p.1 

OAR Box 1846 

Prepped by Ollie Stewart 

Document Number: 

84) IV-A-6 

Docket Number: 

A-90-07 

Printed 11/18/2008 7:30:17 AM Sheet 84 of 93 
P.2 

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tf-90-07 

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•? 8 [ULAI 

MAY 2 6 ©94 

Small Business Impact Analysts 

of the Fuel and Fuel Additive 

Registration Program 

EPA AIR DOCKET 

Prepared by: 

ICF Incorporated 

under 

EPA Contract No. 68-C1-0059 

Work Assignment No. 2-2 

Prepared for. 

Office of Mobile Sources 

U.S. Environmental Protection Agency 

January 31,1994 
P.3 

Table of Contents 

Introduction 1 

Section 1: Requirements of the Regulatory Flexibility Act 3 

Section 2: Methodology 5 

Collecting and Adjusting Data 5 

Calculating Net Income and Assets 6 

Merging of Companies that Appear More than Once in 

the F/FA Data Base 6 

Defining "Small" Manufacturer for This Analysis 7 

Characterizing Fuel and Additive Manufacturers 8 

Estimating Impacts on Small Manufacturers 10 

Comparing the Ratio of Compliance Costs to Sales for 

Small and Large Companies JO 

Estimating the Impact of Compliance Costs on ROA ... . 11 

Examining the Product Mix of Companies Pushed 

into Closure 11 

Describing the Limitations of the Analysis 12 

Section 3: Characterization of Manufacturers in the Regulated 

Industry 13 

Characterizing Additive Manufacturers 13 

Characterizing Fuel Manufacturers 15 

Summarizing Additive and Fuel Manufacturer 

Characteristics 16 

Section 4: Impact on Small Fuel and Fuel Additive 

Manufacturers 23 

Summarizing the Expected Costs of the Proposed 

Regulation 23 

Comparing the Ratio of Compliance Cost to Sales for Small 

and Large Companies 24 

Analyzing the Change in ROA 27 

Examining the Product Mix of Companies Pushed into 

Closure 28 

Assessing the Effectiveness of Small Business Provisions .. . 31 

Section 5: Possible Responses to the Impacts of the 

Regulation 33 

Assessing the Effects of Price Increases 33 

January 31,1994 

Pagei 
P.4 

J * Table of Contents 

Assessing the Effects of Reductions in the Number of 

Products 34 

Section 6: Conclusions 35 

Appendix A: Equations to Estimate Assets and Net Income 

Page ii 

January 31,1994 * * * 
P.5 

Introduction 

The Environmental Protection Agency (EPA) is finalizing regulations for 

the Fuel and Fuel Additive Registration Program, as authorized under 

Section 211 of the Clean Air Act. This program requires emissions and 

health effects testing of all motor vehicle fuels and fuel additives (F/FA). 

In developing these regulations, EPA has taken steps to reduce burden 

on small manufacturers by including provisions such as cost sharing 

and exemption from duplicate testing. This report presents the results 

of a small business impact analysis of the registration and testing 

requirements for unleaded gasoline and diesel products in the Fuel and 

Fuel Additive Registration Program.' The analysis has four main 

objectives: 

/ To determine if the registration program will impact small 

businesses significantly more than large businesses 

/ To estimate the magnitude of small business impacts by 

assessing if the cost of complying with the regulation is 

likely to cause small businesses to fall into financial 

distress or even closure 

/ To examine whether the F/FA program's proposed 

definition of small or the Small Business Administration's 

(SBA) definition of small more accurately captures the point 

at which businesses are likely to be adversely affected 

simply because of their size 

/ To quantify the extent to which the small business 

provisions reduce burden for manufacturers of atypical 

products 

This analysis excludes leaded gasoline and relabeled products. 

January 31,1994 * * * 

Pagel 
P.6 

Introduction 

This report has been prepared for EPA and is expected to be used by the 

Agency in preparing a Regulatory Flexibility Analysis for the final F/FA 

Registration Program. As such, it does not go into detail on subjects 

such as the requirements of the program or how compliance costs were 

estimated. This report should not be used to assess the overall 

economic impacts of the registration program. 

This report is presented in six sections: 

• Requirements of the Regulatory Flexibility Act 

• Methodology 

• Characterization of Manufacturers in the Regulated 

Community 

• Impacts on Small Fuel and Fuel Additive Manufacturers 

• Possible Responses to the Impacts of the Regulation 

• Conclusions 

Page 2 

January 31,1994 * * * 
P.7 

Section 1 

Requirements of the 

Regulatory Flexibility Act 

Section 604 of the Regulatory Flexibility Act (RFA) requires preparation 

of a "Final Regulatory Flexibility Analysis" to accompany a final rule. 

Under the terms of the Act, EPA must determine whether the regulations 

will cause a significant impact on a substantial number of small 

entities.2 Because the RFA does not provide concrete definitions of 

"small entity," "significant impact," or "substantial number," EPA has 

established guidelines setting the standards to be used in evaluating 

impacts on small businesses.3 The guidelines specify that size 

definitions set by the SBA should be used as the initial determination of 

a "small entity." but that EPA may use an alternative definition if it 

better captures the point at which entities are adversely affected simply 

because of their size. 

The EPA guidelines also provide guidance on the standards to be used 

for evaluating impacts on small businesses. Four criteria are established 

for determining whether impacts will be significant: 

• Annual compliance costs increase total costs of production 

for small businesses by more than five percent. 

• Compliance costs as a percentage of sales for small 

businesses are at least ten percent higher than compliance 

costs as a percentage of sales for large businesses. 

• Capital costs of compliance represent a significant portion 

of capital available to small businesses. 

2

 5 USC 601. 

3

 U.S. Environmental Protection Agency, Memorandum to Assistant 

Administrators, "Compliance with the Regulatory Flexibility Act," 

EPA Office of Policy, Planning, and Evaluation, 1984. 

January31,1994 *** 

Page 3 
P.8 

Section 1: Requirements of the Regulatory Flexibility Act 

• The requirements of the regulation are likely to result in 

closures of small businesses. 

According to the guidelines, there is a significant impact on small 

entities whenever any of the above criteria are satisfied. As explained 

below in the section on methodology, this analysis employs the second, 

third, and fourth criteria. The first criterion is not employed because 

production cost data are not readily available. 

Page 4 

January 31,1994 
P.9 

Section 2 

Methodology 

This section presents the data and methodology used to conduct this 

small business impact analysis. Analytical assumptions and limitations 

of the data are also discussed. This section is divided into five parts: 

• Collecting and adjusting data 

• Defining "small" manufacturer for this analysis 

• Characterizing fuel and additive manufacturers 

• Estimating financial impacts 

• Limitations 

Collecting and Adjusting Data 

ICF obtained the majority of data needed for this analysis from EPA. 

