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### Document

Number: 

# 84 ) IV-A- 6 Docket Number: 

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AM Sheet 84 of 93P. 2 

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## o j 

# yu • ? 8 [ULA I MA Y2 6 ©94 

# Smal l Busines s Impac t Analyst s ofth e Fue l an d Fue l Additiv e Registratio n Progra m EP A AI R DOCKE T

Prepared by: IC F Incorporate d unde r EP A Contrac t No . 68-C1-005 9 Wor k Assignmen t No . 2- 2

Prepared for. Offic e o f Mobil e Source s U.S . Environmenta l Protectio n Agenc y

Januar y31,199 4P. 3



# Tabl e of Content s

Introductio n 1 Sectio n 1 : Requirement s o f th e Regulator y Flexibilit y Ac t3 Sectio n 2 : Methodolog y 5 Collectin g an dAdjustin g Dat a5 Calculating Net

Income and

Assets 6 Merging of

Companies that

Appear More than Once in the F/FA Data Base 6 Definin g "Small " Manufacture r fo r Thi s Analysi s 7 Characterizin g Fue l an dAdditiv e Manufacturer s 8 Estimatin g Impact s o nSmal l Manufacturer s 1 0 Comparing the Ratio of

Compliance Costs to Sales for Small and Large Companies J O Estimating the Impact

of Compliance Costs on ROA ... . 11 Examinin g th e Produc t

Mi x o f Companie s Pushe d int o Closur e 1 1 Describin g th e Limitation s o f th e Analysi s 1 2 Sectio n 3 : Characterizatio n o f Manufacturer s i n th e Regulate d Industr y 1 3 Characterizin g Additiv e Manufacturer s 1 3 Characterizin g Fue l Manufacturer s 1 5 Summarizin g Additiv e an dFue l Manufacture r Characteristic s 1 6 Sectio n 4 : Impac to n Smal l Fue l an d Fue l Additiv e Manufacturer s 2 3 Summarizin g th e Expecte dCost s o f th e Propose d Regulatio n 2 3 Comparin g th e Rati o o

f Complianc e Cos t

t o Sale s fo

r Smal l an dLarg e Companie s 2 4 Analyzin g th e Chang e i n RO A 2 7 Examinin g th e Produc t

Mi x o f Companie s Pushe dint o Closur e 2 8 Assessin g th e Effectivenes s o f Smal l Busines s Provision s .. . 3 1 Sectio n 5 : Possibl e Response s t o th e Impact s o f th e Regulatio n 3 3 Assessin g th e Effect s o

f Pric e Increase s 3 3

Januar y31,199 4 Page iP. 4

J * Tabl e o fContent s



### Assessin g th e Effect

s o f Reduction s inth e Numbe r o f Product s 3 4 Sectio n 6 : Conclusion s 3 5 Appendix A : Equation s t o Estimat e Asset s and Ne tIncom e

Pag e i i Januar y31,199 4 * * *P. 5



# Introductio n

Th e Environmenta l Protectio nAgenc y (EPA ) i s finalizing regulation s fo r th e Fue l an dFue l Additiv e Registratio nProgram , a s authorize dunde r Sectio n21 1 o

f th e Clea nAir

Act . Thi s progra mrequire s emission s an d healt heffect s testin g o

f al l moto r vehicl e fuel s an dfuel additive s (F/FA) . I ndevelopin g thes e regulations , EP A ha s take nstep s t o reduc e burde n o nsmal l manufacturer s b y includin g provision s suc ha s cos t sharin g an dexemptio nfromduplicat e testing . Thi s repor t present s th e result s o f asmal l busines s impac t analysi s o

f th e registratio nan dtestin g requirement s fo

r unleade dgasolin e an ddiese l product s i nth e Fue l an d Fue l Additiv e Registratio nProgram. ' Th e analysi s ha s four mai n objectives : / T o determin e i

f th e registratio nprogra mwill impac t smal l businesse s significantl y mor e tha nlarg e businesse s / T o estimat e th e magnitud e o f smal l busines s impact s b y assessin g i

f th e cos t o f complyin g withth e regulatio ni s likel y t o caus e smal l businesse s t o fall int o financia l distres s o r

eve nclosur e / T o examin e whethe r th e F/F A program' s propose d definitio n o

f smal l o r th e Smal l Busines s Administration' s (SBA ) definitio no

f smal l mor e accuratel y capture s th e poin t a t whic hbusinesse s ar e likel y t o b e adversel y affecte d simpl y becaus e o

f thei r siz e / T o quantif

y th e exten t

t o whic hth e smal l busines s provision s reduc e burde nfo r manufacturer s o

f atypica l product s

Thi s analysi s exclude s leade dgasolin e an drelabele dproducts . January31,199 4 * * * Page lP. 6

Introductio n Thi s repor t

ha s bee nprepare dfo

r EP A an di s expecte dt o b e use db y th e Agenc y i npreparin g aRegulatory Flexibility Analysi s fo r th e final F/F A Registratio nProgram . A s such , i t doe s no t g o int o detai l o nsubject s suc ha s th e requirement s o f th e progra mo r

ho w complianc e cost s wer e estimated . Thi s repor t

shoul dno t

b e use dt o asses s th e overal l economi c impact s o

f th e registratio nprogram . Thi s repor t

i s presente di nsi x sections :

• Requirement s o

f th e Regulatory Flexibility Ac t • Methodolog y • Characterizatio no f Manufacturer s i nth e Regulate d Communit y • Impact s o nSmal l Fue l an dFue l Additiv e Manufacturer s • Possibl e Response s t o th e Impact s o f th e Regulatio n • Conclusion s

Pag e 2 January31,199 4 * * *P. 7



# Sectio n 1 Requirement s ofth e RegulatoryFlexibilit yAc t

Sectio n60 4 o

f th e Regulator y Flexibility Ac t (RFA ) require s preparatio n o f a"Final Regulatory Flexibility Analysis " t o accompan y afinal rule . Unde r th e term s o

f th e Act , EP

A mus t determin e whethe r

th e regulation s will caus e asignifican t

impac t o nasubstantia l numbe r o f smal l entities. 2 Becaus e th e RF A doe s no t

provid e concret e definition s o f "smal l entity, " "significan t impact, " o r

"substantia l number, " EP A ha s establishe dguideline s settin g th e standard s t o b e use di nevaluatin g impact s o nsmal l businesses. 3 Th e guideline s specif y tha t siz e definition s se t

b y th e SB A shoul db e use da s th e initia l determinatio no f a"smal l entity. " bu t

tha t EP A ma y us e a nalternativ e definitio ni f i t bette r capture s th e poin t

a t whic hentitie s ar e adversel y affecte dsimpl y becaus e o

f thei r size . Th e EP A guideline s als o provid e guidanc e o nth e standard s t o b e use d fo r evaluatin g impact s o nsmal l businesses . Fou r criteri aar e establishe d fo r determinin g whethe r

impact s will b e significant :

• Annua l complianc e cost s increas e tota l cost s o f productio n fo r smal l businesse s b y mor e tha nfiv e percent .
• Complianc e cost s a s apercentag e o f sale s fo r smal l businesse s ar e a t

leas t te npercen t

highe r tha ncomplianc e cost s a s apercentag e o

f sale s fo r larg e businesses .
• Capita l cost s o

f complianc e represen t

asignifican t

portio n o f capita l availabl e t o smal l businesses .

2 5 US C 601 . 3 U.S . Environmenta l Protectio nAgency , Memorandu mt o Assistan t Administrators , "Complianc e wit hth e Regulatory Flexibility Act, " EP A Office o

f Policy , Planning , an dEvaluation , 1984 .

January31,199 4 ** * Pag e 3P. 8

Sectio n 1 : Requirement s o fth e RegulatoryFlexibilit yAc t

• Th e requirement s o f th e regulatio nar e likel y t o resul t i n closure s o

f smal l businesses . Accordin g t o th e guidelines , ther e i s asignifican t impac t o nsmal l entitie s wheneve r

any o f th e abov e criteri aar e satisfied . A s explaine d belo w i n th e sectio no nmethodology , thi s analysi s employ s th e second , third , an dfourt hcriteria . Th e first criterio ni s no t

employe dbecaus e productio n cos t

dat aar e no t

readil y available .

Pag e 4 January31,199 4P. 9



# Sectio n 2 Methodolog y

Thi s sectio npresent s th e dat aan dmethodolog y use dt o conduc t thi s smal l busines s impac t

analysis . Analytica l assumption s an dlimitation s o f th e dat aar e als o discussed . Thi s sectio ni s divide dint o fiv e parts :

• Collectin g an dadjustin g dat a • Definin g "small " manufacture r fo r thi s analysi s • Characterizin g fuel an dadditiv e manufacturer s • Estimatin g financial impact s • Limitation s 

## Collectin g an d Adjustin g Dat a ICFobtaine dth e majority o f dat aneede dfo

r thi s analysi s fromEPA . Specifically , fo

r eac hregistere dF/F A manufacturer , EP A provide d

• Manufacture r

nam e an didentificatio nnumbe r • Primar y Standar dIndustria l Classificatio n(SIC ) cod e • Numbe r

o f employee s • 199 3 annua l sale s • Typ e an dnumbe r o f product s • Estimate dcomplianc e cos t • Fo r

smal l manufacturer s o

f atypica l products , estimate d complianc e cos t

withou t smal l busines s provision s I ninstance s wher e th e registere dF/F A compan y i s asubsidiar y o r divisio no f alarge r company , EP

A provide dsales , employee , an dSIC cod e informatio nfo

r th e paren t

company . Fo r

companie s withemploye e bu t n o sale s data , EP

A assigne dasale s level o f $ 9 millio ni

f th e compan y ha dfewe

r tha n5 0 employees ; i

f th e compan y ha d5 0 o r

mor e employees , EP

A assigne dasale s leve l o f $4 9 million . I

f neithe r sale s no r employe e dat awer e availabl e fo r acompany , EP

A assigne dasale s valu e o f $4 9 million .

