United States
         Environmental Protection
         Agency
                Office of Water
                (4303)
EPA-821-B-98-012
May 1998
&EPA
Economic Analysis Of
Proposed Effluent Limitations
Guidelines And Standards For
The Transportation Equipment
Cleaning Category

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            Economic Analysis of
Proposed Effluent Limitations Guidelines
  and Standards for the Transportation
       Equipment Cleaning Industry
           Point Source Category
                     Prepared for:
               U.S. Environmental Protection Agency
                     Office of Water
                ; Office of Science and Technology
                Engineering and Analysis Division
              Economic and Statistical Analysis Branch
                   401 M Street SW (4304)
                   Washington, DC 20460
                      Prepared by:

                 Eastern Research Group, Lie.
                    110 Hartwell Avenue
                  Lexington, MA 02173-3198
                      May 1998

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"     if

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                                      CONTENTS
TABLES	,.-........'........,			 vix

FIGURES ..		'.	...		....		 xiii

EXECUTIVE SUMMARY	...,.:.	ES-1

      ES.l    Introduction....'...						ES-1
      ES.2    Industry Profile			ES-1

              ES.2.1   DataSources	.				'..		....ES-1
              ES.2.2   Industry Profile	........	.....ES-2

      ES.3    Economic Impact Analysis Methodology Overview	...	ES-4

              ES.3.1   Cost Annualization Model	'..-,..'		ES-4
              ES.3.2   MarketModel	............. ES-5
              ES.3.3   Facility Closure Model	:	 ES-6
              ES.3.4   Financial Ratio Analysis		,	..ES-6
              ES.3.5   Secondary Impact Analysis	 ES-7

      ES.4    Pollution Control Options	ES-8
      ES.5    Economic Impacts						:.. .ES-12
      ES.6    Initial Regulatory Flexibility Analysis	,	.ES-15
      ES.7    Benefits Methodology...		..........	.........ES-17

              ES.7.1   Projected Water Quality Impacts  ...........		 ES-17
              ES.7.2   Pollutant Fate and Toxicity			 ES-18
              ES.7.3   Documented Environmental Impacts	ES-19

      ES.8    Environmental Assessment and Benefits Analysis	ES-19

              ES.8.1   Overview...		ES-19
              ES.8.2   Water Quality Impacts: Direct Dischargers  ..:.	,....	ES-19
              ES.8.3   Water Quality Impacts and POTW Impacts: Indirect Dischargers..,.	ES-20
              ES.8.4   Human Health Risfe and Benefits	....ES-20
              ES.8.5   Ecological Benefits .....		ES-21
              ES.8.6   Economic Productivity Benefits  .......	:		ES-21
              ES.8.7   Pollutant Fate and Toxicity	 J.			.ES-22
              ES.8.8   Documented Environmental Impacts		ES-22

      ES.9    Costs and Benefits of the TEC Industry Proposed Rule  ................	...ES-23
      ES.10   Unfunded Mandates Reform Act	.,	,	 .ES-23
      ES.ll   References,	;	'.	ES-24

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CHAPTER 1   INTRODUCTION
                                 CONTENTS (continued)

                                         "        ,      '   ••    f      •   " •      •  Page
1-1
       1.1     Scope and Purpose			1-1
       1.2     R*P°rt Organization	1-3
       1.3     References	1-4
CHAPTER!   INDUSTRY PROFILE	.2-1

       2.1     Overview...	"..'.	...'."........•			.	2-1
       2.2     Industry Definition for the Effluent Guideline	2-2

              2.24  Definition Process Description.	2-2
              2.2.2  Summary and Facility Count	2-7

       2.3     Dfa Sources...	2-9
       2.4     Environmental Protection Issues	 2-10
       2.5     Subcategories, Discharge Type, and Number of Cleanings	2-11

              2.5.1  Description	 2-11
              2.5.2  Discharge Type	2-14
              2.5.3  TanksCleaned	...2-14

       2.6     Facility-Level Information	2-17
       2.7     Company-Level Information	 2-28

              2.7.1  Corporate Structure	2-28
              2.7.2  Regulatory Flexibility Analysis and the Small Business
                    Regulatory Enforcement Fairness Act (SBREFA)	 2-30

       2.8     Market Price and Quantity	'.	2-33
       2.9     Industry Growth	2-37
       2.10    International Competitiveness	2-41
       2.11    References	2-42
CHAPTER 3  ECONOMIC IMPACT ANALYSIS METHODOLOGY OVERVIEW	3-1

       3.1    Cost Annualization Model	3-3

             3.1.1   Input Data Sources	3-5
             3.1.2   Financial Assumptions	3-6
             3.1.3   Sample Cost Annualization Spreadsheet	3-7
                                            11

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                                 CONTENTS (continued)
       3.2    MarketMethodology		..:....		..3-7

              3.2.1   Graphical Overview of Commercial Market Changes	 3-9
              3.2.2   Estimating Preregulatory Commercial Market Conditions	 3-10
              3.2.3   Estimating the Shift in the Supply Fimction From Compliance Costs  	3-12

       3.3    Closure Model	3-14

              3.3.1   Present Value of Future Earnings .		 3-16
              3.3.2   Facility-Specific Cost Pass-Through Factor	3-18
              3.3.3   Salvage Value .'..	, 3-19
              3.3.4   Projecting Facih'ty Closures as a Result of the Rule	3-19

       3.4    Financial Ratio Analysis	 3-22

              3.4.1   Aggregation of Facility-Level Regulatory Cost Data..			... 3-24
              3.4.2   AltmanZ"-Score		...,	3-25
              3.4.3   Evaluation of Altaian Z" Results		.....	.... 3-27

       3.5    Secondary Impacts		;			 3.2?

              3.5.1   Methodology for Estimating National
                     Employment and Output Impacts	 •.	3-28

                     3.5.1.1  Input-Output Multiplier Methodology	3-28
                     3.5.1.2  Applicationof Input-Output Methodology to the TEC Industry	3-32

              3.5.2   Estimation of Output and Employment Gains			..	.	. 3-32
              3.5.3   Regional Impacts			;..	 3-34

       3.6    References	3-34
CHAPTER4  POLLUTION CONTROL OPTIONS	 4-1

       4.1  ,   Effluent Limitations Guidelines and Standards	 4-1
       4.2     Technology Options	 4-2

              4.2.1   General Information			 4-2
              4.2.2   Option Description		.4-3
                                                      -   '    '1         ' '
       4.3     Monitoring Options	:	4-7
       4.4     References	v		.		 4-9
                                             111

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                                  CONTENTS (continued)

                                                                                      Eags

CHAPTERS  ECONOMIC IMPACTS	5-1

       5.1    Overview  	5-1
       5.2    Total and Average Compliance Costs		5-2
       5.3    Market-Level Impacts	5-5
       5.4    Facility-Level Impacts	5-9

              5.4.1  Facility Closures Analysis 	,... 5-9
   »
                     5.4.1.1 Facility Closures and Associated Impacts  	5-10
                     5.4.1.2 Sensitivity Analysis: Facility Closures and Associated Impacts	5-14

              5.4.2  Financial Ratio Analysis	5-17

                     5.4.2.1 Altaian Z" Financial Ratio Analysis	5-17
                     5.4.2.2 Sensitivity Analysis: Current Ratio and Times Interest
                            Earned Ratio	5-18

              5.4.3  Sales Test Results	5-21
              5.4.4  Sensitivity Analysis: NESHAP Compliance Costs and Barge Facilities	5-28

       5.5    Impacts to Direct Dischargers Based On Screener Survey Data	5-29

       5.6    Secondary Impacts	5-32

              5.6.1  Estimates of National Employment and Output Impacts	5-34
              5.6.2  Regional Impacts 	5-36

       5.7    New Source Performance Standards and Pretreatment Standards
              for New Sources ...,	'.	 5-37
       5.8    Summary and Observations	5-39
       5.9    Inferences			 5-41


CHAPTER 6  INITIAL REGULATORY FLEXIBILITY ANALYSIS	6-1

       6.1    Introduction	6-1
       6.2    Initial Assessment	'.			6-1
       6.3    Regulatory Flexibility Analysis Components	 6-2

              6.3.1   Need for and Objectives of the Rule.	'..... 6-3
              6.3.2  Estimated Number of Small Business Entities
                     to Which the Regulation WiU Apply	6-3
                                             IV

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                                  CONTENTS (continued)

                                                                                        Ease

                      6.3.2.1  Definition........:.	6-4
                      6.3.2.2  TEC Universe for Evaluation ..	6-4
                      6.3.2,3  Estimated Number of Small Business Entities	6-6

              6.3.3   Description of the Proposed Reporting, Recordkeeping,
                      and Other Compliance Requirements ....			6-7
              6.3.4   Identification of Relevant Federal Rules That May Duplicate,
                      Overlap, or Conflict With the Proposed Rule	6-9
              6.3.5   Significant Regulatory Alternatives	6-9

       6.4    Small Business Analysis	 6-9

              6.4.1   Sales Test	.'..	.:.;.6-9

                      6.4.1.1  Sales Test with Pre-tax Annuali/ed Costs		6-10
                      6.4.1.2  Sales Test with Post-tax AnnuaUzed Costs and
                             Cost Pass-through	,	,	.,'...	, 6-10

              6.4.2   Closures, Employment Losses, and Revenue Losses	6-17
              6.4.3   Financial Distress			 6-23
              6.4.4   Observations			 6-23

       6:5    Regulatory Flexibility Analysis			 6-25

              6.5.1   Truck Chemical Subcategory	6-26
              6.5.2   Rail Chemical Subcategory	;	 6-30
              6.5.3   Barge Chemical and Petroleum Subcategory (Direct Dischargers)	 6-30
              6.5.4   Sensitivity Analysis of Additional Regulatory Relief Options
                      in the Truck Chemical Subcategory	...6-36
              6.5.5   Summary and Conclusion of the Regulatory Flexibility Analysis	 6-38

       6.6    References .'....		6-38
CHAPTER7  BENEFITS METHODOLOGY . . . . . ............. ........... ......... : .... 7-1

       7.1    Projected Water Quality Impacts ..... . ......... .... ---- . ........... ....... . 7-1

              7.1.1   Comparison of Instream Concentrations With
                      Ambient Water Quality Criteria ......... ---- ....... ....... .. ...... .---7-l
                      7.1.1.1 Direct Discharging Facilities .... ....... ..................... .7-2
                      7.1.1.2 Indirect Discharging Facilities ...... ____ . . ................... 7-4

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                                  CONTENTS (continued)
                     7.1.1.3 Assumptions and Caveats	7-8

              7.1.2  Estimation of Human Health Risks and Benefits	.	7-9
                , '     ,      '    '  |,  ,',,!,'    "     '       V    „   , ,     I ' .

                     7.1.2.1 Fish tissue	..7-9
                     7.1.2.2 Drinlqng Water	....7-12
                     7.1.2.3 Assumptions and Caveats	7-13

              7.1.3  Estimation of Ecological Benefits  	7-14

                     7.1.3.1 NonuseBenefits	7-15
                     7.1.3.2 Assumptions and Caveats	7-16

              7.1.4  Estimation of Economic Productivity Benefits 	7-16

                     7.1.4.1 Assumptions and Caveats	7-18

       7.2    PollutantFate and Toxicily	7-18

              7.2.1  Pollutants of Concern Identification			7-19
              7.2.2  Compilation of Physical-Chemical and Toxicity Data			7-20
              7.2.3  Categorization Assessment	7-23
              7.2.4  Assumptions and Limitations	7-28
               ;!.?'       '..      ",,[',    •',''••      .
       7.3    Documented Environmental Impacts	7-29

       7.4    References	f	7-29


CHAPTERS  ENVIRONMENTAL ASSESSMENT AND BENEFITS ANALYSIS	.8-1

       8.1    Overview			8-1
       8.2    Water Quality Impacts: Direct Dischargers			8-3

              8.2.1  Sample Set for Barge Chemical and Petroleum Facilities	8-3
              8.2.2  National Extrapolation for Barge Chemical and Petroleum Facilities	8-4

       8.3    Water Quality Impacts and POTW Impacts: Indirect Discharges	8-4

              8.3.1  Truck Chemical Facilities	8-5

                     8,3.1.1 Sample Set	8-5
                     8.3.1.2 National Extrapolation	;...	...	8-5
                                             VI

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                                 CONTENTS (continued)

                                                                                       Page

              8.3.2   RailChemical Facilities			8-6

                     8.3.2.1 Sample Set....			...8-6
                     8.3.2.2 National Extrapolation		.....8-7

              8.3.3   Barge Chemical and Petroleum Facilities ....		.8-8

                     8.3.3.1 Sample Set	.........8-8
                     8.3.3.2 National Extrapolation	.8-9

       8.4    Human Health Risks and Benefits	 8-9

              8.4:1   Potential Reduction of Carcinogenic Risk			8-9
              8.4.2   Potential Reduction of.Noncarcinogenic (Systemic) Hazard	8-9

       8.5    Ecological Benefits	.....8-10

              8.5.1   Direct Barge Chemical Discharges		.	...8-10
              8.5.2   Indirect Truck Chemical Discharges		...8-11
              8.5.3   Non-monetizable Benefits  .......		 8-11

       8.6    Economic Productivity Benefits		8-12

       8.7    Pollutant Fate and Toxicity .........		........ 8-12

              8.7.1   Truck Chemical Discharges					8-12
              8.7.2   Rail Chemical Discharges		8-13
              8.7.3   Barge Chemical and Petroleum Discharges	8-13
              8.7.4   Pollutants Not Included in the Environmental Modeling	8-14

       8.8    Documented Environmental Impacts	...8-14


CHAFTER9  COSTS AND BENEFITS OF THE TEC INDUSTRY PROPOSED RULE	9-1

       9.1    Introduction			9-1

              9.1.1   Requirements of Executive Order 12866 .	..9-1
              9.1.2   Need for the Regulation  .'....'.	,	. 9-1

       9.2.   Social Costs of the Rule	:	9-3

              9.2.1   Cost Categories		...,			9-4


           "-•''.'•'•,          vii.

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                            CONTENTS (continued)

                                                                       Ease

                  9.2.1.1 Compliance Costs	9-4
                  9.2.1.2 Administrative Costs		9-5
                  9.2.1.3 Worker Dislocation and Benefit Administration Costs	 9-5
                  9.2.1.4 Nonmonetary Costs	9-8

            9.2.2  Estimate of Social Costs	,	9-9

                  9.2.2.1 Costs of Compliance	 9-9
                  9.2.2.2 Administrative Costs	9-9
                  9.2.2.3 Cost of Administering Unemployment Benefits	9-16

      9.3    Comparison of Estimated Costs and Benefits	9-16
      9.4    References	9-18
CHAPTERIO UNFUNDED MANDATES REFORM ACT	10-1

      10.1   References	,	'.	10-2

APPENDIX A COST ANNUALIZATION MODEL

APPENDIX B MARKET METHODOLOGY

APPENDIX C CLOSURE MODEL

APPENDIX D FINANCIAL RATIO ANALYSIS

APPENDIX E SECONDARY IMPACTS

APPENDIX F 1994 DETAILED QUESTIONNAIRE FOR THE
            TRANSPORTATION EQUIPMENT CLEANING INDUSTRY
APPENDIX G 1993 TANK AND CONTAINER INTERIOR
            CLEANING SCREENER QUESTIONNAIRE
                                     vui

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                                          TABLES
                                              *•*.'-,."
Table             -                                                                    Page

ES-1   technology Options for TEC Industry Subcontractors....			ES-9
ES-2   Summary of Impacts Under Proposed Options With Monitoring Costs	 ES-13
ES-3   Impacts to Affected Entities Under Proposed Options by Small Business Status
       Including Monitoring Costs .......			. ES-16

2-1    Facilities by SIC Code and Commercial Status	 2-4
2-2    Number of Facilities by Subcategory and Commercial Status .....'.-	 2-13
2-3    Direct and Indirect Dischargers by Subcategory	 2-15
2-4    Tank Cleanings by Tank Type and Subcategory, Potentially Affected Facilities ....	2-16
2-5    Percentage of Commercial Cleanings	....	.....;.		2-19
2-6    Facility Revenues and TEC Revenues by Subcategory	 2-20
2-7    Facility Revenues and TEC Revenues by Subcategory and Commercial Status  .....	... 2-21
2-8    Facility Employment and TEC Employment by Subcategory..	 2-22
2-9    Facility Employment and TEC Employment by Subcategory and Commercial Status  ....... 2-24
2-10   Facility Costs and TEC Costs by Subcategory	;..	 2-25
2-11   Facility Costs and TEC Costs by Subcategory and Commercial Status	 2-26
2-12   Facility Assets by Subcategory ........:.,...		2-27
2-13   SBA Standards by 4-Digit SIC Codes, TEC Industry Potentially Affected Facilities,
       and Business Entities   			.	2-31
2-14   Number of Potentially Affected Facilities by Subcategory, Small Business Status,
       and Commercial Status			2-32
2-15   Baseline Commercial Equilibrium Price and Tank Cleanings by Subcategory		2-35
2-16   TEC Industry Growth	'..•-.	2-38
2-17   Transportation Services Growth, 1991-1994		....	.-...:.		2-40

3-1    Spreadsheet for Annualizing Costs			3-8
3-2A   Facility Closure Model—Hypothetical Inputs and Salvage Values	 3-20
3-2B   Facility Closure Model—•Hypothetical Inputs, Forecasted Cash Flow, and Closure Scores ... 3-21

4-1    Technology Options for TEC Industry Subcategories  				 .4-4
4-2    Average Facility Monitoring Costs	',.-.'.		  4-8

5-1    Total and Average Compliance Costs—Including Monitoring Costs	5-3
5-2 .   Estimated Regulatory Impact on Market Price and Quantity by
       Subcategoiy—Including Monitoring Costs	 5-6
5-3    Effective Costs Pass-Through by Subcategory	 5-11
5-4    Incremental Closures, Revenue and Employment Losses—Including Monitoring Costs  ....". 5-12
5-5    Sensitivity Analysis of Incremental Closures, Revenue and Employment Losses
       AssumingZero Cost Pass-Through—-Including Monitoring Costs	5-15
5-6    Incremental Financial Distress, Altman-Z" Analysis—Including Monitoring Costs .......... 5-19
5-7    Incremental Financial Distress, Current Ratio Analysis—Including Monitoring Costs	5-20
5-8    Incremental Financial Distress, TIE Ratio Analysis—Including Monitoring Costs	 5-22
                                              IX

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                                    TABLES (continued)

                                                                                       Ease

5-9    Facilities with Post-Tax Annualized Costs Exceeding Specified
       Percentageof Facility Revenues—Including Monitoring Costs	5-24
5-10   Facilities with Pre-Tax Annualized Costs Exceeding Specified
       Percentage of Facility Revenues—Including Monitoring Costs	....5-26
5-11   Economic Impact Analysis for Barge Chemical Facilities Impacted
       by Air Rule—Including Monitoring Costs ..			5-30
5-12   Total and Average Compliance Costs, Scieener Survey Direct Dischargers—
       Including Monitoring Costs	5-31
5-13   Economic Impact Analysis for Screener Survey Direct Dischargers Under Proposed
       Options—Including Monitoring Costs  	5-33
5-14   Secondary Impacts of TEC Industry Regulation on National Output
       and Employment—Preferred Options for the Truck, Rail, and Barge
       Chemical Subcategories With Monitoring Costs 	5-35
5-15   Estimated Secondary Regional Impacts of TEC Industry Regulation—
       Preferred Options for the Truck, Rail, and Barge Chemical Subcategories
       With Monitoring Costs	5-38
5-16   Barriers to Entry—Ratio of Capital Compliance Costs to Facility Assets	5-40
5-17   Summary of Impacts Under Proposed Options With Monitoring Costs 	5-42

6-1    SIC Codes, TEC Industry Potentially Affected Facilities Categorized
       by Small Business Administration Standard	6-5
6-2    Facilities by Subcategory and Business Size	6-8
6-3    Entities with Pre-Tax Annualized Costs Exceeding Specified Percentage
       of Revenues, by Small Business Status—Including Monitoring Costs  	6-11
6-4    Entities with Post-Tax Annualized Costs Exceeding Specified Percentage
       of Revenues, by Small Business Status—Including Monitoring Costs	 6-14
6-5    Affected Entities with Annualized Costs Exceeding Specified Percentageof
       Revenues, Pre- and Post-Tax with Cost Pass-Through, by Small Business
       Status Proposed Options—Including Monitoring Costs	6-18
6-6    Incremental Closures, Revenue and Employment Losses, by Small Business
       Status—Including Monitoring Costs	6-19
6-7    Incremental Financial Distress, by Small Business Status—Including Monitoring Costs	6-24
6-8    Ix>ad Distribution for TT/CBEM! Subcategory, $5 Million Small Business Definition	6-27
6-9    Pre-Tax Financial Distribution for Small Business Owned Entities—
       TT/CHEM Subcategory, $5 Million Small Business Definition—Option 2	6-29
6-10   Pre-Tax Financial Distribution for Small Business Owned Facilities—
       TT/CHEM Subcategory, $5 Million Small Business Definition—Option 1 	6-31
6-11   Load Distribution for RT/CHEM Subcategory, $5 Million Small Business Definition	6-32
6-12   Pre-Tax Financial Distribution for Small Business Owned Entities—
       RT/CHEM Subcategory, $5 Million Small Business Definition	6-33
6-13   Load Distribution for TB/CHEM Subcategory, $5 Million Small Business Definition	6-34

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                                   TABLES (continued)

Table                                                                                 EagS

6-14   Pre-Tax Financial Distribution for Small Business Owned Entities—
       TB/CHEM Subcategory, $5 Million Small Business Definition	...:		.. 6-35
6-15   Regulatory Relief for Small Business-Owned Entities—TT/CHEM Subcategoiy	6-37

9-1    Social Cost of Compliance..............			..... 9-10
9-2    Administrative Cost Components and Frequency Per Facility	9-12
9-3    Facility Counts by Flow Category		 9-13
9-4    Facility Counts by Year and Administrative Activity	9-14
9-5    Administrative Cost of the Regulation ....			9-15
9-6    Total Costs and Benefits of the Proposed TEC Rule .;	...:.	9-17

A-l    Spreadsheet for Annualizing Costs				  A-4
A-2    Inflation Rate, 1984-1994	...	  A-6
A-3    State Income Tax Rates			  A-7
A-4    Depreciation Methods—Comparison of Straight Line vs. Modified
       AcceleratedCostRecoverySystem(MACRS)	  A-10
A-5    Spreadsheet for Annualizing Costs Using Section 169 Provision  		,	  A-ll
A-6    Spreadsheet for Anmialiring Costs with Interest Payments	  A-14

B-l    Facilities Categorized by Percent of Commercial Cleanings		 B-9
B-2    Literature Review for Demand Elasticities of Transportation
       Modes: Rail and Truck  ..:„			.....B-18
B-3    Literature Review for Demand Elasticities of Transportation Modes:
       Barge and Ocean/Sea Tanker			•.."		....	'.. B-24
B-4    References Obtained, Reviewed, But Not Used to Develop Estimates	 B-25
Br5    Summary of Demand Elasticities			 B-30
B-6    Weighted Average of TEC Cost Share		....,.:	 B-31

C-l    Components for Calculating Facility Cash Flow.	C-4
C-2    Forecasting Method Alternatives	C-7
C-3    Summary of Cash Flow Forecast Results	 C-9
C-4    Average Effective Cost Pass-Through by Subcategoiy	:.....C-11
C-5    Components Used in the Salvage Value Estimates		'...... C-14
C-6    Summary of Techniques for Determining Salvage Value—Rail Chemical Subcategoiy	.. C-18
C-7    Pre-Regulatory Status by Subcategoiy .....	....;.......		,		.. C-21
C-8A  Faculty Closure Model—Hypothetical Inputs and Salvage Values	C-23
C-8B  Facility Closure Model—Hypothetical Inputs, Forecasted Cash Flow, and Closure Scores  ... C-24
C-9A  Facility Closure Model—-Hypothetical Inputs and Salvage Values			 C-26
C-9B  Facility Closure Model—Hypothetical Inputs, Forecasted Cash Flow, and Closure Scores  ... C-27
C-10   Components for Calculating Business Entity Cash Flow	C-29

D-l    Components Used in the Altman Z" Analysis,..	,	  D-6
D-2    Preregulatory Altman Z" Scores	  D-8

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                                    TABLES (continued)

Isbls                                                                                  Ease

D-3    Components Used in tbe Current Ratio and Times Interest Earned Ratio Analyses 	  D-10
D-4    Pre-Regulatoiy Current and Tie Ratios	  D-12

E-l    Parameters for Negative Secondary Impact Estimates		E-13
E-2    Parameters for Positive: Secondary Impact Estimates		E-18
                                             XII

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                                        FIGURES

Figure                                                              ,                  EagS

2-1    Definition of Affected TEC Industry Facilities	.2-5

3-1    Cost Annualization Model	.........			3-4
3-2    Impact of the Effluent Guideline on a Commercial Market With Outsourcing ,	3-11
3-3    Commercial Component for the TEC Market Model .....	:.......		 3-13
3-4    Outsourcing Component for the TEC Market Model		3-15
3-5    LostOutput and Transfer Payments for Calculation of Secondary Impacts	 3-29

9-1    Total Pre-TaxAnhualized Compliance Costs			 9-6

A-l    Cost Annualization Model		 A-2

B-l    Impact of the Effluent Guideline on a Commercial Market		'.'.t... B-3
B-2    Commercial Component for TEG Market Model	 B-7
B-3    Estimating Price Elasticity of Supply	 B-14
B-4    Outsourcing Component of TEC Market Model		.	......	B-38
B-5    Steps for Integrating the Outsourcing and Commercial Components		 .B-46
B-6    Graphical Analysis of the Integration of the Outsourcing and
       Commercial Components of the Market Model	.		B-47

C-l    Salvage Value Estimation .»				C-13
»          '            - -              "   '         '   ^
E-l    Lost Output and Transfer Payments for Calculation of Secondary Impacts			E-3
E-2    Lost Output and Transfer Payments for Calculation of Secondary Impacts—
       Perfectly Inelastic Simply Curve		:••••••,	 E-10
E-3    Lost Output and Transfer Payments for Calculation of Secondary Impacts—
       Perfectly Elastic Supply Curve				E-12
                                             xiu

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XIV

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                                 EXECUTIVE SUMMARY
 ES.1   INTRODUCTION

        This Economic Analysis (EA) report evaluates the economic impacts resulting from effluent
 limitations guidelines and standards proposed by the U.S. Environmental Protection Agency (EPA) for the
 transportation equipment cleaning (TEC) point source category. The proposed regulation includes limits for
 Best Practicable Control Technology (BPT), Best Conventional Pollutant Control Technology (BCT), Best
 Available Technology Economically Achievable (BAT), New Source Performance Standards (NSPS), and
 Pretreatment Standards for Existing and New Sources (PSES and PSNS). The EA estimates the impacts to
 the TEC industry of the proposed regulation in terms of effects on market equilibrium price and the number
 of tank cleanings performed, facility closures and associated losses in employment, and financial distress
 short of closure. In addition, the EA analyzes secondary impacts on associated industries and their
 employment, potential barriers to new facilities entering the industry that may be caused by the regulation,
 and impacts on the TEC small business community.
ES.2   INDUSTRY PROFILE

       ES.2.1  Data Sources

       The TEC industry has the characteristic that facilities and companies in the industry represent a wide
range in SIC codes yet TEC represents only a small fraction of each SIC code. Therefore, most readily-
available information—such as that collected by the U.S. Department of Commerce, Bureau of the
Census—does not adequately represent the TEC community affected by the guideline.  The major data
sources for this rulemaking are the EPA survey efforts performed under the authority of Section 308 of the
Clean Water Act: the 1993 Tank and Container Cleaning Screener Questionnaire, and the 1994 Detailed
Questionnaire for the Transportation Equipment Cleaning Industry.
                                            ES-1

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       ES.2.2 Industry Profile

       Except for commodities transported by pipelines, all food, chemical and petroleum commodities are
moved in bulk tank containers. Unless the tank is dedicated to the shipment of one product, interior tank
cleaning is generally required between shipments. TEC facilities provide interior tank cleaning services to the
rail, truck and water transportation industry. The TEC industry thus provides a supporting role to the
nationwide flow of goods by ensuring that no contamination occurs among products from one shipment
tothenext

       The TEC industry was subcategorized on the basis of transportation mode and cargo carried.  The
commodities transported—chemicals, petroleum, food, and dry bulk materials (e.g., grain or pelletized plastic
carried in closed-top hoppers)—affect the pollutants to be found in the wastewater stream and the technology
appropriate to its treatment The transportation mode affects the volume of wastewater produced per tank
cleaning; rail tank cars are larger than tank trucks, and tank barges are larger than both. The volume of
wastewater produced affects the concentration of pollutants in the effluent and therefore the efficiency of the
treatment technologies. With three transportation modes and four types of commodities, the TEC industry
was divided into 11 subcategories (the Barge Chemical and Barge Petroleum subcategories were combined
into one subcategory).