Specifically, for each registered F/FA manufacturer, EPA provided 

• Manufacturer name and identification number 

• Primary Standard Industrial Classification (SIC) code 

• Number of employees 

• 1993 annual sales 

• Type and number of products 

• Estimated compliance cost 

• For small manufacturers of atypical products, estimated 

compliance cost without small business provisions 

In instances where the registered F/FA company is a subsidiary or 

division of a larger company, EPA provided sales, employee, and SIC 

code information for the parent company. For companies with employee 

but no sales data, EPA assigned a sales level of $9 million if the 

company had fewer than 50 employees; if the company had 50 or more 

employees, EPA assigned a sales level of $49 million. If neither sales nor 

employee data were available for a company, EPA assigned a sales value 

of $49 million. 

January 31,1994 

Page 5 
P.10 

Section 2: Methodology 

Calculating Net Income and Assets 

ICF supplemented EPA's data by estimating net income and assets using 

1993 sales data and the regression equations developed for the small 

business impact analysis for the proposed registration regulation. For 

the proposed regulation, two separate equations (one relating net income 

to sales and the other relating assets to sales) were developed for both 

fuel and additive manufacturers. These equations are presented in 

Appendix A. These regression equations are very likely to still be valid 

for two reasons. First, the industry has not changed dramatically in the 

past two years. Second, the relationships between sales ahd net income 

and sales and assets tend to be stable over time.5 

Merging of Companies that Appear More than Once in the 

F/FA Data Base 

A number of companies appear more than once in the F/FA Data Base 

for varying reasons: they manufacture both fuels and additives, they 

have multiple fuel or additive identification numbers, or they have 

affiliates/subsidiaries (for which the same financial data may or may not 

have been provided). ICF made three types of adjustments to the data to 

account for these anomalies and to enable correct estimation of impacts: 

• 

For companies manufacturing both fuels and additives, we 

summed the compliance costs and used the fuel regression 

equations to estimate net income and assets. 

If the same direct parent financial information was provided 

for several (related) companies, we considered them to be 

one company and estimated impacts using the sum of their 

compliance costs. 

If different financial information was provided for related 

companies, we worked with EPA to determine which 

financial information should be used, considered the 

Regulatory Flexibility Analysis of the Proposed Fuels and Fuel 

Additives Registration Program Final Report. Prepared by ICF 

Incorporated for EPA. September 30, 1991. 

We verified this by comparing financial statistics for relevant SIC 

codes in the 1990 and 1992 Annual Statement Studies by Robert 

Morris Associates. 

Page 6 

January 31,1994 
P.11 

Section 2: Methodology 

related companies as one, and estimated impacts using the 

sum of their compliance costs. 

As a result of merging companies in this way, the total number of unique 

companies included in this analysis is 1,076. This includes 438 additive 

manufacturers, 618 fuel manufacturers, and 20 manufacturers that 

produce both additives and fuels. 

Defining "Small" Manufacturer for This Analysis 

The Regulatory Flexibility Act specifies that SBA definitions should be 

used as the initial determination of a small entity but that EPA may use 

an alternative definition if it better captures the point at which entities 

are adversely affected simply because of their size. For this analysis, 

companies were classified as small or large according to the following 

two definitions: 

1. The F/FA program's proposed definition in which a small 

business is defined as any fuel or additive manufacturer 

with total annual sales less than $50 million. 

2. SBA's definitions which are based on sales or number of 

employees, by SIC code. The SBA definitions are presented 

in Exhibit 1. The most frequent definition of small is 

companies having less than or equal to 100 and 500 

employees. SBA regulations specify that for all industries 

not specifically listed the size standard is $3.5 million in 

sales. This cut-off was also used to classify as small or 

large, 24 companies with no SIC code information. 

Employee data was not provided for 34 companies. These 

companies were classified as small or large using one of two 

methods: 

• Employee data for five companies were 

obtained from the 1994 Ward's Business 

Directory of U.S. Private and Public 

Companies. 

• Employee data for the remaining 29 

companies were estimated by comparing the 

company to other companies in the same SIC 

code with a similar level of sales (plus or 

minus 10 percent). This range was then 

compared to the SBA size standard. 

January 31,1994 

Page 7 
P.12 

Section 2: Methodology 

Employee estimates obtained through these two methods 

were used only to classify companies as large or small 

according to SBA definitions; they were not used in the 

characterizations presented in Section 3. 

The resulting designations of small and large companies using the two 

definitions are used throughout this small business impact analysis. 

Characterizing Fuel and Additive Manufacturers 

Eight profiles were developed for both small and large manufacturers of 

fuel and additive products. Each of the companies in these profiles was 

characterized and compared in terms of number of employees, number 

of products, annual sales, and other financial data. To clearly illustrate 

the differences between small and large manufacturers, statistics on the 

minimum, maximum, average, and quartile values were computed for 

each data characteristic (e.g.. number of employees, annual sales, etc.). 

• The minimum and maximum values provide a range of the 

dispersion of values in each set. 

• The average provides a simple (non-weighted) average 

value. 

• Quartiles are a useful measure of distribution of data sets 

that are highly skewed, or those in which other measures 

(e.g.. average) would be warped by extreme values. The 

first (or lower) quartile value separates the lowest valued 

quarter of the total number of values from the second 

quarter; the second quartile value (or median), separates 

the second quarter from the third quarter; the third (or 

upper) quartile value separates the third quarter from the 

top quarter. 

Page 8 

January 31,1994 
P.13 

•m 

>•» Section 2: Methodology 

* • 

EXHIBIT 1 

SBA Definitions of Small by Sic Code for F/FA Manufacturers 

# of Employees or # of Employees or # of Employees or 

SIC Million of $ SIC Million of $ SIC Millions of $ 

1094 500 3081 500 5251 $3.5 

1221 500 3089 500 5261 $3.5 

1311 500 3172 500 5399 $3.5 

1381 500 3411 1000 5411 $13.5 

1382 $3.5 3429 500 5531 $3.5 

1389 $3.5 3432 500 5541 $3.5 

1542 $17.0 3433 500 5571 $3.5 

1711 $7.0 3469 500 5699 $3.5 

2011 500 3479 500 5912 $3.5 

2022 500 3499 500 5941 $3.5 

2023 500 3519 1000 5983 $6.0 • 

2046 .750 3523 500 5984 $3.5 

2048 500 3524 500 6221 $3.5 

2061 500 3531 750 6531 $10.0 

2085 750 3556 500 7389 $3.5 

2086 500 3561 500 7538 $3.5 

2096 500 3569 500 7549 $3.5 

2329 500 3592 500 7699 $3.5 

2339 500 3599 500 8734 $3.5 

2435 500 3694 750 Unknown $3.5 

2436 500 3711 1000 

2611 750 3714 500 

2657 750 3715 500 

2671 500 3724 1000 

2673 500 3795 1000 

2678 500 3799 500 

2813 1000 3861 500 

2819 1000 4221 $12.5 

2821 750 4226 $12.5 

2822 1000 4612 1500 

2824 1000 4613 1500 

2833 750 4953 $6.0 

2834 750 4959 $3.5 

2841 750 5012 100 

2842 500 5013 100 

2843 500 5014 100 

2844 500 5015 100 

2851 500 5072 100 

2865 750 5082 100 

2869 1000 5083 100 

2873 1000 5085 100 

2874 500 5122 100 

2875 500 5153 100 

2879 500 5159 100 

2891 500 5169 100 

2892 750 5171 100 

2899 500 5172 100 

2911 1500 5191 100 

2952 750 5198 100 

2992 500 5211 $3.5 

Page 9 

* * * January 31,1994 * * * 

1 
P.14 

Section 2: Methodology 

Estimating Impacts on Small Manufacturers 

In accordance with EPA guidance described in Section 1, the following 

three methods were used to determine if small businesses are 

disproportionately impacted by the F/FA Registration Program: 

• The ratio of compliance cost to sales was compared for small 

and large companies to see if this ratio was at least ten percent 

higher for small companies. 