January31,199 4 Pag e 5P.1 0
Sectio n 2 : Methodolog y 

### Calculating

Net Income and Assets ICFsupplemente dEPA' s dat ab y estimatin g ne t incom e an dasset s usin g 199 3 sale s dat aan dth e regressio nequation s develope dfo r th e smal l busines s impac t

analysi s fo

r th e propose dregistratio nregulation . Fo r th e propose dregulation , tw o separat e equation s (on e relatin g ne t incom e t o sale s an dth e othe r

relatin g asset s t o sales ) wer e develope dfo r bot h fuel an dadditiv e manufacturers . Thes e equation s ar e presente di n Appendi x A . Thes e regressio nequation s ar e very likel y t o stil l b e vali d fo r tw o reasons . First , th e industr y ha s no t change ddramaticall y i nth e pas t tw o years . Second , th e relationship s betwee nsale s ah dne t incom e an dsale s an dasset s ten dt o b e stabl e over time. 5 

### Merging of Companies

that Appear More than Once in the F/FA Data Base A numbe r

o f companie s appea r

mor e tha nonc e i nth e F/F A Dat aBas e fo r varyin g reasons : the y manufactur e bot hfuel s an dadditives , the y hav e multipl e fuel o r

additiv e identificatio nnumbers , o r the y hav e affiliates/subsidiarie s (fo r whic hth e sam e financia l dat ama y o r ma y no t hav e bee n provided) . IC Fmad e thre e type s o f adjustment s t o th e dat at o accoun t fo r thes e anomalie s an dt o enabl e correc t estimatio no

f impacts :



## • Fo r

companie s manufacturin g bot hfuel s an dadditives , w e summe dth e complianc e cost s an duse dth e fuel regressio n equation s t o estimat e ne t incom e an dassets . I f th e sam e direc t

paren t financia l informatio nwa s provide d fo r severa l (related ) companies , w e considere dthe mt o b e on e compan y an destimate dimpact s usin g th e su mo f thei r complianc e costs . I f different financial informatio nwa s provide dfo r relate d companies , w e worke dwit hEP A t o determin e whic h financial informatio nshoul db e used , considere dth e Regulatory Flexibility Analysis of the Proposed

Fuels and

Fuel Additives Registration Program Fina l Report . Prepare db y IC F Incorporate dfo

r EPA . Septembe r

30 , 1991 . W e verifie dthi s b y comparin g financia l statistic s fo r relevan t SIC code s i n th e 199 0 an d199 2 Annual Statement

Studies b y Rober t Morri s Associates . Pag e 6 January31,199 4P.1 1

Sectio n 2 : Methodolog y relate dcompanie s a s one , an destimate dimpact s usin g th e su mo f thei r complianc e costs . A s aresul t

o f mergin g companie s i nthi s way , th e tota l numbe r o f uniqu e companie s include di nthi s analysi s i s 1,076 . Thi s include s 43 8 additiv e manufacturers , 61 8 fuel manufacturers , an d2 0 manufacturer s tha t produc e bot hadditive s an dfuels . 

### Definin g "Small " Manufacture r fo r Thi s Analysi s Th e Regulatory Flexibility Ac t specifie s tha t

SB A definition s shoul db e use da s th e initia l determinatio no f asmal l entit y bu t

tha t EP A ma y us e a nalternativ e definitio ni f i t bette r capture s th e poin t

a t whic hentitie s ar e adversel y affecte dsimpl y becaus e o f thei r size . Fo r

thi s analysis , companie s wer e classifie da s smal l o r larg e accordin g t o th e following tw o definitions : 1 . Th e F/F A program' s propose ddefinitio ni nwhic hasmal l busines s i s define da s an y fuel o r additiv e manufacture r wit htota l annua l sale s les s tha n$5 0 million . 2 . SBA' s definition s whic har e base do nsale s o r numbe r o f employees , b y SI C code . Th e SB A definition s ar e presente d i n Exhibi t

1 . Th e mos t

frequent definitio no

f smal l i s companie s havin g les s tha nor equa l t o 10 0 an d50 0 employees . SB A regulation s specif y tha t fo r al l industrie s no t specificall y liste dth e siz e standar di s $3. 5 millio ni n sales . Thi s cut-of

f wa s als o use dt o classif y a s smal l o r large , 2 4 companie s wit hn o SI C cod e information . Employe e dat awa s no t

provide dfo

r 3 4 companies . Thes e companie s wer e classifie da s smal l o r larg e usin g on e o

f tw o methods :

• Employe e dat afo

r five companie s wer e obtaine dfromth e 199 4 Ward' s Busines s Directory o

f U.S . Privat e an dPubli c Companies .
• Employe e dat afo

r th e remainin g 2 9 companie s wer e estimate db y comparin g th e compan y t o othe r

companie s i nth e sam e SIC cod e withasimila r

level o f sale s (plu s o r minu s 1 0 percent) . Thi s rang e wa s the n compare dt o th e SB A siz e standard .
January31,199 4 Pag e 7P.1 2
Sectio n 2 : Methodolog y

Employe e estimate s obtaine dthroug hthes e tw o method s wer e use donl y t o classif y companie s a s larg e o r

smal l accordin g t o SB A definitions ; the y wer e no t use di nth e characterization s presente di nSectio n3 . Th e resultin g designation s o f smal l an dlarg e companie s usin g th e tw o definition s ar e use dthroughou t thi s smal l busines s impac t analysis . 

## Characterizin g Fue l an d Additiv e Manufacturer s Eigh t profile s wer e develope dfo r bot hsmal l an dlarg e manufacturer s o f fuel an dadditiv e products . Eac ho f th e companie s i nthes e profile s wa s characterize dan dcompare di nterm s o f numbe r o f employees , numbe r o f products , annua l sales , an dothe r financia l data . T o clearl y illustrat e th e difference s betwee nsmal l an dlarg e manufacturers , statistic s o nth e minimum , maximum , average , an dquartil e value s wer e compute dfo r eac hdat acharacteristi c (e.g. . numbe r o f employees , annua l sales , etc.) .
• Th e minimu man dmaximu mvalue s provid e arang e o f th e dispersio no

f value s i neac hset .
• Th e averag e provide s asimpl e (non-weighted ) averag e value .
• Quartile s ar e ausefu l measur e o f distributio no

f dat aset s tha t ar e highl y skewed , o r

thos e i nwhic hothe r

measure s (e.g. . average ) woul db e warpe db y extrem e values . Th e first (or lower ) quartil e valu e separate s th e lowes t value d quarte r o f th e tota l numbe r

o f value s fromth e secon d quarter ; th e secon dquartil e valu e (or median) , separate s th e secon dquarte r

fromth e thir dquarter ; th e thir d(o r upper ) quartil e valu e separate s th e thir dquarte r fromth e to p quarter .

Pag e 8 January31,199 4P.1 3

• m

>• » Section 2 : Methodology

* • EXHIBI T 1

SB A Definition

s o f Smal l b

y Sic Cod e fo

r F/F A Manufacturer s # o f Employee s o

r # o f Employee s or # o f Employee s o r SI C Millio

n o f $ SI C Millio n o f $ SI C Million s o f $ 109 4 50 0 308 1 50 0 525 1 $3. 5 122 1 50 0 308 9 50 0 526 1 $3. 5 131 1 50 0 317 2 50 0 539 9 $3. 5 138 1 50 0 341 1 100 0 541 1 $13. 5 138 2 $3. 5 342 9 50 0 553 1 $3. 5 138 9 $3. 5 343 2 50 0 554 1 $3. 5 154 2 $17. 0 343 3 50 0 557 1 $3. 5 171 1 $7. 0 346 9 50 0 569 9 $3. 5 201 1 50 0 347 9 50 0 591 2 $3. 5 202 2 50 0 349 9 50 0 594 1 $3. 5 202 3 50 0 351 9 100 0 598 3 $6. 0 • 204 6 .75 0 352 3 50 0 598 4 $3. 5 204 8 50 0 352 4 50 0 622 1 $3. 5 206 1 50 0 353 1 75 0 653 1 $10. 0 208 5 75 0 355 6 50 0 738 9 $3. 5 208 6 50 0 356 1 50 0 753 8 $3. 5 209 6 50 0 356 9 50 0 754 9 $3. 5 232 9 50 0 359 2 50 0 769 9 $3. 5 233 9 50 0 359 9 50 0 873 4 $3. 5 243 5 50 0 369 4 75 0 Unknow n $3. 5 243 6 50 0 371 1 100 0 261 1 75 0 371 4 50 0 265 7 75 0 371 5 50 0 267 1 50 0 372 4 100 0 267 3 50 0 379 5 100 0 267 8 50 0 379 9 50 0 281 3 100 0 386 1 50 0 281 9 100 0 422 1 $12. 5 282 1 75 0 422 6 $12. 5 282 2 100 0 461 2 150 0 282 4 100 0 461 3 150 0 283 3 75 0 495 3 $6. 0 283 4 75 0 495 9 $3. 5 284 1 75 0 501 2 10 0 284 2 50 0 501 3 10 0 284 3 50 0 501 4 10 0 284 4 50 0 501 5 10 0 285 1 50 0 507 2 10 0 286 5 75 0 508 2 10 0 286 9 100 0 508 3 10 0 287 3 100 0 508 5 10 0 287 4 50 0 512 2 10 0 287 5 50 0 515 3 10 0 287 9 50 0 515 9 10 0 289 1 50 0 516 9 10 0 289 2 75 0 517 1 10 0 289 9 50 0 517 2 10 0 291 1 150 0 519 1 10 0 295 2 75 0 519 8 10 0 299 2 50 0 521 1 $3. 5 Pag e 9 * * * January31, 199 4 * * * 

