Economic Impact Analysis of Regulatory Controls in the Dry Cleaning Industry


United States
Environmental Protection
Agency
Office of Air Quality
Planning and Standards
Research Triangle Park, NC 27711
EPA 450/3-91-0215
September 1993
Air
Economic Impact Analysis of
Regulatory Controls in the
Dry Cleaning Industry

Final

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                               RTI Project Number 5428-33 DR
Economic Analysis of Air Pollution
Regulations:  Dry Cleaning Industry
                Emission Standards Division
              U.S. Environmental Protection Agency
               Office of Air and Radiation
            Office of Air Quality Planning and Standards
            Research Triangle Park, North Carolina 27711
                 September 1993

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                            (Disclaimer)
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                       5,35

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                             CONTENTS
Section
                                                              Page


  1   Introduction	*	


      1.1   Requirements and Impacts of the  Proposed
            Standards	               , _2


      1.2   Requirements of the Final Standards	.1-5


      1.3   Impacts  of the Final Standards. ,	  j__8

            1.3.1  Economic Impacts 	       30

            1.3.2  Financial Impacts	    2.-9



  2    Owners-'  Responses to the Final Standards	2-1


      2.1  Control Costs	            2-i


      2.2  Owners' Responses to  Control  Requirements	2-1


      2 .3  Annualized Control Costs	         2 -11



  3    Economic  Impacts	


      3 .1  Market Structure	               3_,

            3.1.1  Market  Structure in  the Commercial
                  Sector,	               -,_1

            3.1.2  Market  Structure- in- the-Industrial
                  Sector	             3 _7


     3.2   Affected Population	             3_7


     3 .3   Market, Adjustments	           3 _9  •

           3.3.1.  Price- and: Oucput. Adjustments-	j _o

           3 ..3 .2  Welfare- Impacts,	                      7 n
                                      *••-*,.,,....	O~"X.J

           3.3.3  Plant Closures	3_15  •

           3 .3 .-4.  Employment:. Effects	       *        i_i --
                                           ..  * .. . * •-• * . . »  . 4 . f f _ O"~-LO

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                       CONTENTS (cont inued)
Section
                                                              Page
      Financial Impacts	„	....4-1
      4.1   Financial Characteristics	4-2
            4.1.1  Distribution of Potentially Affected
                   Firms	4-2
            4.1.2  Baseline Financial Ratios	.4-4
      4.2   Ownership Adjustments	4-5
            4.2.1  Ratio Analysis 	4-8
            4.2.2  Changes In Ownership 	 	 4-8
      References
                                                              .R-l

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                             FIGURES
Figure
                                                             Page
 3-1   Price and Output Adjustments Due to Increased Costs
       of Production:  Urban/Suburban Markets	3-10

 3-2   Price and Output Adjustments Due to Increased Costs
       of Production:  Rural Markets	  2-12

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                              TABLES
Table


 1-1



 1-2


 1-3

 2-1



 2-2



 2-3


 2-4


 2-5




 2-6




 2-7




 2-8




 3-1


 3-2


 3-3
                                                       Page
 Control Technology Requirements Under the Proposed
 Standards By Industry Sector and Machine Type	1-3

 Economic Impacts of Proposed NESHAE	1-4

 Requirements of the Final  Standards	1-7

 Capital Costs of Control:   Vent Controls and Room
 Enclosures ($/facility/yr)	2-2


 Annual  Operating Costs  of Control:  Vent Controls
 and  Room Enclosures	.-	2-3


 Recordkeeping Costs for RC-Controlled Facilities	2-4

 Recordkeeping Costs for CA-Controlled Facilities	2-5

 Response Options  for Dry Cleaners Subject to
 Requirements  Beyond Recordkeeping Under  the  Final
 Standards	2-7


 Annualized Compliance Costs  Per Facility Due to  the
 Final Standards:  No Baseline Vent  Controls
 ($/facility/yr)	2-13


 Ann-  lized Compliance Cos 3  Per. Facilitv Due to  rhe
 Fini_ Standards :  RC Base^ne- Ventr Controls
 ($/facility/yr)	2-14


Annualized Compliance Costs  Per Facility Due to  the
Final Standards:  CA Baseline Vent  Controls
 ($/facility/yr)	2-15


 Profile-of Model Markers' in.  the--Commercial Sector. . . .' . .3-6

Number of  Facilities Affected by the Standards	3-8

Share of. Facilities'. Affected, by  the- Requirements  of
the Standards	            2-8
                            VI.