• The impact of compliance costs on a company's return on 

assets (net income/assets) was calculated to see if compliance 

costs represent a significant portion of capital available to 

small businesses. 

• The likelihood of the program causing small businesses to 

close was determined by examining the impact of compliance 

costs on a company's ROA. For companies with a ROA after 

compliance cost of less than -30 percent, the company's 

product mix was then examined. 

In estimating small business impacts, two simplifying assumptions were 

made. First, testing requirements are assumed to impose one-time 

costs. Second, compliance costs will be incurred over a three-year 

period. Therefore, one-third of a company's compliance costs was used 

in the compliance cost to sales ratio and in calculating the change in 

return on assets (ROA). The following paragraphs discuss the impact 

methodology in more detail. 

Comparing the Ratio of Compliance Costs to Sales for Small 

and Large Companies 

One method of assessing the extent to which small businesses are 

disproportionately impacted by the F/FA Registration Program is to 

compare the compliance costs (relative to sales) for small and large 

businesses, to determine if small company compliance costs are at least 

10 percent higher than compliance costs for large companies. The ratio 

of compliance costs to sales was computed for small and large 

manufacturers of additive and fuel products. This ratio for small 

additive companies was compared to the ratio for large additive 

companies; the process was repeated for fuel manufacturers. 

Page 10 

* *' January 31,1994 
P.15 

Section 2: Methodology 

Estimating the Impact of Compliance Costs on ROA 

Return on assets is a general indicator of financial health and is 

frequently used to compare the financial health of companies within an 

industry. The financial industry often uses ROA as one of the criteria for 

determining the borrowing potential of a company. In this manner, 

analysis of the change in a company's ROA can indicate whether 

compliance costs represent a significant portion of the capital available 

to a small business and, ultimately, whether compliance costs are likely 

to result in closure of that company. As explained below, this can be 

done by utilizing standard ROA thresholds indicating different levels of 

financial health. 

Closure Ssvsi* Financial Financial 

DIstrsss Distress 

Figure 1 Financial health and distress. 

In general, a company 

with a ROA less than 

2.5 percent is 

considered to be in 

financial distress. At 

this level, a company 

may experience 

difficulties obtaining 

additional loans or other capital. A ROA less than -4 percent indicates 

that a company is in severe financial distress. Finally, a ROA less than -

30 percent generally indicates closure. 

For each company, its initial ROA served as a baseline. Because 

compliance costs are assumed to be incurred over three years, ROA after 

compliance costs was calculated by subtracting one-third of compliance 

costs from net income. ROA after costs was then compared with the 

baseline to determine the overall magnitude of the change in ROA and 

whether costs had driven ROA across any of the three thresholds. The 

analysis defines impacted companies as those that cross over one or 

more of the three thresholds and presents tabulations of the number of 

companies that cross thresholds. 

Examining the Product Mix of Companies Pushed into 

Closure 

In order to assess the fourth criterion, the likelihood that the 

requirements of the regulations will result in small business closures, 

the analysis presents the profile of the small businesses which are 

pushed into closure (i.e., the adjusted ROA is less than -30 percent), and 

hypothesizes alterative scenarios for these companies to achieve 

compliance (e.g.. modify product mix). 

January 31,1994 

Page 11 
P.16 

Section 2: Methodology 

Describing the Limitations of the Analysis 

There are several limitations to this impact analysis. First, it assesses 

the impact of the start-up program only. It accounts neither for the 

impacts of testing future unique products nor how testing costs from the 

start-up program will be allocated among additional manufacturers that 

introduce products belonging to existing product groups. 

Second, it assumes that a company is willing to use profits and 

resources from the entire company to cover compliance costs of this 

regulation. How realistic this assumption is depends, in part, on how 

integral fuel and additive products are to the core business of the 

company. 

Third, as mentioned earlier, income and asset data were derived from 

regression equations. While we believe this method of estimating net 

income and assets is valid, there are limitations associated with it. The 

most significant limitation is that net income and assets data are 

estimated and may not exactly reflect the current financial situation of a 

given company. However, this limitation is lessened by the fact that 

errors will tend to average out across the registered companies. Some 

companies will have performed slightly better than estimated while 

others will have performed worse than estimated. 

Page 12 

January 31,1994 
P.17 

Section 3 

Characterization of Manufacturers 

in the Regulated Industry 

We developed eight different 

financial profiles of affected 

companies to facilitate the 

comparison of small and large 

companies, as well as of fuel 

and additive companies (see 

Exhibit 2 through Exhibit 5). 

These profiles provide 

summary data (e.g., number of 

employees, sales, assets, net 

income, retum on assets) for fuel and additive manufacturers, using 

both the F/FA program and SBA definitions. 

Figure 2 Diagram of 8 profiles 

Characterizing Additive Manufacturers 

Both the F/FA program and SBA definitions 

classify approximately 65 percent of additive 

manufacturers as small. The F/FA program 

definition classifies 295 companies as small 

while the SBA definition classifies 300 

companies as small. While the two definitions 

result in nearly the same number of 

companies being classified as small, the 

definitions do not yield data sets that 

comprise the same companies (i.e., F/FA 

small additive manufacturers are not just a 

subset of SBA small additive manufacturers 

— see Figure 3). As shown in Section 4, this 

results in slight differences in the impact on 

small companies depending upon the definition used. 

Figure 3 Number of 

companies classified by EPA 

and SBA definitions as small. 

** January31,1994 *** 

Page 13 
P.18 

Section 3: Characterization of Manufacturers in the Regulated Industry 

In comparing the F/FA and SBA profiles of small additive 

manufacturers, it seems that the F/FA program definition does a slightly 

better job of grouping companies with similar sales and employment 

characteristics. For example, a company with $20 billion in sales and 

1,500 employees was considered "small" by the SBA definition because 

of the SBA categorization for the number of employees in the company's 

SIC code. This level of sales, however, is much higher than the sales of 

most small additive manufacturers. As shown in Exhibits 2 and 3, the 

median sales for both SBA- and F/FA-defined small additive 

manufacturers is approximately $5 million. 