# 1P.1 4

Sectio n 2 : Methodolog y 

## Estimatin g Impact s o n Smal l Manufacturer s I naccordanc e withEP

A guidanc e describe di nSectio n1 , th e following thre e method s wer e use dt o determin e i f smal l businesse s ar e disproportionatel y impacte db y th e F/F A Registratio nProgram :

• Th e rati o o

f complianc e cos t

t o sale s wa s compare dfo r smal l an dlarg e companie s t o se e i f thi s rati o wa s a t

leas t te npercen t highe r for smal l companies .
• Th e impac t

o f complianc e cost s o nacompany' s retur no n asset s (ne t

income/assets ) wa s calculate dt o se e i f complianc e cost s represen t

asignifican t

portio no

f capita l availabl e t o smal l businesses .
• Th e likelihoo do

f th e progra mcausin g smal l businesse s t o clos e wa s determine db y examinin g th e impac t o f complianc e cost s o nacompany' s ROA . Fo r companie s wit haRO

A afte r complianc e cos t

o f les s tha n-3 0 percent , th e company' s produc t mi x wa s the nexamined . I nestimatin g smal l busines s impacts , tw o simplifyin g assumption s wer e made . First , testin g requirement s ar e assume dt o impos e one-tim e costs . Second , complianc e cost s will b e incurre dover athree-yea r period . Therefore , one-thir do f acompany' s complianc e cost s wa s use d i nth e complianc e cos t

t o sale s rati o an di ncalculatin g th e chang e i n retur n o nasset s (ROA) . Th e following paragraph s discus s th e impac t methodolog y i nmor e detail . 

### Comparing

the Ratio of Compliance

Costs to Sales for Small and Large Companies On e metho do

f assessin g th e exten t

t o whic hsmal l businesse s ar e disproportionatel y impacte db y th e F/F A Registratio nProgra mi s t o compar e th e complianc e cost s (relativ e t o sales ) for smal l an dlarg e businesses , t o determin e i f smal l compan y complianc e cost s ar e a t leas t 1 0 percen t

highe r tha ncomplianc e cost s fo r larg e companies . Th e rati o o f complianc e cost s t o sale s wa s compute dfo r smal l an dlarg e manufacturer s o

f additiv e an dfuel products . Thi s rati o fo r smal l additiv e companie s wa s compare dt o th e rati o fo r larg e additiv e companies ; th e proces s wa s repeate dfo r fuel manufacturers .

Pag e 1 0 * * ' January31,199 4P.1 5

Sectio n 2 : Methodolog y 

### Estimating

the Impact of Compliance

Costs on ROA Retur no nasset s i s agenera l indicato r o f financia l healt han di s frequentl y use dt o compar e th e financial healt ho f companie s withi na n industry . Th e financia l industr y oftenuse s RO A a s on e o

f th e criteri afo

r determinin g th e borrowin g potentia l o f acompany . I

nthi s manner , analysi s o

f th e chang e i nacompany' s RO A ca nindicat e whethe r complianc e cost s represen t asignifican t

portio no

f th e capita l availabl e t o asmal l busines s and , ultimately , whethe r complianc e cost s ar e likel y t o resul t i n closur e o

f tha t company . A s explaine dbelow , thi s ca nb e don e b y utilizin g standar dRO A threshold s indicatin g different level s o f financia l health .

Closur e Ssvsi * Financia l Financia l DIstrss s Distres s Figure 1 Financial

health and

distress. I ngeneral , acompan y withaRO

A les s tha n 2. 5 percen t

i s considere dt o b e i n financia l distress . A

t thi s level , acompan y ma y experienc e difficultie s obtainin g additiona l loan s o r

othe r capital . A RO

A les s tha n- 4 percen t

indicate s tha t acompan y i s i nsever e financia l distress . Finally , aRO A les s tha n- 3 0 percen t

generall y indicate s closure . Fo r eac hcompany , it s initia l RO A serve da s abaseline . Becaus e complianc e cost s ar e assume dt o b e incurre dover thre e years , RO

A afte r complianc e cost s wa s calculate db y subtractin g one-thir do f complianc e cost s fromne t

income . RO

A afte r cost s wa s the ncompare dwithth e baselin e t o determin e th e overal l magnitud e o f th e chang e i nRO

A an d whethe r cost s ha ddrive nRO

A acros s an y o

f th e thre e thresholds . Th e analysi s define s impacte dcompanie s a s thos e tha t cros s over

on e o r mor e o f th e thre e threshold s an dpresent s tabulation s o f th e numbe r

o f companie s tha t

cros s thresholds . 

### Examining

the Product Mix of Companies

Pushed into Closure I norde r t o asses s th e fourt hcriterion , th e likelihoo dtha t th e requirement s o

f th e regulation s will resul t i nsmal l busines s closures , th e analysi s present s th e profil e o f th e smal l businesse s whic har e pushe dint o closur e (i.e. , th e adjuste dRO A i s les s tha n-3 0 percent) , an d hypothesize s alterativ e scenario s fo r thes e companie s t o achiev e complianc e (e.g. . modif

y produc t

mix) .

January31,199 4 Pag e 1 1P.1 6
Sectio n 2 : Methodolog y 

## Describin g th e Limitation s o f th e Analysi s Ther e ar e severa l limitation s t o thi s impac t analysis . First , i t

assesse s th e impac t

o f th e start-u p progra monly . I t account s neithe r

fo r th e impact s o

f testin g futur e uniqu e product s no r ho w testin g cost s fromth e start-u p progra mwill b e allocate damon g additiona l manufacturer s tha t introduc e product s belongin g t o existin g produc t groups . Second , i t

assume s tha t

acompan y i s willin g t o us e profit s an d resource s fromth e entir e compan y t o cover complianc e cost s o

f thi s regulation . Ho

w realisti c thi s assumptio ni s depends , i npart , o nho w integra l fuel an dadditiv e product s ar e t o th e cor e busines s o f th e company . Third , a s mentione dearlier , incom e an dasse t dat awer e derive dfrom regressio nequations . Whil e w e believ e thi s metho do f estimatin g ne t incom e an dasset s i s valid , ther e ar e limitation s associate dwit hit . Th e mos t significan t

limitatio ni s tha t

ne t incom e an dasset s dat aar e estimate dan dma y no t

exactl y reflec t

th e curren t

financia l situatio no

f a give ncompany . However , thi s limitatio ni s lessene db y th e fac t tha t error s will ten dt o averag e ou t acros s th e registere dcompanies . Som e companie s wil l hav e performe dslightl y bette r tha nestimate dwhil e other s will hav e performe dwors e tha nestimated .

Pag e 1 2 January31,199 4P.1 7



# Sectio n 3 Characterizatio n o

fManufacturer s i n th e Regulate d Industry

W e develope deigh t

different financia l profile s o

f affecte d companie s t o facilitat e th e compariso no

f smal l an dlarg e companies , a s wel l a s o

f fuel an dadditiv e companie s (se e Exhibi t 2 throug hExhibi t

5) . Thes e profile s provid e summar y dat a(e.g. , numbe r o f employees , sales , assets , ne t income , retu mo nassets ) for fuel an dadditiv e manufacturers , usin g bot hth e F/F A progra man dSB A definitions . Figure 2 Diagram of

8profiles


## Characterizin g Additiv e Manufacturer s Bothth e F/F A progra man dSB A definition s classif y approximatel y 6 5 percen t o f additiv e manufacturer s a s small . Th e F/F A progra m definitio nclassifie s 29 5 companie s a s smal l whil e th e SB A definitio nclassifie s 30 0 companie s a s small . Whil e th e tw o definition s resul t i nnearl y th e sam e numbe r o f companie s bein g classifie da s small , th e definition s d o no t

yiel ddat aset s tha t compris e th e sam e companie s (i.e. , F/F A smal l additiv e manufacturer s ar e no t jus t a subse t o f SB A smal l additiv e manufacturer s

—se e Figur e 3) . A s show ni nSectio n4 , thi s result s i nsligh t

difference s i nth e impac t o n smal l companie s dependin g upo nth e definitio nused . Figure 3 Number

of companies classified

by EPA and SBA definitions as small.

