$11.5 n/a n/a n/a 200 MGD All -$18.5 -$18.0 -$17.0 -$5.2 -$5.3 -$5.5 50 MGD All -$36.8 -$36.0 -$34.5 -$18.3 -$18.0 -$17.5

100 MGD CWB -$13.2 -$12.6 -$11.6 n/a n/a n/a 200 MGD All -$19.4 -$18.9 -$18.1 -$6.2 -$6.3 -$6.5 50 MGD All -$37.9 -$37.2 -$35.9 -$18.5 -$18.3 -$17.8

a
b 

### Table E3-7: Incremental Benefit-Cost Analysis for Existing Phase III Facilities (millions; $2004) Net Benefits Based on Use Benefits Only Incremental Net Benefits Low Low 3% discount rate

7% discount rate

Options are presented in order of increasing applicability of national categorical standards, based on the number of facilitie s. Net benefits are computed by subtracting total annualized costs from total annual use benefits. The net benefits presented he re are based on the comparison of a substantially complete measure of social costs with an incomplete measure of benefits. Incremental net benefits are equal to the difference between ne t benefits of an option and net benefits of the previous option

. Source: U.S. EPA Analysis, 2006.



## E3-3 B REAK 

## -E VEN 

## A NALYSIS OF 

## P OTENTIAL 

## N ON 

## -U SE 

## B ENEFITS 

### As described in Section E3-1, above, EPA’s monetized estimates of benefits for the 316(b) Phase III regulation consider only the use benefit values for commercial and recreational fishing, and exclude non-use benefits

. For the final rule, the Agency assessed non-use benefits only qualitatively (see Chapter A6 of RBA for a qualitative assessment of non-use benefits). As a result, th e comparison of costs and benefits presented in Sections E3-1 and E3-2 does not reflect potential non-use values that may result from the regulatory analysis options. Although EPA did not monetarily estimat e the non-use benefits of the 316(b) Phase III regulation, it is possible to calculate the amount of non-use benefits that would be n eeded for the regulation’s benefits to equal the estimated total costs (the “break-even” non-use benefits value) . This provides another prism through which regulatory decision makers can view the regulatory analysis options’ costs and benefits. It is not necessarily a conclusive analysis. Regulatory decision-make rs may then judge the reasonableness of these required values in assessing what regulatory option, if any, is warranted. To perform this break-even analysis, EPA subtracted th e estimated commercial and recreational use benefits from the estimated annual costs. EPA then used this required residual to calculate the non-use benefit value, in terms of annual willingness-to-pay (WTP), needed for total benef its to equal total costs. This calculation was done in two different ways: (1) on a per household basis and (2) on a per age-1 equivalent basis. EPA performed this analysis using the regional studies framework as described in the RBA. This approach assumes that all of the facilities in the sample weight of a given sample facility are in the same benefits an alysis region as the sample facility. For the WTP per household analysis, this approach also assumes that the size and other characteristics of potential use and non-use benefit populations, which are assessed for th e sample facility, may be extended to the weight of

June 1, 2006 Internal Draft – Deliberat ive, Predecisional – Do not Quote, Cite, or Distribute E3- 7§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



### the sample facility. This assumption embeds considerable uncertainty, but it permits the estimation of a non-use benefit population for each facility, which may then be used to calculate the WTP value by household that equates total benefits and total costs, on a sample-weighted basi s, for each option. For this analysis, EPA assumed that only anglers fishing and households residing within a 25- mile radius of the facility hold non-use values for the affected resources (Census, 2000). 1 

### If the 25-mile radius excludes angl ers and households holding positive nonuse values, the break-even is overestimated; if anglers and households with zero non-use values are included in the 25-mile radius, the break-even would be underestimated unless it can be applied to only those holding positive non-use values. At the national level, EPA estimated the following (see Table E3-8):

f 

### WTP per household. Under the 50 MGD All option, non-use benefit values per household would need to equal $1.09 (3% discount rate) and $1.13 (7% disc ount rate) for total annual benefits to equal total annualized costs. Under the 200 MGD All option, which applies to the next smaller set of facilities, these values change to $1.32 (3% discount rate) and $1. 39 (7% discount rate). Under the 100 MGD CWB option, which applies to the smallest set of fac ilities of the regulatory analysis options, these values decrease to $0.83 (3% and 7% discount rate).

f 

### WTP per age-1 equivalent. Under the 50 MGD All option, non-u se benefit values per age-1 equivalent would need to equal $0.37 (3% discount rate) and $0. 38 (7% discount rate) for total annual benefits to equal total annualized costs. Under the 200 MGD All option, which applies to the next smaller set of facilities, these values decrease to $0.24 (3% discount ra te) and $0.25 (7% discount rate). Under the 100 MGD CWB option these values decrease, to $0.18 (3% and 7% discount rate). Table E3-8: Estimated Value of Non-Use Benefits Re quired for Total Benefits to Equal Total Social Costs for Existing Phase III Faciliti es - Break-Even Analysis ($2004)

Option Total Social Costs (millions) Mean Value of Use Benefits (millions) Non-Use Benefits Necessary to Break Even a

(millions) Number of Households Break-Even WTP per Household ($) Reduction of I&E Losses

(Age-1 Equivalents) Break-Even Value per

Age-1 Equivalent b ($) 3% Discount Rate 50 MGD All $38.3 $2.25 $36.0 33,016,327 $1.09 98,200,000 $0.37 200 MGD All $19.5 $1.50 $18.0 13,639,187 $1.32 74,500,000 $0.24 100 MGD CWB $14.6 $1.87 $12.7 15,242,880 $0.83 71,100,000 $0.18 7% Discount Rate 50 MGD All $39.0 $1.80 $37.2 33,016,327 $1.13 98,200,000 $0.38 200 MGD All $20.1 $1.19 $18.9 13,639,187 $1.39 74,500,000 $0.25 100 MGD CWB $14.1 $1.49 $12.6 15,242,880 $0.83 71,100,000 $0.18

a The non-use benefits category in this tabl e may include some categories of use values that were not taken into account by the recreation and commercial fishing analyses. b The non-use value per age-1 equivalent reported in the table in cludes the value placed on the fish’s contribution to non-use ecological services (e.g ., population, health, sustainability , and overall ecosy stem health). Source: U.S. EPA Analysis, 2006.


### EPA also calculated the annual WTP needed on a per house hold basis and a per age-1 equivalent basis at the regional level (see Table E3-10 and Table E- 6 below). EPA calculated the following:

f 

### WTP per household. The Gulf of Mexico region has the highest estimated annual break-even WTP values per household under all three options. The Mid-Atlantic region has the lowest estimated annual

1 See chapter E2 for details on the estimation of age-1 equivalents.

E3-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



### break-even WTP values per household with $0.19, $0.13, and $0.13 (3% discount rate) under the 50 MGD All, the 200 MGD All, and 100 MGD CWB options, respectively.

f 

### WTP per age-1 equivalent. The North Atlantic region has the highest estimated annual break-even WTP value per age-1 equivalent with $1.94, $2.17, and $1.85 (3% discount rate) under the 50 MGD All, the 200 MGD All, and 100 MGD CWB options, respectively. The Mid-Atlantic region has the lowest estimated annual break-even WTP values per age-1 e quivalent with $0.02 (3% discount rate) under the 50 MGD All, the 200 MGD All, and 100 MGD CWB options. Table E3-9: Estimated Value of Non-Use Benefits Re quired for Total Benefits to Equal Total Social Costs for Existing Phase III Faciliti es - Break-Even Analysis by Regions (2004$, discounted at 3%)