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                        TABLES- (continued)
Table



 3-4



 3-5


 4-1



 4-2


 4-3
Projected Price and Output Adjustments Due  to  the
Standards	
                                                      Page
                                                      .1-13'
Projected Welfare Impacts Due to the Standards ........ 3-14


With-Regulation Financial Statements by Baseline
Financial Condition.                                     _
Projected Financial Ratios with Regulation ............. 4-9


Potential Changes in Ownership Due to the Standards. . .4-11
                            VI1,

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                              SECTION 1
                            INTRODUCTION

      Under the Clean. Air Ace of 1990, the U.S. Environmental
 Protection Agency (EPA)  is required to propose and promulgate
 National  Emission Standards for Hazardous Air Pollutants  (NESHAP }
 In keeping with this requirement,  the EPA proposed a standard to
 control perchloroethylene (PCE)  air emissions from dry cleaning
 facilities on  December 9,  1991.  The purpose of this analysis is
 to evaluate the impacts  of the  final NESHAP for promulgation
 (referred  to as final standards  or standards in the balance of
 this report) .

     The  economic  and financial  impacts of the regulatory
alternatives considered  for proposal  were  estimated in the
Economic Impart Analysis of Rgmilaf.flrv CQnr.         '
Cleaning
                                              )"[.
                    (EPA, 1991) .  A copy of  the  1991  report appears
 in Appendix A of this report.  This report  follows  the same
 methodology and assumptions included in EPA's  1991  report.
     Public comments in response to the
                                                  NESHAP raised
 several issues, including concerns about possible air and water
 quality impacts, associated, with carbon adsorber  (CA) control
 devices and about the use of additional controls designed to
 reduce fugitive emissions from transfer machines.  The final
 scandards: evaluated:: in dhis-. report:, reflect:- EPA's response to these
 issues.  Furthermore,  the impacts reported in this analysis
'include recordkeeping costs,  which were not included in the
 impacts reported in Appendix A.

      The- standards- .outlined., in, this:, analysis- will, pocancially
 affect- dry  cleaners  in two  industry sectors:   commercial dry"
 cleaners  (SIC; 7216)  and: industrial dry cleaners (SIC 7218).   Coin-
 operated, facilities  (SIC," 7215) are not included in. this, analvsis
 because- no  facilities, in,, this, sector  are,- projected  to- incur
 impacts.  Commercial  facilities are the most prevalent  type  of  dry
 cleaners and are generally located in shopping centers  and near
                                i-r

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 densely populated areas.  Industrial plants usually rent uniforms
 and other items to their industrial or commercial users and are
 generally larger than commercial and coin-operated facilities.
 Appendix A contains a profile of the affected industry sectors.

      This section provides an overview of the proposed standards,
 a description of the requirements of the final standards,  and a
 summary of the impacts of the final standards.  Section 2  contains
 the estimated costs of the control requirements and describes the
 methods used to project owners'  responses to these control costs.
 Sections 3 and 4 describe the methods used to compute economic and
 financial impacts of the standards;  these sections also report the
 results of the analysis.

'1.1  REQUIREMENTS AND IMPACTS OF THE PROPOSED STANDARDS
      Under the proposed standards all existing facilities  with
 greater than $100,000 in annual  receipts are required to install
 vent  controls  to limit PCE emissions.   Control equipment
 requirements under the proposed.standards vary with the industry
 sector  and machine technology.   These control requirements  are
 shown in Table 1-1.   (See Appendix A for a description of  the
 machine technologies  identified  in Table 1-1.)