* * January31,199 4 ** * Pag e 1 3P.1 8
Sectio n 3 : Characterizatio n ofManufacturer s i n th e Regulate d Industry I ncomparin g th e F/F A an dSB A profile s o f smal l additiv e manufacturers , i t

seem s tha t

th e F/F A progra mdefinitio ndoe s aslightl y bette r jo b o f groupin g companie s withsimila r sale s an demploymen t characteristics . Fo r

example , acompan y with$2 0 billio ni nsale s an d 1,50 0 employee s wa s considere d"small " b y th e SB A definitio nbecaus e o f th e SB A categorizatio nfo r th e numbe r

o f employee s i nth e company' s SIC code . Thi s level o

f sales , however , i s muc hhighe r tha nth e sale s o

f mos t smal l additiv e manufacturers . A s show ni nExhibit s 2 an d3 , th e media n sale s fo

r bot hSBA
- an dF/FA-define dsmal l additiv e manufacturer s i s approximatel y $ 5 million . Larg e additiv e companie s ar e considerabl y large r tha nsmal l additiv e companies : media nsales , assets , an dne t incom e ar e approximatel y 200 , 400 , an d50 0 time s highe r fo r larg e tha nfo

r smal l companies , respectively . Thus , t o hav e th e registratio nregulatio nimpac t smal l an d larg e additiv e companie s similarly , smal l compan y complianc e cost s mus t b e o nth e orde r

o f 20 0 t o 40 0 time s les s tha nlarg e compan y costs . I naddition , larg e additiv e manufacturer s ten dt o hav e highe r ROAs tha n smal l additiv e manufacturers . B y eithe r definitio no

f small , th e media n smal l compan y RO

A i s 4. 9 percen t

whil e th e media nlarg e compan y RO A i s 6 percent . Thus , smal l additiv e companie s ten dt o b e financiall y les s health y tha nlarg e additiv e companie s and , therefore , will hav e relativel y les s capita l availabl e t o the mt o sustai nfinancia l shocks . Th e tota l numbe r

o f additiv e product s manufacture db y th e 45 8 additiv e compame s i s 2,778 .
• Th e averag e numbe r o f additiv e product s pe r

manufacture r

i s approximatel y 6 .
• Approximatel y 4 5 percen t (20 7 o f 458 ) o f th e additiv e manufacturer s produc e onl y on e product . -

• Th e maximu mnumbe r o f product s manufacture db y asingl e additiv e compan y i s 179 .
• Approximatel y 1 0 percen t (28 6 o f 2,778 ) o f th e additiv e product s ar e atypical . A cursor y revie w o

f manufacturer s o

f atypica l additiv e product s reveal s tha t th e majority ar e small . I nfact , nearl y 6 0 percen t (7 2 o f 122 ) o f th e manufacturer s o

f atypica l additive s ar e considere dsmal l companie s (b y th e F/F A program' s definition) . However , amor e thoroug hexaminatio n show s tha t

manufacturer s o

f mor e tha non e atypica l additiv e ar e overwhelmingl y larg e companies . Fo r example , o

f th e te nmanufacturer s Pag e 1 4 Januar y31,199 4P.1 9
Sectio n 3 : Characterizatio n o fManufacturer s i n th e Regulate d Industry tha t mak e fiv e o r mor e atypica l additiv e products , eigh t ar e considere d larg e (b y th e F/F A program' s definition) .

Figure 4 Number of companies classified

by EPA and SBA definitions as small. 

## Characterizin g Fue l Manufacturer s Ther e ar e 63 8 fuel manufacturer s include di n thi s analysis . A s show ni nExhibit s 4 an d5 , th e F/F A progra man dSB A definition s resul t i nvery differen t

number s o

f fuel manufacturer s bein g classifie da s small . Th e F/F A progra mdefinitio nclassifie s 46 5 fuel manufacturer s (o

r 7 3 percent ) a s small , whil e SB A definition s classif

y onl y 38 1 (or

6 0 percent ) a s smal l (se e Figur e 4) . Th e F/F A progra mdefinitio nmor e tightl y group s fuel manufacturer s withsimila r financia l characteristic s tha nd o SB A definitions . Thi s i s becaus e th e F/F A progra m definitio nha s asmal l compan y cut-of f o f $5 0 millio ni nsales , wherea s SB A definition s ofte nhav e smal l compan y cut off s rangin g from10 0 t o 1,50 0 employees , regardles s o f sales . A s a result , SB A definition s tha t ar e base dsolel y o nth e numbe r o f employee s ar e ap t t o classif y relativel y larg e companie s a s small . Fo r example , fuel manufacturer s classifie db y th e SB A a s smal l ha dsale s rangin g from $49,00 0 t o $5. 5 billio n(Exhibi t 5) ; F/F A smal l compan y sale s rang e from$49,00 0 t o approximatel y $5 0 millio n(Exhibi t 4) . Mediansale s fo

r companie s classifie db y th e SB A a s larg e ar e $4 9 millio n—$ 1 millio n less tha nth e minimu mF/F A larg e compan y sales . Interestingly , smal l companie s hav e simila r RO A profile s unde r

bot h definitions . Accordin g t o eithe r definition , 5 0 percen t

o f th e smal l fuel manufacturer s hav e ROAs o f les s tha no r

equa l t o 3. 6 percent , an d7 5 percen t hav e ROAs o

f les s tha no r

equa l t o 4 percent . F/F A larg e companies , however , hav e somewha t highe r ROAs tha nSB A larg e companies . Thi s migh t

reflec t that , fo r companie s i nthi s analysis , RO A tend s t o increas e withsize , an dF/F A larg e companie s ten dt o hav e highe r sale s tha nSB A larg e companies . Wherea s smal l fuel manufacturer s oftenhav e simila r profiles , th e characteristic s o

f larg e fue l manufacturer s ten dt o b e mor e widespread . Fo r example , th e typica l larg e fuel manufacture r (usin g th e F/F A progra mdefinition ) ha dsale s o f approximatel y $26 9 million ; however , approximatel y one-fourt ho f th e larg e fuel manufacturer s ha dsale s o f

January31,199 4 Pag e 1 5P.2 0
Sectio n 3 : Characterizatio n o f Manufacturer s i n th e Regulate d Industry les s tha n$8 6 million , an dapproximatel y one-fourt hha dsale s o f over $1. 6 billio n(Exhibi t

4) . Th e tota l numbe r

o f fuel product s manufacture db y th e 63 8 fue l companie s i s 1,42 0 —roughl y one-hal f th e numbe r

o f product s manufacture db y th e additiv e companies .
• Th e averag e numbe r o f fuel product s pe r

manufacture r

i s approximatel y 2 .
• Approximatel y 4 0 percen t (25 4 o f 638 ) o f th e fuel manufacturer s produc e onl y on e product .
• Th e maximu mnumbe r o f product s manufacture db y asingl e fuel compan y i s 16 .
• Approximatel y 1 5 percen t (22 0 o f 1,420 ) o f th e fuel product s ar e atypical . Unlike manufacturer s o

f atypica l additiv e products , companie s tha t produc e atypica l fuel product s ar e mor e likel y t o b e larg e (accordin g t o th e F/F A program' s definition) . O f th e 8 3 manufacturer s o f atypica l fuel products , over

7 3 percen t

ar e large . Thi s tren di s eve nmor e pronounce d fo r manufacturer s o

f multipl e atypica l fuel products . Fo r example , o

f th e twelv e manufacturer s o

f five o r mor e atypica l fuel products , eleve nar e considere dlarge . 

## Summarizin g Additiv e an d Fue l Manufacture r Characteristic s A revie w o

f th e F/F A profile s lead s t o eigh t genera l conclusions :

• RO A generall y increase s withth e siz e o f th e company .
• Additiv e manufacturer s ten dt o hav e highe r ROAs tha nfuel manufacturers .
• Larg e additiv e manufacturer s ten dt o b e bigge r i nterm s o

f sale s an dnumbe r

o f employee s tha nlarg e fuel manufacturers , an dsmal l additiv e manufacturer s ten dt o b e smalle r tha n smal l fuel manufacturers .

Pag e 1 6 January31,199 4 '* 'P.2 1
Sectio n 3 : Characterizatio n o fManufacturer s i n th e Regulate d Industry O Fo r additiv e manufacturers , ther e i s almos t n o differenc e betwee nth e F/F A progra man dSB A definition s i nth e numbe r o f companie s classifie da s small .
• Fo r fuel manufacturers , th e F/F A progra mdefinitio nresult s i n 8 3 mor e companie s bein g classifie da s smal l (fo r atota l o f 46 5 smal l manufacturers ) tha nth e SB A definitions .
• Fo r bot hadditiv e an dfuel companies , th e F/F A progra m definitio no

f smal l mor e tightl y group s companie s withsimila r financia l characteristics .
• Smal l additiv e companie s ar e mor e likel y t o produc e a n atypica l produc t

tha nsmal l fuel companies .
• Manufacturer s o

f multipl e atypica l product s ten dt o b e classifie da s large .