Large additive companies are considerably larger than small additive 

companies: median sales, assets, and net income are approximately 

200, 400, and 500 times higher for large than for small companies, 

respectively. Thus, to have the registration regulation impact small and 

large additive companies similarly, small company compliance costs 

must be on the order of 200 to 400 times less than large company costs. 

In addition, large additive manufacturers tend to have higher ROAs than 

small additive manufacturers. By either definition of small, the median 

small company ROA is 4.9 percent while the median large company ROA 

is 6 percent. Thus, small additive companies tend to be financially less 

healthy than large additive companies and, therefore, will have relatively 

less capital available to them to sustain financial shocks. 

The total number of additive products manufactured by the 458 additive 

compames is 2,778. 

• The average number of additive products per manufacturer is 

approximately 6. 

• Approximately 45 percent (207 of 458) of the additive 

manufacturers produce only one product. -

• The maximum number of products manufactured by a single 

additive company is 179. 

• Approximately 10 percent (286 of 2,778) of the additive 

products are atypical. 

A cursory review of manufacturers of atypical additive products reveals 

that the majority are small. In fact, nearly 60 percent (72 of 122) of the 

manufacturers of atypical additives are considered small companies (by 

the F/FA program's definition). However, a more thorough examination 

shows that manufacturers of more than one atypical additive are 

overwhelmingly large companies. For example, of the ten manufacturers 

Page 14 

January 31,1994 
P.19 

Section 3: Characterization of Manufacturers in the Regulated Industry 

that make five or more atypical additive products, eight are considered 

large (by the F/FA program's definition). 

Figure 4 Number of 

companies classified by EPA 

and SBA definitions as small. 

Characterizing Fuel Manufacturers 

There are 638 fuel manufacturers included in 

this analysis. As shown in Exhibits 4 and 5, 

the F/FA program and SBA definitions result 

in very different numbers of fuel 

manufacturers being classified as small. The 

F/FA program definition classifies 465 fuel 

manufacturers (or 73 percent) as small, while 

SBA definitions classify only 381 (or 60 

percent) as small (see Figure 4). 

The F/FA program definition more tightly 

groups fuel manufacturers with similar 

financial characteristics than do SBA 

definitions. This is because the F/FA program 

definition has a small company cut-off of $50 

million in sales, whereas SBA definitions often have small company cutoffs ranging from 100 to 1,500 employees, regardless of sales. As a 

result, SBA definitions that are based solely on the number of employees 

are apt to classify relatively large companies as small. For example, fuel 

manufacturers classified by the SBA as small had sales ranging from 

$49,000 to $5.5 billion (Exhibit 5); F/FA small company sales range 

from $49,000 to approximately $50 million (Exhibit 4). Median sales for 

companies classified by the SBA as large are $49 million — $1 million 

less than the minimum F/FA large company sales. 

Interestingly, small companies have similar ROA profiles under both 

definitions. According to either definition, 50 percent of the small fuel 

manufacturers have ROAs of less than or equal to 3.6 percent, and 75 

percent have ROAs of less than or equal to 4 percent. F/FA large 

companies, however, have somewhat higher ROAs than SBA large 

companies. This might reflect that, for companies in this analysis, ROA 

tends to increase with size, and F/FA large companies tend to have 

higher sales than SBA large companies. 

Whereas small fuel manufacturers often have similar profiles, the 

characteristics of large fuel manufacturers tend to be more widespread. 

For example, the typical large fuel manufacturer (using the F/FA 

program definition) had sales of approximately $269 million; however, 

approximately one-fourth of the large fuel manufacturers had sales of 

January 31,1994 

Page 15 
P.20 

Section 3: Characterization of Manufacturers in the Regulated Industry 

less than $86 million, and approximately one-fourth had sales of over 

$1.6 billion (Exhibit 4). 

The total number of fuel products manufactured by the 638 fuel 

companies is 1,420 — roughly one-half the number of products 

manufactured by the additive companies. 

• The average number of fuel products per manufacturer is 

approximately 2. 

• Approximately 40 percent (254 of 638) of the fuel 

manufacturers produce only one product. 

• The maximum number of products manufactured by a single 

fuel company is 16. 

• Approximately 15 percent (220 of 1,420) of the fuel products 

are atypical. 

Unlike manufacturers of atypical additive products, companies that 

produce atypical fuel products are more likely to be large (according to 

the F/FA program's definition). Of the 83 manufacturers of atypical fuel 

products, over 73 percent are large. This trend is even more pronounced 

for manufacturers of multiple atypical fuel products. For example, of the 

twelve manufacturers of five or more atypical fuel products, eleven are 

considered large. 

Summarizing Additive and Fuel Manufacturer 

Characteristics 

A review of the F/FA profiles leads to eight general conclusions: 

• ROA generally increases with the size of the company. 

• Additive manufacturers tend to have higher ROAs than fuel 

manufacturers. 

• Large additive manufacturers tend to be bigger in terms of 

sales and number of employees than large fuel manufacturers, 

and small additive manufacturers tend to be smaller than 

small fuel manufacturers. 

Page 16 

January31,1994 '* ' 
P.21 

Section 3: Characterization of Manufacturers in the Regulated Industry 

O For additive manufacturers, there is almost no difference 

between the F/FA program and SBA definitions in the number 

of companies classified as small. 

• For fuel manufacturers, the F/FA program definition results in 

83 more companies being classified as small (for a total of 465 

small manufacturers) than the SBA definitions. 

• For both additive and fuel companies, the F/FA program 

definition of small more tightly groups companies with similar 

financial characteristics. 

• Small additive companies are more likely to produce an 

atypical product than small fuel companies. 

• Manufacturers of multiple atypical products tend to be 

classified as large. 

January 31,1994 * * * 

Page 17 
P.22 

Section 3: Characterization of Manufacturers in the Regulated Industry 

EXHIBIT 2 

Profiles of Additive Manufacturers 

F/FA Program Definition 

Summary Statistics 

Small 

Large 

TOTAL 

Number 

295 

163 

458 

Percent 

64% 

36% 

100% 

Employees 

Sale* 

Asset* 

Net 

Income 

ROA 

Employees 

Sales 

Assets 

Net 

Income 

ROA 

Minimum 

0 

$50,000 

$12,063 

$492 

4.08% 

10 

$50,000,000 

$25,436,583 

$1,377,579 

5.42% 

Lower 

guartfle Median Upper guartlle 

Small Additive Manufacturers 

5 

$900,000 

$296,688 

$13,628 

4.59% 

L. 