       TEC facilities can also be subdivided into those that discharge wastewater, called potentially affected
facilities, and those that do not,  called zero discharge or ZDT facilities. Potentially affected facilities may be
required under the proposed regulation to install wastewater treatment equipment, thus incurring compliance
costs. ZDT facilities do not need to purchase wastewater treatment equipment under the regulation and
therefore incur no compliance costs. ZDT facilities do, however, provide direct competition for affected
facilities, limiting their ability to raise tank cleaning prices in response to increased costs. ZDT facilities are
therefore included in the analysis in order to project market level impacts. EPA estimates therg are 692
potentially affected and 537 ZDT facilities for an industry total of 1,229 TEC facilities.

       Two features of the TEC industry are key to understanding how the industry operates. First, the TEC
industry is a service industry whose demand is derived from, or based on, the demand for transportation
•:•   '        '    ":|  ,      '    ;„ .•;[•.  ,  ;.•,•••	,  ' ,  •, ••:!.•,,<•> •: •• :'"     i ,
services.  Industry output, i.e, the number of cleanings performed by the industry, is directly dependent on the
demand for transportation services; as the demand for tank truck services increases, the demand for tank

                                               ES-2

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truck cleaning services increases. The demand for transportation services is itself linked to the demand for
the commodities carried in the tank containers. The cost of TEC services is a small fraction of the cost of
providing transportation services for these commodities, and there are few good substitutes for TEC services;
if the tank is used to transport a commodity, its interior then needs to be cleaned.  The fact that the demand
for TEC services is driven by the demand for the commodities transported in the tanks that then need
cleaning, and that TEC services are a small fraction of the cost of transporting those commodities means that
the demand for TEC services is price inelastic. An increase in the price of TEC services will have relatively
little impact on the number of tank cleanings performed.

       Second, many facilities that provide TEC services do so as an adjunct to their primary operations.
Facilities that manufacture commodities (shippers), provide transportation and warehouse services (carriers),
and build or repair transportation equipment (builder/leasers) frequently provide their own tank cleaning
services for convenience, quality control, and limits to environmental liability. Because TEC operations are
part of a larger business, cleanings may be considered a cost of doing business or recorded at cost as an
internal transfer of services.  EPA chose to call these "in-house" facilities. The distinguishing feature of in-
house facilities is that TEC is not their primary product, and TEC services generally comprise a very small
share of total facility revenues, employment and cost1 Other facilities perform TEC operations as their
primary activity for independent clients. For these facilities, the price per cleaning is a market transaction
between buyer and seller.  EPA chose to call these "commercial" facilities. TEC services comprise a
significant share of total facility revenues, employment and cost at commercial facilities.
                          •                  '                '                  •        i   '   •
       Overall, potentially  affected facilities that provide TEC services are estimated to have earned in
excess of $6 billion in 1994  revenues and to have employed 44,600 workers. Of these revenues, only $208
million (3.3 percent) came from TEC services  and only 3,600 workers (8.1 percent) at TEC facilities
performed tank  cleaning operations. These aggregate industry statistics, however, serve to hide the great
differences between in-house and commercial facilities. The 240 potentially affected commercial TEC
facilities earned an average of $1.8 million in revenues, 42 percent of which came from TEC services. The
452 potentially  affected facilities that provide in-house TEC services earned an average of $ 12.9 million in
revenues, less than 1 percent of which came from TEC services.  Thus, the TEC industry is comprised of two
        1 This explains why the TEC industry is represented by a wide range of SIC codes as discussed above
under Data Sources.
                '                    •  •     '    ES-3 •          .  '                              .

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 groups: one set of relatively large facilities whose primary interest is not TEC services and that perform a
 relatively small number of tank cleanings, and a second set of much smaller facilities whose primary interest
 is TEC services and that provide intensive tank cleaning operations.
 ES.3   ECONOMIC IMPACT ANALYSIS METHODOLOGY OVERVIEW
                                '•i         '     •       ,      '.:'':-
        EPA analyzed the potential regulatory impacts to the TEC industry on several levels. First, the cost
 annualization model used engineering estimates of one-time capital and annual operating and maintenance
 (O&M) costs to calculate the total project cost Second, the aggregate effect of the proposed regulation on
 commercial tank cleaning prices and the number of tanks cleaned were analyzed in a market model. The
 facility' closure analysis estimates each facility's post compliance cash flow to determine if the facility will
 remain profitable enough after installing the wastewater treatment system for the owner to keep it open.
 Facilities which, are projected to remain open may incur impacts that will impair the long run financial health
 of the firm; these impacts are assessed through financial ratio analysis using the Altaian Z" model.  Finally,
 secondary impacts on suppliers to and customers of the TEC industry are analyzed using input-output
 modeling techniques.
        ES3.1 Cost Annualization Model

        Central to the EA is the cost annualization model, which uses facility-specific capital and O&M data
(including monitoring costs, see U.S. EPA, 1998b) and other inputs to determine the annualized costs of
improved wastewater treatment (see Appendix A). This model uses these cost inputs with the facility-
specific real cost of capital (discount rate) over a 16-year analytic time frame to generate the annualized cost
of compliance. EPA chose the 16-year time frame for analysis based on the depreciable life for equipment of
this type, 15 years according to Internal Revenue Service (IRS) rules, plus time for purchasing and installing
the equipment Under each option, EPA examined if it would be less expensive for a facility to have
wastewater hauled offsite than to install, operate and maintain the equipment specified for that option.  The
model generates the annualized cost for each option (including the cost of hauling wastewater, if that was the
less expensive alternative) for each facility in the subcategory, which is then used in the facility and firm
                                              ES-4

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analyses. Annualized costs are also used to calculate the cost-effectiveness of treatment technologies in
removing pollutants from the wastewater (U.S. EPA, 1998a).
        ES.3.2 Market Model
                                            f  '.  -                    .
        The TEC market model uses a simultaneous equation market supply and demand model to project
the impacts of the proposed regulation on the price of commercial tank cleaning services and the number of
tank cleanings performed (see Appendix B). The subcategorization of the TEC industry corresponds to well
defined markets for tank cleaning services based on transportation mode and commodities carried. Market
supply is directly derived from detailed questionnaire survey data. Because TEC services are not an end
product in themselves, but exist only to assist in the provision of transportation services, the demand for TEC
services is derived from the demand for transportation services. The price elasticity of demand for TEC
services is a function of the price elasticity of demand for transportation services and the cost of TEC services
as a percent of the cost of transportation services. In general, derived demand is also a function of the
substitutes available for that good; however, there are no good substitutes available for TEC services.

        The supply curve of TEC services is shifted upwards by the average cost of compliance per tank
cleaned by commercial faculties. Commercial facilities with zero wastewater discharge are included in this
average. This serves to decrease the average cost of compliance per tank cleaned for the entire subcategory.
The post compliance increase in equilibrium price will be lower, and potentially affected commercial facilities
are able to pass on a smaller percentage of compliance costs than they would in the absence of competition
from ZDT facilities. The increase in post compliance price measures the amount of increased costs passed
through from the facilities to the customers.  The "cost pass-through" factor—an output of the market
model—is an input to the facility closure model (see Section ES.3.3).       '

        EPA also examined in the market model the decision faced by in-house facilities—(1) comply with
the proposed regulation or (2) shutdown their TEC operation and outsource their tank cleanings.  This
component of the model compared^the post compliance cost of in-house tank cleanings with the cost of      v
having the same tank cleanings performed commercially (including the cost of moving the tank to the nearest
commercial facility) at the predicted post compliance market price.  Any outsourcing by in-house facilities
implies a shift in the demand curve for TEC services.

               .                       •        ES-5       "  .  ''    -

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                i "I"
        ES.3.3 Facility Closure Model

        In the facility analysis, EPA models the financial impacts of regulatory costs on individual TEC
facilities (see Appendix C). EPA first forecasts the present value of baseline facility cash flow under three
different scenarios.  The forecasts are based on the three years of financial data for each facility in the Section
308 survey assuming no real growth.

        The cost annualization model calculates the present value of post-tax compliance costs over the
sixteen year project life. The present value of compliance costs is adjusted downward by the cost pass-
through factor calculated from the market model. The adjusted present value of compliance costs represents
the estimated change in facility cash flow caused by the proposed regulation.

        For all subcategories except one (Rail Chemical), the estimated change in the present value of cash
flow is subtracted from the projected present value of baseline facility cash flow to estimate the present value
of post compliance cash flow. If the present value of post compliance cash flow is negative under two of the
three forecasting methods, EPA considers the facility likely to close as a result of the regulation.

        In the Rail Chemical subcategory EPA determined that it was appropriate to consider the salvage
value of the facility in the closure analysis (see Appendix C for details). Salvage value is estimated on two
different bases: book value and market value.  The post compliance cash flow for each facility is calculated as
described above. Three estimates of cash flow and two estimates of salvage value provide six possible
outcomes for evaluating the closure decisioa If the post compliance cash flow is less than the salvage value
of the facility in four out of six comparisons (i.e., the majority of the evidence), the facility is projected to
close.                                               .
        ES.3.4 Financial Ratio Analysis

        Financial impacts short of closure may also result from the imposition of regulatory costs. The cost
of complying with the regulation may cause financial instability which will make it more difficult for
companies to raise capital and thus threaten their long term independent financial viability. Banks frequently
use financial ratio analysis to evaluate the long term creditworthiness of potential borrowers.  EPA estimates

                                               ES-6

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 the regulatory impact on financial ratios concerning earnings, assets, liabilities, and working capital at the
 firm level (accounting for costs for multiple facilities, where applicable).  The firm level is the appropriate
 level for this analysis because the firm is the entity responsible for financial decisions. These financial ratios
 are the components of a weighted average known as Altaian's Z", which was developed based on empirical
 data to characterize the financial health of firms. This equation calculates one number, based on the financial
 data, that can be compared to index numbers that define "good" financial health, "indeterminate" financial
 health, and "poor" financial health. Facilities owned by firms whose Altaian's Z" number changes such that
 the firm goes from a "good" or "indeterminate" baseline category to a "poor" post compliance category are
 classified as likely to have significant difficulties raising the capital needed to comply with the proposed rule,
 which can indicate the likelihood of firm bankruptcy, loss of financial independence, or other corporate
 distress.           .
        ES.3.5 Secondary Impact Analysis

        In the secondary analysis, EPA uses input-output analysis to examine 1) gross and net (losses minus
gains) national-level estimates of employment and output changes (gains and losses) throughout the U.S.
economy in all sectors of the economy; 2) a regional impact analysis using estimates of employment and
output changes to determine whether significant impacts on individual states might be experienced.
        National-Level Analysis

        EPA uses input-output analyses to determine the effects of the regulation using national-level
employment and output multipliers. Input-output multipliers allow EPA to estimate the effect of a loss in
output in the TEC industry on the U.S. economy as a whole. Every loss in output in the TEC industry results
in employment losses in that industry.  Additionally, these losses have repercussions throughout the rest of
the economy, and the output and employment multipliers allow EPA to calculate the total losses in output and
employment nationally using the output loss estimated for the TEC industry alone. EPA determines these
impacts at the national level based on the compliance costs of the proposed rule.
                                              ES-7

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       The costs of compliance, however, translate into gains in other sectors of the economy, such as
manufacturers of pollution control equipment To compute output and employment gains at the national
level, over all sectors of the economy, EPA uses the capital and operating costs estimated for pollution
control equipment (which represent output gains in the industries that manufacture, install, and operate the
equipment) along with the output and employment multipliers for those industries, to calculate a national-
level gain in output and employment These gains offset to some extent the losses attributable to the
proposed rule. EPA estimated an upper and lower bound to secondary output and employment impacts by
varying certain assumptions used in the analysis.
       Regional-Level Analysis

       EPA also determined the impacts on regional-level employment and output. EPA conducted a
regional analysis because even if employment and output losses are relatively small on a national level, they
might still have a substantial negative effect on an individual region.  Because no facility closures are
projected under the proposed options, EPA modeled regional effects by assuming that all employment and
output losses estimated at the national level, but none of the offsetting gains, occur in the smallest state.
ES.4   POLLUTION CONTROL OPTIONS

       EPA investigated up to three options for each subcategory.  All options examined for each
subcategory and the options selected for proposal are listed in Table ES-1.

       For direct dischargers, EPA is proposing option 2 for BPT, BCT, and BAT in the Truck Chemical
subcategory and option 1 in the Rail Chemical and Barge Chemical  and Petroleum subcategories; EPA is
proposing option 2 for BPT and BCT in the Food subcategories.2 Option 2 is proposed for NSPS in the
Truck Chemical and Food subcategories; option 3 is proposed in the Rail Chemical subcategory.  Option 1 is
proposed for NSPS in the Barge Chemical and Petroleum subcategory.
       2 EPA is reserving BAT at this time.
                                             ES-8

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                   TABLE ES-1




TECHNOLOGY OPTIONS FOR TEC INDUSTRY SUBCATEGORIES
Option
Proposed Option
for
Standard
Description
Track Chemical Direct Dischargers x~
I1
2

BPT, BCT, BAT
NSPS*
Flow reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, biological treatment, and
sludge dewatering
Flow reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, biological treatment, activated
carbon adsorption, and sludge dewatering
, " Track ChcmicM Indirect Di^hargers ;'
1
2

PSES, PSNS*
Flow reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, and sludge dewatering
Flow reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, activated carbon adsorption,
and sludge dewatering
	 Eail Chemical Direct iJischargers
I2
2
3
BPT, BCT, BAT

NSPS*
Flow reduction, oil/water separation, equalization, biological treatment,
and sludge dewatering ,
Flow reduction, oil/water separation, equalization, dissolved air flotation
(withfloccukaion and pH adjustment), biological treatment, and sludge
dewatering
Flow reduction, oil/water separation, equalization, dissolved air flotation
(with flocculation and pH adjustment), biological treatment, organo-
clay/activated carbon adsorption, and sludge dewatering
                       ES-9

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TABLE ES-1 (continued)
Option

1
2
3


1
2

1
2
3

1
2
Proposed Option
for
Standard
' -* '
PSES

PSNS*


BPT, BCT, BAT
NSPS*
•
^ ' ;' i

PSNS*



BPT, BCT,
NSPS*
Description
Rail Chemical Indirect Dischargers , , ,
Flow reduction and oil/water separation
Flow reduction, oil/water separation, equalization, dissolved air flotation
(wiihfloccukttion andpH adjustment), and sludge dewatering
Flow reduction, oil/water separation, equalization, dissolved air flotation
(with flocculation and pH adjustment), or gano-day /"activated carbon
adsorption, and sludge dewatering
_,
Barge Chemical Direct Dischargers
Flow reduction, oil/water separation, dissolved air flotation, filter press,
biological treatment, and sludge dewatering
Flow reduction, oil/water separation, dissolved air flotation, filter press,
biological treatment, reverse osmosis, and sludge dewatering
Jarges Chemical Indirect Dischargers
Flow reduction, oil/water separation, dissolved air flotation, and in-line
filter press
Flow reduction, oil/water separation, dissolved air flotation, in-line filter
press, biological treatment, and sludge dewatering
Flow reduction, oil/water separation, dissolved air flotation, in-line filter
press, biological treatment, reverse osmosis, and sludge dewatering
' ' -""; ' " Food Grade " " *, '
Flow reduction and oil/water separation
Flow reduction, oil/water separation, equalization, biological treatment,
and sludge dewatering
       ES-10

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                                      TABLE ES-1 (continued)
Proposed Option
for
Option Standard
Description
,>-,'"''" Petroleum
I3 NA . , T
2 NA
Flow reduction, equalization, oil/water separation,
precipitation '
Flow reduction, equalization, oil/water separation,
adsorption, and recycle/reuse
and chemical
activated carbon
,*' ,~^ - : >^V~ ' ' Hooper '% !
1 NA
Flow reduction and gravity separation
Note:  EPA developed options based on incremental technology additions to a treatment train.  Each option builds
       upon the previous option. Technologies incremental to the previous option are shown hi italics to help the
       reader identify the distinguishing characteristics of an option.
* Under NSPS and PSNS, flow reduction consists of good water conservation practices including flow segregation.
1 Option 1 has identical costs and removals as Option 2.
2 Equalization was originally costed with Option 2, but later moved to Option 1; costs have not been adjusted.
3 Because Option 1 would result in higher costs and lower removals man Option 2, it was not completely costed.
                                               ES-11

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        For indirect dischargers, EPA is proposing option 2 for PSES in the Truck Chemical subcategory and
option 1 in the Rail Chemical subcategory. Option 2 is proposed for PSNS in the Truck Chemical and Barge
Chemical and Petroleum subcategories; option 3 is proposed in the Rail Chemical subcategory.
ES.5   ECONOMIC IMPACTS

        This section summarizes projected impacts to subcategories for which treatment technologies have
been proposed using the analytic methodologies outlined in section ES. 3.  The detailed questionnaire
contained no direct discharging facilities in the Truck Chemical, Rail Chemical and Food grade subcategories.
However, EPA believes direct dischargers do exist in these subcategories and identified three direct
dischargers in the Truck Chemical subcategory, one direct discharger in the Rail Chemical subcategory, and
19 direct dischargers in the Food subcategories from the screener survey.  Impacts to the direct discharger
facilities from the screener survey were projected by finding similar indirect discharging facilities from the
detailed questionnaire database and using those facilities as models for the direct dischargers.

        The results of the impact analysis are summarized in Table ES-2.  Pre-tax annualized costs for the
proposed options total $31.1 million (1994 dollars) for indirect dischargers and $2.3 million for direct
dischargers. No incremental compliance costs are projected for direct dischargers in the Food subcategories
because all known facilities have sufficient treatment in place.
                                 „  "               /
        The market model projects the price of tank cleanings to rise by 5.7 percent in the Truck Chemical
subcategory, 4 percent in the Rail Chemical subcategory, and 2.1 percent in the Barge Chemical and
Petroleum subcategory. The number of tank cleanings performed is projected to decline by 1.1 percent in the
Truck Chemical subcategory, and less than 1 percent in the Rail and Barge Chemical and Petroleum
subcategories.  Because the demand for TEC services is price inelastic, the impact of the proposed regulation
                                   4      '  .   ' '            •             ' '                         ;
falls more on price than on the number of tank cleanings performed.

       No closures are projected under the proposed options. Incremental financial distress in incurred by
the parent business entities of 29 facilities, all of which are in the Truck Chemical subcategory.
                                              ES-12

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                                                      Table ES-2
                                     Summary of Impacts Under Proposed Options
                                               With Monitoring Carts [1]
Subcategory
Option
Total in Class
CostType
Cost
Impacts
Closures
Financial
Distress
Sales Test [21
1 Percent
3 Percent

TT/CHEMp]    Option 2
RT/CHEM[3]    Option 1
Total Indirect Dischargers
Direcft Djschflj
TB/CHEMJ3]    Option 1
TT/CHEM [4]    Option 2
RT/CHEM[4]    Option 1
FOOD [4]       Option 2
Total Direct Dischargers
288.
38
                              326
                               14
                               19
37
 Capital
 O&M
 Post-tax Armualized
 Pre-tax Annualized

 Capital
 O&M
. Post4ax Annuaiized
 Pre-tax Annualized
$53,634,936
$24,733,030
$18,795,190
$29,934,987

 $4,420,715
   $675,125
   $756,257
 $1,115,512
        Capital              $58,055,651
        O&M     :          $25,408,175
        Post-tax Annualized    $19,551,447
        Pre-tax Annualized    $31,050,499
 Capital
 O&M
 Post-tax Annualized
 Pretax Annualized

 Capital
 O&M
 Posttax Annualized
 Pretax Annualized

 Capital
 O&M
 Post-tax Armualized
 Pre-tax Annualized

 Capital
 O&M
 Post-tax Annualized
 Pre-tax Annualized

 Capital
 O&M
 Post-tax Annualized
 Pre-tax Annualized
 $3,181,339
 $1,806,128
 $1,347,581
 $2,112,379

       ND
       ND
       ND
       ND

       ND
       ND
       ND
       ND

         $0
         $0
         SO
         $0

 $3,428,603
 $1,951,971
 $1,456,143
 $2^82,907
                                                                                       29
                                                                                       29
                                                                     209
                                                                                                    20
                                                                                                   229
                                                                                                   ND
                                                                     ND
                                                                                                    11
108
13
                                                                                                                121
                                                                                                                ND
ND
[1] Monthly monitoring costs for indirect dischargers; combined weekly/monthly monitoring for direct dischargers.
[2] Post-tax armualized cost/facility revenues.                     .
[3] Facilities contained in detailed questionnaire database.
[4] Facilities contained in screener survey database.
ND: Not disclosed due to business confidentiality
                                                         ES-13

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        EPA also examined the sales test as an additional measure of impacts of the proposed regulation
 (U.S. EPA, 1997).  The sales test examines the ratio of each facility's annuatized compliance costs (either
 prc- or post-tax) to their 1994 revenues.  The results of the post-tax sales test are included in Table ES-2.
 Sixty-six percent of affected facilities incur post-tax annualized compliance costs that exceed 1 percent of
 facility revenues, and 36 percent of affected faculties incur costs exceeding 3 percent of revenues.  The sales
 test is a less sophisticated measure of impacts than the closure model, which examines cash flow over three
 years, and it does not account for a faculty's ability to pass compliance costs through to their customers in the
 form of higher prices.

        EPA projects the proposed regulation will cause total output losses in the U.S. economy ranging
 from $101 million to $118 million (0.002 percent of 1994 U.S. GDP) and employment losses ranging from
 1,230 to 1,440 (0.011 percent of 1994 U.S. employment) when all secondary impacts are accounted for.
 However, new expenditure on wastewater control should generate new output of $84 million and 920 new
jobs nation-wide to offset those losses. The net loss to the U.S. economy thus ranges from $ 16.5 million to
 $34.4. million in output (0.0005 percent of 1994 U.S. GDP) and 300 to 520 jobs (0.004 percent of 1994 U.S.
                                   I                            ' •
 employment).

        If all projected primary and secondary output losses of $118 million—but none of the secondary
 output gains—occurred in the state with the smallest GDP, Vermont would lose 0.9 percent of 1994 output.
 Similarfy, if all projected 1,440 primary and secondary employment losses—but none of the secondary
employment gains—occurred in the state with the smallest employment, Alaska would lose less than
 0.5 percent of 1994 employment

       Another analysis EPA performs is a "barriers-to-entry" analysis to determine whether the costs of
NSPS/PSNS would prevent new sources from entering the market. EPA examined the ratio of each faculty's
projected capital costs (to meet existing source standards) to faculty assets as a proxy for the regulation's
impact on the start up costs of a new faculty. The costs faced by new sources generally will be the same as or
less than those faced by existing sources; it is typically less expensive to incorporate pollution control
equipment into the design at a new plant than it is to retrofit the same pollution control equipment in an
existing plant Because most new sources and existing sources face similar costs, and because EPA also has
shown the proposed options to be economically achievable, having an acceptable level of impact on existing
sources, EPA concluded that the proposed standards do not cause a barrier to entry for new sources.
                                   1;         ,      ,           ,     i                   i  • •  •    	
                                              ES-14

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 ES.6   INITIAL REGULATORY FLEXIBILITY ANALYSIS

        EPA has elected to perform an Initial Regulatory Flexibility Analysis as required by the Regulatory
 Flexibility Act as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA).
 Facilities in the TEC industry represent 29 different SIC codes and 10 separate small business standards.
 EPA determined that business entity revenues of less than $5 million annually was the most appropriate small
 business standard for the TEC industry. Eighty-seven affected entities meet that definition of "small" in
 subcategories for which options have been proposed.  Table ES-3 summarizes the results of the Initial
 Regulatory Flexibility Analysis.