      The projected price  and  output  adjustments, welfare impacts,
 and plant  closures  due- to-the proposed standards are  shown- in.
 Table 1-2.   The  methods and assumptions  used to compute these
 impacts  are  described in  Appendix A.   The price and output
 adjustments  are  short-run effects.   Almost  all new dry cleaning
machines  are equipped with built-in  vent  controls  that  satisfy the
 requirements, of- the- proposed  standards.   The  current  scock- of,
uncontrolled machines  would have  been, replaced with" controlled
machines even  in  the  baseline.  Consequently,  long-run  price and
output adjustments are zero.

      The producer and consumer welfare costs reported  in Table 1-2
are projected  for the  first year of the- regulation.  Fewer  losses
will be  incurred in 14 subsequent: years as- a result of  replacing

                               1-2

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  TABLE 1-1.  CONTROL  TECHNOLOGY REQUIREMENTS UNDER THE PROPOSED
             STANDARDS  BY INDUSTRY SECTOR AND MACHINE TYPE
       Industry Sector and
           Machine Type
 Commereig],
    Dry-to-Dry
    Transfer (uncontrolled)
    Transfer (RC controlled)
 Industrial
    Dry-to-Dry
    Transfer
  Control Technology Requirement
CA or Refrigerated  Condenser (RC)
                CA
 No  additional control required
 Source: U.S. Environmental Protection Agency.  1991.' Economic Tm»,
                                                      _  -   . .  .  f* 3.112. 1
                 io        'S- Environmental  Protection Agency, Office
        of Air Quality Planning and Standards, EPA  450/3-91-02l!

 existing uncontrolled machines with controlled machines,  even at
 baseline.  Fifteen years after the regulation takes  effect,
 producer and consumer welfare costs are zero, assuming that the
 current stock of uncontrolled machines is replaced with  controlled
 machines in the baseline over this time period.  The plant  closure
 projections assume- chat the short-run- industry output reductions-
 are  achieved by closing the smallest affected facilities.

      The estimated regulatory costs of the proposed  standards
 result  in short-run price and output adjustments that are
 relatively- small; (less:. Chan', one, percent: in: absolute, value) .  The.
 estimated loss  in  consumer welfare-is  $6.7 million, for che^
 commercial,  sector.   Producers in  the commercial sector lose an
 estimated $4.8 million  in welfare.   Note that chese welfare losses
only consider the  costs  of  controlling  emissions.   The benefits
associated with changes  in  environmental quality  are  not  included
                                1-3

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 in the estimates of welfare impacts.  Under the proposed
 standards, 28 plant closures are projected for the commercial
 sector.

      The output reduction shown in Table 1-2 was used to project
•worker displacements resulting from the proposed standards.  The
 projected worker displacements assume that layoffs are
 proportional to the short-run industry output reductions.  Under
 the proposed standards,  it is projected that 354 workers will be
 displaced.  The projected worker displacement costs are based on
 the projected displacements and are one-time (nonrecurring) costs.
 Under the proposed standards,  projected worker displacement costs
 total $10.2  million..  Implicit in the estimated displacement costs
 is  the assumption that this baseline-, output reduction--and the
 corresponding reduction  in employment--would have been accounted
 for through  attrition  rather than through worker dislocation.   in
.other words,  the, present value of foregone future displacement is
 assumed to be zero.

      In addition to the  economic impacts,  EPA estimated  financial
 impacts due.to the  proposed standards  under two  financial
 scenarios:   Financial  Scenario  I, which  assumes  a positive
 relationship  between firm size  and baseline firm  financial
 condition  and Financial  Scenario  II, which  assumes that  the number
of-  firms, in. below-average,  average, and  above-average baseline
 financial  condition is proportionately distributed across firms  of
all sizes.  The  firm financial  analysis  used the costs estimated
for the economic impact  analysis to project changes in the
financial viability of affected dry cleaning firms.  Under
Financial. Scenario: I,, no: changes, in. ownership, are- projected.
Under Financial Scenario  II, 669 changes in, ownership are
projected because of capital availability constraints.