Option Total Social Costs (millions) Mean Value of Use Benefits

(millions) Non-Use Benefits Necessary to Break Even a

(millions) Number of Households Break-Even WTP per Household ($) Reduction of I&E Losses

(Age-1 Equivalents) Break-Even Value per

Age-1 Equivalent b ($) 50 MGD All California $0.4 $0.0 $0. 4 1,221,712 $0.31 474,000 $0.79 North Atlantic $2.0 $0.0 $2.0 3,171,400 $0.64 1,040,000 $1.94 Mid-Atlantic $1.2 $0.1 $1. 1 5,899,941 $0.19 44,500,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 n/a 0 n/a Gulf of Mexico $6.7 $1.4 $5.4 1,570,063 $3.4 19,400,000 $0.3 Great Lakes $9.7 $0.4 $9. 3 7,300,769 $1.27 13,500,000 $0.69 Inland $17.3 $0.3 $17.0 13, 852,441 $1.2 19,700,000 $0.9 National Total $38.3 $2.3 $36.0 33,016,327 $1.1 98,200,000 $0.4 200 MGD All California $0.0 $0.0 $0.0 0 n/a 0 n/a North Atlantic $0.5 $0.0 $0.5 1,396,669 $0.34 220,000 $2.17 Mid-Atlantic $0.8 $0.1 $0. 7 5,469,251 $0.13 39,400,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 n/a 0 n/a Gulf of Mexico $3.5 $0. 9 $2.6 404,072 $6.50 12,500,000 $0.21 Great Lakes $4.4 $0.3 $4. 1 4,619,103 $0.88 9,650,000 $0.42 Inland $10.1 $0.2 $9.9 1, 750,092 $5.67 12,700,000 $0.78 National Total $19.5 $1.5 $18.0 13,639,187 $1.32 74,500,000 $0.24 100 MGD CWB California $0.0 $0.0 $0.0 0 n/a 0 n/a North Atlantic $1.6 $0.0 $1.5 1,724,169 $0.90 837,000 $1.85 Mid-Atlantic $0.8 $0.1 $0. 7 5,469,251 $0.13 39,400,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 n/a 0 n/a Gulf of Mexico $6.7 $1.4 $5.4 1,570,063 $3.41 19,400,000 $0.28 Great Lakes $5.3 $0.4 $4. 9 6,479,397 $0.76 11,600,000 $0.42 Inland $0.0 $0.0 $0.0 0 n/a 0 n/a National Total $14.6 $1.9 $12.7 15,242,880 $0.83 71,100,000 $0.18

a The non-use benefits category in this tabl e may include some categories of use values that were not taken into account by the recreation and commercial fishing analyses. b The non-use value per age-1 equivalent reported in the table in cludes the value placed on the fish’s contribution to non-use ecological services (e.g ., population, health, sustainability , and overall ecosy stem health). No benefits or costs are expected in the South Atlantic region be cause all potentially regulated facilities in this region wi thdraw less than 50 MGD and therefore would not be required to install t echnologies to comply with th e regulatory anal ysis options. d Positive non-zero value less than $50,000. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Deliberat ive, Predecisional – Do not Quote, Cite, or Distribute E3- 9

cc § 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



### Table E3-10: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social

Costs for Existing Phase III Faciliti es - Break-Even Analysis by Regions (2004$, discounted at 7%) Non-Use Break-Even Total Mean Value Break-Even Reduction of Benefits Social of Use Number of WTP per I&E Losses Value per Option Necessary to Age-1 Costs Benefits Households Household (Age-1 Equivalent b Break Even a (millions) (millions) (millions) ($) Equivalents) ($) 50 MGD All California $0.4 $0.0 $0. 4 1,221,712 $0.32 474,000 $0.83 North Atlantic $2.0 $0.0 $2.0 3,171,400 $0.62 1,040,000 $1.88 Mid-Atlantic $1.2 $0.1 $1. 1 5,899,941 $0.18 44,500,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 n/a 0 n/a Gulf of Mexico $6.7 $1.1 $5.6 1,570,063 $3.55 19,400,000 $0.29 Great Lakes $9.8 $0.3 $9. 5 7,300,769 $1.30 13,500,000 $0.70 Inland $18.1 $0.2 $17.8 13, 852,441 $1.29 19,700,000 $0.90 National Total $39.0 $1.8 $37.2 33,016,327 $1.13 98,200,000 $0.38 200 MGD All California $0.0 $0.0 $0.0 0 n/a 0 n/a North Atlantic $0.4 $0.0 $0.4 1,396,669 $0.31 220,000 $1.99 Mid-Atlantic $0.7 $0.1 $0. 7 5,469,251 $0.12 39,400,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 n/a 0 n/a Gulf of Mexico $3.4 $0. 7 $2.7 404,072 $6.76 12,500,000 $0.22 Great Lakes $4.1 $0.3 $3. 8 4,619,103 $0.83 9,650,000 $0.40 Inland $11.3 $0.2 $11.1 1, 750,092 $6.34 12,700,000 $0.87 National Total $20.1 $1.2 $18.9 13,639,187 $1.39 74,500,000 $0.25 100 MGD CWB California $0.0 $0.0 $0.0 0 n/a 0 n/a North Atlantic $1.5 $0.0 $1.5 1,724,169 $0.88 837,000 $1.81 Mid-Atlantic $0.7 $0.1 $0. 7 5,469,251 $0.12 39,400,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 n/a 0 n/a Gulf of Mexico $6.7 $1.1 $5.6 1,570,063 $3.55 19,400,000 $0.29 Great Lakes $5.0 $0.3 $4. 7 6,479,397 $0.72 11,600,000 $0.40 Inland $0.0 $0.0 $0.0 0 n/a 0 n/a National Total $14.1 $1.5 $12.6 15,242,880 $0.83 71,100,000 $0.18

a The non-use benefits category in this tabl e may include some categories of use values that were not taken into account by the recreation and commercial fishing analyses. b The non-use value per age-1 equivalent reported in the table in cludes the value placed on the fish’s contribution to non-use ecological services (e.g ., population, health, sustainability , and overall ecosy stem health). No benefits or costs are expected in the South Atlantic region be cause all potentially regulated facilities in this region wi thdraw less than 50 MGD and therefore would not be required to install t echnologies to comply with th e regulatory anal ysis options. d Positive non-zero value less than $50,000. Source: U.S. EPA Analysis, 2006.

E3-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



## G LOSSARY 

### opportunity cost: The lost value of alternative uses of resources (capital, labor, and raw materials) used in regulatory compliance. social cost: The costs incurred by society as a whole as a result of the final rule. Social costs do not include costs that are transfers among parties that do not represent a new cost overall.

June 1, 2006 Internal Draft – Deliberat ive, Predecisional – Do not Quote, Cite, or Distribute E3- 11§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Chapter E3: Benefits and Social Costs



## R EFERENCES


### U.S. Department of Commerce, Bureau of the Census, (Census). 2000. “Summary File 1.” Available at: http://www.census.gov/Press-Release/www/2001/sumfile1.html.
U.S. Environmental Protection Agency (U.S. EPA). 2006. Regional Analysis for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-002. June 2006.