        No small entities are projected to close under the proposed options. Fourteen small entities and 14
 large entities are projected to incur financial distress under the proposed options.3 EPA therefore focussed its
 attention on the sales test to determine if the proposed regulation would have a significant impact on a
 substantial number of small entities. Under the most conservative assumptions of using pre-tax costs with no
 cost pass-through in the sales test, EPA found that 75 of the 87 small affected entities incur costs exceeding
 1 percent of revenues, and 64 of 87 incur costs exceeding 3 percent of revenues. Under the less conservative,
 but more realistic assumptions of using post-tax costs with cost pass-through in the sales test, EPA found
 that 68 of the 87 small affected entities incur costs exceeding 1 percent of revenues, and 17 of 87 incur costs
 exceeding 3 percent of revenues. EPA may .certify that the proposed TEC regulation will not have a
 significant impact on a substantial number of small entities.
                     '                         .                '        "               .         ^
        EPA also chose to perform a regulatory flexibility analysis at this time. EPA examined several
 criteria under which small affected entities could be excluded from the proposed regulation, including the
 number of tank cleanings performed, employment, revenues, and wastewater flow. In general, EPA found
 that the percentage of pollutant loads in a subcategory were proportional to the percentage of facilities
 examined in the subcategory.  Thus, any criteria that excludes 25 percent of entities from the regulation, for
 example, would also exclude 25 percent of pollutant loads from the regulation. EPA has excluded
 intermediate bulk containers (IBCs) from the regulation which provides relief to 39 small affected entities.
EPA is not currently proposing any other exclusions from the proposed regulation.
       3 Numbers do not match total presented in Table ES-2 due to rounding of statistical weights
                                             ES-15

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                                                                      III ia <§ !i
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                                           ES-16

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ES.7   BENEFITS METHODOLOGY

        ES.7.1 Projected Water Quality Impacts

        The water quality impacts and associated risks/benefits of TEC discharges at various treatment
levels are evaluated by: (1) comparing projected instream concentrations with ambient water quality criteria,
(2) estimating the human health risks and benefits associated with the consumption of fish and drinking water
from water bodies impacted by the TEC industry, (3) estimating the ecological benefits associated with
improved recreational fishing habitats on impacted water bodies, and (4) estimating the economic
productivity benefits based on reduced sewage sludge contamination at POTWs receiving the wastewater of
TEC facilities. These analyses are performed for a representative sample set of six direct Barge Chemical
and Petroleum facilities, one indirect Barge Chemical and Petroleum facility, 12 indirect Rail Chemical  .
facilities, and 40 indirect Truck Chemical facilities. Results are extrapolated to the national level based on
the statistical methodology used for estimated costs, loads, and economic impacts.                      '

        Current and proposed pollutant releases are quantified and compared, and potential aquatic life and
human health impacts resulting from current and proposed pollutant releases are evaluated using stream
modeling techniques. Projected instream concentrations for each pollutant are compared to EPA water
quality criteria or, for pollutants for which no water quality criteria have been developed, to toxic effect levels
(i.e., lowest reported or estimated toxic concentration).  Inhibition of POTW operation and sludge
contamination are also evaluated. Using a stream dilution model that does not account for fate processes other
than complete immediate mixing, projected instream concentrations are calculated at current and proposed
BAT treatment levels for stream segments with direct discharging facilities.  For indirect dischargers,
projected instream concentrations are calculated at current and proposed PSES treatment levels for stream
segments with POTW discharges from the indirect discharging facilities. For stream segments with multiple
facilities, pollutant loadings are summed, if applicable, before concentrations are calculated.  Assessing the
impacts  of indirect discharging faculties also includes the consideration of impacts on POTWs, including
inhibition of biota and contamination of sludges.

        The potential benefits to human health are evaluated by estimating the risks (carcinogenic and
noncarcinogenic hazard [systemic]) associated with reducing pollutant levels in fish tissue and drinking water

                                             ES-17

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 from current to proposed treatment levels for both direct and indirect dischargers.  Reduction in carcinogenic
 risks is monetized, if applicable, using estimated willingness-to-pay values for avoiding premature mortality.
 The potential ecological benefits of the proposed regulation are evaluated by estimating improvements in the
 recreational fishing habitats that are impacted by TEC wastewater discharges. Stream segments are first
 identified for which the proposed regulation is expected to eliminate all occurrences of pollutant
 concentrations in excess of both aquatic life and human health ambient water quality criteria (AWQC) or
 toxic effect levels. The elimination of pollutant concentrations in excess of AWQC is expected to result in
 significant improvements in aquatic habitats.  These improvements in aquatic habitats are then expected to
 improve the quality and value of recreational fishing opportunities.  The estimation of the monetary value to
 society of unproved recreational fishing opportunities is based on the concept of a "contaminant-free fishery"
 as presented by Lyke (1993). Potential economic productivity benefits are estimated based on reduced
 sewage sludge contamination due to the proposed regulation.  The treatment of wastewaters generated by
 TEC facilities produces a sludge that contains pollutants removed from the wastewaters. As required by law,
 POTWs must use environmentally sound practices in managing and disposing of this sludge. The proposed
 pretreatment levels are expected to generate sewage sludges with reduced pollutant concentrations. As a
 result, the POTWs may be able to use or dispose of the sewage sludges with reduced pollutant concentrations
 at lower costs.
        ES.7.2 Pollutant Fate and Toxicity

        Human and ecological exposure and risk from environmental releases of toxic chemicals depend
largely on toxic potency, inter-media partitioning, and chemical persistence. These factors in turn depend on
chemical-specific properties relating to lexicological effects on living organisms, physical state,
hydrophobicity/lipophilicity, and reactivity, as well as the mechanism and media of release and site-specific
environmental conditions.  The methodology used to assess the fate and toxicity of pollutants associated with
TEC wastewaters has three steps: (1) identification of pollutants of concern; (2) compilation of physical-
chemical and toxicity data; and (3) categorization assessment
                                              ES-18

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        ES.73 Documented Environmental Impacts

        State and Regional environmental agencies are contacted, and State 304(1) Short Lists, State Fishing
 Advisories, and published literature are reviewed for evidence of documented environmental impacts on
 aquatic life, human health, POTW operations, and the quality of receiving water due to discharges of.
 pollutants from TEC facilities. Reported impacts are compiled and summarized by study site and facility.
ES.8   ENVIRONMENTAL ASSESSMENT AND BENEFITS ANALYSIS

        ES.8.1 Overview

        The environmental assessment quantifies the water quality-related benefits for TEC facilities based
on site-specific analyses of current conditions and the conditions that would be achieved by process changes
under proposed BAT (Best Available Technology) and PSES (Pretreatment Standards for Existing Sources)
controls. The U.S. EPA estimated in-stream pollutant concentrations for 157 priority and nonconventional
pollutants from three subcategories (Truck Chemical, Rail Chemical, and Barge Chemical and Petroleum) of
direct and indirect discharges using stream dilution modeling.  The potential impacts and benefits to aquatic
life are projected by comparing the modeled in-stream pollutant concentrations to published EPA aquatic life
criteria guidance or to toxic effect levels.
                                           - .          •   -          /

        ES.8.2 Water Quality Impacts: Direct Dischargers

        The water quality impacts of direct TEC discharges at current and proposed BAT treatment levels
are evaluated by comparing projected in-stream pollutant concentrations with aquatic life and human health
AWQC using stream modeling techniques. Human health criteria or toxic effect levels are developed in two
ways: 1) for consumption of both water and organisms, and 2) for consumption of organisms only. Potential
human health and aquatic life impacts on receiving stream water qualityare assessed for direct Barge
Chemical and Petroleum dischargers for the sample set of facilities, and extrapolated to national estimates
using survey weights.
                                             ES-19

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        ES.83 Water Quality Impacts and POTW Impacts: Indirect Discharges

        The water quality impacts of indirect TEC discharges at current and proposed PSES treatment levels
 are evaluated by comparing projected in-stream pollutant concentrations with aquatic life and human health
 AWQC using stream modeling techniques. Human health criteria or toxic effect levels are developed in two
 ways: 1) for consumption of both water and organisms, and 2) for consumption of organisms only.
 Potential human health and aquatic life impacts on POTW operations and their receiving stream water quality
 are assessed for indirect Truck Chemical, Rail Chemical, and Barge Chemical and Petroleum dischargers, and
 extrapolated to national estimates using survey weights.
        ES.8.4 Human Health Risks and Benefits

        The results of this analysis indicate the potential benefits to human health by estimating the risks
(carcinogenic and systemic) associated with current and reduced pollutant levels in fish tissue and drinking
water. The excess annual cancer cases at current discharge levels and, therefore, at proposed BAT and
proposed pretreatment discharge levels are projected to be far less than 0.5 for all populations evaluated from
the ingestion of contaminated fish and drinking water for both direct and indirect TEC (Truck Chemical, Rail
Chemical, and Barge Chemical and Petroleum) wastewater discharges. A monetary value of this benefit to
society is, therefore, not projected.

        Systemic toxicant effects are projected from fish consumption only for indirect Truck Chemical
discharges. For Truck Chemical discharges (sample set), systemic effects are projected to result from the
discharge of one pollutant to seven receiving streams at current discharge levels.  An estimated population of
4,284 subsistence anglers and their families are projected to be affected at current discharge levels. At
proposed pretreatment discharge levels, systemic effects are projected to result from the discharge of one
pollutant to three receiving streams. The affected population is reduced to 687 subsistence anglers and their
families. When results are extrapolated to the national level, an estimated population of 14,173 subsistence
anglers and their families are projected to be affected from the discharge of one pollutant to 39 receiving
streams at current discharge levels. As a result of the proposed pretreatment regulatory option, the affected
population is reduced to 3,492 (on  16 receiving streams). Monetary values for the reduction of systemic
toxic effects cannot currently be estimated

                                              ES-20

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        ES.8J5 Ecological Benefits
                                                                           N
        Potential ecological benefits of the proposed regulation, based on improvements in recreational
 fishing habitats, are projected for only direct Barge Chemical and Petroleum wastewater discharges and
 indirect Truck Chemical wastewater discharges.  The proposed regulation is not projected to completely
 eliminate in-stream concentrations in excess of aquatic life and human health AWQC in any stream receiving
 wastewater discharges from indirect Barge Chemical and Petroleum and indirect Rail Chemical facilities.
 Results of the analysis, including non-monetizable benefits are presented in the following sections.,
                                                f
        For the direct Barge Chemical and Petroleum sample set, the estimate of the increase in value of
 recreational fishing to anglers on one improved receiving stream is $54,400 to $194,000 (1994 dollars). The
 estimate of the nonuse value of the proposed BAT regulatory option on the improved receiving stream is
 $27,200 to $97,000 (1994 dollars).  Based on extrapolated data to the national level, the estimate of the
 increase in value of recreational fishing to anglers ranges from $157,000 to $562,000 and the increase in
 nonuse value ranges from $78,500 to $281,000 (1994 dollars).

        For the indirect Truck Chemical sample set, the estimate of the increase in value of recreational
                                               -                           '.       .            ^
 fishing to anglers on two improved receiving streams is $248,000 to $886,000 (1994 dollars).  The estimate
 of the nonuse value of the proposed BAT regulatory option on the improved receiving streams  is $124,000
 to $443,000 (1994 dollars). Based on extrapolated data to the national level, the estimate of the increase in
 value of recreational fishing to anglers ranges from $ 1,494,000 to $5,334,000 and the increase in nonuse
. value ranges from $747,000 to $2,667,000 (1994 dollars).
        ES.8.6 Economic Productivity Benefits

        Potential economic productivity benefits, based on reduced sewage sludge contamination and sewage
 sludge disposal costs, are evaluated at POTWs receiving the wastewater discharges from indirect TEC
 facilities. No sludge contamination problems are projected at the 35 POTWs receiving wastewater from 40
 Truck Chemical facilities, at the 11 POTWs receiving wastewater from 12 Rail Chemical facilities, or at the
 one POTW receiving wastewater from the one Barge Chemical and Petroleum facility. Therefore, ,no
 economic productivity benefits are projected as a result of the proposed regulation.

                                              ES-21                  .

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        ES.8.7 Pollutant Fate and Toxicity

        Human exposure, ecological exposure, and risks from environmental releases of toxic chemicals
 depend largely on toxic potency, inter-media partitioning, and chemical persistence. These factors are
 dependent on chemical-specific properties relating to physical state, hydrophobicity/lipophilicity, reactivity,
 and toxicological effects on living organisms. For example, volatile pollutants potentially cause risk to
 exposed populations via inhalation, and pollutants with high potential to bioaccumulate in aquatic biota
 potentially accumulate in the food chain and can cause increased risk to higher trophic level organisms and to
 exposed human populations via consumption offish and shellfish. They are also dependent on the media of
 release and site-specific environmental conditions.
        ES.8.8 Documented Environmental Impacts

        Documented environmental impacts on aquatic life, human health, POTW operations, and receiving
stream water quality are also summarized in this assessment  The summaries are based on a review of
published literature abstracts, State 304(1) Short Lists, State Fishing Advisories, and contact with State and
Regional environmental agencies. Five POTWs receiving the discharge from four Truck Chemical faculties
and one Rail Chemical facility are identified by States as being point sources causing water quality problems
and are included on their 304(1) Short List All POTWs listed currently report no problems with TEC
wastewater discharges. Past and potential problems are reported by the POTWs for oil and grease, pH, TSS,
surfactants, grycol ethers, pesticides and mercury.  Several POTW contacts stated the need for a national
effluent guidelines for the TEC industry.

        Current and past problems (violation of effluent limits, POTW pass-through and interference
problems, POTW sludge contamination, etc.) caused by direct and indirect discharges from all three
subcategories of TEC facilities (Truck Chemical, Rail Chemical and Barge Chemical and Petroleum) are also
reported by State and Regional contacts in seven regions. Pollutants causing the problems include BOD,
cyanide, hydrocarbons, metals (copper, chromium, silver, zinc), oil and grease, pesticides, pH, phosphorus,
styrene, surfactants, and TSS. In addition, one Barge Chemical and Petroleum facility and 19 POTWs
receiving wastewater discharges of 20 Truck Chemical and two Rail Chemical facilities are located on water
                                             ES-22

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bodies with State-issued fish consumption advisories. However, the vast majority of advisories are based on
chemicals that are not pollutants of concern for the TEC industry.
ES.9   qOSTS AND BENEFITS OF THE TEC INDUSTRY PROPOSED RULE

        Pursuant to Executive Order 12866 and Section 202 of the Unfunded Mandates Reform Act
(UMRA), EPA performed a cost-benefit analysis. This analysis investigated the social cost of the regulation,
measured as the pre-tax costs of compliance plus government administrative costs plus the costs of
administering unemployment benefits. Estimated benefits generated by the proposed regulation were
summarized in Chapter 8.

        The proposed option is expected to have a total annual social cost of $35 million, which includes
$34.4 million in pre-tax compliance costs, $0.6 million in administrative (permitting) costs, and $0.005
million in unemployment benefits administration costs. EPA estimates that annual benefits will range from
$2.5 million to $8.8 million, which includes $1.7 million to $5.9 million for recreational benefits, and $0.8
million to $3.0 million for nonuse benefits.
ES.10 UNFUNDED MANDATES REFORM ACT

       Tide H of the Unfunded Mandates Reform Act of 1995 (Public Law 104-4; UMRA) establishes
requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal
governments as well as the private sector.  Under Section 202(a)(l) of UMRA, EPA must generally prepare a
written statement, including a cost-benefit analysis, for proposed and final regulations that "includes any
Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate or
by the private sector" of annual costs in excess of $100 million. As a general matter, a federal mandate
includes Federal Regulations that impose enforceable duties on State, local, and tribal governments, or on the
private sector.

       The proposed TEC industry effluent limitations guidelines are not an unfunded mandate on state,
local, or tribal governments because the cost of the regulation is borne by the TEC industry. The proposed

       •   :   '       "          *       ,    -  ES-23   -....:••'    -.   "     -     "--.-'.

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rule does not impose total costs in excess of $100 million per year on the TEC industry. EPA examined

increased permitting and unemployment benefits administrative costs and found them to be less than
1 percent of $100 million.
ES.11  REFERENCES


Lyke,A. 1993. "Discrete Choice Models to Value Changes in Environmental Quality: A Great Lakes Case
Study." Thesis submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy
(Agricultural Economics) at the University of Wisconsin-Madison.

U.S. EPA. 1997. EPA interim guidance for implementing the Small Business Regulatory Enforcement
Fairness Act and related provisions of the Regulatory Flexibility Act Washington, DC: U.S. Environmental
Protection Agency.  Februarys.

U.S. EPA. 1998a. Development document for the proposed effluent limitations guidelines and standards for
the transportation equipment cleaning industry. EPA-821-B-98-011. Washington, DC: U.S. Environmental
Protection Agency, Office of Water. May.

U.S. EPA. 1998b. Cost-effectiveness analysis of proposed effluent limitations guidelines and standards for
the transportation^equipment cleaning industry point source category. EPA-821-B-98-013. Washington,
DC: U.S. Environmental Protection Agency, Office of Water. May.
                                            ES-24

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                                         CHAPTER!
                                      INTRODUCTION
 1.1    SCOPE AND PURPOSE

        This report evaluates the costs, economic impacts, and benefits of pollution control requirements for
 the transportation equipment cleaning (TEC) industry.  The TEC industry provides interior tank cleaning
 services to the truck, rail, and water transportation industry. TEC facilities are defined as those facilities
 that clean the interior of :

        •      Tank trucks
        •      Rail tank cars
        •      Tank barges
        •      Intermodal tank containers
        •      Intermediate bulk containers (or "totes")
        •      Ocean/sea tankers
        •      Hopper trucks
.'       •      Hopper rail cars
        •      Hopper barges

 used to transport materials or cargos that come into direct contact with the tank or container interior.
 Except for commodities transported by pipelines, all food, chemical, and petroleum commodities are
 moved in bulk tank containers. Unless a particular tank is dedicated to the shipment of one product,
 interior tank cleaning is generally required between shipments. The cleaning process often generates
 wastewater, and that wastewater is the focus of this regulatory effort
                                              '1-1

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        The Federal Water Pollution Control Act (commonly known as the Clean Water Act [CWA, 33

 U.S.C.  § 125 1 etseq.]) establishes a comprehensive program to "restore and maintain the chemical, physical,

 and biological integrity of the Nation's waters" (section 101(a)). EPA is authorized under sections 301, 304,

 306, and 307 of the CWA to establish effluent limitations guidelines and standards of performance for

 industrial dischargers. The standards EPA establishes include:


        •      Best Practicable Control Technology Currently Available (BPTV Required under section
               304(bXl), these rules apply to existing industrial direct dischargers. BPT limitations are
               generally based on the average of the best existing performances by plants of various sizes,
               ages, and unit processes within a point source category or subcategory.

        •      Best Available Techno, Togy Economically Achievable (BAT). Required under section
               304(b)(2), these rules control the discharge of toxic and nonconventional pollutants and
               apply to existing industrial direct dischargers.

        •      Best Conventional Pollutant Control Technology fBCTV Required under section 304(b)(4),
               these rules control the discharge of conventional pollutants from existing industrial direct
               dischargers.1 BCT limitations must be established in light of a two-part cost-reasonableness
               test BCT replaces BAT for control of conventional pollutants.
                                                        '
                                „                         ,                            ,
                           Standards for Existing Sources (PSES).  Required under section 307.
               Analogous to BAT controls, these rules apply to existing indirect dischargers (whose ,
               discharges flow to publicly owned treatment works [POTWs]).

               New Source Performance Standards fNSPSV Required under section 306(b), these rules
               control the discharge of toxic and nonconventional pollutants and apply to new source
               industrial direct dischargers.

               Pretreattt]ent Standards for New Sources (PSNS). Required under section 307. Analogous
               to NSPS controls, these rules apply to new source indirect dischargers (whose discharges
               flow to POTWs).
EPA did not establish any national effluent limitations guidelines or standards for the TEC industry prior to
this rule proposed on May 15,1998 (CFR citation).
       1 Conventional pollutants include biochemical oxygen demand (BOD), total suspended solids (TSS),
fecal coliform, pH, and oil and grease.

                                               1-2

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1.2     REPORT ORGANIZATION
        This Economic Assessment (EA) is organized as follows:
               Chapter!—Industry Profile

               Provides background information on the facilities, companies, and industry affected by this
               regulation. Due to the lack of publicly available information about the TEC industry, the
               industry profile is based primarily on two surveys implemented by EPA.
               Chapter 3;—Economic Impact Analysis Methodology Overview

               Summarizes the economic methodology by which EPA examines incremental pollution
               control costs and their associated impacts on the industry. More detailed information on the
               economic methodology is located in Appendixes A through E.
               Chapter 4—-Pollution Control Options

               Presents short descriptions of the regulatory options considered by EPA. More detail is
               given m the Development Document (U.S. EPA, 1998a).
               Chapters—Economic Impacts

               Using the methodology presented in Chapter 3, EPA presents the annualized costs reflecting
               the capital and annual operating and maintenance costs that are associated with more
               stringent pollution control. EPA also presents the economic impacts associated with the
               regulatory costs, including impacts on facilities, companies, industry output, and TEC
               employment  In other words, this chapter presents the findings on which EPA based its
               determination of economic achievability under the CWA.2
               Chapter6—Initial Regulatory Flexibility Analysis

               Pursuant to the Regulatory Flexibility Act as amended by the Small Business Regulatory
               Enforcement Fairness Act, EPA examines whether the regulatory options have a significant
               adverse impact on a substantial number of small entities.
       2 EPA also calculated the pollutant removals, cost-effectiveness, and cost-reasonableness associated
with the regulatory options. This information is presented in a separate report (U.S. EPA, 1998b).

                             ..•"..      1-3

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               Chapter 7—Benefits Methodology

               Summarizes the methodology by which EPA identifies, qualifies, quantifies, and—where
               possible—monetizes the benefits associated with reduced pollution.
               Chapter 8—Environmental Assessment and Benefits Analysis

               Using the methodology described in Chapter 7, EPA prepares an assessment of the
               nationwide benefits of the regulation.
               Chapter 9—Cost and Benefits of the TEC Industry Proposed Rule

               Using the benefits described in Chapter 8, EPA presents an assessment of the nationwide
               costs and benefits of the regulation pursuant to Executive Order 12866 and the Unfunded
               Mandates Reform Act (UMRA).
               Chapter 10—Unfunded Mandates Reform Act

               Provides a "road map" showing how the EA is responsive to each of the relevant provisions
               ofUMRA.
1.3    REFERENCES
U.S. EPA. 1998a. Development document for the proposed effluent limitations guidelines and standards for
the transportation equipment cleaning industry. EPA-821-B-98-011. Washington^ DC: U.S. Environmental
Protection Agency, Office of Water. May.

U.S. EPA. 1998b. Cost-effectiveness analysis of the proposed effluent Imitations guidelines and standards
for the transportation equipment cleaning industry. EPA-821-B-98-013. Washington, DC: U.S.
Environmental Protection Agency, Office of Water. May.
                                             1-4

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                                         CHAPTER 2
                                   INDUSTRY PROFILE
 2.1    OVERVIEW

        Transportation serves as a vital link in the U.S. economy, making sure that raw materials,
 intermediate goods, and finished goods flow throughout the nation as needed. Transportation equipment
 cleaning (TEC) supports the nationwide flow of goods by ensuring that no contamination occurs among
 products from one shipment to the next The TEC industry, the subject of this effluent guideline, provides
. interior tank cleaning services to the truck, rail, and water transportation industry.  The cleaning services are
 providedfor:

        •      Tank trucks
                                                                                     '
        •      Rail tank cars
        •      Tank barges
        •      Intennodal tank containers
        •      Intermediate bulk containers (or "totes")
        •      Ocean/sea tankers
        »      Hopper trucks
        •      Hopper rail cars
        •      Hopper barges

 Except for commodities transported by pipelines, all food, chemical, and petroleum commodities are moved
 in bulk tank containers. Unless a particular tank is dedicated to the shipment of one product, interior tank
 cleaning is generally required between shipments. More detailed descriptions of the containers and cleaning
 methods are described in the Development Document (U.S. EPA, 1998).
                                              2-1

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        The TEC industry has three major characteristics that affect the structure of this economic analysis:

        •      It is a service industry.
        •      The demand for TEC services is derived from, or based on, the demand for transportation
               services.
        •      TEC services are provided by both in-house and commercial facilities.

Industry output (i.e., the number of cleanings performed by the industry) is directly dependent on the demand
for transportation services; as the demand for tank truck services increases, the demand for tank truck
cleaning services increases. The demand for TEC services is also linked to the demand for the commodities
carried in the tank containers. An increase in the demand for pesticides, for example, will increase the
                                  11       '                      . n     !                      r '
demand for tank containers in which to ship pesticides. This increase in the demand for tank containers will
increase the demand for tank cleanings.

        The TEC industry is a multifaceted industry with links to all sectors of the economy.  Section 2.2
describes the process that EPA used to identify and define the industry. Section 2.3 summarizes the data
sources supporting this profile, while  Section 2.4 briefly addresses some of the environmental protection
issues for this industry. Section 2.5 presents the industry subcategories. Sections 2.6 and 2.7 present
facility-level and company-level information, respectively. Baseline (or preregulatory) price and quantity
estimates are described in Section 2.8. Section 2.9 discusses industry growth, while Section 2.10 discusses
international competition.
2.2    INDUSTRY DEFINITION FOR THE EFFLUENT GUIDELINE

       2.2.1   Definition Process Description

       For the purpose of establishing an effluent guideline, EPA has defined the TEC industry according to
the cleaning processes used within the industry.  However, these cleaning processes, which are the source of
discharged wastewater, may be provided for very different reasons by different facilities.  These differences in
why cleaning services are provided are reflected in the five major operational structures that exist in the TEC
industry:
                                               2-2

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        •      Independent—Facilities that provide TEC services as their primary source of revenue.
               These facilities do not own their own transportation fleets.
        •      Carrier—Facilities that own and/or operate their own transportation fleets to cany other
               companies' cargos.                              .
        •      Shipper—Facilities that own and/or operate a transportation fleet to carry their own cargos.
        •      Builder/Leaser—Facilities that build or repair transportation fleets and lease them.
                                             *-.                '    '
        •      Other—Facilities that are combinations of the operational structures defined above or that
               provide services not classified above (e.g., construction services).

Companies that manufacture commodities (shippers), provide transportation and warehouse services
(carriers), or build or repair transportation equipment (builder/leasers) frequently provide their own tank
cleaning services. They do so for convenience and quality control and to limit their environmental liability.
These services are generally provided at cost to other operations within die facility, although some facilities
may perform a small number of commercial tank cleanings (e.g., for outside, unrelated clients).  The
distinguishing feature of these facilities is that TEC is not their primary service, and TEC services generally
account for only a very small share of total facility revenues, employment, and cost. Independents on the
other hand, provide TEC services as their primary business (although many faculties also offer some light
repair services), and TEC  services provide the dominant share of total facility revenues, employment, and
cost          '     ',     ' '

        The fact that many facilities provide TEC services even though those services may not comprise a
significant share of their primary business makes it difficult to characterize the TEC industry. For example,
facilities that were determined to be within the industry list a wide range of SIC codes for their primary
business activity. Table 2-1 shows that the SIC codes range from 1560 (General Building Contractors) to
7966 (Amusement and Recreation Services), including the more-expected 4213 (Trucking and Warehousing)
and 7699 (Miscellaneous Repair). This heterogeneity in business definition affects the small business
analyses required by the Regulatory Flexibility Act as amended by the Small Business Regulatory
Enforcement Fairness Act of 1996 (see Section 2.7 for more details).