1.2   REQUIREMENTS OF- THE  FINAL STANDARDS'
     Three categories of  requirements contained in the final
standards were evaluated for this analysis:  vent control
                                1-5

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 requirements, room enclosure requirements, and recordkeeping
 requirements.  The control requirements vary by industry sector,
 type of dry cleaning machine, level of output, baseline vent
 control device,  and designation as a major or area source.  Major
 sources include facilities emitting 10 or more tons of PCE per
 year;  area sources include facilities emitting less than 10 tons
 of PCE per year.   For this analysis,  it was assumed that major
 sources include all industrial facilities and commercial
 facilities with greater than $100,000 in annual receipts that
 operate uncontrolled transfer machines.

      Table 1-3 contains the control technology requirements for
 dry cleaning machines under the final standards.  'All dry-to-dry
 and transfer machines at facilities with output levels
 corresponding to  more than $75,000 in annual receipts are subject
 to vent control and recordkeeping  requirements.   The vent control
 requirements specify that  uncontrolled facilities install RCs.
 Facilities above  $75,000 that use  CA  control devices in the
 baseline are nof required  to  purchase and install RC control
 devices until their CA requires  replacement.

     Room  enclosure requirements apply only to major sources  that
 use  transfer machines  or reclaimers (dryer used in combination
 with a  transfer washer or  dry-to-dry  machine).  In this analysis,
 it was  assumed that  room enclosures are raouired  for  all
 industrial  dry cleaners  wic.i  transfer  machines and for commercial
 facilities  over $100,000 in receipts operating transfer machines
without baseline control devices.  Room enclosure  requirements
 include a small CA  (approximately one-third the size of a CA used
 for process, vent-., controls) to capture- and, coneroi  fugitive
emissions from1 transfer- machines.

     The control requirements contained in Table 1-3 are  for
existing dry cleaning machines.  New dry-to-dry machines... are
subject to the same requirements (including RC vent controls and
recordkeeping) as existing dry-to-dry  machines-with one exception:
                                1-6

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 new dry-to-dry machines at major source facilities are required to

 install both RC and CA devices.   New transfer machines are

 effectively banned under the final standards through a requirement

 to  emit no emissions during clothing transfer.


 1.3   IMPACTS OF THE 'FINAL STANDARDS

      Impacts due to the final standards were projected using an

 integrated approach that combines an economic impact analysis with

 a firm  financial analysis.   The  approach was integrated by using

 inputs  from each type of analysis to compute impacts in the other.

 For  example,  financial impacts were  based on the  costs  computed in

 the  economic  analysis.   In turn,  economic impacts  were  based on

 the  costs  of  capital  computed using  data on  the financial  status
 of firms in the  industry.


 1.3.1   Economic
     The economic impacts of the standard were computed using  a
methodological and empirical approach based on the principles  of

applied microeconomics.  Economic impacts were quantified through
estimating market adjustments of price and output and estimating

corresponding effects on consumer and producer welfare.  The

effects of the standards on employment and plant closures were

also quantified as part of the economic impact analysis.   The key
elements of the economic analysis, are- as follows:

     • Analyzed impacts using a model plant approach that
       characterizes machine technology,  machine capacity,  and
       operating practices of typical dry cleaning machines.
       Impacts are measured at  multiple capacity utilization
       levels for each model plant.,

     • Analyzed impacts using an urban/ rural model market
       approach.   Model, markets differentiate the market  for dry
       cleaning services by number  of facilities  in the market,
       tne  share of  affected and unaffected. facilities  in the
       market,  the baseline price of dry  cleaning services,  and
     .  the  projected behavioral response  to  regulation.