January31,199 4 * * * Pag e 1 7P.2 2
Sectio n 3 : Characterizatio n o fManufacturer s i n th e Regulate d Industry 

### EXHIBI T 2 Profile s of

Additiv e Manufacturer

s F/F A Progra

m Definitio n Summar y Statistic s
Smal l Larg e TOTA L Numbe r 29 5 16 3 45 8 Percen t

64 % 36 % 100 %

Employee s Sale * Asset * Ne t Incom e RO A Employee s Sale s Asset s Ne t Incom e RO A Minimu m

0 $50,00 0 $12,06 3 $49 2 4.08 %

1 0 $50,000,00 0 $25,436,58 3 $1,377,57 9 5.42 % Lowe r

guartfl e Media n Uppe rguartll e Smal l Additiv e Manufacturer s 5 $900,00 0 $296,68 8 $13,62 8 4.59 % L . 72 2 $176,414,56 6 $102,845,13 3 $5,865,45 6 5.70 % 1 6

$4,282,99 5 $1,671,04 2 $81,82 6 4.90 % 5 2

$12,116,18 5 $5,288,94 9 $270,26 4 5.11 % ug e Additiv e Manufacturer s

3.54 8 $972,795,13 3 $681,922,81 4 $41,710,68 6 6.12 % 14.33 5

$3,405,500,00 0 $2,733,105,65 1 $175,985,07 5 6.44 % Maximu m

1.11 0 $49,000,00 0 $24,873,52 0 $1,345,97 0 5.41 %

332.70 0 $115,068,000,00 0 $135,063,393,62 0 $10,047,009,08 1

7.44 % Averag e

5 1 $9,688,73 8 $4,476,56 7 $234,29 0 4.86 %

14.76 4 $4,974,456,42 0 $4,905,814,56 1 $344,352,61 1 6.12 %

Pag e 1 8 January31,199 4P.2 3

Sectio n 3 : Characterizatio n of Manufacturer s i n th e Regulate d Industry EXHIBI T 3 Profile s o f

Additiv e Manufacturer s SB A Definitio n Summar y Statistic s
Smal l Larg e TOTA L Numbe r

30 0 15 8 45 8 Percen t

65 % 35 % 100 %

Minimu m Lowe r

guartil e Media n Uppe rguartil e Maximu m Averag e

Smal l Additiv e Manufacturer s Employee s Sale s Asset s Ne tIncom e RO A 0

$50,00 0 $12,06 3 $49 2 4.08 % 5

$950,00 0 $315,00 5 $14,50 1 4.60 % 1 9

$4,923,21 7 $1,949,92 6 $96,02 9 4.92 % 6 0

$19,400,00 0 $8,910,13 6 $464,17 8 5.21 % 1.50 0

$20,090,000,00 0 $19,529,978,71 3 $1,352,458,49 9

6.93 % 6 6

$91,674,72 9 $79,016,06 7 $5,298,10 8 4.92 % Larg e Additiv e Manufacturer s Employee s Sale s Asset s Ne tIncom e RO A 1

$4,000,00 0 $1,549,11 1 $75,64 3 4.88 % 75 3

$139,763,50 0 $79,450,76 7 $4,488,07 4 5.65 % 3.60 0

$999,672,63 3 $702,821,79 2 $43,036,86 1 6.12 % 14.50 0

$3,405,500,00 0 $2,733,105,65 1 $175,985,07 5 6.44 % 332.70 0

$115,068,000,00 0 $135,063,393,62 0 $10,047,009,08 1

7.44 % 15.10 4 $4,975,876,70 2 $4,889,518,19 3 $343,524,20 8 6.03 %

January31,199 4 * ' Pag e 1 9P.2 4

Sectio n 3 : Characterizatio n o f Manufacturer s i n th e Regulate d Industry 

### EXHIBI T 4 Profile s o f

Fuel Manufacturer

s F/F A Progra

m Definitio n Summar y Statistic s
Smal l 

### Larg e TOTA L Numbe r 46 5 17 3 63 8 Percen t

73 % 27 % 100 %

Employee s Sale s Asset s Ne tIncom e RO A
Employee s Sale s Asset * Ne tIncom e RO A Minimu m

0 $49,00 0 $13,16 4 $29 2 2.21 %

0 $50,000,00 0 $15,643,98 3 $655,62 1 4.19 % Lowe r

guartil e

8 $3,000,00 0 $882,30 3 $28,54 4 3.25 %

21 5 $85,917,70 2 $27,204,04 0 $1,198,32 1 4.40 % Media n Smal l Fue l Ma n

2 2 $9,000,00 0 $2,711,66 4 $97,05 7 3.57 % Larg e Fue l Ma n

44 5 $268,822,00 0 $87,279,65 8 $4,269,96 0 4.89 % Uppe rguartil e afacturer s 5 1 $22,000,00 0 $6,782,32 1 $263,63 9 3.90 % afacturer s 3.02 5 $1,775,820,00 0 $628,866,62 2 $36,751,77 2 5.85 % Maximu m

29.43 7 $49,665,53 4 $15,537,04 1 $650,73 7 5.19 %

67.30 0 $62,359,000,00 0 $68,509,097,98 8 $4,969,802,31 8

7.86 % Averag e

15 4 $14,707,89 4 $4,535,22 4 $178,35 4 3.54 %

4.31 5 $2,653,133,84 8 $1,688,061,56 3 $116,891,85 2 5.16 %

Pag e 2 0 January31,199 4 * "P.2 5

Sectio n 3 : Characterizatio n ofManufacturer s i n th e Regulate d Industry EXHIBI T 5 Profile s o f

Fue l Manufacturer s SB A Definitio n Summar y Statistic s
Smal l Large TOTA L Numbe r 38 1 25 7 63 8 Percen t

60 % 40 % 100 %

Minimu m Lowe r

guartil e Media n Uppe r guartil e Maximu m Averag e Smal l Fue l Manufacturer s Employee s Sale s Asset s Ne tIncom e RO A 0

$49,00 0 $13,16 4 $29 2 2.22 % 7

$2,300,00 0 $672,49 0 $21,23 1 3.17 % 1 8

$8,995,33 2 $2,710,22 6 $97,00 1 3.58 % 4 5

$27,256,59 7 $8,478,54 4 $349,40 0 4.00 % 1.30 0

$5,500,000,00 0 $1,908,317,65 7 $123,243,50 4 6.46 % 5 0

$64,794,32 8 $21,395,29 5 $1,141,17 7 3.62 % Larg e Fue l Manufacturer s Employee s Sale s Asset s Ne tIncom e RO A 0

$200,00 0 $55,41 8 $1,39 7 2.52 % 8 0 $18,618,75 0 $5,700,19 1 $218,13 5 3.83 % 20 3

$49,000,00 0 $15,324,29 1 $641,03 0 4.18 % 1.00 0

$451,834,00 0 $148,384,46 8 $7,614,59 0 5.13 % 67.30 0

$62,359,000,00 0 $68,509,097,98 8 $4,969,802,31 8

7.55 % 3.09 8

$1,710,114,27 0 $1,108,578,74 9 $77,021,61 9 4.52 %

January31,199 4 •* • Pag e 2 1P.2 6



# Sectio n 4 Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s

I ndeterminin g th e exten t t o whic hsmal l businesse s ar e mor e heavil y impacte db y th e F/F A Registratio nProgram , IC Fexamine dth e complianc e cost s fo

r manufacturer s o

f fuel an dadditiv e products . I n ou r assessment , w e examine dcomplianc e cos t relativ e t o sales , thu s enablin g u s t o illustrat e th e relativ e impact s o f th e registratio nprogra m o nsmal l an dlarg e manufacturers . We als o estimate dth e expecte deffect o f complianc e cost s o n retur no n asset s (ROA) , t o depic t th e effect

o f th e registratio n progra mo n th e financial healt ho f fuel an dadditiv e manufacturers . 

## Summarizin g Expecte d Cost s ofth e Propose d Regulatio n Industr y cost s o

f complyin g withth e F/F A Registratio nProgra mar e estimate dt o tota l $72,365,643 . Progra man dmanufacture r cost s ar e drive nb y th e relativel y hig hcos t o f testin g atypica l products . Onl y 1 2 percen t o f F/F A product s ar e atypical ; thes e products , however , accoun t for 8 7 percen t

($62,975,072 ) o

f tota l progra mcosts . Th e media n complianc e cos t

i s $115,40 0 fo

r atypica l additiv e product s an d$68,87 7 fo r atypica l fuel products . Th e media ncomplianc e cos t fo r product s othe r tha n atypical s (i.e. , baselin e an dnon-baseline ) i s $400 . Exhibi t 6 summarize s complianc e cost s pe r manufacture r

an dcompare s complianc e cost s fo

r larg e an dsmal l companies . Estimate dcost s pe r manufacture r

rang e fromjus t

$40 0 t o over

$4. 2 million . Th e media n smal l compan y complianc e cos t i s $50 0 an dth e media nlarg e compan y complianc e cos t

varie s from$88 7 t o $18,316 , dependin g o n whethe r th e F/F A progra mo r

SB A definition s ar e use do r i f th e compan y i s afuel o r additiv e manufacturer . Sixty-fou r percen t o f al l companie s (69 3 o

f 1,076 ) hav e complianc e cost s lower tha n$1,000 . Approximatel y on e percen t o f al l companie s (1 1 o

f 1,076 ) hav e complianc e cost s highe r tha n $1,000,000 .