E3- 12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns 

# Appendix E3A: Summary of Results for Supplemental Options

A C ONTENTS 

## I Chapter E3 supplemental options evaluated for potential Phase III

Chapter E3

a Option
I-only I&E I-only I&E I-only I&E Action I&E I&E 114 114 114 368 368 368 146

closures) 0 0 0 0 0 0 0 Judgment 114 114 114 368 368 368 146 146 Requirements 95 94 82 213 199 186 47 16 action b Impingement 19 9 n/a 155 103 n/a 99 n/a controls only n/a 10 32 n/a 67 183 n/a 130 entrainment controls

a

b Source: 146

0 

### PPENDIX NTRODUCTION Introduction..........................................................E3A-1 

### This appendix supplements by presenting EPA’s analysis of the benefits and costs for eight E3A-1 Comparison of Benefits and Social Costs by Option .....................................................E3A-2 

### existing facilities. Results are presented for the comparison E3A-2 Incremental Analysis of Benefits and Social 

### of benefits and costs and the breakeven assessment of non- Costs........................................................E3A-8 

### use benefits. As discussed previously in , the E3A-3 Break-Even Analysis of Potential Non-Use 

### benefit and cost values presente d in this appendix pertain Benefits ...................................................E3A-8 

### only to the Manufacturers and Electric Generators References..........................................................E3A-14 

### segments of the industries subject to Phase III regulation. EPA estimated the compliance response for each facility under each of the other options (see Table E3A-1, below). In this table and the followi ng tables, the options are listed in order of increasing cost, which reflects the breadth of regulatory coverage based on design intake flow applicabilit y threshold and the stringency of compliance requirements. For a description of this analysis, see section E3-1 of Chapter E3.

Table E3A-1: Number of Existing Pha se III Facilities by Compliance Action

Electric Generators 2-50 MGD Manufacturers 2-50 MGD Manufacturers 50+ MGD Facility Compliance Phase II Phase II Everywhere Everywhere Everywhere Everywhere Everywhere Everywhere Facilities Potentially Subject to Regulation (excluding baseline
Facilities Subject to Best Professional
Facilities Subject to National Categorical
No compliance

Impingement and

Alternative less stringent requi rements based on a site-specific assessment of co sts, or costs and benefits, are allowed. T he estimate of number of facilities meeting sp ecific requirements is uncertain because the numbe r of facilities requesting alternative less st ringent requirements based on site-spe cific assessments is unknown. These facilities already meet compliance requirements. U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E3A-1§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



## E3A-1 C OMPARISON OF 

## B ENEFITS AND 

## S OCIAL 

## C OSTS BY 

## O PTION 

### Table E3A-2, below, reports benefits, costs, and net be nefits for all eight supplemental options. For further information on this analysis, see Section E3-1 of Chapter E3

.
Table E3A-2: Total Benefits, Social Costs, a nd Net Benefits for Existing Phase III Facilities by Option (millions; 2004$)
Option Total Monetized Use Benefits a Low Mean High Total Social Costs Net Benefits Based on Use Benefits Only b
Low Mean High
3% Discount Rate Electric Generators 2-50 MGD I-only Everywhere $0.0 $0.0 $0.0 $2.2 -$2.2 -$2.2 -$2.2 I&E like Phase II $0.0 $0.0 $0.0 $3.2 -$3.2 -$3.2 -$3.1 I&E Everywhere $0.0 $0.0 $0.0 $8.1 -$8.0 -$8.0 -$8.0 Manufacturers 2-50 MGD I-only Everywhere $0.1 $0.1 $0.2 $21.5 -$21.5 -$21.4 -$21.3 I&E like Phase II $0.1 $0.2 $0.3 $34.8 -$34.7 -$34.6 -$34.5 I&E Everywhere $0.1 $0.2 $0. 3 $56.6 -$56.5 -$56.4 -$56.2 Manufacturers 50+ MGD I-only Everywhere $0.7 $1.3 $2.3 $25.0 -$24.2 -$23.7 -$22.7 I&E Everywhere $1.5 $2.4 $4. 0 $46.1 -$44.6 -$43.7 -$42.0
7% Discount Rate Electric Generators 2-50 MGD I-only Everywhere $0.0 $0.0 $0.0 $2.1 -$2.1 -$2.1 -$2.1 I&E like Phase II $0.0 $0.0 $0.0 $3.0 -$3.0 -$3.0 -$3.0 I&E Everywhere $0.0 $0.0 $0.0 $8.8 -$8.8 -$8.8 -$8.7 Manufacturers 2-50 MGD I-only Everywhere $0.0 $0.1 $0.1 $22.5 -$22.5 -$22.4 -$22.4 I&E like Phase II $0.1 $0.1 $0.2 $37.1 -$37.0 -$36.9 -$36.9 I&E Everywhere $0.1 $0.2 $0. 3 $60.3 -$60.2 -$60.2 -$60.1 Manufacturers 50+ MGD I-only Everywhere $0.6 $1.0 $1.8 $26.0 -$25.4 -$25.0 -$24.2 I&E Everywhere $1.2 $1.9 $3. 2 $46.2 -$45.0 -$44.3 -$43.0

a The total monetizable value of I&E reductions includes use bene fits only. EPA evaluated non-us e benefits only qualitatively. The range (low, mean, and high) of annualized us e values is computed by adding the high-e nd value for commercial fishing benefits ( based on assumed producer surplus of 40% of gross revenue) to the low, mean, and high values from recrea tional fishing benefits, respect ively (see Chapter A4 of the RBA). b Net benefits are calculated by subtracting total annualized cost s from total annual use benefits. The net benefits presented here are based on the comparison of a substantially complete measure of social costs with an incomplete measure of benefits. Source: U.S. EPA Analysis, 2006.


### Table E3A-3 and Table E3A-4, following pages, report net benefits, by option and benefit study region for, respectively, the 3% and 7% discount rate calculati ons. For further information on this analysis, see Section E3-1 of Chapter E3

.

E3A-2 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns

Option North Mid- South Gulf of Great Inland National California Atlantic Atlantic Atlantic b Mexico Lakes Total a

Low

0.0 0.0 (0.1) 0.0 0.0 (0.5) (1.5) (2.2) 0.0 0.0 (0.3) 0.0 0.0 (0.8) (1.9) (3.2) 0.0 0.0 (0.4) 0.0 0.0 (0.9) (6.6) (8.0)
(0.7) 0.0 (0.5) 0.0 (0.6) (8.4) (10.3) (21.5) (1.4) 0.0 (1.1) 0.0 (4.5) (10.1) (16.2) (34.7) (1.4) 0.0 (1.1) 0.0 (4.5) (10.0) (37.5) (56.5)
(0.2) (0.4) (0.7) 0.0 (0.5) (4.2) (17.9) (24.2) (0.4) (2.0) (1.2) 0.0 (3.6) (9.4) (27.3) (44.6)

0.0 0.0 (0.1) 0.0 0.0 (0.5) (1.5) (2.2) 0.0 0.0 (0.3) 0.0 0.0 (0.8) (1.9) (3.2) 0.0 0.0 (0.4) 0.0 0.0 (0.9) (6.6) (8.0)
(0.7) 0.0 (0.5) 0.0 (0.6) (8.4) (10.3) (21.4) (1.4) 0.0 (1.1) 0.0 (4.5) (10.0) (16.1) (34.6) (1.4) 0.0 (1.1) 0.0 (4.5) (10.0) (37.4) (56.4)
(0.2) (0.4) (0.7) 0.0 (0.2) (4.1) (17.8) (23.7) (0.4) (2.0) (1.1) 0.0 (3.0) (9.3) (27.1) (43.7) High