        The process that EPA used to evaluate  and define the TEC industry is illustrated in Figure 2-1. The
left-hand circle corresponds to faculties with manufacturing or transportation operations while the right hand
circle encompasses facilities with TEC operations. The intersection of the two circles contains facilities
              .   -                  .           2-3

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 TABUE2-1
 FACILITIES BY SIC CODE AND COMMERCIAL STATUS
SIC Category
15
20


37
39
42




44




47



51

63
73
75

76

79
Building Construction
Food and Kindred Products


Transportation Equipment
Miscellaneous Manufacturing Industries
Motor Freight Transportation & Warehousing




Water Transportation




Transportation Services



Wholesale Trade - Nondurable Goods

Insurance Carriers
Business Services
Automotive Repair, Services, and Parking

Miscellaneous Services

Amusement and Recreation Services
4-digit Commercial In-house Total
SIC Code Faculties fll Facilities HI Faculties fll
1560
2037
2077
2079
3743
3930
4200
4210
4212
4213
4231
4400
4463
4491
4492
4499
4700
. 4741
4785
. 4789
5161
5172 '
6338
7398
7512
7542
7692
7699
7966




2
7



18
7
2

8
3
6
7
6
1
5



8
2
.22
. 1
125
7
3
17
41
86


44
14
13
120
54

1
3
3
0

6

7
11
9
7




11

3
17
41
86
2
7
44
14
13
138
61
2
1
11
7
6
7
13
1
12
11
9
7
8
2
22
1
136
7
    Total

Numbers may not sum to totals due to rounding.
[1] From national estimates based on detailed questionnaire database.
240
452
692
                                           2-4

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                                                 2-5

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 whose primary business is not tank cleaning but who maintain TEC operations in support of their primary
 line of business. These facilities correspond to the carrier, shipper, builder/leaser, and other operational
 structures defined above. Those facilities contained in the right hand circle but lying outside the intersection
 of the two circles correspond to the independent operational structure.
                  l"            ,,      i                             •,                  •
        Some facilities which provide manufacturing or transportation services commingle their TEC
 wastewater with other process wastewater and use a single wastewater treatment system.  Where such
 facilities are already regulated by another effluent guideline, EPA determined that, rather than add an
 additional regulatory burden, the first guideline took precedence.1 These "EGO" (effluent guideline, other)
 facilities were removed from the analysis. Examples of EGO operations include tank cleanings performed by
 dairies, chemical manufacturers, and incinerators.

        Areas A and B in Figure 2-1 represent TEC operations not covered by a pre-existing guideline and
 which may be affected by this guideline. Because TEC operations are performed at such facilities primarily
 to support other business activities, the EPA designates such facilities as "in-house" for the purposes of this
 analysis. The operational structure explains why these facilities provide TEC services; the designation "in-
 house" characterizes the type of TEC services provided.

        Within the intersection, Area A represents facilities that do not discharge wastewater, while Area B
 represents those that do discharge wastewater. Discharging facilities, or "potentially affected" facilities,
 clean tank containers and discharge the wastewater from those cleanings directly to U.S. surface waters or
 indirectly to publicry owned treatment works (POTWs).  Discharging facilities will be affected by the effluent
 guideline and may bear incremental pollution control costs. Other faculties do not discharge wastewater.  For
 example, they may recycle it all or have the water hauled to a commercial centralized waste treatment center.
These faculties are designated "zero discharge" (ZDT) facilities.

       Areas C and D denote facilities for which TEC is their sole or primary business. Because TEC
services account for a very significant percentage of total revenues, employment, and cost, at these faculties,
and because these TEC services are primarily performed on tank containers not owned by the faculty, the
    1 Regulatory coordination such as this is consistent with EPA's Common Sense Initiative, which was
announced on 20 July 1994.
                                               2-6

-------
EPA designates such facilities as "commercial" for the. purposes of this analysis.2 Commercial facilities range
from large nationwide chains of tank cleaning facilities to relatively small, single-facility companies.  Like in-
house facilities, commercial facilities may be dischargers (potentially affected by this rulemaking) or
nondischargers.

        The remaining area in Figure 2-1—Area E—indicates manufacturing or transportation operations
that do not have TEC operations.  These facilities are not affected by this rulemaking.

        Commercial facilities are generally a homogeneous group; in-house facilities are heterogeneous. The
most frequent SIC code among commercial facilities is 7699; 52 percent of potentially affected faculties fall
into this category. The remaining 115 faculties are distributed over 17 other SIC codes. In comparison, the
most frequent in-house SIC code is 4213; only 27 percent of potentially affected in-house faculties report this
code. The remainder are spread over 18 SIC codes. Furthermore, comparison with the 1994 County
Business Patterns illustrates that even within these codes, tank cleaning facilities comprise a very small
percent of all establishments. Tank cleaning facilities in SIC codes 4210,4212, and 4213  comprise less than
0.2 percent of all establishments (165 of 109,000 establishments) in the three-digit SIC code 421. Tank
cleaning facilities in SIC 7699 comprise only 0.4 percent of all establishments in that four-digit SIC code
(136 of 34,000 establishments) (U.S. Bureau of the Census, 1996).  Thus, the TEC industry is well diffused
through the U.S. economy, forming a small share of many different industries and a significant share of none.
        2.2.2   Summary and Facility Count

        There are two major, intersecting classifications for the economic industry profile:

        •      In-house/commercial facilities
        •      Potentially affected/nondischarging facilities
   2 See Section 2.6 for a more detailed definition of commercial and in-house facilities.

                ;      .   '    '      •          • ,2-7-             .    . •  •   .

-------
The facility counts3 represented by the areas in Figure 2-1 are approximately:
                                                          *             i -
        •       1,229 facilities (not previously regulated)
        •       910 in-house facilities (Areas A and B)
                —452 dischargers (Area B)
                — 458 ZDT (Area A)
        •       319 commercial facilities (Areas C and D)
                — 240 dischargers (Area D)
                — 79ZDT(AreaC)
        •       692 potentially affected or discharging facilities (Areas B and D)
        •       537 ZDT facilities (Areas A and C)

The 692 discharging TEC facilities (240 commercial, 452 in-house) potentially affected by the guideline are
the primary focus of the economic analysis. The ZDT facilities will not be affected by the guideline; because
they do not discharge wastewater, they will bear no incremental pollution control costs as a result of the
regulation. However, ZDT facilities are an integral part of the industry profile for two reasons. First, the
technologies they use provide a basis for considering zero-discharge options for the TEC facilities that
currently discharge. Second, although commercial ZDT faculties do not incur control costs, they compete
                                  1  I                 ,              •"!',!.           •
directly with commercial discharging facilities that do incur those costs. If a significant percentage of
commercial cleaning faculties within a subcategory incur no costs, it will be more difficult for discharging
faculties to pass on their increased costs to their customers. The competitive pressure of the ZDTs will place
downward pressure on prices. If control costs cannot be passed on to customers, then the additional pollution
control costs must be paid out of profits; this increases the likelihood that some faculties will have to close
because they cannot bear the increased burden. This likelihood is discussed in more detail in Chapter 3
(Economic Methodology) and Appendix B (Market Methodology).4
    3 These are the national estimates for the nationwide number of faculties. They are weighted estimates
statistically derived from the detailed questionnaire data and sampling weights (SAIC, 1997).  Unless otherwise
specified, such as in Section 2.8, all results are weighted national estimates.
   4 Unlike commercial ZDT facilities, in-house ZDTs neither incur costs nor affect market behavior. They
are included in the industry profile for completeness.

                                                2-8

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2.3     DATASOTJRCES

        As described in Section 2.2, facilities and companies in the TEC industry represent a wide range in
SIC codes yet TEC represents only a small fraction of the commercial activity in each code category.
Because of this phenomenon, most readily available information—such as that collected by the U.S.
Department of Commerce, Bureau of the Census—does not adequately represent the TEC community
affected by the guideline. The major data sources for this rulemaking are the EPA survey efforts performed
under tiie authority of Section 308 of the Clean Water Act:

        •      Screener survey (data as of 1992; EPA, 1993).
        •      Detailed questionnaire (1994 technical data, 1992-1994 economic and financial data; EPA,
               1995).

The screener survey was conducted to better identify these facilities that were performing TEC operations and
generating wastewater. EPA considers these facilities as potentially "in-scope" of the regulation.  The survey
asked 16 questions, most of which were multiple choice (see Appendix G).  EPA mailed out 3,267 screener
questionnaires of which approximately 2,963 were returned and 734 were in-scope (Radian, 1994).

        EPA used the information from the screener survey to develop the detailed questionnaire. This
questionnaire was separated into two volumes:

        •      Part A: Technical Information
        •      PartB: Financial and Economic Information (included as Appendix?)

        Faculties identified in the screener survey as performing TEC operations served as the sampling
frame for the detailed questionnaire. However, because the size of the screener survey had been limited by
cost, the survey had identified only a subset of all TEC  faculties in the United States (in other words, the in-
scope population identified by the screener survey was a sample, not a census). The detailed questionnaire
was sent to approximately 300 facilities to minimize burden on the industry while collecting sufficient
information for the analysis. The facilities that received the detailed questionnaire were identified by
statistical methods (see SAIC, 1996, for a detailed description). The sampling frame for the detailed
questionnaire was stratified on the basis of facility characteristics. This means that an estimate can be made
                                            '
                          '     '              "2-9       "        '.'""                   .

-------
far the number of facilities but that it is not possible to extrapolate and estimate the number of companies in
the industry. This feature affects the small business analysis (see Chapter 6).

        Other data sources used in the economic analysis include:

        •      Census data (particularly those illustrating the larger economic sectors supported by the
               TEC industry).
        •      Industryjournals.
        •      Computerized literature searches (see Appendix B for an explanation of how these were
               used in developing the market model).
        •      General economic and financial references (these are cited throughout the report).

Discussions with the regulated community took place throughout the rulemaking effort


2.4     ENVIRONMENTAL PROTECTION ISSUES

        The 1990 Pollution Prevention Act emphasized that EPA should seek solutions that focus on
pollution prevention rather than end-of-pipe controls that may simply transfer the pollutants to another
media. EPA identified several pollution prevention practices relevant to this industry:

        •      Heel control
        •      Water-use minimization
        •      Pretreatment and sludge pollutant minimization

        Heel control means removing as much material as possible from the bottom of the tank (i.e., "heel")
before cleaning. Heel control reduces the amount of pollutants that must be recaptured by the wastewater
treatment system.  The TEC industry has grown increasingly aware of and has emphasized the importance of
heel control as a means of reducing pollutants in the wastewater stream (Modem Bulk Transporter, 1996).
                                              2-10

-------
       Minimising the amount of water used to clean tanks results in several benefits First, the water
pollution control equipment can be sized for die smaller volume of effluent that needs to be treated. This
leads to lower overall equipment costs and operation and maintenance costs for a given facility.  Second, the
smaller volume of wastewater produced contains higher pollutant concentrations (i.e., same pollutant mass in
a smaller volume of water). This results in higher efficiencies for the pollution control equipment (U.S. EPA,
1998).

       Through pretreatment, industries limit the concentration of certain pollutants (including heavy metals
and organic chemicals) in wastewater discharged to a treatment works. These programs minimize
interference with the treatment process at the POTW, and also can significantly improve the quality of
sewage sludge. Sludge that meets concentration limits for 10 metals (arsenic, cadmium, chromium, copper,
lead, mercury, molybdenum, nickel, selenium, and zinc) can be applied to land (e.g., used as fertilizer) in
certain circumstances (40 CFR Part 503).                 .   ,
             ,                         .                             •',."'"
       EPA considered th& segregation of stormwater and TEC water in developing options and associated
costs (U.S. EPA, 1998). The coordination of different regulatory requirements (e.g., stormwater regulations
and solid waste issues associated with heel control) means that the rulemaking process for the TEC industry
effluent guideline is following the tenets of EPA's Common Sense Initiative.
2.5    SUBCATEGORIES, DISCHARGE TYPE, AND NUMBER OF CLEANINGS

       2.5.1 Description

       EPA divided the TEC industry into 11 .subcategories on the basis of commodity transported and the
mode of transportation:

       "      Barge Hopper (BH/HOPPER)
       •      Rail Hopper (RH/HOPPER)
       •      Rail Chemical (RT/CHEM)
       •      Rail Food (RT/FOOD)

                                             2-11

-------
        •      Rail Petroleum (RT/PETR)
        »      Barge Chemical and Petroleum (TB/CHEM)5
        •      Barge Food (TB/FOOD)
        •      Truck Chemical (TT/CHEM)6
        •      Truck Food (XT/FOOD)
        •      Truck Petroleum (TT/PETR)
        »      Truck Hopper (TH/HOPPER)

la general, the commodity1 transported affects the types of pollutants found in the wastewater stream.  The
                                   !
three commodities encountered in the TEC industry are chemical, petroleum, and food products; hoppers
generally transport dry bulk materials such as grain, fertilizer, and pelletized plastic. The mode of
transportation affects the volume of wastewater produced. Rail tank cars are larger than tank trucks and tank
barges are larger than both. Larger volumes of wastewater are required to clean larger tanks. The
concentration of pollutants in the wastewater stream affects the efficiency of the pollution control technology;
thus the volume of wastewater is relevant for specifying and analyzing the effluent guidelines.  These
subcategories are not completely exclusive; for example, some truck facilities do clean small numbers of rail
tank cars.  However, the subcategorization scheme was in large part self-sorting (see Section 2.5.3 and
Development Document, U.S. EPA, 1998, for further details).

        Table 2-2 presents the breakdown of facilities within each of the 11 subcategories on the basis of
total facilities, discharging facilities by commercial and in-house status, and ZDT faculties by commercial
and in-house status.
    5 Effluent sampling found that no significant difference existed between Barge Chemical and Barge
Petroleum subcategories; these two subcategories were therefore combined into a single Barge Chemical and
Petroleum subcategory.
   6 This subcategory contains facilities that clean a significant number of intermediate bulk containers (IBCs)
and intermodal tank containers hi addition to tank trucks; 75  ZDT facilities, which are unaffected by the
regulation, clean IBCs exclusively.
                                              2-12

-------
                                     TABLE 2-2

        NUMBER OF FACILITIES BY SUBCATEGORY AND COMMERCIAL STATUS
Subcategory
Barge Hopper
Rail Hopper
Rail Chemical
Rail Food
Rail Petroleum
Barge Chemical
Barge Food
Track Chemical *
Track Food
Track Petroleum
Track Hopper
Total
Potentially Affected
Commercial
9
5
18
0
0
12
2
128
42
12
11
240
In-house
3
0
19
86
3.
3
0
160
131
23
23
452
ZDT
Commercial
2
0
16
0
1
5
0
33
0
22
0
79
In-house
0
0
14
0
0
11
0
234
145
48
5
458
Total
15
5
67
86
4
31
2
556
319
105
39
1,229
National estimates from detailed questionnaire database.
Numbers may not sum to total due to rounding.
* Includes intermediate bulk container (IBC) and intermodal facilities.
                                        2-13

-------
        2J53 Discharge Type

                                    ' i                                           .
        Section 1.1 summarizes the different effluent limitations guidelines and standards, the pollutants
 controlled by each, and the type of discharge to which each standard pertains.  Best Available Technology
 Economically Achievable (BAT) standards set effluent limitations on toxic and nonconventional pollutants
 for direct dischargers prior to wastewater discharge directly into a water body such as a stream, river, lake,
 estuary, or ocean. Indirect dischargers send wastewater to a POTW for further treatment prior to discharge to
 U.S. surface waters; Pretreatment Standards for Existing Sources (PSES) set effluent limitations for indirect
 dischargers on toxic and nonconventional pollutants which pass through a POTW. Table 2-3 summarizes the
 number of direct and indirect dischargers as determined through the detailed questionnaire sample survey.
 Ninety-six percent of the facilities  (an estimated 669 of 692) are indirect dischargers and would therefore be
 subject to PSES requirements.

        Based on detailed questionnaire data, direct dischargers are found only in the Barge Hopper (9
 facilities) and Barge Chemical and Petroleum (14 facilities) subcategories. However, EPA believes that
 direct dischargers exist in other subcategories. Using the screener survey, EPA identified additional direct
 discharging facilities in the Truck Chemical, Petroleum, and Food subcategories, the Rail Chemical
 subcategory, and the Barge Food subcategory. For economic and financial data, the screener survey provides
 only one year of revenue and employment data which is insufficient for the economic analyses performed on
 facilities that responded to detailed questionnaires. Economic impacts to the screener identified direct
 discharging facilities were therefore modeled using somewhat different techniques (Section 5.5). In addition,
 because these facilities were identified through the screener survey questionnaire faculties, statistically
 reliable inferences comparable to those drawn from detailed questionnaire facilities may not be drawn from
these facilities.
        2.53 Tanks Cleaned

        Table 2-4 presents the number of tank cleanings performed by potentially affected facilities, by
subcategory and commercial status. Overall, tank trucks comprise some 88 percent of all tanks cleaned,
followed by intermediate bulk carriers ("totes"), closed-top hopper trucks, and rail tank cars. In general, the
data in Table 2-4 supports the claim that the subcategorization by transportation mode is self-sorting; for

                                               2-14

-------
                                 TABLE2-3

         DIRECT AND INDIRECT DISCHARGERS BY SUBCATEGORY
Subcategory
Barge Hopper
Rail Hopper
Rail Chemical
Rail Food
Rail Petroleum
Barge Chemical
Barge Food
Truck Chemical
Truck Food
Truck Petroleum
Truck Hopper
Total
Direct
Dischargers
> - - 9
0
I1
6
0
14
21
' 31
181
0
0
232
Indirect
Dischargers
3
5
38
86
3
1
2
288
173
34
34
669
Total
Potentially
Affected
Facilities
12
5
38
86
3
15
2
288
173
34
34
692
Note: Numbers may not sum to total due to rounding.
1 Number of direct dischargers estimated from screener survey; indirect dischargers and total
potentially affected facilities from National Estimates based on detailed questionnaire database.
2 Does ,not include direct dischargers estimated from screener survey.
                                   2-15

-------
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                          2-16

-------
example, although facilities in the truck chemical subcategory clean over 1,000 rail tank cars, 90 percent of
all tanks cleaned by the subcategory are tank trucks while another 7 percent are intennodal containers and
totes.

        The second important feature of Table 2-4 is mat it emphasizes the significance of commercial
facilities in the industry. In general, commercial facilities are typically much smaller than in-house facilities
when measured by facility revenues, costs, and employment; commercial facilities also comprise only
35 percent of all discharging TEC faculties (240 of 692 potentially affected TEC facilities are commercial).
However, because commercial facilities devote most of their resources to tank cleaning, they actually perform
more than half of all TEC operations. (More detail on facility data is given in Section 2.6 below.) This
means that roughly half of all tank cleanings provided in the United States are performed by companies
whose primary business interests lie elsewhere.                  -
              i          ;                             .                 •
        The in-house/commercial distinction is especially important in understanding the largest subcategory,
Truck Chemical. On average, the 128 commercial Truck Chemical facilities perform more than twice as
many cleanings per year as the 160 in-house faculties. In fact, the 128 commercial Truck Chemical facilities
comprise only 18 percent of the total number of TEC facilities, yet they perform 45 percent of all tank
cleanings by discharging facilities in all subcategories. Thus, the Truck Chemical facilities are distinguished
not only by the total number of tank cleanings performed, but also by the intensity of operations in terms of
cleanings per facility.
2.6    FACILITY-LEVEL INFORMATION

       This section analyzes facility-level information on the basis of subcategory and commercial/in-house
status.7 The key variables used to characterize the industry are revenues, employment, costs, and assets; all
numbers cited are 1994 values.  These variables are examined at the facility level and at the level of TEC
operations only. In general, it will be observed that the most significant differences among faculties are not
associated with subcategorization but the commercial/in-house distinction.
   7 Data examined hi mis section are based on statistically weighted responses to the detailed questionnaire;
as explained above, information on the direct dischargers found in the screener survey is not comparable with
this data because it was not drawn from the same sample frame.

                                              2-17

-------
        The definition that the Agency used to assign the designation "commercial" or "in-house" is based on
 the percentage of tank cleanings performed at the facility for commercial clients. If a facility indicated in the
 survey that more than SO percent of cleanings were performed for commercial clients, the facility was deemed
 commercial. Table 2-5 presents the distribution of facilities by percentage of commercial cleanings. The
 distribution is bimodal, with over 90 percent of the facilities performing either more than 90 percent or less
 than 10 percent of cleanings commercially.

        Table 2-6 summarizes total facility revenues and facility revenues from TEC operations. Overall
 facility revenues exceed $6.2 billion; however, only $208 million, or 3 percent, is attributable to TEC
 operations. Table 2-7 contains a more detailed breakdown for revenue data by subcategory and commercial
                               •         '        •       ' •              : "  I-
 status. The vast majority of revenues are derived from the manufacturing and transportation services
 provided by in-house facilities. The average in-house facility earns seven times the revenues earned by the
 average commercial facility. However, the average commercial facility earns 14 times the revenues from
 TEC operations earned by an in-house facility. Thus, while revenues from TEC operations comprise
 42 percent of facility revenues for commercial facilities, they comprise less than 1 percent of revenues for
 in-house facilities.8

        A total of 26 facilities reported zero revenues; these faculties are cost centers.  That is, these are
 facilities that do all or almost all of their cleanings to support another business activity while the mam
 location for the primary business activity is located elsewhere; the company itself views TEC as simply a cost
 of doing its larger business activity. Companies owning cost centers have the ability to switch from
providing TEC service on an in-house basis to a commercial basis (i.e., outsourcing). The outsourcing
decision is modeled as a component of the market model (Chapter 3 and Appendix B).9

        Since, by definition, in-house facilities perform less than 50 percent of cleanings commercially, small
TEC revenues do not necessarily mean small TEC operations. However, other data confirm that TEC
operations at in-house facilities tend to be smaller than at commercial facilities.  Table 2-8 summarizes
    * TEC revenues do not form 100 percent of the revenues for commercial facilities because commercial
facilities are defined as those mat perform more man 50 percent of their cleanings for commercial clients; this
definition therefore includes facilities mat earn substantial revenues from non-TEC activities.
    9 The existence of cost centers affects the financial closure analysis. For these facilities, the economic
analysis defaults to the company level.
                                              2-18

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                     TABLETS

     PERCENTAGE OF COMMERCIAL CLEANINGS
Percent
Commercial
Cleanings
0%
1-10%
11-20%
21-30%
31-40%
41-50%
51-60%
61-70%
71-80%
81-90%
91-99%
100%
Number of
Facilities in ,
Range1
310
102
8
r
9
0
24
0
5
7
10
2
214
Percent
Facilities
in Range
44.9%
14.7%
1.2%
1.3%
0.0%
3.5%
0:0%
0.7%
1.0%
1.5%
0.3%
31.0%
Note: Percentages do not total to 100.0% due to rounding.
i1 From national estimates based on detailed questionnaire database.
                        2-19

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                                       2-21

-------
                                     TABLE2-8

        FACILITY EMPLOYMENT AND TEC EMPLOYMENT BY SUBCATEGORY
Subcategory
Barge Hopper
Rail Hopper
Rail Chemical
Rail Food
Rail Petroleum
Barge Chemical
Barge Food
Truck Chemical
Truck Food
Truck Petroleum
Truck Hopper
Total
Number of
Potentially
Affected
Facilities1
12
5
38
86
3
15
2
288
173
34
34
692
Total
Employment
887
ND
2,190
ND
ND
707
ND
12,101
21,690
774
659
44,597
Average
Employment
71
ND
58
ND
ND
47
ND
42
125
22
20
64
Total
TEC
Employment
120
ND
276
ND
ND
498
ND
1,910
699
22
81
3,623
Average
TEC
Employment
10
ND
7 '
ND
ND
33
ND
7
4
1
2
5
ND: Not disclosed due to business confidentiality.
^rom national estimates based on detailed questionnaire database.
                                        2-22

-------
 facility employment Overall, potentially affected TEC facilities employ over 44,000 workers; less than 10
 percent of those workers—3,600 employees—are devoted to TEC operations. Table 2-9 provides
, employment information by subcategory and commercial status. The average number of employees engaged
 in TEC operations at in-house facilities is only 4 percent of overall in-house facility employment. The
 average number of TEC employees at an in-house facility is less than half the average number of TEC
 employees at commercial faculties, while total facility employment at in-house facilities is five times total
 facility employment at commercial facilities. This information again emphasizes the fact that in-house
 faculties are generally much larger than commercial facilities, but that TEC operations form only a very small
 part of facility activities.10

        Tables 2-10 and 2-11 summarize facility cost information. Facility costs due to TEC operations
 comprise 4.5 percent of overall operational costs for discharging facilities. Total facility operations cost
 $5.9 billion while TEC operations cost $264 million. For 128 facilities, TEC costs were so small that the
 company did not track them.  The ratio of TEC costs to facility costs for carriers was used to estimate the
 derived demand for TEC services in the market model; see Section 2.9 below. The basic differences between
 commercial and in-house facilities are again apparent TEC operations  account for 40 percent of total facility
 costs at commercial facilities and for; less than 2 percent of total costs at in-house facilities.

        Table 2-12 summarizes the facility asset information.  Assets among discharging facilities with TEC
 operations total $3.8 billion, with average assets of $5.6 million per facility.  However, most of these assets
 are attributable to non-TEC operations. Many facilities do not separately track TEC assets.11 To obtain an
                                               f-   _ •              '         '   -
 approximate estimate of typical assets, EPA selected companies whose  primary business is TEC and divided
 business assets by the number of facilities.  In this example, typical assets are $1.2 million per facility.
    10 Companies may show in-house operations as transferring services at cost to other parts of the facility,
 or they may record as revenue only the commercial cleanings performed at the facility.  Financial data for
 these facilities may show little or no profit.  Any additional cost may make the facility appear unprofitable
 when, hi reality, the company would adjust the transfer cost or consider outsourcing. For these facilities, the
 financial analysis defaults to the company level while the market model addresses whether the company would
 outsource its TEC operations.
    11 Of 692 facilities, 116 reported that they do not track assets at me facility level; 144 reported that they
 do not track TEC assets at me facility level, and some do not track TEC assets at all.