January31,199 4 Pag e 2 3P.2 7
Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s EXHIBIT 6 Summar y o f

Complianc e Cost s pe rManufacture r Typ e o f Manufacture r Minimu m Additive Manufacturers F/F A Progra m Definitio n Smal l Larg e SB A Definitio n Smal l Larg e Tota l $40 0 $40 0 $40 0 $40 0 $40 0 Fuel Manufacturers F/F A Progra m Definitio n Smal l Larg e SB A Definitio n Smal l Larg e Tota l $40 0 $40 0 $40 0 $40 0 $40 0 Media n

$50 0 $4,80 4 $50 0 $4,80 4 $88 7

$50 0 $18,31 6 $50 0 $88 7 $50 0 Maximu m

$1,304,61 8 $4,214,05 6 $1,304,61 8 $4,214,05 6 $4,214,05 6
$657,90 0 $2,292,25 7 $938,02 4 $2,292,25 7 $2,292,25 7 % wit h

cost s > $10,00 0

25 % 43 % 25 % 43 % 31 %

5 % 56 % 11 % 31 % 19 % 

## Comparin g th e Rati o of Complianc e Cos t t o Sale s fo r Smal l an d Larg e Companie s Th e firs t metho duse dt o determin e i f smal l busines s ar e disproportionatel y impacte db y th e F/F A Registratio nProgra mwa s t o compar e th e rati o o

f complianc e cos t

t o sale s fo

r smal l an dlarg e businesse s t o se e i

f thi s rati o wa s a t

leas t te npercen t

highe r fo r smal l companies . Sinc e testin g requirement s will impos e one-tim e cost s tha t will b e incurre dover

athree-yea r

period , th e complianc e cos t use dfo r th e analysi s presente di nExhibi t 7 i s th e tota l complianc e cos t divide d Pag e 2 4 January31,199 4 * * *P.2 8

Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s b y three . (I

f th e tota l complianc e cos t wa s use dinstea do

f th e averag e over thre e years , th e impact s woul db e greate r tha nshow nhere. ) Fo r additiv e manufacturers , th e rati o o f complianc e cos t

t o sale s fo

r smal l companie s ar e substantiall y highe r tha nfo r larg e companies . Th e figure s i nExhibi t

7 indicat e th e exten t

t o whic hth e (complianc e cos t to sales ) rati o fo

r smal l companie s i s greate r tha nfo r larg e companies . 3 A hig h"Small/Large " rati o i nth e tabl e indicate s tha t th e smal l compan y i s affecte dsignificantl y mor e tha nth e comparabl e larg e company .
• A figure of" 1 " indicate s a nimpac t o f complianc e cos t

t o sale s tha t i s relativel y th e sam e fo r smal l an dlarg e companie s (figure s i nth e tabl e hav e bee nrounded) .
• A s larg e companie s experienc e agreate r burde no

f complianc e cos t t o sales , th e figures i nth e tabl e woul db e les s tha n"1" , an dwoul di nfac t

approac h"0 " (althoug hth e zer o figure i nth e tabl e i s du e t o a noutlie r i nth e data , whic hoccur s becaus e on e compan y wit hhig hsale s i s classifie da s smal l b y SBA' s definition) .
• Th e minimum/maximu mvalue s i nth e tabl e illustrat e th e exten t t o whic hth e mos t

lightly/heavil y impacte dsmal l compan y compare s t o th e mos t lightly/heavil y impacte dlarg e company . Th e typica l smal l additiv e company' s rati o o f complianc e cos t

t o sale s i s abou t 1 7 t o 3 2 time s greate r

tha nfo r atypica l larg e manufacture r (usin g SBA' s an dth e F/F A program' s definitions , respectively) . Althoug h9 5 percen t o f th e smal l additiv e companie s (accordin g t o th e F/F A program' s definition ) ar e mor e heavil y impacte dtha nth e typica l larg e additiv e company , larg e compan y statistic s ten dt o b e quit e varied , an d thu s quartile s migh t

no t accuratel y reflec t

th e distributio nvery well . Alon g th e sam e lines , th e lower quartil e (i.e. , smal l an dlarg e companie s withlo w complianc e t o sale s ratios ) show s tha t smal l companie s ar e no t a s heavil y affected .

January31,199 4 Pag e 2 5P.2 9
Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s EXHIBIT 7 Compariso n o f

Smal l an d Larg e Compan y Complianc e Cos tt o Sale s Ratios *
Minimu m Additiv e Manufacturer s F/F A Progra m Definitio n Smal l Larg e Small/Larg e SB A Definitio n Smal l Larg e Small/Larg e 0.000272 %

0.000001 % 27 2 0.000041 % 0.000001 % 4 1 Fue l Manufacturer s F/F A Progra m Definitio n Smal l Larg e Small/Larg e SB A Definitio n Smal l Larg e Smal l /Larg e 0.000268 %

0.000001 % 25 6 0.000045 % 0.000000 % 21 1 Lowe r guartil e

0.001572 % 0.000089 %

1 8 0.001481 % 0.000089 %

1 7

0.000755 % 0.000697 %

1 0.001032 % 0.000150 %

7 Media n

0.012209 % 0.000384 % 3 2 0.010136 % 0.000599 %

1 7

0.001773 % 0.003136 %

1 0.002457 % 0.000557 %

4 Uppe r guartil e

0.128205 % 0.003347 % 3 8 0.104747 % 0.003851 % 2 7

0.006667 % 0.006388 %

1 0.009948 % 0.018028 %

1 Maximu m

129.515152 % 0.258927 % 50 0 129.515152 % 3.565000 % 3 6

84.346154 % 0.283498 % 29 8 25.655556 % 367.861167 %

0* *

* Three-yea r

averag e complianc e cos t t o sales : al l figures i ntabl e ar e rounded . " Th e maximu m3-yea r averag e complianc e cos t t o sale s for

larg e companie s wa s 1 4 time s larger

tha nth e maximu m3-yea r averag e complianc e cos t t o sale s fo r

smal l companies . A s show ni nth e tabl e (Exhibi t 7) , th e typica l smal l fuel manufacture r experience s impact s simila r t o larg e fuel manufacturers . Entrie s i nth e tabl e o f "1 " indicat e tha t

relativ e t o sales , smal l companie s fac e complianc e cost s tha t

ar e th e same a s larg e companies . I nfact , a t leas t 7 5 percen t

o f th e fuel manufacturer s hav e a1: 1 ratio . Accordin g t o th e F/F A program' s definitio no f smal l an dlarg e companies , onl y 3 3 percen t Pag e 2 6 January31,199 4 " 'P.3 0
Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s

o f smal l companie s hav e acomplianc e cos t t o sale s rati o a t

leas t te n percen t highe r tha nth e correspondin g rati o fo r th e media nlarg e companies . It i s importan t

t o not e tha t

th e complianc e cos t

t o sale s ratio s ar e verysmal l fo r thi s regulation ; a s aresult , ate npercen t differenc e betwee n smal l an dlarg e compan y ratio s ha s littl e statistica l significance . In addition , th e fac t

tha t complianc e cost s hav e relativel y greate r effect s o n smal l additiv e manufacturer s —whil e no t unimportan t

i nevaluatin g impact s o n smal l manufacturer s —i s probabl y no t o f grea t concer n unles s th e actua l magnitud e o f th e impact s o naparticula r compan y i s significant . A compan y ma y pa y arelativel y hig hcomplianc e cos t compare dwithanothe r

fir mi nth e industr y (e.g. , $1,00 0 versu s $400 ) withou t havin g muc himpac t

o nit s financia l health . I nthi s case , a compariso n o

f th e magnitud e o

f change s i nROA, discusse di nth e nex t section , i s amor e direc t

indicato r o f th e impact s o

f complianc e cost s o n firms. 

## Analyzin g th e Chang e i n RO A Th e secon dmetho db y whic himpact s wer e estimate dwa s b y analyzin g th e chang e i nacompany' s RO A directl y attributabl e t o th e F/F A Registratio nProgram . A s show ni nExhibi t 8 , complianc e cost s o

f th e F/F A Registratio nProgra mar e expecte dt o caus e 4 8 (1 6 percen t o f small ) additiv e manufacturer s an d2 5 ( 5 percen t o f small ) fuel manufacturer s t o g o int o som e leve l o f financia l distress. (Companie s tha t produc e bot hfuel s an dadditive s ar e liste dunde r bot hfuel an d additiv e heading s i nExhibi t 8) . Al l o f th e seventy-thre e companie s ar e classifie da s smal l b y th e F/F A program' s definitio nan dal l bu t eigh t ar e classifie da s smal l b y SB A definitions .

January31,199 4 Pag e 2 7P.3 1
Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s EXHIBI T 8 Estimate d Impact s o n RO A Typ e o f Manufacture r "Financial Digress " (-4%-<ROA<2.5% ) Additive Manufacturers F/F A Program Definitio n Small Larg e SBA Definitio n Small Larg e 2 3 0
2 0 3 Fue l Manufacturers P/F A Program Definitio n Small Larg e SBA Definitio n Small Larg e 2 6 0
2 2 4 "Severe Financia l

Distress " (-30%-<ROA<-4% )

1 3 0
12 1

3 0
3 0 "Closure " (ROA<-30% )

12 0
12 0

4 0
4 0 Numbe ro f

companie s pushe d int o som e degre e o f distres s

4 8 0
4 4 4

25 * 0
21 * 4
* Eigh t

fue l manufacturer s ha da nRO A o f les s tha n2.5 % before complianc e cost s wer e incorporated , an dar e thu s no t include di nth e numbe r of companie s pushed

int o financia l distress . 