722 

$176,414,566 

$102,845,133 

$5,865,456 

5.70% 

16 

$4,282,995 

$1,671,042 

$81,826 

4.90% 

52 

$12,116,185 

$5,288,949 

$270,264 

5.11% 

uge Additive Manufacturers 

3.548 

$972,795,133 

$681,922,814 

$41,710,686 

6.12% 

14.335 

$3,405,500,000 

$2,733,105,651 

$175,985,075 

6.44% 

Maximum 

1.110 

$49,000,000 

$24,873,520 

$1,345,970 

5.41% 

332.700 

$115,068,000,000 

$135,063,393,620 

$10,047,009,081 

7.44% 

Average 

51 

$9,688,738 

$4,476,567 

$234,290 

4.86% 

14.764 

$4,974,456,420 

$4,905,814,561 

$344,352,611 

6.12% 

Page 18 

January 31,1994 
P.23 

Section 3: Characterization of Manufacturers in the Regulated Industry 

EXHIBIT 3 

Profiles of Additive Manufacturers 

SBA Definition 

Summary Statistics 

Small 

Large 

TOTAL 

Number 

300 

158 

458 

Percent 

65% 

35% 

100% 

Minimum 

Lower 

guartile Median Upper guartile Maximum Average 

Small Additive Manufacturers 

Employees 

Sales 

Assets 

Net Income 

ROA 

0 

$50,000 

$12,063 

$492 

4.08% 

5 

$950,000 

$315,005 

$14,501 

4.60% 

19 

$4,923,217 

$1,949,926 

$96,029 

4.92% 

60 

$19,400,000 

$8,910,136 

$464,178 

5.21% 

1.500 

$20,090,000,000 

$19,529,978,713 

$1,352,458,499 

6.93% 

66 

$91,674,729 

$79,016,067 

$5,298,108 

4.92% 

Large Additive Manufacturers 

Employees 

Sales 

Assets 

Net Income 

ROA 

1 

$4,000,000 

$1,549,111 

$75,643 

4.88% 

753 

$139,763,500 

$79,450,767 

$4,488,074 

5.65% 

3.600 

$999,672,633 

$702,821,792 

$43,036,861 

6.12% 

14.500 

$3,405,500,000 

$2,733,105,651 

$175,985,075 

6.44% 

332.700 

$115,068,000,000 

$135,063,393,620 

$10,047,009,081 

7.44% 

15.104 

$4,975,876,702 

$4,889,518,193 

$343,524,208 

6.03% 

January 31,1994 *' 

Page 19 
P.24 

Section 3: Characterization of Manufacturers in the Regulated Industry 

EXHIBIT 4 

Profiles of Fuel Manufacturers 

F/FA Program Definition 

Summary Statistics 

Small 

Large 

TOTAL 

Number 

465 

173 

638 

Percent 

73% 

27% 

100% 

Employees 

Sales 

Assets 

Net Income 

ROA 

Employees 

Sales 

Asset* 

Net Income 

ROA 

Minimum 

0 

$49,000 

$13,164 

$292 

2.21% 

0 

$50,000,000 

$15,643,983 

$655,621 

4.19% 

Lower 

guartile 

8 

$3,000,000 

$882,303 

$28,544 

3.25% 

215 

$85,917,702 

$27,204,040 

$1,198,321 

4.40% 

Median 

Small Fuel Man 

22 

$9,000,000 

$2,711,664 

$97,057 

3.57% 

Large Fuel Man 

445 

$268,822,000 

$87,279,658 

$4,269,960 

4.89% 

Upper guartile 

afacturers 

51 

$22,000,000 

$6,782,321 

$263,639 

3.90% 

afacturers 

3.025 

$1,775,820,000 

$628,866,622 

$36,751,772 

5.85% 

Maximum 

29.437 

$49,665,534 

$15,537,041 

$650,737 

5.19% 

67.300 

$62,359,000,000 

$68,509,097,988 

$4,969,802,318 

7.86% 

Average 

154 

$14,707,894 

$4,535,224 

$178,354 

3.54% 

4.315 

$2,653,133,848 

$1,688,061,563 

$116,891,852 

5.16% 

Page 20 

January 31,1994 * " 
P.25 

Section 3: Characterization of Manufacturers in the Regulated Industry 

EXHIBIT 5 

Profiles of Fuel Manufacturers 

SBA Definition 

Summary Statistics 

Small 

Large 

TOTAL 

Number 

381 

257 

638 

Percent 

60% 

40% 

100% 

Minimum 

Lower 

guartile Median 

Upper 

guartile Maximum Average 

Small Fuel Manufacturers 

Employees 

Sales 

Assets 

Net Income 

ROA 

0 

$49,000 

$13,164 

$292 

2.22% 

7 

$2,300,000 

$672,490 

$21,231 

3.17% 

18 

$8,995,332 

$2,710,226 

$97,001 

3.58% 

45 

$27,256,597 

$8,478,544 

$349,400 

4.00% 

1.300 

$5,500,000,000 

$1,908,317,657 

$123,243,504 

6.46% 

50 

$64,794,328 

$21,395,295 

$1,141,177 

3.62% 

Large Fuel Manufacturers 

Employees 

Sales 

Assets 

Net Income 

ROA 

0 

$200,000 

$55,418 

$1,397 

2.52% 

80 

$18,618,750 

$5,700,191 

$218,135 

3.83% 

203 

$49,000,000 

$15,324,291 

$641,030 

4.18% 

1.000 

$451,834,000 

$148,384,468 

$7,614,590 

5.13% 

67.300 

$62,359,000,000 

$68,509,097,988 

$4,969,802,318 

7.55% 

3.098 

$1,710,114,270 

$1,108,578,749 

$77,021,619 

4.52% 

January31,1994 •*• 

Page 21 
P.26 

Section 4 

Impact on Small Fuel and 

Fuel Additive Manufacturers 

In determining the extent to which small businesses are more heavily 

impacted by the F/FA Registration Program, ICF examined the 

compliance costs for manufacturers of fuel and additive products. In 

our assessment, we examined compliance cost relative to sales, thus 

enabling us to illustrate the relative impacts of the registration program 

on small and large manufacturers. We also estimated the expected effect 

of compliance costs on return on assets (ROA), to depict the effect of the 

registration program on the financial health of fuel and additive 

manufacturers. 

Summarizing Expected Costs of the Proposed 

Regulation 

Industry costs of complying with the F/FA Registration Program are 

estimated to total $72,365,643. Program and manufacturer costs are 

driven by the relatively high cost of testing atypical products. Only 12 

percent of F/FA products are atypical; these products, however, account 

for 87 percent ($62,975,072) of total program costs. The median 

compliance cost is $115,400 for atypical additive products and $68,877 

for atypical fuel products. The median compliance cost for products 

other than atypicals (i.e., baseline and non-baseline) is $400. 

Exhibit 6 summarizes compliance costs per manufacturer and compares 

compliance costs for large and small companies. Estimated costs per 

manufacturer range from just $400 to over $4.2 million. The median 

small company compliance cost is $500 and the median large company 

compliance cost varies from $887 to $18,316, depending on whether the 

F/FA program or SBA definitions are used or if the company is a fuel or 

additive manufacturer. Sixty-four percent of all companies (693 of 

1,076) have compliance costs lower than $1,000. Approximately one 

percent of all companies (11 of 1,076) have compliance costs higher than 

$1,000,000. 