                                                2-23                             "

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                                 TABLE 2-12

                    FACILITY ASSETS BY SUBCATEGORY
Subcategory
Barge Hopper
Rail Hopper .
Rail Chemical
RailFood
Rail Petroleum
Barge Chemical
Barge Food
Truck Chemical
Truck Food
Truck Petroleum
Truck Hopper
Total
Number of
Potentially
Affected
Facilities1
12
5
38
86
3
15
2
288
173
34
34
692
Total
: Assets
$91,646,713
ND
$194,774,483
ND
ND
$32,936,179
ND
$677,344,139
$2,352,564,566
$42,946,514
$12,681,120
$3,838,276,960
Average
Assets
$7,350,469
ND
$5,158,431
ND
ND
$2,165,471
ND
$2,352,201
$13,560,831
$1,246,487
$377,026
$5,550,381
ND: Not disclosed due to business confidentiality.
Number of potentially affected facilities may not sum to total due to rounding.
^rom national estimates based on detailed questionnaire database..
                                     2-27

-------
        The distinction between commercial and in-house facilities is important for the economic analysis.
First, in-house tank cleanings do not represent a market transaction. Therefore, in-house facilities must be
separated from commercial facilities in order to perform market analysis. The market analysis examines the
impact of regulations on the price of cleanings and on the overall number of cleanings performed by the
industry. Second, both types of faculties are providing the same service, but with different motives;
therefore; they may respond differently to EPA regulation. For commercial facilities, TEC operations are the
primary business focus; however, to in-house facilities, TEC is an ancillary operation.  In-house facilities may
choose not to incur the incremental regulatory cost, and thus may close their TEC operation and out-source
their TEC requirements to commercial facilities. This decision is modeled in Appendix B. However, many
in-house facilities have indicated that they will continue TEC operations and absorb the increased cost
Third, in-house facilities tend to be larger than commercial facilities; the agency is required to examine the
potential impacts to small business entities, and such impacts are likely to be less severe for in-house
faculties. This possibility is covered in more detail in Section 2.7.2.
2.7     COMPANY-LEVEL INFORMATION

        2.7.1 Corporate Structure

        The 142 facilities sampled for the detailed questionnaire differ not only in size, but in corporate
structure as well. As mentioned in Section 2.2, the survey was designed to sample at the facility level.
                                     i      .       ;                       •
Therefore, the analysis cannot estimate, with confidence, the total number of business entities that own TEC
facilities. Thus, further discussion at the business entity level will be based on unweighted facility data.
                                                ,
        The companies fall into several groups:

        »      Those owning only one TEC facility, wherein the company is the facility.
        •      Those that own only one TEC facility but that have other business operations in addition to
               the one TEC facility.
        •      Those owning multiple TEC facilities.
                                               2-28

-------
        The first group of business entities, wherein the company is equivalent to the facility, is the easiest to
 characterize. Fifty facilities have this corporate hierarchy, of which 30 are potentially affected and 20 are
 ZDTs.

        The second group is comprised of 23 companies. Of these, 14 facilities are potentially affected and 9
 are ZDTs. The feature that distinguishes the second group from the first group is that facilities in the second
 group are owned by a corporate entity larger than the facility- This entity may well own other facilities;
 however, those facilities do not perform TEC operations. This distinction is significant because the Agency
 is required by law to prepare an initial regulatory flexibility analysis unless the Administrator determines that
 a proposed rule will not significantly impact a substantial number of small entities. The appropriate level for
 this analysis is the business entity, not the facility. Thus, when preparing such an analysis, or in certifying
 that such an analysis is unnecessary, the size of the faculty's parent business entity, not the size of the
 facility, is the relevant variable.                                               ,

        The third group of business entities are those that own multiple facilities that perform TEC
 operations.  The remaining 68 facilities that received a detailed questionnaire are owned by 37 business
 entities; some business entities received multiple questionnaires while others received only one. Of the 68
 surveyed facilities, 49 are potentially affected and 19 are ZDTs. These 37 business entities own a total of
 243 TEC facilities; seven business entities own between 15 and 30 TEC facilities each.  These seven business
 entities include both independent commercial TEC chains and large shipper/carrier firms with multiple sites.
 Because the status of the unsurveyed facilities is unknown, it is difficult to characterize any of these business
 entities as dischargers orzero dischargers, however, at least 29 of the business entities own at least one ,
 facility that discharges wastewater.

        This group of multiple facility business entities represents a more complex problem for analysis.
 These businesses are less likely to be affected by small business considerations, however, the  impacts due to
 costs from all affected facilities must be estimated, not just the costs of surveyed facilities. Because some
business entities own a large number of TEC facilities, aggregate compliance costs could be quite significant
 at the business entity level even if costs for individual facilities would not adversely impact those facilities.
                                               2-29

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       2.7.2   Regulatory Flexibility Analysis and the Small Business Regulatory Enforcement
               Fairness Act (SBREFA)

       The Regulatory Flexibility Act (RFA, 5 U.S.C. 601 et seq., Public Law 96-354), as amended by the
Small Business Regulatory Enforcement Fairness Act (SBREFA), requires all federal agencies to certify that
a rule or proposed rule will not have a significant impact on a substantial number of small entities, or provide
a regulatory flexibility analysis.  The RFA acknowledges that small entities have limited resources and makes
it the responsibility of the regulating federal agency to avoid burdening such entities unnecessarily. The RFA
and SBREFA bom define "small business" as having the same meaning as the term "small business concern"
under Section 3 of the Small Business Act (unless an alternative definition has been approved). For small
business concerns, the relevant entity is the business, not the facility. Thus, in the context of the TEC
industry, it must be determined if a facility is owned by a small business entity, not if the facility itself is
small.

       The definition of "small" is generally defined by standards set by the Small Business Administration
(SBA) accordimg to SIC code. The TEC industry, however, cannot be defined by a single, or even a few, SIC
codes. Furthermore, the SBA standards vary widely across the SIC codes reported by TEC facilities.
Table 2-13 summarizes the SIC codes reported by TEC facilities, the SBA standard associated with that
                              i     i (     ,
code, the number of (weighted) facilities reporting that code, and the number of (unweighted) business
entities reporting that code. Note that small business standards range from $5 million to $20.5 million in
annual revenues and from 500 to 1,500 employees.

       The Agency's proposed guidance for SBREFA standards permits the selection of a single small
business standard when an industry covers several SIC codes. Of the 11 different small business standards
specified in the above table, 266 of 692 potentially affected facilities and 27 of 73  business entities report
codes with $5 million given as the most appropriate standard. In addition, the $5 million standard is
specified for the most relevant SIC code—7699 (Miscellaneous Services). This SIC code is assigned to
facilities whose primary business activity is tank cleaning.

       With $5 million specified as the appropriate small business standard for the  TEC industry, a total of
184 weighted faculties that produce wastewater belong to business entities that are "small" (see Table 2-14).
Of these 184 small potentially affected facilities, 175 are single-facility businesses. In addition, 132 of the
                                              2-30

-------
 TABLE 2-13
 SBA STANDARDS BY 4-DIGIT SIC CODES,
TEC INDUSTRY POTENTIALLY AF1'E<
1 -


SIC Category
15 Building Construction
20 Food and Kindred Products



28 Chemicals and Allied Products
37 Transportation Equipment




39 Miscellaneous Manufacturing Industries
42 Motor Freight Transportation & Warehousing




44 , Water Transportation ~




47 Transportation Services



51 Wholesale Trade -Nondurable Goods

63 Insurance Carriers
65 Real Estate

73 Business Services
75 Automotive Repair, Services, and Parking


_
76 Miscellaneous Services

79 Amusement and Recreation Services
Total
CTEDFACE

4-digit
'SIC Code
1560
2037
2041
2077
2079
2821
3715
3731
3732
3743
3799
3930
4200
, 4210
4212
4213
4231
4400
4463
4491
4492
4499
4700
4741
4785
4789
5161
5172
6338
6512
6599
7398
, 7512
7513
7514
7542
7692
7699
7966
•'i
LillES, AND BUSINESS ENTITIES
•'
SBA
Standard*
$17,000,000
500 emp.
500 emp.
500 emp.
750 emp.
750 emp.
500 emp.
1,000 emp.
500 emp.
1,000 emp.
500 emp.
750 emp.
$18,500,000
$18,500,000
$18,500,000
$18,500,000
$5,000,000
$20400,000
$20,500,000
$18,500,000
$5,000,000
$5,000,000
$18,500,000
$5,000,000
$5,000,000
$5,000,000
100 emp.
100 emp.
$5m 71,500 emp.
$5,000,000
$15,000,000
$18,000,000
$18,500,000
$18,500,000
$18,500,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000

Potentially
Affected
Facilities [1]
3
17

41
86




2

7
44
14
13
138
61
2
1
11
7
6
7
'- 13
1
12
11
9
7


8
2


22
1
136
7
692
Unweighted
Business
Entities
1
1
r
1
1
1
1
1
1
i .
i
i
5
1
i
15
4
. ,1

3
2
1
I
4
1


2
1
1
1
1

1
1
2
1
10
1
73
*Where SIC code reported incorrectly, SBA Standard from 2-digft or 3-digit level applied as appropriate.
Numbers may not sum to totals .due to rounding.
[1] From national estimates based on detailed questionnaire database.
                                             2-31

-------
 TABLE 2-14
NUMBER OF POTENTIALLY AFFECTED FACILITIES BY SUBCATEGORY,
SMALL BUSINESS STATUS, AND COMMERCIAL STATUS
Potentially Affected Facilities [11
Subcategoiy
Barge Hopper
Hail Hopper
Truck Hopper
Barge Chemical
Rail Chemical
Truck Chemical
Barge Food
Rail Food
Truck Food
Rail Petroleum
Truck Petroleum
Total
Commercial
9
5
11
12
18
128
2
0
42
0
12
240
In-house
3
0
23
3
19
160
0
86
131
3
23
452
Small Business Owned
Potentially Affected Facilities [1]
Commercial
2
0
11
8
9
59
0
0
42
0
1
132
In-house
0
0
0
0
0
11
0
0
30
3
9
52
Numbers may not sum due to rounding.
[1] From national estimates based on detailed questionnaire database.
                                        2-32

-------
184 weighted facilities are considered commercial cleaners. This is relevant because only 240 of 692 affected
facilities are commercial, thus 55 percent of commercial facilities are owned by small business entities.
These small commercial businesses perform a large share of tank cleanings. The small business analysis is
presented in Chapter 6.
2.8    MARKET PRICE AND QUANTITY

       Because the market for TEC services is heterogeneous, baseline market conditions for each
subcategory in the TEC industry were estimated by combining financial information from the Section 308
survey with standard economic theory. While the following description highlights key assumptions and
results, details of the market model will be found in Appendix B of this document

       The market for TECservices can be considered perfectly competitive on a national basis. A
perfectly competitive market contains a large number of fairly similar firms, none of which is large relative to
the size of the market These two conditions make it difficult for any one firm to raise its product price
because there are many other firms equally satisfactory to customers who will attract away customers from
the first firm by maintaining their lower price; in other words, no single firm has "market power." It is
possible for a firm to have some localized market power if, for example, it has the only facility in a particular
geographic region. Given the mobility of TEC customers, however, that is unlikely to be an important facet of
this industry.
    \           '            .''•'•.          •
       For perfect competition to exist, an important condition is that there must be no barriers to entry.
New firms must be able to easily enter the market in response to perceived opportunities to earn profits.  The
inability to prevent entry by new firms helps ensure market discipline. Barriers of entry can arise because of
large capital requirements necessary to start a new company, patent rights on important production processes,
or regulatory requirements. None of those conditions appear to exist in the TEC industry.  There are, for
example, no apparent barriers to purchasing or using cleaning technology, and no licensing requirements.

       Capital requirements for starting up a TEC company do not appear particularly onerous. Survey data
was obtained on the book value of assets owned by companies with TEC facilities. Analysis was performed
on the assets owned by that subset of TEC facilities that perform 100 percent commercial cleanings and for

    "  "           ,  "    .       .       '    -   2-33   •  .           .•'•''

-------
which TEC operations are the primary source of facility revenues; this subset of facilities was examined to
provide the clearest estimate of capital requirements for TEC operations alone.  This analysis showed that the
typical TEC facility has a book value of fixed assets of approximately $1.2 million. It does not seem,
therefore, that capital requirements for TEC are sufficiently large to present a barrier to entry in comparison
to other industries.                                                                   ,
  *
        The supply of TEC services and the baseline equilibrium quantity of tanks cleaned in each
subcatcgory were derived from survey data provided by faculties on the number and type of tanks cleaned and
the revenues earned from tank cleaning operations.  Only commercial facilities were included, as, by
definition, in-house tank cleanings are non-market transactions. (However the market model does address the
decision by in-house faculties to outsource TEC operations; see Appendix B.)  The average revenue earned
per cleaning is the facility's price. The highest facility price—the "marginal" price—becomes, by
construction of the supply curve, the baseline equilibrium market price. The total weighted tank cleanings
performed by faculties in the subcategory is the baseline equilibrium market quantity. Estimates of baseline
price and quantity are presented by subcategory in table 2-15.

        The demand for TEC services is derived from the demand for transportation services. Demand for a
product is best characterized by its elasticity. The price elasticity of demand is defined as the percentage
change in quantity demanded caused by a 1 percent change in price. If demand is inelastic, the percentage
change in quantity demanded is smaller than the percentage change in price; therefore total market revenues
rise in response to an increase in price.  The opposite relationship holds if demand is elastic. According to the
results of the literature search, the best estimates for transportation services are that the demand for rail
services is approximately unit elastic (a 1 percent change in price causes a 1 percent change in quantity
demanded) while the demand for trucking services is slightly more elastic and the demand for water-borne
services is slightly less elastic. Details of the literature search and its findings are given in Appendix B.

       The price elasticity of demand for TEC services is derived from the estimates of demand elasticity
for transportation services using a standard, well-defined economic relationship. The derived demand for this
service is a function of the demand for the primary service (transportation), the cost share of TEC put of total
transportation cost, and the availability of substitutes for TEC (see Appendix B for details). According to
survey data from faculties operated by carriers, the cost of TEC services is less than 10 percent of the total
                                               2-34

-------
                          TABLE 2-15

           BASELINE COMMERCIAL EQUILffiRIUM PRICE
             AND TANK CLEANINGS BY SUBCATEGORY
Subcategory
Barge Hopper
Rail Hopper
Rail Chemical
Rail Food
Rail Petroleum
Barge Chemical .
Barge Food
Truck Chemical
Truck Food
Truck Petroleum
Truck Hopper
Equilibrium
Price
$550
NA
$781
NA
•NA
$6,448
NA ,
$279
$125
$436
$191 .
Equilibrium
Tank
Cleanings
4J32
NA
32,915
NA '
NA
12,078
NA
769,668
65,723
4,842
7,546
NA: Sample size top small to estimate reliable figures.
                            2-35

-------
cost of providing transportation services; some survey respondents reported that the cost of TEC was so
small that they dont even track it

        There are relatively few good substitutes available for TEC services. The need for tank cleanings can
be minimized by the use of dedicated tanks or the use of tank liners. Tank liners are a relatively recent
development and have not become a significant option for operators (Modem Bulk Transporter, 1994). The
use of dedicated tanks would require a large increase in investment by operators, as many more tanks would
be required to provide the same level of services.

        The low cost share for TEC services in the provision of transportation services combined with a lack
of good substitutes for TEC services results in an extremely inelastic demand for TEC services.  The lack of
substitutes means the costs of TEC are essentially unavoidable. The low cost share means that operators do
not have incentive to expend significant resources in finding a means to minimise TEC costs.

        The significance of inelastic demand for TEC services is that TEC facilities will be more able to bear
the burden of increased regulatory cost than if demand were elastic. Because demand is inelastic, the
increased cost of providing TEC services can, in part, be passed on to customers in the form of higher prices
rather than be paid for out of company profits. Companies can increase revenues by increasing price to help
pay the regulatory cost; facilities will be less likely to be forced into closure.  If demand is price elastic, an
increase in price will decrease revenues, and more of the regulatory cost would be borne by the company.

        In the case of the TEC industry, however, a second influence works against the effects of inelastic
demand. The existence of commercial facilities with zero wastewater discharge will limit the ability of firms
to increase price. These ZDT facilities will incur no regulatory costs and therefore will have less incentive to
increase price; they can attract customers away from the now higher-priced competitors. Because commercial
ZDT facilities are a distinct minority in the market, they are unlikely to be able to provide all commercial
cleanings and some price increase will occur in the market However, the existence of these faculties will
prevent prices from increasing as much as they would in the absence of ZDTs. The market model accounts
for this behavior (see Appendix B).

        Finally, there is another significant implication of the small cost share of TEC operations. In theory,
truck, rail, and barge transportation are substitutes for each other. In practice, choice of transportation mode

                                               2-36

-------
 may be limited by other factors. Barge transportation is by far the cheapest mode in terms of cost per ton-
 mile; however, geography and speed are important determinants of when it is chosen. Rail has a lower cost
 per ton-mile than trucks, but when the cost of yard operations is included, rail service cannot compete with
 truck service over short distances and only has a competitive advantage over trucks on long hauls.

        Because the transportation modes are, at least in some circumstances, competitors, costs imposed on
 one mode provide incentive for shippers to substitute other modes for transport services, to theory, the
 proposed effluent guideline could cause such a substitution. However, TEC service for all three modes is
 subject to the regulation.  Also, the cost of TEC services comprises a very small share of the cost of
 transportation services. It would, in practice, take an extremely large differential in cost per cleaning imposed
 on different modes to have a large enough impact on the differential in each mode's overall costs of providing
 transportation services to cause a shipper to switch between transportation modes. For all intents and
 purposes, the likelihood of such substitution effects is very small. For that reason, EPA has analyzed the
 TEC market subcategories as if they are independent of each other.
2.9     INDUSTRY GROWTH

        The heterogeneous nature of the TEC industry means that reliable published data on the growth rate
of the industry is unavailable. EPA used two sources to estimate industry growth: data from the detailed
questionnaire, and published data on the growth of the transportation services industry. Because the demand
for TEC services is derived from the demand for transportation services, the long-run growth rate of the TEC
industry should be similar to that of the transportation services industry.

        Table 2-16 presents data on TEC industry growth derived from the detailed questionnaire. A total of
67 potentially affected facilities (9.6 percent of discharging facilities) and 84 total facilities (6.8 percent of
total facilities) opened in the 1992 to 1994 period covered by the questionnaire.  The majority of these new
facilities were commercial.  New discharging facilities accounted for $155 million in industry revenues,
                                              2-37

-------
                                       TABLE 2-16

                                TEC INDUSTRY GROWTH
TEC Facility Growth

New Facilities
New Commercial Facilities
New Facility Revenues
New Facility Employment
%
New Facility Tank Cleanings
Number of
Potentially
Affected
Facilities1
67
50
$154,619,312
1,547
342,976
Number of
ZDT Facilities
17
_
$27,932,593
394
5,543
Total Number of
Facilities
84
50
$182,551,905
1,941
348,519
TEC Tank Cleaning Growth

Tanks Cleaned by Potentially
Affected Facilities
% Change
Tanks Cleaned by ZDT Facilities
% Change
Tanks Cleaned by All Facilities
% Change
1992
1,101,765
__
453,954
__
1,555,719
—
1993
1,352,004
22.7%
439,121
-3.3%
1,791,125
15.1%
1994
1,619,552
19.8%
455,791
3.8%
2,075,343
15.9%
Note:  Tanks cleanings performed in 1994 do not match numbers reported in table 2-4.  Some facilities
       mat were open in 1992 and 1993 were unable to report the number of tank cleanings ihey
       performed.  These facilities were removed from the estimates above in order to avoid
       overestimating the growth in tank cleanings.
'From national estimates based on detailed questionnaire database.
                                           2-38

-------
provided 1,550 new jobs, and cleaned 343,000 tanks in 1994.  All new facilities identified in the detailed .
questionnaire opened in 1993.12

        An industry can grow through an increase in production at existing facilities as well as through the
opening of new facilities. An estimate of the increase in annual tank cleanings performed captures both types
of growth and therefore provides a better sense of overall industry growth. This estimate is provided in the
bottom of Table 2-16. Tank cleanings per year performed by potentially affected facilities grew by
approximately 23 percent in 1993 and 20 percent in 1994. Because the growth in cleanings provided by ZDT
facilities was much smaller than that for potentially affected facilities, the overall average growth rate for the
entire TEC industry, as measured by this method, was approximately 15 percent in 1993 and 16 percent in
199413

        Table 2-17 presents two estimates of the growth in the transportation services industry. The first
estimate is based on Department of Transportation data on ton-miles of freight transported (U.S. Department
of Transportation, 1997). Overall, ton-miles of freight carried grew by 3.5 percent in 1992, less than 1
percent in 1993, and 6 percent in 1994. The second estimate uses Bureau of Economic Analysis data (U.S.
Department of Commerce, 1996) on real output by industry for SIC codes 40 (railroad transportation), 42
(trucking and warehousing), and 44 (water transportation). These data indicate that the transportation
services industry grew by almost 4 percent in 1992,6 percent in 1993, and 7 percent in 1994.

        Several factors might contribute to this difference between estimates of the growth in tank cleanings
performed and estimates of the growth in transportation services:
    12 The sources used to provide the sampling frame for the screener survey were published in 1992 and
1993; the detailed questionnaire sample was drawn from the subset of screener survey facilities deemed in-
scope for the proposed TEC regulation on the basis of their responses (SAIC, 1996).  Therefore, & facility
which opened in 1994 could not have received a detailed questionnake.
   13 Several facilities indicated in the detailed questionnaire that they could not provide data on tank cleanings
performed in 1992 or 1993. In order to avoid overestimating the growth rate for 1994, these facilities were
not included in the analysis.  The analysis provided in Table 2-16 implicitly assumes that the number of tank
cleanings performed at the excluded facilities grew at the same rate as the number of tank cleanings at the
included facilities. In addition, the total number of tank cleanings provided in Table 2-16 is smaller than the
number of tank cleanings provided inTable 2-4. ,
                     .'•;.'•                    2-39      ••-.••-".

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         •      Several TEC facilities indicated on the detailed questionnaire that they estimated the number
                of tank cleanings performed in 1992 or 1993; if these facilities underestimated tank
                cleanings performed in those years, and excluded facilities grew at a lower rate than other
                facilities, Table 2-16 would overestimate the growth in tank cleanings.

         •      The ton-miles and real output data are aggregate measures of transportation services
                provided; within each transportation group, tank transportation services may have grown
                faster than other transportation services. Table 2-17 would underestimate the growth of
                transportation services that require tank cleaning.

         •      Changes in tank cleaning policy may have occurred that could have affected tank cleaning
                frequency (e.g., a change in government regulations may have required more frequent tank
                inspections, or shippers may have required more frequent tank cleaning to ensure product
                quality).. Such changes could cause tank cleanings performed to grow at a faster rate than
                tank transportation services provided.

         •      Although in the long run the growth rates of transportation services and TEC services should
                be comparable, their growth rates may not be comparable in any specific year.

EPA believes the estimated growth rate in tank cleanings presented in Table 2-16 provides an upper bound
estimate of the TEC industry growth rate. The estimated growth rate for transportation services presented in
Table 2-17 provides a lower bound estimate of the TEC industry growth rate; the true value for growth, in
TEC services lies between the upper and lower bounds.                                   .
2.10    INTERNATIONAL COMPETITIVENESS


        International trade issues are not considered significant for the TEC industry. Although, in theory,

carriers could substitute Canadian or Mexican TEC services for U.S. services, such substitutions are unlikely

in practice. First, foreign facilities would be too inconvenient for the vast majority of tank operators.  Second,

the opportunity cost in. terms of transit time of a border crossing solely for the purpose of obtaining TEC
services is likely to be prohibitive.
    /    *          •          •                            "       -      .  •

        Increasing TEC prices could potentially have an effect on transported products that may be subject to

international trade. However, TEC services make up a small fraction of the cost of transportation services,

and transportation services comprise only a fraction of the cost of the final demand product in the

marketplace. Any impact of increasing TEC prices is likely to have a negligible effect on the price of
internationally traded products.


        '"              .               " '"   2-41' ..                 ."-'•'     '  :.  /

-------
2.11   REFERENCES
                          '
Mpdem Bulk Transporter.  1996. Tank container industry members review the role each one plays. Modern
Bulk Transporter. Houston, TX. December42.

Modern Bulk Transporter.  1994. Environmental Linings, Inc., provides disposable tank liners. Modern
Bulk Transporter. Houston, TX. May: 154.

Radian, 1994. Draft screener database report for the transportation equipment cleaning industry. Prepared
for U.S. Environmental Protection Agency, Office of Water, by Radian Corporation. Herndon, VA.
December 14.

SAIC.  1996.  Transportation equipment cleaning industry detailed questionnaire sample design report
(interim draft). Prepared for U.S. Environmental Protection Agency, Office of Water, by SAIC. McLean,
Virginia.  April 12.

SAIC.  1997.  Preliminary national estimates from Parts A and B of detailed questionnaire for TEC and ZDT
facilities; separately and combined.  Prepared for U.S. Environmental Protection Agency, Office of Water,
by SAIC. McLean, Virginia. May?.

U.S. Bureau of the Census.  1996. County business patterns, 1994. Washington, DC:  U.S. Government
Printing Office. October.

U.S. Department of Commerce. 1996. Improved estimates of gross domestic product by industry, 1959-
1994. Survey of Current Business. 76(8):133.

U.S. Department of Transportation.  1997. National transportation statistics, 1997.  Table 1-9. Available at
http^/www.bts.gov/btsprod/nts. Washington, DC: U.S. Department of Transportation, Bureau of
Transportation Statistics.

U.S. EPA. 1993. Tank and container interior cleaning screener questionnaire. OMB No. 2040-0166.
Washington, DC: U.S. Environmental Protection Agency, Office of Water.

U.S. EPA. 1995. 1994 Detailed questionnaire for the transportation equipment cleaning industry. OMB No.
2040-0179. Washington, DC: U.S. Environmental Protection Agency, Office of Water. April.

U.S. EPA. 1998. Development document for the proposed effluent limitations guidelines and standards for
the transportation equipment cleaning industry. EPA-821-B-98-011. Washington, DC: U.S. Environmental
Protection Agency, Office of Water. May.
                                             2-42

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                                       CHAPTERS
        ECONOMIC IMPACT ANALYSIS METHODOLOGY OVERVIEW
       The economic impact methodology for the TEC industry effluent limitations guidelines and standards
compares conditions in the industry before and after the proposed regulation. The methodology uses several
measures to assess economic impacts on the industry. These measures include facility closures, financial
stress, employment losses, revenue losses, secondary impacts, price changes, and output changes.