## Examinin g Profile s of Manufacturer s Pushe d int o Closur e Fourtee nsmal l manufacturer s (te nadditive , tw o fuel , an dtw o tha t produc e both ) ar e predicte dt o g o ou t o f busines s becaus e o

f complianc e cost s o f th e F/F A Registratio nProgram . Examinatio no f companie s expecte dt o g o ou t

o f busines s reveal s th e followin g (se e Exhibi t 9) :

• Al l o f th e companie s pushe dint o closur e wer e financiall y health y (i.e. , ha dROA s greate r tha n2.5% ) prio r

t o th e analysi s o f complianc e cos t

impacts . Th e averag e RO A o f th e fourtee n companie s wa s 4.24% .

Pag e 2 8 January31,199 4 ** *P.3 2

i 1 1 » Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s

GAl l o f th e companie s pushe dint o closur e ar e classifie da s smal l b y bot hF/F A progra man dSB A definitions . The y generall y hav e fewe

r tha nfiv e employee s an dsale s les s tha n $500,000 .
• O naverag e th e fourtee ncompanie s manufactur e 4. 5 product s

—2. 5 "baseline " product s an d2 "atypical " products. 6 More than-hal f o f th e companie s produc e thre e o r fewe r products . Al l o f thes e compame s produc e atypica l products .
• Fo r abou t hal f o f th e companie s pushe dint o closure , complianc e cost s ar e greate r tha nannua l sales . Th e averag e complianc e cos t

o f $369,73 1 i s slightl y les s tha nth e averag e annua l sale s o

f $395,970 .
• Fo r companie s pushe dou t

o f business , th e averag e RO A afte r complianc e cos t

i s predicte dt o b e approximatel y -17 2 percent . Th e fourtee ncompanie s predicte dt o g o ou t o f busines s becaus e o

f complianc e cost s ar e no t typica l o f smal l fuel an dadditiv e manufacturers .
• I ncompariso nt o smal l fuel an dadditiv e manufacturers , th e averag e compan y pushe dint o closur e i s i nth e lower quartil e o f bot hth e numbe r

o f employee s an dannua l sales . I nothe r words , th e averag e compan y pushe dou t o f busines s ha s fewe

r employee s an dlower

annua l sale s tha n75 % o f th e smal l fue

l an dadditiv e manufacturers .
• Th e averag e RO

A o f companie s pushe dint o closur e i s less than 75 % o

f al l o f th e manufacturer s o

f smal l additiv e products , bu t

greater than 75 % o

f al l o f th e manufacturer s o

f smal l fuel products . I nexaminin g th e produc t mi x o f th e companie s pushe dou t o f business , si x companie s produc e onl y atypica l products , thre e companie s produc e mor e atypica l tha nbaselin e products , an dfiv e companie s produc e fewe r atypica l tha n baselin e products . Th e adjuste dRO A i s correlate dwith th e relativ e numbe r

o f atypica l products : companie s withonl y atypica l product s hav e th e lowes t adjuste dRO

A (i.e. , mos t

likel y t o close ) an d Baselin e product s contai nonl y th e element s carbon , hydrogen , oxygen , nitrogen , an dsulfur . Atypical product s contai nelement s othe r tha ncarbon , hydrogen , oxygen , nitrogen , an dsulfur .
January31,199 4 Pag e 2 9P.3 3
Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s compame s withth e fewes t atypica l product s hav e th e highes t adjuste d ROA . Thi s relationshi p i s expecte dbecaus e o f assumptio ninclude di n developin g complianc e costs . Whe nsmal l manufacturer s (i.e. , thos e withsale s o

f les s tha n$5 0 million ) produc e baselin e products , the y ar e exemp t fro mtestin g cost s an da s aresult , th e complianc e cost s ar e minimal . O nth e othe r

hand , complianc e cost s fo r smal l manufacturer s includ e testin g o

f atypica l products . Fo r companie s tha t

produc e baselin e an datypica l products , apotentia l complianc e strateg y woul db e t o sto p producin g atypica l product s an dt o manufactur e an dsel l onl y baselin e products , reducin g complianc e cost s significantl y an dallowin g th e compan y t o remai ni nbusiness . Th e effectivenes s of

thi s strateg y woul db e determine db y th e relativ e importanc e o

f atypica l produc t

sales . Fo r companie s tha t

produc e onl y atypica l products , th e uniqu e chemica l characteristic s o

f thes e product s migh t

allo w pric e increase s t o cove r th e increase dcomplianc e costs . Alternatively , th e companie s migh t b e abl e t o sprea dth e complianc e cost s over mor e tha nthre e years . However , i t seem s possibl e tha t

smal l companie s wit hlo w sale s tha t produc e onl y (or primarily ) atypica l product s will b e pushe dou t of business .

Pag e 3 0 January31,199 4P.3 4

Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s EXHIBI T 9 Summar y Profil e o f

Manufacturer s Pushe d int o Closur e Manufacturer' s Produc t

Mix * Tota l 1 1 6 1 4 4 1 3 3 7 1 8 3 8 3 Atypica l Baselin e

1 0 1 0 4 2 1 0 4 0 4 0 1 0 2 1 2 1 2 5 3 1 5 1 2 1 7 1 2 AVERAGE 4. 5 2 2. 5 #o f Employee s

6 1 4 4 4 3 2 4 4 0 4 2 4 20 0 3 Annua l Sale s $110,00 0 $166,09 6 $260,00 0 $240,00 0 $310,00 0 $340,00 0 $85,00 0 $430,00 0 $300,00 0 $340,00 0 $410,00 0 $280,00 0 $972,48 8 1,300.00 0 $395,97 0 Complianc e

Cos t $427,40 0 $427,40 0 $657,90 0 $427,40 0 $542,69 9 $542,700 . $115,40 0 $427,600 . $230,90 0 $231,00 0 $232,40 0 $115,60 0 $428,10 0 $427,60 0 $369,73 1 RO

A

4.21 % 4.29 % 2.58 % 4.35 % 4.40 % 4.41 % 4.17 % 4.46 % 4.39 % 4.41 % 4.45 % 4.38 % 4.61 % 3.00 %
4.24 % Adjuste d

RO A -488.79 % -308.00 % -300.06 % -203.35 % -194.22 % -174.88 % -172.96 % -104.45 % -83.24 % -71.90 % -57.95 % -42.98 % -39.53 % -34.98 %
-172.49 %
* Th e firs t

colum n indicate s tota l numbe r o f products , th e secon dcolum ni s numbe r of atypica l products , an dth e thir dcolum ni s numbe r of baselin e products . 

## Assessin g th e Effectivenes s ofSmal l Busines s Provision s A compariso no

f impact s wa s mad e base do ncomplianc e cost s calculate dwithan dwithou t specia l provision s provide dfo r atypica l produc t manufacturer s withsale s o f les s tha n$1 0 million . Result s sho w tha t

th e specia l provision s fo r manufacturer s o

f atypica l product s save d6 0 companie s atota l o f $27,487,300 . O naverage , th e provision s

January31,199 4 * * * Pag e 3 1P.3 5
Sectio n 4 : Impac t o n Smal l Fue l an d Fue l Additiv e Manufacturer s reduce dcomplianc e cost s pe r compan y b y nearl y 6 5 percent . Inth e absenc e o

f th e provisions , analysi s o f th e chang e i nRO

A du e t o th e complianc e cos t

indicate s tha t

almos t ninet y companie s woul dhav e bee n pushe dint o som e leve l o f financia l distres s —2 7 companie s woul dhav e gon e ou t o f business , 2 1 companie s woul dhav e bee ni nsever e financial distress , an d4 0 companie s woul dhav e bee ni n financia l distress . Thes e companie s includ e al l 6 0 manufacturer s covere db y th e smal l busines s provision s a s wel l a s others . Thus , th e F/F A progra mprovisio nfo r smal l atypica l manufacturer s prevent s 1 5 companie s frombein g pushe dint o financia l distress .

Pag e 3 2 January31,199 4P.3 6



# Sectio n 5 Possibl e Response s t o th e Impact s of th e Regulatio n Companie s projecte dt o experienc e impact s fromth e complianc e cost s will no t necessaril y b e lef

t wit hth e reduction s i nthei r rate s o f retur n indicate db y thi s analysis . Instead , the y will hav e ope nt o the ma numbe r o f course s o

f actio ntha t

coul dreduc e th e impact s o f th e regulations . Tw o likel y responses , pric e increase s an dreduction s i nth e numbe r o f products , ar e discusse dbelow . Thes e actions , however , will hav e secondar y effect s o f thei r own . 