January 31,1994 

Page 23 
P.27 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

EXHIBIT 6 

Summary of Compliance Costs per Manufacturer 

Type of 

Manufacturer 

Minimum 

Additive Manufacturers 

F/FA Program Definition 

Small 

Large 

SBA Definition 

Small 

Large 

Total 

$400 

$400 

$400 

$400 

$400 

Fuel Manufacturers 

F/FA Program Definition 

Small 

Large 

SBA Definition 

Small 

Large 

Total 

$400 

$400 

$400 

$400 

$400 

Median 

$500 

$4,804 

$500 

$4,804 

$887 

$500 

$18,316 

$500 

$887 

$500 

Maximum 

$1,304,618 

$4,214,056 

$1,304,618 

$4,214,056 

$4,214,056 

$657,900 

$2,292,257 

$938,024 

$2,292,257 

$2,292,257 

% with 

costs > 

$10,000 

25% 

43% 

25% 

43% 

31% 

5% 

56% 

11% 

31% 

19% 

Comparing the Ratio of Compliance Cost to Sales for 

Small and Large Companies 

The first method used to determine if small business are 

disproportionately impacted by the F/FA Registration Program was to 

compare the ratio of compliance cost to sales for small and large 

businesses to see if this ratio was at least ten percent higher for small 

companies. Since testing requirements will impose one-time costs that 

will be incurred over a three-year period, the compliance cost used for 

the analysis presented in Exhibit 7 is the total compliance cost divided 

Page 24 

January 31,1994 * * * 
P.28 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

by three. (If the total compliance cost was used instead of the average 

over three years, the impacts would be greater than shown here.) 

For additive manufacturers, the ratio of compliance cost to sales for 

small companies are substantially higher than for large companies. The 

figures in Exhibit 7 indicate the extent to which the (compliance cost to 

sales) ratio for small companies is greater than for large companies. 

3 A high "Small/Large" ratio in the table indicates that the small 

company is affected significantly more than the comparable 

large company. 

• A figure of" 1" indicates an impact of compliance cost to sales 

that is relatively the same for small and large companies 

(figures in the table have been rounded). 

• As large companies experience a greater burden of compliance 

cost to sales, the figures in the table would be less than "1", 

and would in fact approach "0" (although the zero figure in the 

table is due to an outlier in the data, which occurs because 

one company with high sales is classified as small by SBA's 

definition). 

• The minimum/maximum values in the table illustrate the 

extent to which the most lightly/heavily impacted small 

company compares to the most lightly/heavily impacted large 

company. 

The typical small additive company's ratio of compliance cost to sales is 

about 17 to 32 times greater than for a typical large manufacturer (using 

SBA's and the F/FA program's definitions, respectively). Although 95 

percent of the small additive companies (according to the F/FA 

program's definition) are more heavily impacted than the typical large 

additive company, large company statistics tend to be quite varied, and 

thus quartiles might not accurately reflect the distribution very well. 

Along the same lines, the lower quartile (i.e., small and large companies 

with low compliance to sales ratios) shows that small companies are not 

as heavily affected. 

January 31,1994 

Page 25 
P.29 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

EXHIBIT 7 

Comparison of Small and Large Company 

Compliance Cost to Sales Ratios* 

Minimum 

Additive Manufacturers 

F/FA Program 

Definition 

Small 

Large 

Small/Large 

SBA Definition 

Small 

Large 

Small/Large 

0.000272% 

0.000001% 

272 

0.000041% 

0.000001% 

41 

Fuel Manufacturers 

F/FA Program 

Definition 

Small 

Large 

Small/Large 

SBA Definition 

Small 

Large 

Small /Large 

0.000268% 

0.000001% 

256 

0.000045% 

0.000000% 

211 

Lower 

guartile 

0.001572% 

0.000089% 

18 

0.001481% 

0.000089% 

17 

0.000755% 

0.000697% 

1 

0.001032% 

0.000150% 

7 

Median 

0.012209% 

0.000384% 

32 

0.010136% 

0.000599% 

17 

0.001773% 

0.003136% 

1 

0.002457% 

0.000557% 

4 

Upper 

guartile 

0.128205% 

0.003347% 

38 

0.104747% 

0.003851% 

27 

0.006667% 

0.006388% 

1 

0.009948% 

0.018028% 

1 

Maximum 

129.515152% 

0.258927% 

500 

129.515152% 

3.565000% 

36 

84.346154% 

0.283498% 

298 

25.655556% 

367.861167% 

0** 

* Three-year average compliance cost to sales: all figures in table are rounded. 

" The maximum 3-year average compliance cost to sales for large companies was 14 

times larger than the maximum 3-year average compliance cost to sales for small 

companies. 

As shown in the table (Exhibit 7), the typical small fuel manufacturer 

experiences impacts similar to large fuel manufacturers. Entries in the 

table of "1" indicate that relative to sales, small companies face 

compliance costs that are the same as large companies. In fact, at least 

75 percent of the fuel manufacturers have a 1:1 ratio. According to the 

F/FA program's definition of small and large companies, only 33 percent 

Page 26 

January 31,1994 " ' 
P.30 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

of small companies have a compliance cost to sales ratio at least ten 

percent higher than the corresponding ratio for the median large 

companies. 

It is important to note that the compliance cost to sales ratios are verysmall for this regulation; as a result, a ten percent difference between 

small and large company ratios has little statistical significance. In 

addition, the fact that compliance costs have relatively greater effects on 

small additive manufacturers — while not unimportant in evaluating 

impacts on small manufacturers — is probably not of great concern 

unless the actual magnitude of the impacts on a particular company is 

significant. A company may pay a relatively high compliance cost 

compared with another firm in the industry (e.g., $1,000 versus $400) 

without having much impact on its financial health. In this case, a 

comparison of the magnitude of changes in ROA, discussed in the next 

section, is a more direct indicator of the impacts of compliance costs on 

firms. 

Analyzing the Change in ROA 

The second method by which impacts were estimated was by analyzing 

the change in a company's ROA directly attributable to the F/FA 

Registration Program. As shown in Exhibit 8, compliance costs of the 

F/FA Registration Program are expected to cause 48 (16 percent of 

small) additive manufacturers and 25 (5 percent of small) fuel 

manufacturers to go into some level of financial distress. (Companies 

that produce both fuels and additives are listed under both fuel and 

additive headings in Exhibit 8). All of the seventy-three companies are 

classified as small by the F/FA program's definition and all but eight are 

classified as small by SBA definitions. 