       The measures are generated by several economic and financial models. This chapter summarizes the
models used in the economic impact analysis.  The economic impacts are evaluated using the following five
models and methods:

       •      Cost annualization model
       •      Market model (consisting of a commercial component and an outsourcing component)
                         j                          >           -         i
       •      Closure model
       •      Financial ratio analysis                                              •   ,
       •      Secondary impacts analysis
       The cost annualization model (Appendix A) uses engineering estimates of capital and annual
operating and maintenance costs to calculate total compliance costs over the 16-year project lifetime; these
costs are used both to estimate the incremental cost-effectiveness of pollutant removal technologies (see
Chapter 4 and then Cost-effectiveness Document) and as inputs into the remaining models, which project the
economic impacts of the regulation.

       The commercial component of the market model (Appendix B) estimates the impact of compliance
costs on overall cleanings performed and market price; it does not estimate impacts to the individual
commercial facilities that perform the cleanings. That is, the market model estimates the aggregate decrease
in tank cleanings performed by a subcategory; however, it does not estimate if post-compliance decline in
                                      / ~         .             '            v

                                             3-1

-------
tank cleanings is due to the closure of one or more facilities, or to a small decrease in cleanings among many
facilities. The market model also examines the decision by in-house faculties to either upgrade their TEC
wastewater treatment systems, or to close their TEC operations (but not the entire facility) and outsource their
tank cleaning requirements to commercial faculties.

        The closure model (Appendix C) addresses of the impact of compliance costs on the financial health
of individual faculties. In effect, the closure analysis models the financial evaluation a facility owner might
make when deciding whether to upgrade pollution controls or close the facility.

        The financial ratio analysis (Appendix D) examines whether a company could afford the cost of
upgrading all of the TEC faculties that it owns.1 Companies that own more than one TEC faculty may not
able to afford the total cost of upgrading all the facilities, even if it makes economic sense to each individual
facility. Many banks use financial ratio analyses to assess the credit worthiness of a potential borrower. If
the incidence of regulatory costs causes a company's financial ratios to move into an unfavorable range, the
company will find it more difficult to borrow money. Under these conditions, EPA considers the company
and each faculty that it owns to be experiencing "financial distress short of closure."

        The secondary impacts analysis (Appendix E) assesses national and regional output and employment
impacts resulting from compliance with the proposed effluent limitations guidelines for the TEC industry.
Compliance costs decrease the output of the TEC industry, which may cause a loss in TEC employment The
decrease in TEC output decreases the demand for products in the industries that supply inputs to the TEC
industry. As a result, these industries may suffer reduced output and employment as well.  However, the need
to manufacture, install, operate, and maintain the pollution control equipment may generate increased
economic activity in other industries.  This increase in economic activity resulting from compliance with the
regulation can result in output and employment gains that offset the losses caused by the regulation. The
impacts of the TEC regulation on output and employment in non-TEC industries are called secondary
impacts.
        1 The closure model examines whether it makes economic sense to upgrade a given faculty (e.g.,
whether the facility could absorb the additional costs and still remain profitable). It does not examine
whether the company can raise the capital to make that investment  The financial ratio analysis examines the
post-regulatory credit worthiness of the company.
                                               3-2

-------
        Although there are points of interaction between these five models, each model provides a different
perspective on the industry and the impacts potentially caused by the effluent Imiitations guidelines
requirements.  Section 3.1 presents the cost annualization model Section 3.2 presents the market model and
discusses the estimation of cost pass-through—the link between the market-level and facility-level analysis.
Section 3.3 describes the facility closure model, while the estimation of financial distress is presented in
Section 3.4. Section 3.5 presents the methodology for estimating secondary impacts. Further information
about each model may be found in Appendixes A through E.
3.1     COST ANNUALIZATION MODEL

        EPA uses the cost annuali/ation model to estimate the anmiali/ed and present value of total capital
costs and operating and maintenance costs for new pollution control equipment  Costs are annualized for two
reasons. First, the initial capital outlay should not be compared against the facility's income in the first year
because the capital cost is incurred only once in the equipment's lifetime. Therefore, the initial investment
should be spread out over the equipment's life. Second, money has a time value: A dollar today is worth more
than & dollar in the future.                 .                                                    -

        The cost annualization model is defined in terms of 1994 dollars because 1994 is the most recent
year for which financial data are available from the survey (U.S. EPA, 1995a). The model evaluates what
each facility would pay in 1994 dollars for all initial and future expenditures. Finally, the model calculates
the annualized cost for the cash outflow as an annuity that has the same present value as the stream of cash
outflow and includes the cost of money or interest.  The annualized cost is analogous to a mortgage payment
that spreads me one-time investment of a home over a series of constant monthly payments.

        Figure 3-1 is an overview of the cost annuaUzation model.  Inputs to the model come from three
sources' 1) the capital and annual costs for incremental pollution control developed by the Agency, 2)
financial assumptions based on secondary sources, and 3) financial data taken from the  1994 Questionnaire.
The cost annualization model calculates four types of compliance costs for a facility:

        »      Present value of expenditures—before-tax basis
        •      Present value of expenditures—after-tax basis
              .'     •                           3-3          ..-       '

-------
Data Sources
 Inputs
      Outputs
Engineering
Incremental
Pollution Control
Costs
Secondary
Sources
Capital Costs
                Annual Costs
Cost Deflator to •
$1994
               Depreciation 	
               Method (MACRS)

               Federal Tax Rate
                State Tax Rate
Questionnaire      Discount Rate
               Tax Status
                                      LJ
                           Cost
                       Annualization
                          Model
itr



/

Present Value
     of
Expenditures
                               Figure 3-1

                         Cost Annualization Model
                                  3-4

-------
         •      Annualized cost—before-tax basis
         •      Annualized cost—after-tax basis.                                              ,

         Section 3.1.1 discusses the data sources for the cost annualization model; Section 3.1.2 summarizes
 the financial assumptions in the model; and Section 3.1.3 presents all steps of the model with a sample
 calculation. Appendix A contains a more detailed technical discussion of the cost annualization model.
        3.1.1   Input Data Sources                                                               v

        The capital and operating and maintenance (O&M) costs used in the cost annualization model were
 developed by EPA's engineering staff. The capital cost is the initial investment needed to purchase and
 install the equipment; it is a one-time cost The O&M cost is the annual cost of operating and maintaining
 the equipment O&M costs are incurred every year of the equipment's operation.

        The depreciable life of the asset is based on information in the 1994 Questionnaire and the Internal
 Revenue Code.       -..."•             .

        The discount/interest rate is either the discount rate or the interest rate that the faculty supplied in
 the 1994 Questionnaire (as long as it falls between 3 and 19 percent)—whichever is higher. It is used in
 calculating the present value of the cash flows. The discount rate represents an estimate of the facility's
 marginal cost of capital— i.e., what it will cost the facility to raise the money either through debt (a loan),
 equity (sale of stock), or working capital (opportunity cost). For companies that do not use a discount rate,
 the interest rate is used in the calculations. Where a facility-specific interest rate is available (and is between
 3 and 19 percent), that facility-specific rate is used in the cost annualization model; if such a rate is not
 available (or falls outside that range), the industry average discount rate of 10.4 percent is used instead.2
        2 A rate less man 3 percent is suspiciously low given mat, in 1994, banks charged a prime rate of
7.15 percent and the discount rate at the Federal Reserve Bank ofNew York was 3.6 percent (CEA,
1995). A rate greater man 19 percent is more likely to be an internal "hurdle" rate—the rate of return
required for a project to be undertaken.
                                                3-5

-------
        The tax rate used to calculate the tax shield on compliance cost expenditures is determined by the

corporate structure and taxable income, both of which are supplied in the 1994 Questionnaire. Corporate

structure identifies whether the facility pays taxes at the corporate or individual rate.  The amount of taxable

income identifies the tax bracket of the facility; the tax bracket is determined by the taxable income of the

parent business entity, not the facility. The cost annualization model uses the average state tax rate because

of the complexities in the industry; for example, a facility could be located in one state, while its corporate

headquarters are located in a second state. To address differences between small and large businesses, the

cost annualization model incorporates variable tax rates according to the type of business entity and level of

income. The closure analysis uses after-tax cost because it reflects the impact the business would actually

feel in its net income.
        3.1.2   financial Assumptions


        The cost annualization model incorporates several financial assumptions:
               Depreciation method. The cost annualization model uses the Modified Accelerated Cost
               Recovery System (MACRS). MACRS involves the ability to write off greater portions of
               the investment in the early years. In contrast, the straight-line depreciation writes off a
               constant amount of the investment each year. MACRS offers companies an advantage over
               the straight-line method because a company's income may be reduced under MACRS by a
               greater amount in the early years when the time value of money is greater.

               Timing between initial investment and operation. A business cannot begin to depreciate a
               capital investment before it goes into operatioa The mid-year convention may be used for
               equipment that is placed in service at any point within the year.  The Agency chose to use a
               mid-year convention in the cost annualization model because of its flexibility and the
               likelihood that the equipment considered for pollution control could be built and installed
               within a year of initial investment Because a half-year of depreciation is taken in the first
               year, a half-year is taken in the 16th year of operation. Thus the cost annualization model
               spans a 16-year period.

               Depreciable lifetime for equipment. An asset's depreciable life can differ from its actual
               service lifetime.  Equipment with a 20-year lifetime—typical of many pollution control
               components—is considered 15-year property. In addition, the Internal Revenue Code
               Section 168 lists a municipal wastewater treatment plant as an example of 15-year property
               (IRS, 1995). The cost annualization model, therefore, incorporates a 15-year lifetime.

               Tax shields on interest payments. To maintain a conservative estimate of the after-tax
               annualized cost, tax shields on interest payments are not included in the cost annualization


                                               3-6

-------
                model. A facility could finance the investment through a bank loan (debt), money from
                working capital, issuance of a corporate bond, or selling additional stock (equity shares). In
                any case, the cost annualization model assumes a cost to the facility to use the money (the
                discount/interest rate), whether the money is paid as interest or is the opportunity cost of
                internal funding.

                Discount rates. EPA uses either the interest rate or the discount rate provided by the facility
                in the cost annualization model—whichever is higher. This decision assigns the higher rate
                to the opportunity cost for internal financing. The decision will lead to a slightly higher
                annualized cost if only debt or a mix of debt and internal funding is used to raise the capital.
                The decision, however, will not underestimate industry compliance costs or impacts.
        3.1.3   Sample Cost Annualization Spreadsheet


        Table 3-1 presents a sample cost annualization spreadsheet that calculates the before- and after-tax

annualized costs of the pollution control investment to the facility.  The after-tax annualized cost reflects
what a business actually pays to comply with incremental pollution control requirements and is used to

calculate the cost of the regulation.  The before-tax annualized cost is used in calculating calculate cost-
effectiveness, in the outsourcing component of the market model, and in the financial ratio analysis. The
after-tax present value of incremental pollution control expenditures is used in the closure analysis.3
3.2     MARKET METHODOLOGY


         A market model consisting of two components, the commercial component and the outsourcing
component, was used to analyze supply and demand within the TEC industry. A market analysis is
appropriate only for TEC facilities mat offer commercial services because market interactions can only be
analyzed where prices and quantities are observable. In-house faculties perform TEC for themselves and
claim another business operation as their primary focus; in-house faculties thus perform most and perhaps
all, of their cleanings without a market transaction.  These facilities can, however, choose to meet their TEC
        3 Direct dischargers in the Truck Chemical and Hail Chemical subcategories are in the screener
survey but not the detailed questionnaire survey (Section 2.5.2).  The screener survey contains insufficient
information on those facilities to perform the market, closure, financial ratio, and secondary impact
analyses.  The cost annualization model is used to calculate annualized costs in order to estimate cost-
effectiveness for the two subcategories.

                                               3-7

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-------
 needs by outsourcing their cleanings to a commercial facility—a move that would impact the market analysis.
 The market model therefore incorporates these in-house, non-commercial facilities through an outsourcing
 component

         Output from the market model includes:

         •      An estimated new commercial price and quantity for each market group.
         •      A percentage cost pass-through for each commercial market group, to be used in the closure
                analysis.                                             >
         •      The estimated magnitude of line closures within in-house facilities deciding to outsource.
         •      Revised estimates of total annuali/ed costs for in-house facilities deciding to outsource, for
                use in the closure analysis.

 Non-commercial, in-house facilities are analyzed in the maricet model to the extent that they may provide a
 small number of commercial cleanings; the calculations of the market model encompass only the commercial
 portion of the industry.

        Section 3.2.1 presents a graphical overview of commercial market changes.  Sections 3.2.2
 summarizes how EPA estimates preregulatory market conditions, while section 3.2.3 describes the shift in the
.supply function resulting from compliance costs. See Appendix B for a detailed technical discussion of the
 market methodology.
        3.2.1   Graphical Overview of Commercial Market Changes

        The market impacts of the effluent guideline on the TEC industry will depend on the extent to which
cost increases 1) cause a decline in the quantity of tank cleanings performed, and 2) can be passed on to
consumers through higher prices.  Since tank cleanings are inputs into the service of transportation and since
transportation is an input into the product it delivers, the demand for cleaning ultimately depends on the
demand for the final products delivered by the transportation industry.     -
                                               3-9

-------
        Figure 3-2 illustrates a commercial market for TEC. Preregulatory conditions are shown by S1
                                 -                   •       ,     • .    ' -!
 (supply), D1 (demand), and equilibrium (their intersection) at P1*" and Q*™ (price and quantity). Imposing the
 effluent guideline causes an increase in the cost of providing TEC services. This changes the commercial
 TEC supply curve, shifting it upwards (to the left); the supply shift is shown as Xs in Figure 3-2. At the same
 time, the cost of in-house cleaning, a substitute service, increases. Therefore, the potential exists for facilities
 to switch from providing the service for themselves to outsourcing their TEC needs into the commercial
 market If in-house faculties do shift to commercial providers, the demand curve in the commercial TEC
 market groups shifts upwards (to the right). This demand shift is derived from the outsourcing component of
 the model. The change in price due to this outsourced quantity is shown as A.D.

        At the intersection of the new supply and demand curves, S2 and D2, Figure 3-2 shows the
 postregulatory equilibrium at a higher price and lower quantity, T**0" and OP™*, than the preregulatory
 equilibrium of P1" and Q5™. Because the regulation would change both the supply and demand for commercial
 services, however, the change in quantity cannot be predicted; the only predictable movement is an increase in
 price.  Figure 3-2 can be redrawn to show an increased or an equivalent postregulatory quantity compared to
 the preregulatory environment The actual result would depend on the relative magnitudes of the supply and
 demand function shifts. In other words, it is feasible that the market analysis could show an overall increase
 in the amount of business realized by commercial TEC facilities. This would occur if the amount of cleanings
 outsourced to the commercial market (the change in demand) exceeds the decline in cleanings due to increases
 in price (the change in supply).
        3.2.2   Estimating Preregulatory Commercial Market Conditions

        The demand and supply curves need to be estimated prior to the imposition of regulatory costs in
 order to estimate baseline industry conditions. The change from the baseline is a measure of the impacts
 caused by increased pollution control costs. Both the commercial supply and the commercial demand
 equations can be estimated with information from the detailed questionnaire and other sources.  Commercial
 TEC supply is a function of the price of commercial TEC service and the regulatory compliance cost (which
 is zero under preregulatory conditions). Commercial TEC demand is a function of the price of commercial
•TEC services and the cost and availability of substitute services (e.g., in-house provision). Both the supply
 and demand equations are also functions of other exogenous variables, such as the price of inputs to provide

                                              3-10

-------
                             TEC COMMERCIAL MARKET GROUP g
                                                                             s1
ppost
ppre
                                                         increase in quantity
                                                         demanded from
                                                         outsourcing component
                                 Qpost   Qpre
Q
                                                                            9
        D1, S1 = preregulatory market conditions
        D2, S2 = postregulatory market conditions
        ppre Qpre = pre-requlatory equilibrium price and quantity
        ppost Qpost - post-requlatory equilibrium price and quantity
        Xs = supply shift = weighted average increase in marginal cost from regulation
        X° = demand shift = change in price due to change in quantity demanded
                                       Figure 3-2


             Impact of the Effluent Guideline on a Commercial Market With Outsourcing
                                         3-11

-------
 TEC, the number of annual tank inspections, and the commodities transported These variables are assumed
 to be unaffected by the regulation and are therefore considered exogenous; exogenous variables enter the
 market model through the constant terms in the demand and supply equations.

        Due to the limited amount of time-series data available from industry and other sources, traditional
 methods for estimating supply and demand functions are not feasible. Figure 3-3 is a flow diagram of the
 steps necessary to obtain quantitative estimates of the supply and demand for commercial facilities. The
 process begins with identifying commercial facilities and weighting questionnaire data from the facility level
 to the market level. The process continues with grouping data by mode of equipment cleaned, and estimating
 the supply and demand elasticities.
                 *                                                          .             '      ,
       , The price elasticities of supply and demand are two of the key parameters for estimating market level
 impacts.4 The price elasticity of supply is estimated econometricatty from weighted questionnaire data on
 commercial tank cleanings and facility revenues. The price elasticity of demand is derived from published
 studies of the price elasticity of demand for transportation services and from questionnaire data on the cost of
 TEC operations as a percentage of the total costs of transportation services. Appendix B contains a detailed
 explanation of each step in the process.
       3.2.3   Estimating the Shift in the Supply Function From Compliance Costs

       After the effluent guideline is promulgated, the supply function will shift because of the increase in
pollution control costs. The per unit cost increase may differ for each firm and may not be correlated with
firm size or price.  Therefore, to calculate the shift in the supply function, EPA uses the expected value of the
change in marginal cost for the given market group. The expected shift of the supply function is equal to a
       4 The price elasticity of demand/supply is defined as me percentage change in quantity
demanded/quantity supplied caused by a 1 percent change hi market price.  The relative elasticities of
supply and demand determine whether market impacts fall primarily on the price of tank cleaning or on the
quantity of tank cleanings performed.  This can be observed in Figure 3-2 by comparing impacts when the
demand curve is steep (relatively inelastic) with impacts when the demand curve is flat (relatively elastic).
For the same upward shift in the supply curve, the impact will fall primarily on price, with little effect on
the number of tank cleanings performed, when demand is relatively inelastic; the impact will fall primarily
on quantity, with little effect on price, when demand is relatively elastic.

                                             3-12

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                      Commercial Facilities


             Total Number of
           Tanks Cleaned per
                 Facility
                  (Qj)
 Aggregate
 Number of
Gleanings for
Each Market
   Group

    (Q1n)


                 Typical Cleaning
                 Price per Tank for
                   Each Facility

                      (P?)

                   Weight Each Facility's Price
                         and Quantity
                     Categorize Facilities
                      Into Market Groups
Take Natural Logs of Price |
 (Pg) and Quantity (QgPj)
  Linear Regression of
   Quantity and Price.

                  Interpret Supply Elasticity
                      for Each Group
Establish Baseline
  Price for Each
  Market Group

      (P10)
                                                  Weighted Average
                                                   Pollution Control
                                                   Cost per Market
                                                       Group g
                   Calculate y-intercept for
                   Supply using Q^ and eg
                                              Estimate of Supply
                                              Shift From Pollution
                                                 Control Costs
                                               Demand and
                                             Supply Equations

                             TEC Cost Share of
                           Overall Transportation
                            Costs for Carriers for
                             Each Market Group

                                                                Demand Elasticity of
                                                                 Transportation for
                                                                 Each Market Group  j
                                                                          Elasticity of
                                                                          Substitution
                                                                       Between TEC and
                                                                         Other Inputs to
                                                                         Transportation

                             Derived Demand
                                Equation

                                                         Demand Elasticity
                                                           for Each TEC
                                                           Market Group
                                                         Calculate Demand
                                                          Constant Using
                                                           Pfl.QgandV
New Price and
Quantity for Each
Commercial Market
Group g
. ^A^W.....«.V^«,..>^^0«»XV^V^)V


Sc
Commercial Price
for Outsourcing
Component
(pi>
•
                                              Figure 3-3

                           Commercial Component for TEC Market Model
                                               3-13

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weighted average of the facility-specific pollution control costs per unit of output The entire supply curve
shifts upwards (Le., to the left).

        Section B.3 describes how the postregulatory equilibrium price and quantity are found for each
regulatory option. The new equilibrium quantity and price may be an intermediate equilibrium. It is an
equilibrium: quantity supplied equals quantity demanded by those currently participating in the commercial
market at the going market price P2. However, it is an interim equilibrium in the sense that in-house providers
of TEC services may now have incentive to outsource their TEC needs. If any of these facilities do choose to
enter the commercial market, the demand curve will shift and the market will move to a new equilibrium point
(see Figure 3-2).  The market will not be in final equilibrium until all demariders and suppliers of TEC
services, both commercial and in-house, no longer have any incentive to change their behavior at the existing
market price.
             '                       !                        '              .'',''
        Figure 3-4 illustrates the logic flow for the outsourcing component The outsourcing module
calculates the relative increase in cleaning cost for in-house facilities, compares it to the facility's willingness
to switch to commercial cleaning (obtained from questionnaire data), calculates the cost of having the same
cleaning performed commercially, and determines whether or not the facility would outsource its cleaning.
Section B.3.1 provides a detailed description of the subcomponents shown in Figure 3-4.

        After the postregulatory price and quantity are determined, a cost pass-through percentage (CPT) can
be calculated for use in the closure model. CPT is the difference between the baseline and postregulation
prices as a proportion of the average pollution control cost per unit  CPT estimates the relative burden of the
cost of the regulation borne by the producers and consumers of TEC services by determining what percentage
of pollution control costs is actually paid by the facility, and what percentage of those- costs the facility may
recover by passing them along to consumers in the form of higher prices. Each market group will have a
different CPT; calculation of the CPT is explained in detail in Section B.3.
33     CLOSURE MODEL

        EPA developed a financial model to estimate whether the additional costs of complying with the
proposed regulation render a TEC facility unprofitable. If so, the faculty is projected to close as a result of

                                              3-14

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                           Calculate  Incremental
                          Pollution Control Costs
                                  Pre-tax
                                Annualized
                       |L  [From Cost
                       at  Anhualization
                          Model]
Identify Commercial Cleaners
               Identify Facilities With In-House Operations
                    Calculate Pre-Regulatory Cost
                         Pre-tax Annualized
                                                 Calculate Percent Cost Increase
                                                        Cleaning  Basis,
                                                        Not Wastewater
                                                       .Treatment Basis
                                                     Compare Against Data
                                                  (Question #16) Questionnaire
          [From
          Commercial
          Component] •


          CbmrrTercTaT
           Price per
             Tank
 Percent Increase Is
Less Than Switching
       Point
        I
 Percent Increase
Exceeds Switching
      Point
                                                           1
Would Not Switch

_ 9'®anin5_ _
Calculate
Commercial
Price


"£
s^se, JfHdoWseJ
•• ••^zf-*- -^ '•• *'-'••••••••••'•
Costs , v- ;
- c\ ; ,-; ;°J
' •. •. --.f •• * * '

.{Closure
^^AnafysisJ
I
f
	 ' 	 -t^-

Compare
Against
Total
Commercial
Cost
, t v~
                                                                        (Closure
                                                                        Analysis] *
                                 I
                                                                                               {Get 0s, the
                                                                                               Quantity
                                                                                               That Will
                                                                                               Switch to
                                                                                               Commercial]
                                               Figure 3-4
                              Outsourcing Component of TEC Market Model

                                                 3-15

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the regulation, leading to facility-level impacts such as losses in employment and revenue. The model is
based on facility-specific data from the detailed questionnaire (U.S. EPA, 1995a) because such data are not
available elsewhere.

        The closure decision is modeled as:
        Post-regulatory status   =   Present value of future earnings
                                       (Present value of after-tax incremental pollution control costs
                                       * (1-percent cost pass-through))
                                       Salvage value
That is, the model calculates long-term earnings after reduction by pollution control costs, and compares them
to the liquidation value of the faculty. If the post-regulatory status is less than zero, it does not make
                  ,                 ' • •        .                            •!•
economic sense for the facility owner to upgrade the facility. Under these circumstances, the facility is
projected to close. Section 3.3.1 describes alternative measures of future earnings, and the methods used to
forecast the present value of future earnings.  Section 3.3.2 describes how EPA adjusts the CPT from an
industry-wide value to the facility-specific value in the closure model. Section 3.3.3 describes the options
investigated for salvage value, and Section 3.3.4 presents EPA's methodology for determining facility closure
when evaluating multiple approaches for estimating future earnings and salvage value.
        3.3.1   Present Value of Future Earnings

        EPA examined two alternatives for estimating the present value of future plant operations:

        •      Net income from all operations, calculated as revenues less operating costs; selling, general,
               and administrative expenses; depreciation; interest; and taxes (as these items are recorded on
               the facility's income statement).
                                                                         i
        •      Cash flow, which equals net income plus depreciation.
                                                                         i                  '
Depreciation reflects previous, rather than current, spending and does not actually absorb any portion of
incoming revenues.  Transportation equipment cleaning is an industry that does not show continuing capital
investment for increased efficiency and expansion.  For this reason, cash flow is more likely to indicate the

                                               3-16

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 funds available for operation than net income. EPA therefore selected cash flow as the basis for measuring
 the present value of future facility operations in the closure analysis.
        Forecasting Methods for Future Cash Flow

        Facility cash flow must be forecast over the 16-year project lifetime. All forecasting methods
examined for and used in the closure analysis incorporate the following assumptions and procedures:  *

        •      No growth in real terms.
        •      Constant 1994 dollars. (Data from 1992 and 1993 are inflated using the change in the
               Consumer Price Index.)

The "no growth" assumption is made so that a facility is not assumed to grow its way out of an economic
impact associated with additional pollution control costs; essentially, EPA assumes that facilities are running
at of near capacity and that significant growth is unlikely without a major capacity addition.

       Although the financial health of the TEC industry is expected to follow that of the transportation
sector in the general economy, an examination of the pretest survey data indicated that cash flow for a facility
sometimes showed pronounced year-to-year variations. To address uncertainties in the long-term estimates of
cash flow, EPA chose to incorporated more than one forecasting method when evaluating closure. EPA
examined five different forecasting methods in order to address facility-specific variations; the following
three methods were chosen:5                                            .