## Assessin g th e Effect s ofPric e Increase s Th e analysi s presente dabov e estimate s impact s o nreturn s assumin g n o change s i nprice s o r

sales . I nman y cases , however , regulator y cost s ca n b e passe do nt o consumers , o r bac k t o suppliers . Th e scop e o f thi s analysi s preclude dan y attemp t t o mak e detaile dprediction s o f th e pric e change s tha t

coul dresult . Severa l genera l observations , however , ca nb e made . First , th e complianc e cost s represen t a nincreas e i nth e fixed cost s o f producin g th e products , rathe r tha nth e variable costs . Th e distinctio n lie s i nth e fac t tha t i f afir mincrease s it s outpu t

o f agive n product , it s tota l complianc e cost s d o no t increase ; i nfact , th e complianc e cost s pe r

produc t uni t dro p somewha t

wit hever

y additiona l uni t sold , a s th e fixedcomplianc e cost s ar e sprea dover mor e units . Thi s mean s tha t

competin g additiv e manufacturer s will hav e a nincentiv e t o kee p sale s o

f thei r product s hig ht o hel p pa y fo r thei r testin g costs . Thi s pressur e t o sel l coul dmak e i t les s likel y tha t

pric e increase s will stick , a s attempt s t o rais e price s b y on e fir mar e undercu t

b y other s seekin g greate r marke t share , unles s o r

unti l som e competin g producer s withdra w fromth e market . I naddition , arequiremen t tha t an y ne w manufacturer s enterin g th e marke t compensat e th e existin g manufacturer s confer s acertai ndegre e o f protectio no nth e existin g manufacturers . T o th e exten t tha t the y ha d bee nkeepin g thei r

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

r imposin g testin g cost s o nne w competitor s migh t allo w

Januar y 31,199 4 Pag e 3 3P.3 7

* Sectio n 5 : Possibl e Response s t o th e Impact s o fth e Regulatio n

existin g firms t o rais e price s somewha t withou t fea r tha t thi s increas e will resul t

i nincrease dcompetition . I nothe r words , price s migh t

b e raise dt o hel p cover

complianc e cost s becaus e an y potentia l ne w competitor s woul dfac e simila r costs . An

y pric e increase s would , o f course , impos e par t

o f th e cost s o

f th e regulation s o nconsumers , an d coul db e expecte dt o reduc e sale s t o acertai nextent . Finally , t o th e exten t

tha t aproduc t

ha s unusua l characteristics , it s manufacture r

ma y hav e considerabl e freedo mi nsettin g it s price , an d migh t hav e mor e succes s i ncoverin g it s complianc e costs . Thi s i s a n importan t

consideration , give ntha t man y o f th e larges t

complianc e cost s ar e face db y firms tha t

ar e payin g asubstantia l percentag e o f th e tota l testin g cost s o

f tha t testin g group . Thi s ma y sugges t tha t thei r product s hav e fe w clos e substitutes . Thus , thei r unusua l qualitie s ma y b e abl e t o suppor t apric e increas e tha t

offset s th e impac t

o f th e testin g cost s — especiall y give nthat , a s note dabove , an y potentia l ne w competitor s will fac e hig hcomplianc e cost s a s well . 

## Assessin g th e Effect s of Reduction s i n th e Numbe rof Product s Anothe r respons e ope nt o producer s facin g substantia l testin g cost s i s t o dro p th e produc t

o r product s wit hth e greates t cost s an dsmalles t

profi t potential . Thi s respons e i s likel y t o hav e som e residua l impact s o n profitability . Thi s residua l impact , however , i s likel y t o b e relativel y smal l a s th e fir

mi s droppin g aproduc t wit hhig hcost s an dsmal l sales/profi t

potential . Ultimatel y thi s respons e woul dreduc e th e numbe r o f competin g product s an dmak e i t easie r fo r remainin g firm s t o increas e prices . Reduction s i nne w product s ca nb e expecte dt o occu r a s well ; innovatio n tha t create s produc t

diversit y ma y b e discourage dt o a nunknow nexten t sinc e every ne w produc t will requir e th e paymen t o f testin g costs . Furthermore , th e mor e unusua l th e ne w produc t is , th e greate r

it s complianc e cos t

i s likel y t o be . Again , thi s increase s th e abilit y o f existin g manufacturer s t o rais e price s enoug ht o cover thei r costs , bu t ma y resul t

i nles s produc t

diversity .

Pag e 3 4 January31,199 4P.3 8



# Sectio n 6 Conclusion s

Thi s smal l busines s impac t analysi s show s tha t

th e F/F A Registratio n Progra mwil l no t

hav e significan t

financial impact s o nth e majority o f smal l an dlarg e companie s i nth e regulate dcommunity . Sixty-fou r percen t o f al l companie s hav e tota l complianc e cost s lowe r tha n$1,000 . Moreover , smal l busines s provision s for manufacturer s o

f atypica l product s ar e expecte dt o sav e affecte dcompanie s roughl y $2 7 million . Thi s analysis , however , indicate s tha t smal l businesses , particularl y smal l additiv e manufacturers , ar e disproportionatel y impacte db y th e program . Th e rati o o

f complianc e cos t

t o sale s i s a t

leas t te npercen t greate r for th e majority o

f smal l additiv e companie s whe ncompare dt o larg e additiv e companies . Fo r fuel companies , onl y 33 % o f smal l companie s hav e complianc e cos t t o sale s ratio s a t

leas t te npercen t highe r tha nth e correspondin g rati o fo r th e media nlarg e companies . Analysi s o

f th e impac t

o nRO A indicate s tha t

complianc e cost s ar e expecte dt o pus happroximatel y 7 3 smal l companie s (4 8 additiv e an d2 5 fuel) int o som e leve l o

f financia l distress . Specia l provision s fo r smal l atypica l manufacturer s preven t 1 5 additiona l companie s frombein g pushe dint o som e leve l o f financial distress . Companie s pushe dint o som e leve l o f financia l distres s —whethe r smal l o r larg e —manufactur e atypica l products . Approximatel y 8 7 percen t o f tota l progra mcost s ar e du e t o testin g atypica l products . Smal l additiv e manufacturer s ar e mor e heavil y impacte drelativ e t o smal l fuel manufacturer s becaus e the y ar e mor e likel y t o produc e atypica l products . Therefore , on e migh t conclud e tha t

i t i s thei r produc t mi x rathe r tha nthei r

siz e tha t cause s smal l additiv e manufacturer s t o b e disproportionatel y impacted . However , thi s conclusio ndoe s no t hol di f on e compare s smal l an dlarg e additiv e manufacturers : thi s analysi s show s tha t

larg e additiv e manufacturer s ar e bette r abl e t o suppor t testin g o f multiple atypica l product s tha nsmal l additiv e manufacturer s ar e o f testin g asingl e atypica l product .

January31,199 4 Pag e 3 5P.3 9
Sectio n 6 : Conclusion s Thi s analysi s als o support s th e adoptio no f th e F/F A program' s definition s o

f smal l fo r F/F A manufacturers . Th e F/F A program' s definitions , especiall y fo

r fuel manufacturers , appea r t o bette r captur e th e poin t a t whic hentitie s ar e adversel y affecte dsimpl y becaus e o f thei r size . However , w e not e tha t thi s ma y reflec t

th e fac t tha t th e F/F A program' s definition s wer e use dt o plac e manufacturer s int o produc t group s o f smal l o r larg e companies , thereb y determinin g wha t thei r complianc e cost s woul dbe . It i s beyon dth e scop e o

f thi s analysi s t o determin e wha t

th e tota l complianc e cost s o f th e F/F A Registratio n Progra mwoul dbe , o r

wha t th e impact s woul db e o nregulate d companies , i

f produc t grouping s wer e base do nSB A definitions .

Pag e 3 6 Januar y31,199 4P.4 0

Sectio n 6 : Conclusion s APPEND KA Equation s t o Estimat e Asset s an d Ne tIncom e

Equation s t o Estimat e Asset s an d Ne tIncom e fo rFue l Manufacturer s Equation s t o Estimat e Asset s an d Ne tIncom e fo rAdditiv e Manufacturer s Log(Ne tIncome/k x ) = a+ bfLogfSales/k^ ) Iwliere k,=1.000and

k 2 =1.000.000) LogfNetIncome/kj ) = a+ bfLogfSales/k^) ) (where k,=1.000and

k 2 =1.000.000) Regression Output: Constan t St dEr r of Y Es t RSquare d No . o f Observation s Degree s o f

Freedo m X CoefTicient(s ) St dEr r o f Coef . t = 33.93 2 0.92 4 0.33 0 0.88 8 14 7 14 5 1.11 4 0.03 3 Regression Output: Constan t St dEr r o f Y Es t RSquare d No . o f Observation s Degree s o f

Freedo m X Coefflcient(s ) St dEr r o f Coef. t = 48.58 3 1.18 7 0.25 8 0.96 1 9 7 9 5 1.14 9 0.02 4

LogfAssets/kj ) = a+ bfLogfSales/k^) * (where k,=1.000.000and k 2 =l..000.000) LogfAssets/kj ) = a+ bfLogfSales/kg) ) Mien p k,=1.000.000and k 2 =1.000.000) Regression Output: Constan t St dEr r o f Y Es t RSquare d No . o f Observation s Degree s o f

Freedo m X Coefficient(s ) St dEr r o f Coef . t = 48.39 7 -0.54 2 0.22 0 0.93 7 15 9 15 7 1.02 2 0.02 1 Regression Output: Constan t St dEr r o f Y Es t RSquare d No . o f Observation s Degree s o f

Freedo m X Coefficlent(s ) St dEr r o f Coef. t = 77.81 4 -0.47 7 0.16 1 0.98 4 10 3 10 1 1.10 8 0.01 4

* Outlier was excluded

January 31,199 4 * * * Pag e 3 7