     •  Computed annualized compliance costs  using engineering data
       ana  an estimated weighted average  cost  of  capital  (WACO
       for  firms  in  below-average,  average-,,  and: above -aver age
                               1-8

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        financial condition  (consistent with the  distribution of
        financial condition used in Financial. Scenario  II).
       • Estimated short-run price and output adjustments  and
        corresponding consumer and producer  welfare  impacts  using
        applied microeconomics.  (Welfare impacts  computed in this
        analysis consider only the c^s£i of  controlling emissions'
        The benefits associated with changes in environmental
        quality are not included in the estimates  of welfare
        impacts.)         .
       • Projected net plant closures based on the  assumption  that
        the entire reduction in output is accounted for by the
        smallest  affected plants leaving the industry.
       * ™;!:mated one-time worker displacements and displacement
      The price and output adjustments projected for the final
 standards are all relatively small (<2. 5' percent in absolute
 value) .   in the commercial sector the net welfare impacts are an
 estimated -$25 million.   in the  industrial sector,  a welfare gain
 of  $607,000 is projected.   The oucput reduction in the commercial
 sector results in an  estimated 259 plant  closures and -$23.4
 million  in worker displacement costs.
 1-3.2.
     As previously mentioned,  the  financial  analysis  of  affected
dry cleaning firms was based on the costs computed for the
economic analysis.  Ownership,  ixnpaccs. were: escimaced.  using
financial data on the distribution of firm financial  health.  The
changes in firm financial status and capital availability for
firms of different sizes and financial condition were estimated 'in
the financial analysis.  Key elements. of the financial analvsis
are as; follows-:.-
             ial, scenarios..
                                  °f fUndS C° firms df Different
                          condition and different output .levels .
                               1-9

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     • Evaluated profitability impacts on firms by baseline
       financial status and baseline output level.
     • Projected changes in ownership due to profitability impacts
       and capital availability constraints.

     Projected changes in ownership due to the promulgation
requirements all result from capital availability constraints.
The estimated number of projected changes in ownership ranges from
0 to 834,  depending on the financial scenario.
                              1-10

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                              SECTION 2
              OWNERS' RESPONSES TO THE FINAL STANDARDS

      Owners of affected facilities have several options for
 responding to the standards.   This section reports the estimated
 control  costs associated with the control requirements of the
 final standards,  characterizes the owners'  options for responding
 to  these requirements,  and describes the methods used to project
 the owners'  responses.

 2.1  CONTROL COSTS

      The promulgation requirements evaluated in this report
 include  vent controls,  room enclosures,. and recordkeeping
 requirements (see Table 1-3).   Affected  entities will potentially
 incur initial and recurring costs  as a result of these
 requirements.  Tables 2-1  and  2-2  report  the capital (initial)  and
 annual operating  (recurring) costs  associated with the vent
 control  requirements  and room  enclosure requirements estimated  for
 facilities with $75,000  or more in  annual receipts.   Tables 2-3
 and 2-4  report the initial and recurring recordkeeping costs  for
 facilities with RC-controlled  machines and  CA-controlled machines,
 respectively.  Costs  reported  for recordkeeping  requirements
 include  leak detection and repair costs.  Costs  reported in Tables
 2-1  through  2-4 are net  of any solvent recovery  savings  associated
 with  the controls.

 2.2   OWNERS'  RESPONSES TO  CONTROL REQUIREMENTS
      The owners of dry cleaning facilities  potentially  affected.by
 the requirements of the:-standards: may respond:,, in:, several ways.,
Owners can invest in  the required, vent controls, and  room.
enclosures, switch solvents, accelerate  the purchase of  new dry-
 to-dry machines, with built in RCs-, or cease operations,.  These.
owners must evaluate their alternatives,  assess the benefits and
costs of each, and respond in some manner.  Owners generally
respond in the way that maximizes the net-present value of the
firm...
                                2-1

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If the expected costs of operating the plant exceed the
expected revenues, the owner(s) of the plant closes it. If the
expected revenues of operating the complying plant exceed the
expected costs, it is economically viable, so the owner(s) will
likely keep the plant or sell it. Owner(s) keep the plant if they
have and/or can borrow the funds required for the capital
investment. If, however, they neither have nor can borrow the
required funds, they may decide to sell the plant. Potential
changes in ownership due to capital constraints are discussed in
Section 4. The discussion that follows, however, assumes that
owner(s) continue operating the plant.