       •      Most recent year (1994 data) as best indicator of future cash flow.
       •      Three-year average (1992-to-1994 data, after inflation to 1994 dollars).
       •      Time-varying cash flow option #1.
               Cash flow follows a 3-year pattern:
               1994 =1994 cashflow          ,
               1995 = 1993 cash flow
       5 EPA requested 3 years of data in the questionnaire to mitigate the uncertainty in the analysis
resulting from a single datum point (i.e., 1 year of data).

                                         •   :  3-17

-------
               1996 =1992 cash flow
               1997 =1993 cash flow
               1998 =• 1994 cash flow (pattern begins again).
               If the facility had a good/bad year in 1993, the result is a good/bad year every 2 years.

All three forecasting methods are incorporated into the closure model (see Section 3.3.4).  The final step in
estimating each facility's pre-regulatory present value is to discount the cash flow stream back to the first year
in the time series.  As in the cost annualization model, the facility-specific nominal discount rate must lie
between 3 and 19 percent to be used in the model; otherwise the industry average nominal rate is used instead
(Section 3.1 and Appendix A).
        33.2   Facility-Specific Cost Pass-Through Factor

        The market model estimates the percentage of incremental pollution control costs that are passed on
to the consumer through higher prices.  This price increase applies only to TEC services; however, most
facilities earn revenues from non-TEC operations as well. For in-house facilities in particular, TEC services
form only a small fraction of overall revenues. The price increase does not apply to these non-TEC
operations. In. order not to overestimate the increase in facility revenues due to higher prices for TEC services
                                    i   • •  . •  •            .               i.
(and therefore underestimate the impacts of the rule), EPA adjusted the industry-wide cost pass-through
factor (CPT) by the facility-specific ratio of TEC revenues to total revenues. The result is a faculty-specific
cost pass-through factor, also called the effective cost pass-through.6 Because commercial facilities as a
group earn a higher percentage of revenues from TEC operations, the average effective CPT for commercial
faculties is substantially higher than for in-house faculties.
        6 For example, suppose a faculty earns total revenues of $1 million, of which 25 percent ($250
thousand) is attributable to tank cleaning revenues. A 20 percent increase in the price of tank cleanings
(cost pass-through) will increase the facility's revenues by $50 thousand ($1 million x 0.2 x 0.25), not
tOflA *ti/\>ieonr1 ftt million -r fl *)\
\cusi pass-uuruugiij wiu urcicasc u
$200 thousand ($1 million x 0.2).
                                               3-18

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         3.3.3   Salvage Value

         Many service industries require little capital investment relative to manufacturing industries. The
 value of a service industry facility may be more closely related to its customer list, location (potential service
 area), and existing cash flow rather than to the value of its assets. Within a service industry, the year-long
 performance shown by a facility's income statement may be more important than the "snapshot in time"
 provided by the balance sheet Under these circumstances, the salvage value based on assets is effectively
 zero. Because a manufacturing facility produces products, fixed assets—such as buildings and
 equipment-^nay play a more important role in estimating its liquidation or salvage value.       ,
                                     'f       .  .      :
         The TEC industry consists of facilities in both service and manufacturing industries. Even within a
 subcategory, there may be a mix of commercial providers of TEC services and in-house operations that are
 part of manufacturing facilities. EPA examined each subcategory and determined that a zero salvage value
 was appropriate for all but one subcategory (Denning, 1996). Under this approach, the closure decision
 described in Section 3.3 is based solely on whether the facility retains a positive long-term cash flow after
1 responding to the regulation. The remaining subcategory is the Rail-Chemical subcategory. EPA determined
 that it was appropriate to develop salvage value estimates for this subcategory based on the value of current
 and long-term assets (see Section C.2 for details).
        3.3.4   Projecting Facility Closures as a Result of the Rule
         \          •'        .•••••''     .  '   - .-. .         •            '
        Tables 3-2A and 3-2B are annotated printouts of the closure model, which was completed using
 hypothetical data. With two salvage value estimates evaluated under three forecasting methods, there are six
 ways to evaluate a faculty's status.  In order to use the same methodology and models for all subcategories,
 both the book and tax assessment estimates are set to zero for all subcategories but Rail Chemical. If a
 facility's post-regulatory status is less than zero (i.e., if its post-regulatory cash flow is negative or is less
 than salvage value for the Rail Chemical subcategory), the facility is assigned a score of "1" for that
 forecasting method/salvage value estimate comparison.  A facility, then, may have a score ranging
 fromOto6.7
        7 Faculties not in the Rail Chemical subcategory may have scores of 0, 2, 4, or 6.

                                               3-19

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TABLE 3-2A
FACILITY CLOSURE MOOEt - HYPOTHETICAL INPUTS AND SALVAGE VALUES
   A
      CtOSUREMOOB.           Survey ID*         1234 Class:                                           run date:  03-Jun-Q8

      ALL FIGURES IN DOLLARS
iNFUT VARIABLES:

Inflation Rate (1995-2010):
Co. -Specific Discount Rate (Mom.):
Avg. Discount Rata (Nominal):
Nominal Discount Rate:
Real Discount Rate:
Inventory Recovmy Factor
Fixed Asset Recovmy Factor


3.6%
13.6%
10.4%
13.6%
10.0%
40.0%
20.0%
I
I
I
I
I
I .
I
I
I
    B SALVAGE VALUE
       CURRENTASSETS:
       18M Cash:                    $10,000
       1804 Inventoriec                  $100

        Total:                       $10,040


       FIXED ASSETS:

       Tax Assessed Value:
                                   Assessed Assessment      Market    Recoverable
                                      Value       Rate       Value         Value
       Total:                       $500,000       100%    $500.000      $100,000

       BookValo*:

       19C4Und:                        $0
       1904 Building*:                     $0
       1994 Equipment          '     $900,000
       1994 Other Noncunwit Assets:      $1,000
       Leu Cum. Deprec.:            $140,000

       Total:                       $461,000.
       Recoverable Value:              $92,200


      TOTAL SALVAGEVAtQEOF MILL"
          Uskig Tax Assessments:                 $110,040
          Using Book Value:                      $102,240
                                                              3-20

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TABLE 3-2B
FACILITY CLOSURE MODEL - HYPOTHETICAL INPUTS, FORECASTED CASH FLOW, AND CLOSURE SCORES
      PRESENTVALUE:


   C PAST CASH FLOW ($1894):
-
Cash Flow
Cash Flow
.Cash Flow
FORECASTED CASH FLOW

1
. 2
3
,4
5
8
7
8
9
10
.11
12
13
14
15
16

1892
1883
1984

Year
1995
1986
1987
1988
1998
2000
2001
2002
2003
2004
2005
2008
2007
2008
2009
2010
Current $
12,500
60,000
15,000

1994
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15.000
$15,000
$1994
$13,271
$61,784
$15,000

Avenge
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30.022
$30,022
$30,022 ,
$30,022
$30,022
$30,022
$30.022
$30,022
$30,022
$30,022





Variation
$81,794
$13,271
$81,794
$15,000
$81,794
$13,271
$61,784
$15,000
$81.794
$15,000
$61,794
$13,271
$61,794
$15,000
$81,794
$13.271
                                                                                    Inflate Cash Flow to 1994 dollan
                                                                                    Consumer Price Index for Transportation
                                                                                         1862      126.5
                                                                                         1983      130.4
                                                                                         1864      134.3
     BASELINE PRESENTVALUE
                                           $129.081    $258,370
                                                                  $338,372
  D SUMMARY:
Cost Pass-Through

Regulatory Option
Baseline
Option 1
Option 2
Options
Option 4
Options
Option 6
Option?
Option 8
Option 9
Option 10
Option 11
Option 12
10%
PVof
I ncrfl i iwntftl
.Reg.Co«t*
$0
$10.000
$20,000
$29,700
$75,000
$100,000
$125,000
$150,000
$175.000
$200,000
$300,000
$400,000
$500,000

Adj. PVof
Incremental
Reg. Costs

$9,000
$18,000
$26,730
$87,500
$90,000
$112,500
$135,000
$157,500
$180,000
$270,000
$380,000
$450,000

Assessment

. 1984
$128,091
0
0
0
1
1
1
1
1
1
1
1
1
1

$110.040
Present Value
Average
$258,370
0
0
0
0
0
0
0
0
1
1
1
1
•: 1
Salvaoe Value


Variation
$336,372
0
0
0
0
0
0
0
0
0
0
1
1
1
Book:

1994
$128,081
0
0
0
0
1
1
1
1
1
1
1
1
1

$102.240
Present Value
Average
$258.370
0
0
0
Q
rj
0
0
0
1
1
1
1
1



Variation
$336,372
0
0
o
o
0
Q
o
Q
Q
o
\
•J
1



Q
0
0
•J
2
2
' 2
2
4
4
Q
Q
e
                                                         3-21

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        Closure is the most severe impact that can occur at the facility level and represents a final,
irreversible decision in the analysis. The decision to close a facility is not made lightly; business owners are
aware of and concerned with community impacts, the turmoil introduced into worker's lives, and how the
       "                             !        '            ' '              I1
action might be interpreted by stockholders. The business will likely investigate several business forecasts
and several methods of valuing their assets. All data, assumptions, and projections of future market behavior
would be weighed in the corporate decision to close a mill, and the uncertainties associated with the
projections would be evaluated. When examining the results of several analyses, business owners are likely
to find that the results are mixed.  Some indicators may be negative, while others show that the facility can
weather the current difficult situation. A decision to close a facility is likely to be made only when the weight
of evidence indicates that this is the appropriate path for the company to take.

        EPA emulated corporate decision making patterns when determining when a facility would close.  A
score of 3 means thathalf of the comparisons indicate a financially viable concern. A business is unlikely to
close a facility when the uncertainty in the data means there is a 50-50 chance of it being viable. EPA
selected a score of 4 or higher to indicate closure because it meant that the majority of the comparisons (i.e.,
at least 4 of 6) now indicate poor financial health. EPA believes that this scoring approach represents a
reasonable and conservative method for determining closure.

        Closure impacts are assessed on an incremental basis. A facility closure is considered to be closed
by regulatory cost when its pre-regulatory closure score is 3 or less, and its post-regulatory score is greater
than 3. For example, in Table 3-2B, Section D, the facility begins to show the effects of incremental
compliance costs with option 3, but is not considered a closure until option 8. For more details on scoring,
see Appendix C.
3.4     FINANCIAL RATIO ANALYSIS

        EPA's financial ratio analysis examines whether a company could afford the cost of upgrading all the
TEC facilities that it owns. Particularly for companies that own more than one TEC facility, it could make
economic sense to upgrade each facility, but the company may not be able to afford the total cost of
upgrading all the faculties that it owns. Many banks use financial ratio analyses to asses the credit
worthiness of apotential borrower. If the incidence of regulatory costs causes a company's financial ratios to

                                               3-22

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 move into an unfavorable range, the company will find it more difficult to borrow money. Under these
 conditions, EPA considers the company and each facility that it owns to be experiencing "financial distress
 short of closure."

        Financial ratios are calculated at the business entity level because:

       • •     Accounting procedures maintain complete financial statements (balance sheet and income
               statement) at the business entity or corporate level, but not necessarily at the facility level.
               The survey data indicate that many companies do not keep complete financial statements at
               the facility level.
        •     Significant financial decisions, such as e^qjansion of a facility's capacity, are typically made
               or approved at the corporate level.
       '•».-'   The business entity (or corporate parent, where one exists) is the legal entity responsible for
               repayment of a loan. The lending institution evaluates the credit-worthiness of the business
               entity, not the facility.

 Section 3  of the detailed questionnaire collected business entity financial information (U.S. EPA, 1995a).
 The questionnaire was sent to a sample, not a census, of TEC facilities. EPA calculates national estimates
 with statistical weights for each faculty in the sample. Because the sampling frame was developed on the
 basis of facility attributes, it is not possible to develop statistical weights for business entity results, and the
 number of financially distressed business entities cannot be estimated (Denning, 1997). Instead, the impacts
 are passed to the facility level through the facility-level weights. For example, say a company owns one TEC
 facility, that facility has a weight of seven, and the regulatory costs place the company in financial distress.
 This report would describe the impacts as these seven facilities are owned by corporate parents which show
 financial distress, not seven businesses show financial distress.8

        Section 3.4.1 discusses the aggregation of facility-level regulatory cost data required to perform the
ratio analysis at the business entity level. Section 3.4.2 presents the Alttnan Z"-score, a weighted average of
financial ratios used to assess financial distress.
        8 For 205 of foe 692 potentially affected facilities (30 percent), me faculty and the business entity
are identical; these are called stand-alone facilities. A stand-alone facility with a weight of seven would
represent seven business entities.
                           '           '     :•   3-23      '                                     .

-------
       3.4.1   Aggregation of Facility-Level Regulatory Cost Data


       EPA estimated costs on a facility basis. EPA aggregated facility-level regulatory costs to the

business entity level in order to assess the impact of the total costs incurred by the entity.    As mentioned

above, the TEC data represent a sample and not a census.  Some business entities in the survey own TEC

facilities that were not sampled. In order to avoid underestimating the impact on these firms' financial ratios,

compliance costs must be estimated for those TEC facilities not in the sample. Each of the 93 potentially

affected facilities that received detailed questionnaires fall into one of three groups:


       •      Forty-four facilities (304 weighted facilities) represent the only TEC facility owned by the
             , company ("SF,'* or single facility, firms). Of these 44 facilities, 30 (205 weighted facilities)
               are stand-alone business entities.

       •      Fourteen facilities (175 weighted facilities) are owned by parent companies that own other
               TEC facilities; the facility in question, however, is the only facility owned by the parent
               company that received a questionnaire ("SQ," or single questionnaire, firms).

       •      Thirty-five facilities (213 weighted facilities) are owned by parent companies that own other
               TEC facilities; each parent company owns more than one facility that received a
               questionnaire. The parent company, however, typically owns other TEC facilities that did
               not receive questionnaires ("MQ," or multiple questionnaire, firms).
                                   i            t

For the SF group of facilities, the facility compliance costs are equal to the business entity compliance costs.


       For the SQ and MQ groups, EPA scaled the costs for the TEC facilities in the survey to estimate the

costs for all TEC facilities owned by the business entity.  The factor used to scale up facility compliance costs

is calculated from the ratio of facility TEC operating costs to business entity TEC operating costs.  The

inverse of this ratio is used as the scaling factor; individual facility costs are multiplied by the scaling factor
then summed over all facilities in the questionnaire database owned by the parent business entity.  TEC  costs

were chosen to calculate the scaling factor because this ratio captures the size of facility TEC operations
relative to parent business entity TEC operations better than other alternative measures such as: 1) the ratio

of facility TEC revenues to total business TEC revenues, 2) subcategory median cost, or 3) subcategory

average cost9
        9 Some business entities in the database own both in-house and commercial facilities; facilities also
may differ greatly in size. Suppose, for example, mat one firm owns two TEC facilities, only one of
which is in the database.  One facility accounts for 90 percent of TEC operations and performs
                                               3-24

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        3.4.2   Altaian Z"-Score


        EPA selected a weighted average of financial ratios, called the Altaian Z"-score, to characterize the

 baseline and post-regulation financial conditions of potentially affected firms  The Altaian Z"-score is a

 multidiscrimmant function, originally developed to assess bankruptcy potential (Altaian, 1993);'° TheZ"-

 score has advantages over consideration of an individual ratio or a collection of individual financial ratios:


        •      It is a simultaneous consideration of liquidity, leverage, profitability, and asset management
                It addresses the problem of how to interpret data sets in which some financial ratios look
                "good" while other ratios look"bad.H

        •      There are defined threshold or cut-off values for classifying firms in good, indeterminant,
                and poor financial health.  "Rules of thumb" are available for some financial ratios, such as
                current ratio and times interest earned, but these frequently vary with the industry (US
                EPA,1995b).

        •      The Altaian Z"-score is a well accepted standard technique of financial analysis (see Brealy
                and Meyers, 1996, and Brigham and Gapenski, 1997).


        Altaian developed several variations on the multidiscriminant functioa EPA selected the Z"-score

 because it was developed to evaluate public and private nonmanufacturing firms. Altaian (1993) notes that
 "this particular model is also useful within an industry where the type of financing of assets differs greatly

 among firms and important adjustments, like lease capitalization, are not made." Based on this criteria, the
 Z"-score model is the most appropriate model for the TEC industry.


        The model is:
commercial cleanings, while the second accounts for 10 percent of TEC operations and performs only in-
house cleanings. The selected approach provides a more accurate estimate of the costs borne by me
business entity man would the revenue ratio scale or median/average subcategory compliance costs
approach.

        10 EPA uses the Altaian Z"-score as an indication of financial distress, but not necessarily
bankruptcy. A Z"-score below "bankruptcy likely" is a warning sign, not a determination of immediate
bankruptcy. There is a time lag between a warning (i.e., low Z"-score) and actual bankruptcy. During mis
period, a company has the opportunity to change its behavior to avoid the projected bankruptcy. The
Chrysler Corporation is such an example; Altman (1993) cites other examples.  If a business entity's Z"-
score falls below the "bankruptcy likely" cutoff as a result of me rule, EPA considers the option to have
caused financial distress.  The company will likely have to change the way it does business to respond to
the regulation.

                                              3-25

-------
        Z" - 6.56X! + 3.26X2 + 6.72X3 + 1.05X4

•where the pro-compliance components are:

        Z" - overall index
        Xj - working capital/total assets
        Xj - retained earnings/total assets
        X3 = earnings before interest and taxes (EBIT)/total assets  ,
        X< - book value of equity/book value of total liabilities.

Taken individually, each of the ratios given above is higher for firms in good financial condition and lower for
firms in poor financial condition.  Consequently, the greater a firm's bankruptcy potential, the lower its
discriminant score. An Altman Z"-score below 1.1 indicates that bankruptcy is likely; a score above 2.6
indicates that bankruptcy is unlikely. Z"-scores between 1.1 and 2.6 are indeterminant. Pre-regulatory scores
are calculated from survey data.

        EPA estimates financial distress short of closure based on changes that occur in the Altman Z"-score
as a result of pollution control costs.  Capital costs are those developed by the engineering staff for use in the
cost annualizaiion model. The annualized pollution control costs for each option were calculated in the cost
annualization model. Compliance costs affect the financial ratios through their impact on assets and
earnings, decreasing the value of each ratio:

        X} = working capital/(total assets + capital costs)
        Xj=retained earnings/(total assets + capital costs)
        X3 = (EBIT - pre-tax annualized compliance costs)/(total assets + capital costs)
        X< = book value of equity/(book value of total liabilities + capital costs)

The approach therefore assumes that the firm would incur debt in some form for the capital cost. An
alternative is to assume that the equipment could be purchased out of working capital; however, the first
approach is more likely.
                                               3-26

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        3.43   Evaluation of Altaian Z" Results

        Post-regulatory financial stress is evaluated and reported on an incremental basis. Facilities are
described as incurring financial stress short of closure when their parent firm has a pre-regulatory Altman Z"-
score that is greater than 1.1 (the upper bound of the bankruptcy likely range), and a post-regulatory score
that is less than 1.1. The financial distress is considered "short of closure" because facilities estimated to be
incremental closures in the closure model are removed from the analysis. A facility cannot be both an
incremental closure and incur incremental financial-distress. The results of the closure model take precedence
because a company is more likely to close a facility than jeopardize the financial health of the entire business
with the facility's upgrade. Facilities that are expected to remain open are then examined for financial
distress using financial ratio analysis.'
3.5     SECONDARY IMPACTS

        The impacts to output and employment in rion-TEC industries caused by the regulation of the TEC
industry are called secondary impacts.  The secondary impact analysis assesses national and regional output
and employment impacts resulting from compliance with the proposed effluent limitations guidelines for the
TEC industry. Compliance costs decrease the output of the TEC industry, which may cause a loss in TEC
employment11 The decrease in TEC output decreases the demand for products in the industries that supply
inputs to the TEC industry. As a result, these industries may suffer reduced output and employment as well.
In other industries, however, the need to manufacture, install, operate, and maintain the pollution control
equipment required under the new regulation may generate increased economic activity.  This increase in
economic activity resulting from compliance with the regulation can result in output and employment gains
that offset the losses caused by the regulation.    >

        The analysis in this section identifies a range of estimated secondary impacts caused by the TEC
regulation.  Section 3.5.1 describes the input-output (IO) methodology used to estimate secondary impacts
        11 This loss in employment may be comprised of actual job losses, or may be reflected in a
decrease in the number of hours worked by several employees, all of whom retain their jobs. For mis
reason, employment impacts are measured as "full-time-equivalents* (FTEs), where one FTE equals 2,080
labor hours or 1 person-year of employment.

                                              3-27-

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and the application of this methodology to the TEC industry. Section 3.5.2 presents the procedure used to
estimate offsetting gains from purchasing wastewater treatment systems. Section 3.5.3 describes the
difficulties associated with, estimating regional impacts for the proposed TEC options.
        3.5.1   Methodology for Estimating National Employment and Output Impacts

        EPA generates national output and employment impact estimates through the use of output and
employment multipliers derived from the National Input-Output (10) tables compiled by the Bureau of
Economic Analysis (U.S. Department of Commerce, 1997). IO multipliers estimate the total impact on the
national economy that will result from change in the quantity purchased of a single industry's output
Impacts include the change in the quantity purchased of the industry's output (direct effects), the impact on
the industry's suppliers (indirect effects), and the impacts caused by the change in expenditures by employees
of all impacted industries due to their changed income (induced effects). Multipliers vary between industries
because of differences in their upstream effects (the degree to which an .industry uses other industries'
production as inputs) and downstream effects (the degree to which an industry supplies inputs into other
industries).

        A change in the number of tank cleanings by the TEC industry may have a number of effects. For
example, a decrease in tank cleanings by the TEC industry caused by the regulation will decrease the demand
for tank cleaning solvents.  This may cause the suppliers of tank cleaning solvents to decrease their
production of solvents, impacting those industries that supply them with the inputs required to manufacture
the solvents. In addition, the employees of each industry will experience a decrease in income; this will affect
their purchases of other products.  The final demand multiplier estimates the total dollar value of output lost
due to the decreased demand for other products caused by the decreased supply of tank cleaning services.
       3.5.1.1 Input-Output Multiplier Methodology

       To use the final AemtmA output multiplier, the loss in industry output caused by the decrease in
supply must be estimated. This lost output is expressed in terms of decreased industry revenues (i.e., the
dollar value of lost output). Figure 3-5 illustrates the change in industry revenues caused by the regulation.

                                              3-28

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Price
  PI


  P*

  P2
                                                                  SI


                                                                  } per unit compliance costs

                                                                  S
                                   Ql     Q*
Tanks Cleaned
                                        Figure3-5

                             Lost Output and Transfer Payments
                             for Calculation of Secondary Impacts
                                            3-29

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The rectangle bounded by P*Q* represents total pre-compliance industry revenues, while the rectangle
bounded by P2^ represents post-compliance industry revenues attributable to tank cleaning services; the
difference between the two rectangles represents the value of output lost due to the regulation. Next,
estimated output loss in the regulated industry is multiplied by the final demand output multiplier for the
industry to calculate the decrease in total national output caused by the regulation:

               output loss  x final demand output multiplier =  total national output loss

The total loss in national output includes the lost output in the regulated industry as well as indirect and .
induced losses in industries that provide inputs to the industry, and final consumption goods.

        This calculation does not account for all regulatory impacts, however.  Compliance costs are passed
through to customer industries in the form of increased prices; this price change increases the customer
industries' costs of operation (a decrease in supply), which in turn reduces the quantity of output they provide
and generates secondary impacts for their suppliers as well. In Figure 3-5 the cost passed through is
represented by the increase in equilibrium price from P* to P1 multiplied by the number of tanks cleaned at
that price, Ql. Secondary impacts may also be generated by compliance costs that are avoided by the
regulated industry by passing them through to their customers. Multiplying the value of output represented
by (P1 - P*) x Q1 by the final demand multiplier for the customer industries accounts for these impacts.
        In addition to the final demand output multiplier, EPA will use the final demand employment
multiplier and the direct effect employment multiplier to estimate national employment impacts. The final
demand employment multiplier uses data on the labor input required per dollar of output in each industry to
estimate the direct, indirect, and induced changes in national employment (measured in FTEs) caused by the
initial change in the regulated industry's output:

         output loss x final demand employment multiplier  = total national employment loss

This final demand employment multiplier essentially estimates the total number of employees in all industries
required to produce $1 million of the regulated industry's output
                                              3-30

-------
        EPA also makes use of the direct effect employment multiplier in estimating impacts. Typically,
 unemployment in a regulated industry is estimated directly from incremental facility closures There are no
 incremental facility closures projected under the proposed options for the TEC industry, however, though the
 post-compliance decrease in tank cleanings projected by the TEC market model does infer employment
 impacts. The direct effect employment multiplier can be used to estimate the unemployment impacts in the
 regulated industry.

        The key to estimating employment impacts in the regulated industry from the direct effect
 employment multiplier is the relationship between that multiplier and the final demand employment
 multiplier.  The final demand employment multiplier described above estimates total national employment
 impacts based on the change in output in the regulated industry.  The direct effect employment multiplier also
 estimates total national employment impacts, but this estimate is based on the change in employment in the
 regulated industry:

      industry employment loss  x  direct effect employment multiplier  =  national employment loss
        . '                          fr                       -
 Because both multipliers are derived from the same underlying relationships in the production process, the
 national impacts  estimated from changes in employment should be consistent with national impacts estimated
 from changes in output EPA can directly estimate output losses in the regulated industry and use the final
 demand employment multiplier to estimate national employment impacts. National employment impacts can
 then be divided by the direct effect employment multiplier to estimate the loss in industry employment:
                                                                                   k
      national employment loss  •*• direct effect employment multiplier  =  industry employment loss

This estimate is valid because all three multipliers are derived from the same underlying relationships
estimated in the IO tables. All IO multipliers used in the secondary impacts analysis are listed in
Appendix E.             •                      "
                                              3-31

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        3.5.1.2 Application of Input-Output Methodology to the TEC Industry

        Although the application of IO multipliers to estimate impacts is straightforward in theory, practical
application to the TEC industry is difficult for two reasons. First, the Bureau of Economic Analysis does not
provide IO multipliers for the TEC industry.  Second, lost industry output is difficult to estimate because a
significant proportion of tank cleanings occur with no market transaction (i.e., in-house cleanings).

        To address the first problem, EPA applied the IO multipliers for transportation services according to
the transportation mode of the subcategory (e.g., facilities in the Barge Chemical and Petroleum subcategory
were assigned the IO multiplier for water transportation services, IO category 65.04). EPA chose this strategy
because each of the activities performed by facilities that provide TEC services (such as building or repairing
tank containers, terminal operations by shippers and carriers, or TEC services alone) are inputs into the
transportation service industry. Any regulatory impact to the TEC industry affects the national economy
through its impact on transportation services.