0.0 0.0 (0.1) 0.0 0.0 (0.5) (1.5) (2.2) 0.0 0.0 (0.3) 0.0 0.0 (0.8) (1.9) (3.1) 0.0 0.0 (0.4) 0.0 0.0 (0.9) (6.6) (8.0)
(0.7) 0.0 (0.5) 0.0 (0.5) (8.4) (10.2) (21.3) (1.3) 0.0 (1.1) 0.0 (4.4) (10.0) (16.1) (34.5) (1.3) 0.0 (1.1) 0.0 (4.4) (10.0) (37.4) (56.2)
(0.2) (0.4) (0.7) 0.0 0.5 (4.0) (17.6) (22.7) (0.4) (2.0) (1.0) 0.0 (2.0) (9.1) (26.7) (42.0)

a

b

Source: 

### Table E3A-3: Total Net Benefits for Existing Phase III Facilities by Option and Region (millions; 2004$, discounted at 3%) Net Benefits Based on Use Benefits Only

Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere Mean Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere

Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere Net benefits are computed by subtracting total annualized cost s from total annual use benefits. The net benefits presented h ere are based on the comparison of a substantially complete measure of social costs with an incomplete measure of benefits. No benefits or costs are expected in th e South Atlantic region becau se all potentially regulated facilities in this region alr eady meet the national categorical requirements in the base line and therefore would not be required to install technologies to comply with th is option. U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E3A-3§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns

a Option North South Gulf of Great National Inland California Atlantic Atlantic Atlantic b Lakes Total
Low

0.0 0.0 (0.1) 0.0 0.0 (0.5) (1.5) (2.1) 0.0 0.0 (0.3) 0.0 0.0 (0.7) (1.8) (3.0) 0.0 0.0 (0.4) 0.0 0.0 (0.8) (7.4) (8.8)

(0.7) 0.0 (0.5) 0.0 (0.6) (10.1) (9.7) (22.5) (1.3) 0.0 (1.1) 0.0 (5.6) (11.7) (15.9) (37.0) (1.3) 0.0 (1.1) 0.0 (5.6) (11.7) (38.7) (60.2)

(0.2) (0.4) (0.7) 0.0 (0.6) (4.6) (18.6) (25.4) (0.4) (2.0) (1.1) 0.0 (3.7) (9.6) (27.4) (45.0)

0.0 0.0 (0.1) 0.0 0.0 (0.5) (1.5) (2.1) 0.0 0.0 (0.3) 0.0 0.0 (0.7) (1.8) (3.0) 0.0 0.0 (0.4) 0.0 0.0 (0.8) (7.4) (8.8)

(0.7) 0.0 (0.5) 0.0 (0.6) (10.1) (9.6) (22.4) (1.3) 0.0 (1.1) 0.0 (5.6) (11.7) (15.9) (36.9) (1.3) 0.0 (1.1) 0.0 (5.6) (11.7) (38.7) (60.2)

(0.2) (0.4) (0.7) 0.0 (0.4) (4.5) (18.5) (25.0) (0.4) (2.0) (1.1) 0.0 (3.3) (9.5) (27.3) (44.3) High

0.0 0.0 (0.1) 0.0 0.0 (0.4) (1.5) (2.1) 0.0 0.0 (0.3) 0.0 0.0 (0.7) (1.8) (3.0) 0.0 0.0 (0.4) 0.0 0.0 (0.8) (7.4) (8.7)

(0.7) 0.0 (0.5) 0.0 (0.6) (10.1) (9.6) (22.4) (1.2) 0.0 (1.0) 0.0 (5.6) (11.7) (15.8) (36.9) (1.2) 0.0 (1.0) 0.0 (5.6) (11.7) (38.6) (60.1)

(0.2) (0.4) (0.7) 0.0 0.2 (4.4) (18.4) (24.2) (0.4) (1.9) (1.0) 0.0 (2.5) (9.3) (27.0) (43.0)

a

b

Source: 

### Table E3A-4: Total Net Benefits for Existi ng Phase III Facilities by Option and Region (millions; 2004$, discounted at 7%)
Net Benefits Based on Use Benefits Only

MidMexico

Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere Mean Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere

Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere Net benefits are computed by subtracting total annualized cost s from total annual use benefits. The net benefits presented h ere are based on the comparison of a substantially comp lete measure of social costs with an in complete measure of benefits and should b e interpreted with caution. No benefits or costs are expected in th e South Atlantic region becau se all potentially regulated facilities in this region alr eady meet the national categorical requirements in the base line and therefore would not be required to install technologies to comply with th is option. U.S. EPA Analysis, 2006.

E3A-4 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



### Table E3A-5, Table E3A-6, and Table E3A-7 compile th e time profiles of benefits and costs for the eight supplemental options. The tables also report the calculate d present and annualized values of benefits and costs at 3% and 7% discount rates.
Table E3A-5: Time Profile of Benefits and Costs for Existing Phase III Electric Generator 2-50 MGD Facilities (millions; 2004$) “Electric Generators 2-50 MGD “Electric Generators 2-50 MGD “Electric Generators 2-50 MGD I-only Everywhere” I&E like Phase II” I&E Everywhere” Year Total Cost Total Cost Total Cost Benefits Benefits Benefits 2007 $ 0.00 $ 2.18 $ 0.00 $ 2.18 $ 0.00 $ 2.22 2008 $0.00 $2.69 $0.00 $3.23 $0.00 $3.56 2009 $0.00 $3.45 $0.00 $3.96 $0.00 $5.28 2010 $0.00 $3.76 $0.00 $5.36 $0.00 $42.00 2011 $0.00 $5.68 $0.00 $6.78 $0.00 $43.58 2012 $0.00 $5.99 $0.00 $6.78 $0.01 $8.21 2013 $0.01 $4.49 $0.01 $5.28 $0.01 $7.78 2014 $0.01 $6.31 $0.01 $8.39 $0.02 $9.54 2015 $0.01 $3.39 $0.01 $4.43 $0.02 $5.59 2016 $0.01 $3.63 $0.02 $4.31 $0.03 $6.29 2017 $0.02 $6.24 $0.02 $6.97 $0.03 $8.19 2018 $0.02 $4.88 $0.02 $5.70 $0.03 $7.19 2019 $0.02 $6.11 $0.02 $6.86 $0.03 $8.23 2020 $0.02 $5.27 $0.02 $6.69 $0.03 $11.04 2021 $0.02 $6.48 $0.02 $6.55 $0.03 $9.22 2022 $0.02 $8.53 $0.02 $9.27 $0.03 $10.49 2023 $0.02 $5.44 $0.02 $6.25 $0.03 $8.90 2024 $0.02 $8.39 $0.02 $9.87 $0.03 $10.98 2025 $0.02 $4.79 $0.02 $5.84 $0.03 $6.99 2026 $0.02 $5.09 $0.02 $5.77 $0.03 $7.74 2027 $0.02 $7.28 $0.02 $8.01 $0.03 $9.23 2028 $0.02 $5.04 $0.02 $5.86 $0.03 $7.35 2029 $0.02 $6.62 $0.02 $7.37 $0.03 $8.74 2030 $0.02 $5.20 $0.02 $6.62 $0.03 $10.97 2031 $0.02 $6.39 $0.02 $6.46 $0.03 $9.13 2032 $0.02 $8.85 $0.02 $9.59 $0.03 $10.81 2033 $0.02 $5.26 $0.02 $6.07 $0.03 $8.72 2034 $0.02 $8.51 $0.02 $10.00 $0.03 $11.11 2035 $0.02 $4.49 $0.02 $5.54 $0.03 $6.69 2036 $0.02 $4.87 $0.02 $5.55 $0.03 $7.52 2037 $0.02 $6.27 $0.02 $7.00 $0.03 $8.21 2038 $0.02 $4.02 $0.02 $4.83 $0.03 $6.33 2039 $0.02 $4.55 $0.02 $5.22 $0.03 $6.35 2040 $0.02 $2.69 $0.02 $3.17 $0.03 $3.96 2041 $0.02 $2.52 $0.02 $2.89 $0.03 $3.56 2042 $0.01 $4.53 $0.02 $4.85 $0.02 $5.15 2043 $0.01 $2.07 $0.01 $2.29 $0.02 $2.41 2044 $0.01 $2.88 $0.01 $2.88 $0.01 $2.88 2045 $0.00 $1.74 $0.01 $1.74 $0.01 $1.74 2046 $0.00 $1.68 $0.00 $1.68 $0.00 $1.68 2047 $0.00 $2.48 $0.00 $2.48 $0.00 $2.48 2048 $0.00 $0.65 $0.00 $0.65 $0.00 $0.65 PV 3% $0.27 $121.00 $0.33 $139.92 $0.53 $238.62 Annualized 3% $0.01 $5.99 $0.02 $6.93 $0.03 $11.82 PV 7% $0.13 $69.69 $0.17 $81.42 $0.27 $157.82 Annualized 7% $0.01 $5.25 $0.01 $6.13 $0.02 $11.89 Monetized Monetized Monetized (excl. O&G) (excl. O&G) (excl. O&G)

Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E3A-5§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



### Table E3A-6: Time Profile of Benefits and Costs for Existing Phase III Manufacturer 2-50 MGD Facilities (millions; 2004$) “Manufacturers 2-50 MGD I-only “Manufacturers 2-50 MGD I&E “Manufacturers 2-50 MGD I&E Everywhere” like Phase II” Everywhere” Year Total Cost Total Cost Total Cost Benefits Benefits Benefits 2007 $ 0.00 $ 2.34 $ 0.00 $ 3.65 $ 0.00 $ 3.99 2008 $0.00 $6.76 $0.00 $10.19 $0.00 $12.19 2009 $0.00 $11.50 $0.00 $16.65 $0.00 $20.20 2010 $0.00 $22.93 $0.00 $65.88 $0.00 $76.31 2011 $0.00 $30.60 $0.00 $131.86 $0.01 $141.24 2012 $0.02 $181.68 $0.02 $192.66 $0.03 $203.06 2013 $0.04 $17.76 $0.05 $25.69 $0.06 $323.07 2014 $0.09 $14.32 $0.12 $21.81 $0.15 $32.65 2015 $0.10 $14.74 $0.15 $21.17 $0.18 $29.73 2016 $0.11 $16.17 $0.18 $22.49 $0.22 $33.11 2017 $0.12 $17.26 $0.19 $23.26 $0.23 $34.28 2018 $0.12 $11.65 $0.20 $18.20 $0.24 $27.02 2019 $0.12 $12.11 $0.20 $19.48 $0.24 $29.75 2020 $0.12 $19.53 $0.20 $29.69 $0.24 $42.36 2021 $0.12 $27.63 $0.20 $36.53 $0.24 $47.13 2022 $0.12 $25.79 $0.20 $35.54 $0.24 $46.56 2023 $0.12 $17.70 $0.20 $25.56 $0.24 $34.09 2024 $0.12 $16.26 $0.20 $23.63 $0.24 $33.91 2025 $0.12 $16.12 $0.20 $22.55 $0.24 $31.09 2026 $0.12 $17.62 $0.20 $23.94 $0.24 $34.54 2027 $0.12 $18.30 $0.20 $24.30 $0.24 $35.32 2028 $0.12 $11.81 $0.20 $18.36 $0.24 $27.18 2029 $0.12 $12.61 $0.20 $19.98 $0.24 $30.26 2030 $0.12 $19.47 $0.20 $29.62 $0.24 $42.30 2031 $0.12 $27.55 $0.20 $36.44 $0.24 $47.05 2032 $0.12 $26.11 $0.20 $35.86 $0.24 $46.88 2033 $0.12 $17.52 $0.20 $25.38 $0.24 $33.91 2034 $0.12 $16.39 $0.20 $23.76 $0.24 $34.03 2035 $0.12 $15.83 $0.20 $22.25 $0.24 $30.79 2036 $0.12 $17.39 $0.20 $23.72 $0.24 $34.32 2037 $0.12 $17.29 $0.20 $23.29 $0.24 $34.31 2038 $0.12 $10.79 $0.20 $17.33 $0.24 $26.15 2039 $0.12 $10.00 $0.20 $15.15 $0.24 $23.63 2040 $0.12 $7.73 $0.20 $11.78 $0.24 $18.30 2041 $0.12 $6.17 $0.19 $8.38 $0.23 $14.23 2042 $0.10 $6.43 $0.17 $7.35 $0.21 $11.01 2043 $0.08 $2.58 $0.15 $2.83 $0.18 $4.33 2044 $0.03 $2.88 $0.07 $2.88 $0.09 $2.88 2045 $0.02 $1.74 $0.05 $1.74 $0.06 $1.74 2046 $0.01 $1.68 $0.02 $1.68 $0.02 $1.68 2047 $0.00 $2.48 $0.00 $2.48 $0.01 $2.48 2048 $0.00 $0.65 $0.00 $0.65 $0.00 $0.65 PV 3% $1.97 $510.10 $3.21 $778.32 $3.91 $1,218.35 Annualized 3% $0.10 $25.27 $0.16 $38.55 $0.20 $60.35 PV 7% $0.99 $340.26 $1.60 $533.65 $1.95 $842.29 $0.08 $25.63 $0.13 $40.19 $0.16 $63.44 Monetized Monetized Monetized (excl. O&G) (excl. O&G) (excl. O&G)

Annualized 7% Source: U.S. EPA Analysis, 2006.

E3A-6 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



### Table E3A-7: Time Profile of Benefits and Costs for Existing Phase III Manufa cturer 50+ MGD Facilities (millions; 2004$)