January 31,1994 

Page 27 
P.31 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

EXHIBIT 8 

Estimated Impacts on ROA 

Type of 

Manufacturer 

"Financial Digress" 

(-4%-<ROA<2.5%) 

Additive Manufacturers 

F/FA Program 

Definition 

Small 

Large 

SBA Definition 

Small 

Large 

23 

0 

20 

3 

Fuel Manufacturers 

P/FA Program 

Definition 

Small 

Large 

SBA Definition 

Small 

Large 

26 

0 

22 

4 

"Severe Financial 

Distress" 

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

13 

0 

12 

1 

3 

0 

3 

0 

"Closure" 

(ROA<-30%) 

12 

0 

12 

0 

4 

0 

4 

0 

Number of companies 

pushed into some 

degree of distress 

48 

0 

44 

4 

25* 

0 

21* 

4 

* Eight fuel manufacturers had an ROA of less than 2.5% before compliance costs 

were incorporated, and are thus not included in the number of companies pushed into 

financial distress. 

Examining Profiles of Manufacturers Pushed into 

Closure 

Fourteen small manufacturers (ten additive, two fuel, and two that 

produce both) are predicted to go out of business because of compliance 

costs of the F/FA Registration Program. Examination of companies 

expected to go out of business reveals the following (see Exhibit 9): 

• All of the companies pushed into closure were financially 

healthy (i.e., had ROAs greater than 2.5%) prior to the analysis 

of compliance cost impacts. The average ROA of the fourteen 

companies was 4.24%. 

Page 28 

January31,1994 *** 
P.32 

i 11 » Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

G All of the companies pushed into closure are classified as 

small by both F/FA program and SBA definitions. They 

generally have fewer than five employees and sales less than 

$500,000. 

• On average the fourteen companies manufacture 4.5 products 

— 2.5 "baseline" products and 2 "atypical" products.6 More 

than-half of the companies produce three or fewer products. 

All of these compames produce atypical products. 

• For about half of the companies pushed into closure, 

compliance costs are greater than annual sales. The average 

compliance cost of $369,731 is slightly less than the average 

annual sales of $395,970. 

• For companies pushed out of business, the average ROA after 

compliance cost is predicted to be approximately -172 percent. 

The fourteen companies predicted to go out of business because of 

compliance costs are not typical of small fuel and additive 

manufacturers. 

• In comparison to small fuel and additive manufacturers, the 

average company pushed into closure is in the lower quartile 

of both the number of employees and annual sales. In other 

words, the average company pushed out of business has fewer 

employees and lower annual sales than 75% of the small fuel 

and additive manufacturers. 

• The average ROA of companies pushed into closure is less 

than 75% of all of the manufacturers of small additive 

products, but greater than 75% of all of the manufacturers of 

small fuel products. 

In examining the product mix of the companies pushed out of business, 

six companies produce only atypical products, three companies produce 

more atypical than baseline products, and five companies produce fewer 

atypical than baseline products. The adjusted ROA is correlated with 

the relative number of atypical products: companies with only atypical 

products have the lowest adjusted ROA (i.e., most likely to close) and 

Baseline products contain only the elements carbon, hydrogen, 

oxygen, nitrogen, and sulfur. Atypical products contain elements 

other than carbon, hydrogen, oxygen, nitrogen, and sulfur. 

January 31,1994 

Page 29 
P.33 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

compames with the fewest atypical products have the highest adjusted 

ROA. This relationship is expected because of assumption included in 

developing compliance costs. When small manufacturers (i.e., those 

with sales of less than $50 million) produce baseline products, they are 

exempt from testing costs and as a result, the compliance costs are 

minimal. On the other hand, compliance costs for small manufacturers 

include testing of atypical products. 

For companies that produce baseline and atypical products, a potential 

compliance strategy would be to stop producing atypical products and to 

manufacture and sell only baseline products, reducing compliance costs 

significantly and allowing the company to remain in business. The 

effectiveness of this strategy would be determined by the relative 

importance of atypical product sales. 

For companies that produce only atypical products, the unique chemical 

characteristics of these products might allow price increases to cover the 

increased compliance costs. Alternatively, the companies might be able 

to spread the compliance costs over more than three years. However, it 

seems possible that small companies with low sales that produce only 

(or primarily) atypical products will be pushed out of business. 

Page 30 

January 31,1994 
P.34 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

EXHIBIT 9 

Summary Profile of Manufacturers Pushed into Closure 

Manufacturer's Product 

Mix* 

Total 

1 

1 

6 

1 

4 

4 

1 

3 

3 

7 

18 

3 

8 

3 

Atypical Baseline 

1 0 

1 0 

4 2 

1 0 

4 0 

4 0 

1 0 

2 1 

2 1 

2 5 

3 15 

1 2 

1 7 

1 2 

AVERAGE 

4.5 2 2.5 

# of 

Employees 

6 

1 

4 

4 

4 

3 

2 

4 

4 

0 

4 

2 

4 

200 

3 

Annual 

Sales 

$110,000 

$166,096 

$260,000 

$240,000 

$310,000 

$340,000 

$85,000 

$430,000 

$300,000 

$340,000 

$410,000 

$280,000 

$972,488 

1,300.000 

$395,970 

Compliance 

Cost 

$427,400 

$427,400 

$657,900 

$427,400 

$542,699 

$542,700. 

$115,400 

$427,600. 

$230,900 

$231,000 

$232,400 

$115,600 

$428,100 

$427,600 

$369,731 

ROA 

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% 

Adjusted 

ROA 

-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% 

* The first column indicates total number of products, the second column is number 

of atypical products, and the third column is number of baseline products. 

Assessing the Effectiveness of Small Business 

Provisions 

A comparison of impacts was made based on compliance costs 

calculated with and without special provisions provided for atypical 

product manufacturers with sales of less than $10 million. Results 

show that the special provisions for manufacturers of atypical products 

saved 60 companies a total of $27,487,300. On average, the provisions 

January 31,1994 * * * 

Page 31 
P.35 

Section 4: Impact on Small Fuel and Fuel Additive Manufacturers 

reduced compliance costs per company by nearly 65 percent. In the 

absence of the provisions, analysis of the change in ROA due to the 

compliance cost indicates that almost ninety companies would have been 

pushed into some level of financial distress — 27 companies would have 

gone out of business, 21 companies would have been in severe financial 

distress, and 40 companies would have been in financial distress. These 

companies include all 60 manufacturers covered by the small business 

provisions as well as others. Thus, the F/FA program provision for small 

atypical manufacturers prevents 15 companies from being pushed into 

financial distress. 

Page 32 

January 31,1994 
P.36 

Section 5 

Possible Responses to the 

Impacts of the Regulation 

Companies projected to experience impacts from the compliance costs 

will not necessarily be left with the reductions in their rates of return 

indicated by this analysis. Instead, they will have open to them a 

number of courses of action that could reduce the impacts of the 

regulations. Two likely responses, price increases and reductions in the 

number of products, are discussed below. These actions, however, will 

have secondary effects of their own. 