Year Total Cost Total Cost

2007 $0.00 $3.59 $0.00 $5.26 2008 $0.00 $9.76 $0.00 $15.66 2009 $0.00 $14.07 $0.00 $23.41 2010 $0.01 $121.55 $0.01 $61.10 2011 $0.03 $43.23 $0.08 $171.40 2012 $0.19 $56.68 $0.38 $68.41 2013 $0.44 $32.44 $0.92 $120.46 2014 $1.06 $16.01 $2.06 $31.63 2015 $1.32 $18.66 $2.51 $29.05 2016 $1.42 $14.28 $2.70 $22.80 2017 $1.48 $16.65 $2.81 $26.89 2018 $1.50 $12.83 $2.83 $22.18 2019 $1.50 $16.57 $2.84 $28.48 2020 $1.50 $30.44 $2.84 $49.49 2021 $1.50 $42.55 $2.84 $105.53 2022 $1.50 $22.30 $2.84 $34.05 2023 $1.50 $32.83 $2.84 $70.06 2024 $1.50 $18.30 $2.84 $33.62 2025 $1.50 $20.05 $2.84 $30.43 2026 $1.50 $15.74 $2.84 $24.25 2027 $1.50 $17.69 $2.84 $27.93 2028 $1.50 $12.99 $2.84 $22.34 2029 $1.50 $17.07 $2.84 $28.99 2030 $1.50 $30.38 $2.84 $49.42 2031 $1.50 $42.47 $2.84 $105.45 2032 $1.50 $22.62 $2.84 $34.37 2033 $1.50 $32.65 $2.84 $69.88 2034 $1.50 $18.43 $2.84 $33.74 2035 $1.50 $19.75 $2.84 $30.13 2036 $1.50 $15.52 $2.84 $24.03 2037 $1.50 $16.68 $2.84 $26.91 2038 $1.50 $11.97 $2.84 $21.32 2039 $1.50 $12.36 $2.84 $20.70 2040 $1.49 $9.30 $2.82 $15.47 2041 $1.47 $5.30 $2.76 $8.88 2042 $1.31 $6.57 $2.45 $9.31 2043 $1.06 $2.10 $1.91 $2.67 2044 $0.44 $2.88 $0.78 $2.88 2045 $0.18 $1.74 $0.32 $1.74 2046 $0.08 $1.68 $0.14 $1.68 2047 $0.02 $2.48 $0.03 $2.48 2048 $0.00 $0.65 $0.00 $0.65 PV 3% $24.63 $580.11 $46.64 $1,005.88 Annualized 3% $1.26 $28.73 $2.38 $49.82 PV 7% $12.44 $386.74 $23.61 $654.94 Annualized 7% $1.00 $29.13 $1.90 $49.33 “Manufacturers 50+ MGD I-only Everywhere” “Manufacturers 50+ MGD I&E Everywhere”
Monetized Benefits (excl. O&G) Monetized Benefits (excl. O&G)

Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E3A-7§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



## E3A-2 I NCREMENTAL 

## A NALYSIS OF 

## B ENEFITS AND 

## S OCIAL 

## C OSTS 

### EPA conducted an incremental analysis of benefits and social costs to de termine as increasingly more costly options are considered, by what amount do benefits, costs, and net benefits change from option to option. Table E3A-8, below, reports this analysis for the eight supp lemental options evaluated. For a description of this analysis, see Section E3-3 of Chapter E3

.

c Option a b c Mean High Mean High

-$2.2 -$2.2 -$2.2 n/a n/a n/a -$3.2 -$3.2 -$3.1 $4.9 $4.9 $4.9 -$8.0 -$8.0 -$8.0 -$5.8 -$5.8 -$5.8

-$21.5 -$21.4 -$21.3 -$18.3 -$18.3 -$18.2 -$34.7 -$34.6 -$34.5 $21.8 $21.8 $21.7 -$56.5 -$56.4 -$56.2 -$35.0 -$35.0 -$34.9

-$24.2 -$23.7 -$22.7 $10.5 $10.9 $11.8 -$44.6 -$43.7 -$42.0 -$20.3 -$20.0 -$19.3

-$2.1 -$2.1 -$2.1 n/a n/a n/a -$3.0 -$3.0 -$3.0 $5.7 $5.7 $5.7 -$8.8 -$8.8 -$8.7 -$6.6 -$6.6 -$6.6

-$22.5 -$22.4 -$22.4 -$19.5 -$19.4 -$19.4 -$37.0 -$36.9 -$36.9 $23.2 $23.2 $23.2 -$60.2 -$60.2 -$60.1 -$37.8 -$37.7 -$37.7

-$25.4 -$25.0 -$24.2 $11.6 $11.9 $12.7 -$45.0 -$44.3 -$43.0 -$19.6 -$19.3 -$18.8

a
b 

### Table E3A-8: Incremental Benefit-Cost Analysis for Existing Phase III Facilities (millions; 2004$) Net Benefits Based on Use Benefits Only Incremental Net Benefits

Low Low

Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere

Electric Generators 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 2-50 MGD I-only Everywhere I&E like Phase II I&E Everywhere Manufacturers 50+ MGD I-only Everywhere I&E Everywhere 3% discount rate

7% discount rate

Options are presented in order of increasing appli cability, based on the numbe r of facilities regulated. Net benefits are computed by subtracting total annualized costs from total annual use benefits. The net benefits presented he re are based on the comparison of a substantially complete measure of social costs with an incomplete measure of benefits. Incremental net benefits are equal to the difference between ne t benefits of a given option and the net benefits of the previo us less stringent option. Source: U.S. EPA Analysis, 2006.



## E3A-3 B REAK 

## -E VEN 

## A NALYSIS OF 

## P OTENTIAL 

## N ON 

## -U SE 

## B ENEFITS 

### EPA conducted a break-even analysis for each option to determine the per household value and per age-1 equivalent value of non-use benefits ne eded for total annual benefits to equa l total annual costs. Table E3A-9 and Table E3A-10, following pages, present results at the nati onal level (discounted at 3 and 7%, respectively). Table E3A-11 and Table E3A-12 present regional results. See Section E3-3 of Chapter E3 for details of this analysis.

E3A-8 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



### Table E3A-9: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Cost for Existing Phase III Facilities - Break- Even Analysis (2004$, discounted at 3%)

Option Total Social Costs (millions) Mean Value of Use Benefits (millions) Non-Use Benefits Necessary to Break

Even a (millions) Number of Households BreakEven WTP per Household ($) Reduction in I&E Losses

(Age-1 Equivalents) BreakEven Value per

Age-1 Equivalent ($) b
Electric Generators 2-50 MGD I-only Everywhere $0.01 $2. 2 $2.2 33,016,327 $0.07 802,000 $2.77 I&E like Phase II $0.02 $3. 2 $3.2 15,242,880 $0.21 863,000 $3.66 I&E Everywhere $0.03 $8.1 $8.0 13,639,187 $0.59 2,610,000 $3.08 Manufacturers 2-50 MGD I-only Everywhere $0.10 $21.5 $21.4 0 n/a 4,720,000 $4.54 I&E like Phase II $0.16 $34.8 $34.6 13, 639,187 $2.54 8,040,000 $4.31 I&E Everywhere $0.20 $56.6 $56.4 33,016,327 $1.71 9,340,000 $6.04 Manufacturers 50+ MGD I-only Everywhere $1.26 $25.0 $23.7 15,242,880 $1.56 39,400,000 $0.60 I&E Everywhere $2.38 $46.1 $43.7 0 n/a 103,000,000 $0.42

a The non-use benefits category in this tabl e may include some categories of use values that were not taken into account by the recreation and commercial fishing analyses. b The non-use value per age-1 equivalent reported in the table in cludes the value placed on the fish’s contribution to non-use ecological services (e.g ., population, health, su stainability, and overa ll ecosystem health). Source: U.S. EPA Analysis, 2006.



### Table E3A-10: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Cost for Existing Phase III Facilities - Break- Even Analysis (2004$, discounted at 7%) Non-Use BreakBreak- Mean Value Benefits Reduction in Even Total Social of Use Necessary Number of Even WTP I&E Losses Value per Option Costs Benefits to Break Households per (Age-1 Age-1 Household (millions) (millions) Even a ($) Equivalents) Equivalent (millions) ($) b
Electric Generators 2-50 MGD I-only Everywhere $0.01 $2.1 I&E like Phase II $0.01 $3.0 I&E Everywhere $0.02 $8.8 $2.1 0 n/a 802,000 $2.65 $3.0 0 n/a 863,000 $3.48 $8.8 0 n/a 2,610,000 $3.35 Manufacturers 2-50 MGD I-only Everywhere $0.08 $22.5 I&E like Phase II $0.13 $37.1 I&E Everywhere $0.16 $60.3 $22.4 0 n/a 4,720,000 $4.75 $36.9 0 n/a 8,040,000 $4.60 $60.2 0 n/a 9,340,000 $6.44 Manufacturers 50+ MGD I-only Everywhere $1.00 $26.0 $25.0 0 n/a 39,400,000 $0.63 I&E Everywhere $1.90 $46.2 $44.3 0 n/a 103,000,000 $0.43

a The non-use benefits category in this tabl e may include some categories of use values that were not taken into account by the recreation and commercial fishing analyses. b The non-use value per age-1 equivalent reported in the table in cludes the value placed on the fish’s contribution to non-use ecological services (e.g ., population, health, su stainability, and overa ll ecosystem health). Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E3A-9§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns

Non-Use Reduction of Benefits WTP per of Use Option Costs Benefits Household (Age-1 Age-1 (millions) (millions) a ($) Equivalents) Equivalent b (millions) ($)

California $0.0 $0.0 $0.0 0 n/a 0 n/a $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.1 $0.0 $0.1 1,078,126 $0.12 26,600 $4.92

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.0 $0.0 $0.0 0 n/a 0 n/a $0.5 $0.0 2,545,871 $0.18 303,000 $1.55 Inland $1.5 $0.0 $1.5 5,501,774 $0.28 473,000 $3.21 National Total $2.2 $0.0 $2.2 $0.24 802,000 $2.77

California $0.0 $0.0 $0.0 0 n/a 0 n/a $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.3 $0.0 $0.3 1,078,126 $0.30 26,600 $12.29

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.0 $0.0 $0.0 0 n/a 0 n/a $0.8 $0.0 2,545,871 $0.30 327,000 $2.35 Inland $1.9 $0.0 $1.9 5,840,778 $0.33 509,000 $3.76 National Total $3.2 $0.0 $3.2 $0.33 863,000 $3.66

California $0.0 $0.0 $0.0 0 n/a 0 n/a $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.4 $0.0 6,388,407 $0.06 1,480,000 $0.28

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.0 $0.0 $0.0 0 n/a 0 n/a $0.9 $0.0 2,545,871 $0.34 331,000 $2.59 Inland $6.6 $0.0 $6.6 6,321,161 $1.04 802,000 $8.19 National Total $8.1 $0.0 $8.0 $0.53 2,610,000 $3.08

California $0.7 $0.0 804,176 $0.88 10,300 $69.02 $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.5 $0.0 $0.5 5,275,611 $0.09 150,000 $3.08

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.6 $0.6 34,907 $16.58 543,000 $1.07 $8.4 $0.0 3,689,094 $2.28 698,000 $12.07 Inland $10.3 $0.0 $10.3 $0.48 3,320,000 $3.09 National Total $21.5 $0.1 $21.4 $0.69 4,720,000 $4.54



### Table E3A-11: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social

Costs for Existing Phase III Faciliti es - Break-Even Analysis by Regions (2004$, discounted at 3%) Break-Even Mean Value Break-Even Total Social Number of I&E Losses Value per Necessary to Households Break Even

“Electric Generators 2-50 M GD I-only Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes $0. 5

9,125, 771 “Electric Generators 2-50 MGD I&E like Phase II” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes $0. 8

9,464, 776 “Electric Generators 2-50 MGD I&E Everywhere” Option

North Atlantic $0. 4 South Atlantic Gulf of Mexico Great Lakes $0. 9

15,255, 439 “Manufacturers 2-50 MGD I-only Everywhere” Option $0. 7 North Atlantic

South Atlantic Gulf of Mexico $0. 0 Great Lakes $8. 4 21, 228,706 31,032, 495

E3A-10 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



### Table E3A-11: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social

Costs for Existing Phase III Faciliti es - Break-Even Analysis by Regions (2004$, discounted at 3%)

Option Total Social Costs (millions) Mean Value of Use Benefits (millions) Non-Use Benefits Necessary to Break Even a

(millions) Number of Households Break-Even WTP per Household ($) Reduction of I&E Losses

(Age-1 Equivalents) Break-Even Value per

Age-1 Equivalent b ($) “Manufacturers 2-50 MGD I&E like Phase II” Option California $1.4 $0.0 $1. 4 804,176 $1.69 481,000 $2.82 North Atlantic $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $1.1 $0.0 $1. 1 5,275,611 $0.21 2,310,000 $0.48 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $4.5 $0. 1 $4.5 34,907 $128.36 855,000 $5.24 Great Lakes $10.1 $0.0 $10. 0 3,689,094 $2.72 732,000 $13.72 Inland $16.2 $0.0 $16.1 23, 255,379 $0.69 3,660,000 $4.41 National Total $34.8 $0.2 $34.6 33,059, 167 $1.05 8,040,000 $4.31 “Manufacturers 2-50 MGD I&E Everywhere” Option California $1.4 $0.0 $1. 4 804,176 $1.70 534,000 $2.56 North Atlantic $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $1.1 $0.0 $1. 1 5,275,611 $0.21 2,310,000 $0.48 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $4.5 $0. 1 $4.5 34,907 $128.36 855,000 $5.24 Great Lakes $10.1 $0.0 $10. 0 3,689,094 $2.72 764,000 $13.14 Inland $37.5 $0.1 $37.4 23, 482,894 $1.59 4,880,000 $7.67 National Total $56.6 $0.2 $56.4 33,286, 682 $1.69 9,340,000 $6.04 “Manufacturers 50+ MGD I-only Everywhere” Option California $0.2 $0.0 $0. 2 1,221,712 $0.14 10,200 $16.35 North Atlantic $0.4 $0.0 $0.4 0 n/a 0 n/a Mid-Atlantic $0.8 $0.0 $0. 7 5,171,002 $0.14 1,000,000 $0.72 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $0.9 $0.8 $0.2 1,315,491 $0.15 10,400,000 $0.02 Great Lakes $4.4 $0.3 $4. 1 5,434,405 $0.75 11,700,000 $0.35 Inland $18.0 $0.2 $17.8 11, 669,888 $1.52 16,200,000 $1.10 National Total $25.0 $1.3 $23.7 24,812, 498 $0.96 39,400,000 $0.60 “Manufacturers 50+ MGD I&E Everywhere” Option California $0.4 $0.0 $0. 4 1,221,712 $0.31 474,000 $0.79 North Atlantic $2.0 $0.0 $2.0 3,171,400 $0.64 910,000 $2.22 Mid-Atlantic $1.2 $0.1 $1. 1 5,899,941 $0.19 44,500,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $4.4 $1.4 $3.0 1,570,063 $1.94 19,400,000 $0.16 Great Lakes $9.7 $0.4 $9. 3 7,300,769 $1.27 13,400,000 $0.69 Inland $27.5 $0.4 $27.1 16, 438,931 $1.65 24,600,000 $1.10 National Total $46.1 $2.4 $43.7 35,602, 817 $1.23 103,000,000 $0.42

a The non-use benefits category in this tabl e may include some categories of use values that were not taken into account by the recreation and commercial fishing analyses. b The non-use value per age-1 equivalent reported in the table in cludes the value placed on the fish’s contribution to non-use ecological services (e.g ., population, health, sustainability , and overall ecosy stem health). No benefits or costs are expected in th e South Atlantic region becau se all potentially regulated facilities in this region alr eady meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. d Positive non-zero value less than $50,000. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E3A-11

c§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns

Option Costs (millions) of Use Benefits (millions) Non-Use Benefits

a (millions) WTP per Household ($) Reduction of (Age-1 Equivalents) Age-1 Equivalent b ($)