Assessing the Effects of Price Increases 

The analysis presented above estimates impacts on returns assuming no 

changes in prices or sales. In many cases, however, regulatory costs can 

be passed on to consumers, or back to suppliers. The scope of this 

analysis precluded any attempt to make detailed predictions of the price 

changes that could result. Several general observations, however, can be 

made. First, the compliance costs represent an increase in the fixed 

costs of producing the products, rather than the variable costs. The 

distinction lies in the fact that if a firm increases its output of a given 

product, its total compliance costs do not increase; in fact, the 

compliance costs per product unit drop somewhat with every additional 

unit sold, as the fixed compliance costs are spread over more units. This 

means that competing additive manufacturers will have an incentive to 

keep sales of their products high to help pay for their testing costs. This 

pressure to sell could make it less likely that price increases will stick, 

as attempts to raise prices by one firm are undercut by others seeking 

greater market share, unless or until some competing producers 

withdraw from the market. 

In addition, a requirement that any new manufacturers entering the 

market compensate the existing manufacturers confers a certain degree 

of protection on the existing manufacturers. To the extent that they had 

been keeping their prices low as a strategy to discourage competition, 

the potential for imposing testing costs on new competitors might allow 

January 31,1994 

Page 33 
P.37 

* 

Section 5: Possible Responses to the Impacts of the Regulation 

existing firms to raise prices somewhat without fear that this increase 

will result in increased competition. In other words, prices might be 

raised to help cover compliance costs because any potential new 

competitors would face similar costs. Any price increases would, of 

course, impose part of the costs of the regulations on consumers, and 

could be expected to reduce sales to a certain extent. 

Finally, to the extent that a product has unusual characteristics, its 

manufacturer may have considerable freedom in setting its price, and 

might have more success in covering its compliance costs. This is an 

important consideration, given that many of the largest compliance costs 

are faced by firms that are paying a substantial percentage of the total 

testing costs of that testing group. This may suggest that their products 

have few close substitutes. Thus, their unusual qualities may be able to 

support a price increase that offsets the impact of the testing costs — 

especially given that, as noted above, any potential new competitors will 

face high compliance costs as well. 

Assessing the Effects of Reductions in the Number of 

Products 

Another response open to producers facing substantial testing costs is to 

drop the product or products with the greatest costs and smallest profit 

potential. This response is likely to have some residual impacts on 

profitability. This residual impact, however, is likely to be relatively 

small as the firm is dropping a product with high costs and small 

sales/profit potential. Ultimately this response would reduce the 

number of competing products and make it easier for remaining firms to 

increase prices. 

Reductions in new products can be expected to occur as well; innovation 

that creates product diversity may be discouraged to an unknown extent 

since every new product will require the payment of testing costs. 

Furthermore, the more unusual the new product is, the greater its 

compliance cost is likely to be. Again, this increases the ability of 

existing manufacturers to raise prices enough to cover their costs, but 

may result in less product diversity. 

Page 34 

January 31,1994 
P.38 

Section 6 

Conclusions 

This small business impact analysis shows that the F/FA Registration 

Program will not have significant financial impacts on the majority of 

small and large companies in the regulated community. Sixty-four 

percent of all companies have total compliance costs lower than $1,000. 

Moreover, small business provisions for manufacturers of atypical 

products are expected to save affected companies roughly $27 million. 

This analysis, however, indicates that small businesses, particularly 

small additive manufacturers, are disproportionately impacted by the 

program. The ratio of compliance cost to sales is at least ten percent 

greater for the majority of small additive companies when compared to 

large additive companies. For fuel companies, only 33% of small 

companies have compliance cost to sales ratios at least ten percent 

higher than the corresponding ratio for the median large companies. 

Analysis of the impact on ROA indicates that compliance costs are 

expected to push approximately 73 small companies (48 additive and 25 

fuel) into some level of financial distress. Special provisions for small 

atypical manufacturers prevent 15 additional companies from being 

pushed into some level of financial distress. 

Companies pushed into some level of financial distress — whether small 

or large — manufacture atypical products. Approximately 87 percent of 

total program costs are due to testing atypical products. Small additive 

manufacturers are more heavily impacted relative to small fuel 

manufacturers because they are more likely to produce atypical 

products. Therefore, one might conclude that it is their product mix 

rather than their size that causes small additive manufacturers to be 

disproportionately impacted. However, this conclusion does not hold if 

one compares small and large additive manufacturers: this analysis 

shows that large additive manufacturers are better able to support 

testing of multiple atypical products than small additive manufacturers 

are of testing a single atypical product. 

January 31,1994 

Page 35 
P.39 

Section 6: Conclusions 

This analysis also supports the adoption of the F/FA program's 

definitions of small for F/FA manufacturers. The F/FA program's 

definitions, especially for fuel manufacturers, appear to better capture 

the point at which entities are adversely affected simply because of their 

size. However, we note that this may reflect the fact that the F/FA 

program's definitions were used to place manufacturers into product 

groups of small or large companies, thereby determining what their 

compliance costs would be. It is beyond the scope of this analysis to 

determine what the total compliance costs of the F/FA Registration 

Program would be, or what the impacts would be on regulated 

companies, if product groupings were based on SBA definitions. 

Page 36 

January 31,1994 
P.40 

Section 6: Conclusions 

APPENDK A 

Equations to Estimate Assets and Net Income 

Equations to Estimate Assets and 

Net Income for Fuel Manufacturers 

Equations to Estimate Assets and 

Net Income for Additive Manufacturers 

Log(Net Income/kx) = a + bfLogfSales/k^) 

Iwliere k,=1.000 and k2=1.000.000) 

LogfNet Income/kj) = a + bfLogfSales/k^)) 

(where k,=1.000 and k2=1.000.000) 

Regression Output: 

Constant 

Std Err of Y Est 

R Squared 

No. of Observations 

Degrees of Freedom 

X CoefTicient(s) 

Std Err of Coef. 

t = 33.932 

0.924 

0.330 

0.888 

147 

145 

1.114 

0.033 

Regression Output: 

Constant 

Std Err of Y Est 

R Squared 

No. of Observations 

Degrees of Freedom 

X Coefflcient(s) 

Std Err of Coef. 

t = 48.583 

1.187 

0.258 

0.961 

97 

95 

1.149 

0.024 

LogfAssets/kj) = a + bfLogfSales/k^)* 

(where k,=1.000.000 and k2=l..000.000) 

LogfAssets/kj) = a + bfLogfSales/kg)) 

Mienp k,=1.000.000 and k2=1.000.000) 

Regression Output: 

Constant 

Std Err of Y Est 

R Squared 

No. of Observations 

Degrees of Freedom 

X Coefficient(s) 

Std Err of Coef. 

t = 48.397 

-0.542 

0.220 

0.937 

159 

157 

1.022 

0.021 

Regression Output: 

Constant 

Std Err of Y Est 

R Squared 

No. of Observations 

Degrees of Freedom 

X Coefficlent(s) 

Std Err of Coef. 

t = 77.814 

-0.477 

0.161 

0.984 

103 

101 

1.108 

0.014 

* Outlier was excluded 

January 31,1994 * * * 

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