California $0.0 $0.0 $0.0 0 n/a 0 n/a $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.1 $0.0 $0.1 1,078,126 $0.11 26,600 $4.45

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.0 $0.0 $0.0 0 n/a 0 n/a $0.5 $0.0 2,545,871 $0.18 303,000 $1.49 Inland $1.5 $0.0 $1.5 5,501,774 $0.26 473,000 $3.07 National Total $2.1 $0.0 $2.1 $0.23 802,000 $2.65

California $0.0 $0.0 $0.0 0 n/a 0 n/a $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.3 $0.0 $0.3 1,078,126 $0.28 26,600 $11.51

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.0 $0.0 $0.0 0 n/a 0 n/a $0.7 $0.0 2,545,871 $0.29 327,000 $2.23 Inland $1.8 $0.0 $1.8 5,840,778 $0.31 509,000 $3.58 National Total $3.0 $0.0 $3.0 $0.32 863,000 $3.48

California $0.0 $0.0 $0.0 0 n/a 0 n/a $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.4 $0.0 6,388,407 $0.06 1,480,000 $0.26

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.0 $0.0 $0.0 0 n/a 0 n/a $0.8 $0.0 2,545,871 $0.42 331,000 $2.44 Inland $7.4 $0.0 $7.4 6,321,161 $1.16 802,000 $9.18 National Total $8.8 $0.0 $8.8 $0.57 2,610,000 $3.35

California $0.7 $0.0 804,176 $0.84 10,300 $65.26 $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $0.5 $0.0 $0.5 5,275,611 $0.09 150,000 $3.09

c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 $0.6 $0.6 34,907 $16.92 543,000 $1.09 $10.1 $0.0 3,689,094 $2.74 698,000 $14.50 Inland $9.7 $0.0 $9.6 $0.45 3,320,000 $2.90 National Total $22.5 $0.1 $22.4 $0.72 4,720,000 $4.75



### Table E3A-12: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social

Costs for Existing Phase III Faciliti es - Break-Even Analysis by Regions (2004$, discounted at 7%)

Total Social Mean Value Necessary to Break Even Number of Households Break-Even I&E Losses Break-Even Value per

“Electric Generators 2-50 M GD I-only Everywhere” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes $0. 5

9,125, 771 “Electric Generators 2-50 MGD I&E like Phase II” Option

North Atlantic

South Atlantic Gulf of Mexico Great Lakes $0. 7
9,464, 776 “Electric Generators 2-50 MGD I&E Everywhere” Option

North Atlantic $0. 4 South Atlantic Gulf of Mexico Great Lakes $0. 8

15,255, 439 “Manufacturers 2-50 MGD I-only Everywhere” Option $0. 7 North Atlantic

South Atlantic Gulf of Mexico $0. 0 Great Lakes $10. 1 21, 228,706 31,032, 495

E3A-12 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



### Table E3A-12: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social

Costs for Existing Phase III Faciliti es - Break-Even Analysis by Regions (2004$, discounted at 7%)

Option Total Social Costs (millions) Mean Value of Use Benefits (millions) Non-Use Benefits Necessary to Break Even a

(millions) Number of Households Break-Even WTP per Household ($) Reduction of I&E Losses

(Age-1 Equivalents) Break-Even Value per

Age-1 Equivalent b ($) “Manufacturers 2-50 MGD I&E like Phase II” Option California $1.3 $0.0 $1. 3 804,176 $1.56 481,000 $2.60 North Atlantic $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $1.1 $0.0 $1. 1 5,275,611 $0.20 2,310,000 $0.46 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $5.6 $0. 0 $5.6 34,907 $160.15 855,000 $6.54 Great Lakes $11.7 $0.0 $11. 7 3,689,094 $3.18 732,000 $16.02 Inland $15.9 $0.0 $15.9 23, 255,379 $0.68 3,660,000 $4.34 National Total $37.1 $0.1 $36.9 33,059, 167 $1.12 8,040,000 $4.60 “Manufacturers 2-50 MGD I&E Everywhere” Option California $1.3 $0.0 $1. 3 804,176 $1.57 534,000 $2.36 North Atlantic $0.0 $0.0 $0.0 0 n/a 0 n/a Mid-Atlantic $1.1 $0.0 $1. 1 5,275,611 $0.20 2,310,000 $0.46 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $5.6 $0. 0 $5.6 34,907 $160.15 855,000 $6.54 Great Lakes $11.7 $0.0 $11. 7 3,689,094 $3.18 764,000 $15.35 Inland $38.7 $0.1 $38.7 23, 482,894 $1.65 4,880,000 $7.92 National Total $60.3 $0.2 $60.2 33,286, 682 $1.81 9,340,000 $6.44 “Manufacturers 50+ MGD I-only Everywhere” Option California $0.2 $0.0 $0. 2 1,221,712 $0.14 10,200 $16.90 North Atlantic $0.4 $0.0 $0.4 0 n/a 0 n/a Mid-Atlantic $0.7 $0.0 $0. 7 5,171,002 $0.13 1,000,000 $0.70 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $0.9 $0.6 $0.4 1,315,491 $0.27 10,400,000 $0.03 Great Lakes $4.7 $0.2 $4. 5 5,434,405 $0.83 11,700,000 $0.38 Inland $18.7 $0.2 $18.5 11, 669,888 $1.59 16,200,000 $1.14 National Total $26.0 $1.0 $25.0 24,812, 498 $1.01 39,400,000 $0.63 “Manufacturers 50+ MGD I&E Everywhere” Option California $0.4 $0.0 $0. 4 1,221,712 $0.32 474,000 $0.83 North Atlantic $2.0 $0.0 $2.0 3,171,400 $0.62 910,000 $2.15 Mid-Atlantic $1.2 $0.1 $1. 1 5,899,941 $0.18 44,500,000 $0.02 South Atlantic c $0.0 $0.0 $0.0 0 $0.00 0 $0.00 Gulf of Mexico $4.4 $1.1 $3.3 1,570,063 $2.11 19,400,000 $0.17 Great Lakes $9.8 $0.4 $9. 5 7,300,769 $1.30 13,400,000 $0.71 Inland $27.6 $0.3 $27.3 16, 438,931 $1.66 24,600,000 $1.11 National Total $46.2 $1.9 $44.3 35,602, 817 $1.24 103,000,000 $0.43

a The non-use benefits category in this tabl e may include some categories of use values that were not taken into account by the recreation and commercial fishing analyses. b The non-use value per age-1 equivalent reported in the table in cludes the value placed on the fish’s contribution to non-use ecological services (e.g ., population, health, sustainability , and overall ecosy stem health). No benefits or costs are expected in th e South Atlantic region becau se all potentially regulated facilities in this region alr eady meet the national categorical requirements in the baseline and therefore would not be requir ed to install technologies to comply wit h this option. d Positive non-zero value less than $50,000. Source: U.S. EPA Analysis, 2006.

June 1, 2006 Internal Draft – Delib erative, Predecisional – Do not Quote, Cite, or Distribute E3A-13

c§ 316(b) Final Rule: Phase III – EA, Part E: Social Costs, Be nefits, and Benefit-Cost Analysis Appendix E3A: Supplemental Optio ns



## R EFERENCES


### U.S. Environmental Protection Agency (U.S. EPA). 2006. Regional Analysis for the Final Section 316(b) Phase III Existing Facilities Rule . EPA-821-R-06-002. June 2006.

E3A-14 Internal Draft – Deliberative, Predecisional – Do not Quote, Cite, or Distribute June 1, 2006