        To address the second problem, EPA chose to value in-house cleanings at the preregulatory market
equilibrium price for commercial cleanings.  Under perfect competition, the price of a good or service is just
equal to the piprginal cost of supplying it EPA thus assumed that the value of tank cleaning to society is
reflected in the price of providing that service.
        3.5.2   Estimation of Output and Employment Gains

        Negative impacts to output and employment caused by the regulation may be offset by positive
impacts to industries and individuals that provide wastewater treatment services. la Figure 3-5, the cost of
                if             i1      I          ,     '                     :
wastewater treatment per tank cleaned is equal to the difference between P1 and P2.12 While compliance costs
represent a loss in revenues to providers and customers of TEC services, they also represent income to the
providers of wastewater treatment services.  Compliance costs, from society's viewpoint, are not a net loss,
but a transfer of income from one industry to others. Thus, compliance costs represent an increase in the
demand for wastewater treatment systems, the construction services to install the systems, chemicals and
        12 Total compliance costs are equal to (P1 - P2) x Ql.

                                               3-32

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 parts to operate and maintain the systems, and labor services to run the systems. The increase in demand for
 each of these components causes increased demand in those industries which supply them. Therefore
 compliance costs cause positive secondary impacts that are also estimated through IO output and employment
 multipliers.

        Application of IO multiplier methodology to estimate output and employment gains due to regulation
 of the TEC industry is much more straightforward than the application to estimate losses. Total annualized
 compliance costs represent the gain in output to suppliers of wastewater treatment systems. The final demand
 output and employment multipliers are applied to total annualized compliance costs to calculate positive
 secondary impacts. The primary modification required is that different components, of compliance costs
 represent an increase in demand to different industries that have different multipliers. Thus, annualized
 compliance costs must be desegregated before IO multipliers can be applied

        Total secondary output gains from the regulation are measured as the sum of the following
 compliance costs, multiplied by the appropriate industry final demand output multipliers to determine total
 direct, mdirect, and induced gains attributable to the regulation:

        •      Annualized capital costs, disaggregated into capital and installation components.
        •      Annual operating and maintenance costs attributable to monitoring, waste              *
               disposal, materials, and energy use.

Annual expenditure on operating and maintenance labor services are then added to the estimated increase in
total national output (i.e., the multiplier is set equal to one).

       Total secondary employment gains from the regulation are measured as the sum of the following
compliance costs, multiplied by the appropriate industry final employment multipliers to determine total
direct, indirect, and induced gains attributable to the regulation:

       •      Annuali/ed capital costs, disaggregated into capital and installation components.
       •      Annual operating and maintenance costs attributable to monitoring, waste disposal,
               materials, and energy use.
                                              3-33

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Annual expenditure on operating and maintenance labor services converted to FTE employment are then

added (i.e., the multiplier is set equal to one) to the total. All multipliers used to estimate secondary impact

gains are listed in Appendix E.
       3J53   Regional Impacts


       Because the TEC industry detailed questionnaire was sent to a sample of TEC faculties stratified by
type of tank cleaned and certain financial characteristics, EPA cannot determine the geographical distribution
of TEC faculties with any degree of statistical confidence. In addition, the closure model projects no facility
closures under the preferred options,13 and market model projections of impacts provide no means of
ascertaining how these aggregate impacts are distributed across facilities. For these reasons, it is impossible
for EPA to accurately project impacts to any particular geographical region.
3.6    REFERENCES


Altaian. 1993. Altman, Edward. Corporate financial distress and bankruptcy. New York: John Wiley
and Sons.

Brealy and Meyers. 1996. Breary, Richard A., and Stewart C. Myers. Principles of corporate finance
(5th ed). New York:  The McGraw-Hill Companies, Inc.
                                  i' •.      •    •          '         i
Brigham and Gapenski. 1997. Brigham, Eugene F., and Louis C. Gapenski. Financial management: Theory
and practice (8th ed.). Fort Worth:  The Dryden Press.

CEA. 1995. Council of Economic Advisors. Economic report of the president Washington, DC.
Table B-59.

Denning.  1996. Cash flow vs. salvage value: Phone call from George Denning, EPA, WAM, to Calvin
Franz, ERG. Memo to TEC Industry Project File.  October 18.

Denning.  1997. Business entity weights: Phone call from George Denning, EPA, WAM, to Calvin Franz,
ERG. Memo to TEC Industry Project File. April 22.
        13 In previous EAs, projected facility closures have been used to estimate regional and community
impacts.

                                              3-34

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Franz. 1996. Method for calculating the percentage increase in price due to pollution control requirements
for pulp and paper. Memo from Calvin Franz, ERG, to Matt Clark, EPA. March 21.

IRS.  1995. The Research Institute of America, Inc. The complete mtemal revenue code. New York
January 1995 edition.

U.S. Department of Commerce. 1997. Regional multipliers: A user handbook for the regional input-output
modeling system (RIMS Q). Washington, DC: U.S. Government Printing Office. March.

U.S. EPA. 1992. Total cost assessment: Accelerating industrial pollution through innovative project
financial analysis.  Washington, D.C.: U.S. Environmental Protection Agency, Office of PoUutionJPrevention
and Toxics.

U.S. EPA. 1995a. 1994 Detailed questionnaire for the transportation industry. OMB No. 2040-0179.
Washington, D.C.: U.S. Environmental Protection Agency, Office of Water.

U.S. EPA. 1995b. Interim economic guidance for water quality standards: Workbook
EPA-823-B-95-002. Washington, DC: U.S. Environmental Protection Agency, Office of Water.
                                            3-35

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3-36

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                                         CHAFTER4

                           POLLUTION CONTROL OPTIONS


     ;                   '       -       -           ...-•'••'                  -

 4.1    EFFLUENT LIMITATIONS GUIDELINES AND STANDARDS


        The Federal Water Pollution Control Act (commonly known as the Clean Water Act [CWA, 33
 U.S.C. §1251 et seq.]) establishes a comprehensive program to "restore and maintain the chemical, physical,
 and biological integrity of the Nation's waters" (section 101(a)). EPA is authorized under sections 301,304,
 306, and 307 of the CWA to establish effluent limitations guidelines and pretreatment standards of
 performance for industrial dischargers. The standards EPA establishes include:


        •      Best Practicable Control Technology Currently Available fBPT>. Required under section
               304(b)(l)..these rules apply to existing industrial direct dischargers. BPT limitations are
               generally based on the average of the best existing performances by plants of various sizes,
               ages, and unit processes within a point source category or subcategory.

        •      Best Available Technology Economically Achievable fBATY Required under section
               304(b)(2), these rules control the discharge of toxic and nonconventional pollutants and
               apply to existing industrial direct dischargers.

        •      Best Conventional Pollutant Control Technology mCTY Required under gartinn 3fU(h)(^
               these rules control the discharge of conventional pollutants from existing industrial direct
               dischargers1. BGT limitations must be established in light of a two-part cost-reasonableness
               test  BCT replaces BAT for control of conventional pollutants.

        •      Pretreatment Standards for Existing Sources (PSESX Required under section 307
               Analogous to BAT controls, these rules apply to existing indirect dischargers (whose
               discharges flow to POTWs.

        *      New Source Performance Standards (NSPSY  Required under sactinn 3flfi(h) the** mlg?
               control the discharge of toxic and nonconventional pollutants and apply to new source
               industrial direct dischargers.
       1 Conventional pollutants include biochemical oxygen demand (BOD), total suspended solids (TSS),
fecal coliform, pH, and oil and grease.
                                             4-1

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                           Standards for New Sources (PSNSX Required under section 307. Analogous
               to NSPS controls, these rules apply to new source indirect dischargers (whose discharges
               flowtoPOTWs).

EPA is proposing effluent limitation and pretreatment standards for certain subcategories in the TEC industry
in this rulemaldng effort.
42    TECHNOLOGY OPTIONS
     , ,                     .    ,    ,               .    ',      •                   -           i ,  - „
       4.2.1   General Information

       EPA does not mandate technologies when establishing effluent limitations guidelines and
pretreatment standards. However, EPA evaluates various technology options in order to base the limitations
on demonstrated technologies and evaluates the economic impact of the cost of those technologies on the
regulated industry. This section briefly describes the pollution control options evaluated for each subcategory
within the TEC industry. The Development Document (U.S. EPA, 1998) provides a detailed description of
the TEC industry subcategories and pollution control options for each subcategory.

       In addition to wastewater treatment technologies, each option specifies the use of good heel removal
and management practices, and good water conservation practices. Heel control, the removal of material
from the bottom of the tank (i.e., "heel") before cleaning, reduces the amount of pollutants that must be
captured by the wastewater treatment system. Good water conservation practice minimizes the use of water
to clean the tanks. The treatment train can then be sized for a smaller volume of wastewater, resulting in
savings on both capital equipment costs and operation and maintenance costs for a given facility. Also,
because the pollutant concentrations in the wastewater are higher (i.e., same pollutant mass in a smaller
volume of water), the pollution control equipment can work more efficiently (U.S. EPA, 1998).
                                              4-2

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        4.2.2   Option Description

        Table 4-1 summarizes the technology options considered for each TEC industry subcategory. The
 first column indicates the option number that appears in the cost and impact tables in Chapters Five through
 Nine. The second column identifies the technology option proposed for each standard.  The third column
 contains the a brief description of the technology option. For three subcategories—Truck Chemical, Rail
 Chemical, and Barge Chemical and Petroleum—EPA considered different options for facilities with different
 discharge statuses; thus there are separate entries for direct and indirect dischargers. For example, Option 2
 for the Truck Chemical subcategory considers biological treatment for direct dischargers but not indirect
 dischargers,

        EPA developed between one and three technology options for each subcategory based on incremental
 technology additions to a wastewater treatment train.  Option 1 presents the basic treatment train for the
 subcategory. Option 2 then adds further treatment technologies to the treatment train specified in Option 1.
 The incremental or distinguishing technology for each option is described in italics in Table 4-1.  For
 example, Option 2 for direct dischargers in the Truck Chemical subcategory includes all Option 1
 technologies plus an activated carbon adsorption unit; the activated carbon adsorption unit is referred to as
 the incremental technology. Similarly, for subcategories that specify a third option, Option 3 includes all
 Option 2 technologies plus an incremental technology.

        For direct dischargers, EPA proposes to set Option 2 for BPT, BCT, BAT, and NSPS in the Truck
 Chemical subcategpry. Option 1 is proposed for BPT, BCT, and BAT in the Rail Chemical subcategory;
 Option 3 is proposed for NSPS. In the Barge Chemical and Petroleum subcategory, Option 1 is proposed for
 BPT, BCT, BAT, and NSPS. For all direct dischargers in the Food subcategories, regardless of
 transportation mode, EPA is proposing Option 2 for BPT, BCT, and NSPS.
                                    -   -           ,                             v '
        For indirect dischargers, EPA proposes to set Option 2 for PSES and PSNS hi the Truck Chemical
 subcategory. Option 1 is proposed for PSES in the Rail Chemical subcategory, and Option 3 is proposed for
PSNS. In the Barge Chemical and Petroleum subcategory, EPA does not propose to set PSES; Option 2 is
proposed for PSNS.  EPA is not proposing limitations for the petroleum or hopper subcategories at this time;
                                              4-3

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                    TABLE 4-1




TECHNOLOGY OPTIONS FOR TEC INDUSTRY SUBCATEGORffiS
Option
Proposed Option
for
Standard
Description
,:•••> T^ru<£ C&emlcal Dired Disdiargers
I1
2

BPT, BCT, BAT
NSPS*
How reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, biological treatment, and
sludge dewatering
How reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, biological treatment, activated
carbon adsorption, and sludge dewatering:
-^ -, ', '- Track ChemiealBidira^ Dischargers - "--
1
2

PSES, PSNS*
How reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, and sludge dewatering
How reduction, equalization, oil/water separation, chemical oxidation,
neutralization, coagulation, clarification, activated carbon adsorption,
and sludge dewatering
'"\^ ,; »^CIi««ikaIi)ir€ctl)&diarg»rS
I2
2
3
BPT, BCT, BAT

NSPS*
How reduction, oil/water separation, equalization, biological treatment,
and sludge dewatering
How reduction, oil/water separation, equalization, dissolved air flotation
(withfloccidation and pH adjustment), biological treatment, and sludge
dewatering
How reduction, oil/water separation, equalization, dissolved air flotation
(with flocculation and pH adjustment), biological treatment, organo-
clay /activated carbon adsorption, and sludge dewatering
                      4-4

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TABLE 4-1 (continued)
Option
s *" s %
1
2
3
, , > ,
1
2
f
1
2
.3
- ,-' "
1
2
Proposed Option
for
Standard
'-
PSES

PSNS*
..,,,,/,, ' -
BPT, BCT, BAT
NSPS*

]

PSNS*

, - ' ?"

BPT, BCT
NSPS*
Description
Rail Chemical Indirect Dischargers
Flow reduction and oil/water separation
How reduction, oil/water separation, equalization, dissolved air flotation
(with flocculation and pH adjustment), and sludge dewatering
Plow reduction, oil/water separation, equalization, dissolved air flotation
(with flocculation and pH adjustment), organo-clay/activated carbon
adsorption, and sludge dewatering
Barge Chejnfcal Direct Dischargers
How reduction, oil/water separation, dissolved air flotation, filter press,
biological treatment, and sludge dewatering
How reduction, oil/water separation, dissolved air flotation, filter press,
biological treatment, reverse osmosis, and sludge dewatering
$arge Chemical Indfo°ect D&chargers '••' """ - ' -
How reduction, oil/water separation, dissolved air flotation, and in-line
filter press
How reduction, oil/water separation, dissolved air flotation, in-line filter
press, biological treatment, and sludge dewatering
How reduction, oil/water separation, dissolved air flotation, in-line filter
press, biological treatment, reverse osmosis, and sludge dewatering
Food Grade
How reduction and oil/water separation
How reduction, oil/water separation, equalization, biological treatment,
and sludge dewatering
        4-5

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                                       TABLE 4-1 (continued)
Option
Proposed Option
for
Standard
Description
-;- ' Petroleum ,
I3
2
NA
NA
Flow reduction, equalization, oil/water separation, and chemical
precipitation
Flow reduction, equalization, oil/water separation, activated carbon
adsorption, and recycle/reuse
	 .<" ' <% " '' llonjier "" " ''' ' -"" " '- -' ' " "-"""
1
NA
Flow reduction and gravity separation
Note:  EPA developed options based on incremental technology additions to a treatment train.  Each option builds
       upon the previous option.  Technologies incremental to the previous option are shown in italics to help the
       reader identity the distinguishing characteristics of an option.
* Under NSPS and PSNS, flow reduction consists of good water conservation practices including flow segregation.
1 Option 1 has identical costs and removals as Option 2.
2 Equalization was originally costed with Option 2, but later moved to Option 1; costs have not been adjusted.
3 Because Option 1 would result in higher costs and lower removals man Option 2, it was not completely costed.
                                                4-6

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 4.3    MONITORING OPTIONS

        EPA evaluated each technology option in conjunction with various combinations of the following six
 monitoring options:

        «      'No monitoring.
        •       Quarterly monitoring for volatile, semivolatile, metal, and conventional pollutants.
        •       Bimonthly monitoring for volatile, semivolatile, metal, and conventional pollutants.
        •     .  Monthly monitoring for volatile, semivolatile, metal, and conventional pollutants.
        •       Combination of monthly monitoring (for volatile, semivolatile, and metal pollutants) and
                weekly monitoring for conventional pollutants.
        •       Weekly monitoring for volatile, semivolatile, metal, and conventional pollutants.

EPA examines monitoring costs as well as technology costs in the economic analysis. For the purpose of
presenting projected economic impacts, EPA chose to focus on monthly monitoring for indirect dischargers
and a combination of weekly and monthly monitoring for direct dischargers; all projected impacts described
in Chapter 5 are reported on the basis of those monitoring frequencies. The proposed rule does not mandate a
specific monitoring frequency. Under these circumstances, in practice, monitoring frequency is determined
by the permit writers. Most faculties, particularly indirect dischargers, monitor for toxic pollutants less
frequently than once a month (Bradley, 1998). Therefore, monthly monitoring is a conservative assumption
for analyzing economic impacts.

       Table 4-2 presents average annual monitoring costs per facility for each monitoring option evaluated
for the TEC industry.  These costs are the sum of the average cost of laboratory tests for volatile, semi-
volatile, metal, and conventional pollutants, multiplied by the frequency of each test (U.S. EPA, 1998).
Monitoring costs are also presented on a pre- and post-tax annualized basis (Section 3.1 and Appendix A) for
consistency with the annualized compliance costs presented in Chapter 5.  Monitoring costs at the appropriate
level of frequency are included in the compliance costs presented in Table 5-1.
                                               4-7

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                                                4-8

-------
        Table 4-2 begins by presenting the annual, pie-tax annualized, and post-tax annualized cost for
 quarterly monitoring—the least frequent option considered (see leftmost column of numbers). More frequent
 monitoring places additional or incremental costs on a facility. The incremental costs as you move from one
 monitoring frequency to the next higher level are shown in the second line under each of the costs.  For
 example, if indirect dischargers in the Truck Chemical subcategory increase monitoring frequency from
 monthly to a combination of monthly and weekly, each facility will incur additional pre-tax annualized costs
 of $6,372 per year over the 16-year project life. With 288 facilities in the Truck Chemical subcategory, total
 pre-tax annualized compliance costs will increase by approximately $1.8 million for the entire subcategory.2
 4.4     REFERENCES

 Bradley. 1998, Memorandum from Patrick Bardley, EPA Permits Division, toNeilPatel,U.S.
 Environmental Protection Agency, Office of Water, Economics and Statistics Division.  March.
 U.S. EPA. 1998. Development document for the proposed effluent limitations guidelines and standards for
 the transportation equipment cleaning industry. EPA-821-B-98-011. Washington, DC: U.S. Environmental
 Protection Agency, Office of Water. May.
        2 This is only an approximation. The additional costs may cause some facilities to switch from
treating wastewater to having their wastewater hauled for disposal off site; such facilities would incur zero
monitoring costs, and incremental monitoring costs for the entire subcategory would be less than $1.8
'million
                                               4-9

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4-10

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                                         CHAPTERS
                                  ECONOMIC IMPACTS
 5.1    OVERVIEW

        Chapter 5 presents the estimated regulatory impacts on the TEC industry. The economic impacts
 flow from the costs associated with the incremental pollution control requirements discussed in Chapter 4.
 While a facility need not install any specific pollution control technology, the regulatory requirements are
 based on a technology that can achieve the specified effluent limits. In this chapter, EPA evaluates the
 impacts of these costs using the models presented in Chapter 3.

        EPA is promulgating BPT, BAT, BCT, andNSPS standards in the Truck and Rail Chemical
 subcategories. Similarly, EPA is promulgating BPT, BCT, and NSPS (but not BAT) standards in the Food
 grade subcategories. However, no direct dischargers are identified in the detailed questionnaire database for
 these subcategories, although EPA believes they do exist EPA did identify direct discharging facilities in the
 screener survey for the Truck Chemical, Rail Chemical, Truck Food and Barge Food subcategories.

        Because the screener survey does not contain the same level of data as the detailed questionnaire,
 EPA has analyzed potential impacts to these facilities differently than the detailed questionnaire facilities.
 Therefore, projected impacts due to BPT, BAT, and BCT standards in the Truck Chemical and Rail Chemical
 subcategories, and BPT and BCT standards in the Food grade subcategories are discussed separately in
 Section 5.5.  All analysis presented in Sections 5.2 through 5.4 is based solely on faculties contained in the
 detailed questionnaire database. Thus, projected impacts to proposed options described in Sections 5.2
 through 5.4 include PSES standards for the Truck and Rail Chemical subcategories, and BPT, BAT, and
 BCT standards for the Barge Chemical and Petroleum subcategory.

        Sections 5.2 through 5.4 each summarize a different level of economic analysis for existing sources.
 Section 5.2 discusses total and average compliance costs by subcategory.  Section 5.3 presents estimated
impacts at the market level (that is, the estimated change in the market equilibrium price and quantity of tank
cleanings performed before and after the imposition of incremental costs on the market model).  Section 5.4
                                              5-1

-------
presents impacts at the facility level. Severe impacts are measured at the facility level on the basis of facility
closures, employment losses, and revenue losses. Facilities not projected to close may experience financial
                                 "•  i    .'    • .     i1       '.    '     •    i     '
stress, which could create long-run difficulties for the financial viability of the business entity. EPA measures
these impacts through a financial ratio analysis of each facility's parent business entity. The facility-level
analysis also includes the results of the sales test ratio, which compares facility annualized compliance costs
to revenues.  Subcategory results are presented within each section.  Section 5.5 describes projected impacts
on direct discharging facilities in the Truck Chemical, Rail Chemical, and Food grade subcategories for which
detailed questionnaire data is unavailable.  Section 5.6 presents EPA's analysis of secondary impacts.
Section 5.7 discusses incremental pollution control for new sources.  Section 5.8 summarizes results of the
economic analyses for all options for the industry and the proposed options for the regulated subcategories.
See Chapter 3 and Appendixes A through E for details about the impact methodologies.
5.2    TOTAL AND AVERAGE COMPLIANCE COSTS

                                  " '   '       "         i           .      '
       Table 5-1 presents total and average compliance costs in 1994 dollars by subcategory and regulatory
option. The table includes estimated capital costs, annual operating and maintenance costs, and pre- and
post-tax annualized costs. EPA calculated annualized costs by combining the one-time capital expenditure
with operating and maintenance costs over the 16-year project life. These annualized costs, which are
analogous to home mortgage payment, represent the total project cost as 16 equal annual payments (Chapter
3 and Appendix A). Also included in the annualized costs are costs for periodic effluent monitoring. EPA
examined several monitoring options in combination with each technology option. The results presented in
this chapter are based on monthly monitoring for all subcategories except direct dischargers in the Barge
Chemical and Petroleum subcategory. The result in that subcategory is based on a combination of monthly
and weekly monitoring.1

       Total post-tax annualized compliance costs range from $18.8 million under option 2 for the Truck
Chemical subcategory, to $310,000 under option 1 for the Truck Hopper subcategory. However, because the
number of potentially affected facilities in each subcategory ranges from 288 in Truck Chemical to 2 in Barge
     1 EPA examined quarterly, bi-monthly, monthly, weekly, and a combination of monthly and weekly
monitoring (Chapter 4). Increased monitoring frequency adds to the cost of the regulation but does not increase
pollutant removals.
                                               5-2

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 Food, the average cost per facility provides a better indication of relative compliance costs. Average post-tax
 annualized costs range from $118,000 per facility under option 2 in the Barge Chemical and Petroleum
 subcategory to $9,000 per facility under option 1 in the Truck Hopper subcategory.
 53     MARKET-LEVEL IMPACTS

        The market model estimates the impact of compliance costs on overall cleanings performed and
 market price; it does not estimate impacts to the individual commercial facilities that perform the cleanings.
 That is, the market model estimates the aggregate decrease in tank cleanings performed by a subcategory;
 however, it does not estimate whether the post-compliance decline in tank cleanings is due to the closure of
 one or more facilities, or to a small decrease in cleanings for many facilities. The market model also
 examines the decision by in-house facilities to upgrade their TEC wastewater treatment systems or to close
 their TEC operations (but not the entire facility) and outsource their tank cleaning requirements to
 commercial facilities. Table 5-2 presents the estimated impact of regulatory compliance costs on baseline
 market price and quantity for each subcategory. EPA calculated baseline price and quantity directly from
 data from Part B of the detailed questionnaire (Appendix B).                                       -
                                                                               t,.
        Unless all facilities in a subcategory are already sufficiently treating their wastewater, imposing
 regulatory controls increases the average cost of tank cleaning. If all other factors remain equal,2 this
 increased cost results in a decrease in the market supply of tank cleanings (this is shown in the third column
 of Table 5-2). The imposition of controls on in-house facilities provides incentive for these facilities to
 switch to commercial cleaners to avoid the increased costs. Such a change, should it occur, would result in an
 increase in demand (shown in the fourth column of Table 5-2).  A decrease in supply, other things remaining
 constant, causes the market price to increase and the number of tank cleanings performed to decrease. An
increase in demand, other things constant, causes the market price and the number of tank cleanings
performed to increase. The combined effects of an increase in demand coupled with a decrease in supply is a
stronger upward pressure on prices; however, these combined effects tend to offset changes in the number of
cleanings.
   2 This assumption abstracts the analysis from other effects on the market, such as market growth or changes
in wage rates, which are independent of the regulation. Thus, EPA does not assume a facility can avoid closure
or other regulatory impacts through increased revenues from forecasted growth.

                                               5-5               " .        -

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         The decrease in supply caused by the imposition of compliance costs ranges from 2 percent of
 baseline supply under option 1 in the Barge Chemical and Petroleum subcategory to 25 percent under option
 2 in the Truck Food subcategory. Under the options presented in Table 5-2, there was no outsourcing of
 cleanings in any subcategory. The primary reason no outsourcing occurs is that many in-house faculties
 indicated in the detailed questionnaire that they would not outsource tank cleanings, regardless of
 compliance costs. The decrease in supply caused an increase in post-regulatory equilibrium price, ranging
 from 2 percent of baseline price under option 1 of Barge Chemical and Petroleum to 24 percent of baseline
 price under option 2 of Truck Food. The decrease in the post-regulatory quantity of tank cleanings performed
 ranges from 0.1 percent to 4 percent The pattern of impacts is consistent for all subcategories under all
 options: the impact on price is substantially larger than the impact on quantity.

        The pattern of impacts presented in Table 5-2 is attributable to a very inelastic demand for and a
 relatively elastic supply of tank cleaning services.3 Estimates of the price elasticity of demand for
 transportation services range from -1.3 for truck transportation to -0.7 for barge transportation. Because the
 cost of tank cleaning services is  a very small percentage of the cost of transportation services, the price
 elasticity of demand for tank cleaning services is a fraction of the demand elasticity for transportation. EPA's
 estimates of the elasticity of demand for TEC services therefore range from -0.195 for trucks to -0.07 for
 barges (Appendix B). Thus, a 1 percent increase in price for tank truck TEC services, for example, will
 decrease the number of tank cleanings demanded by less than 0.2 percent; the impact falls primarily on price
 with relatively little effect on quantity.

        Intuitively, demand is price inelastic for two reasons. First, there are few substitutes for TEC
 services; tanks need to be cleaned periodically and there are few ways to avoid this requirement. Second,
 TEC services make up a relatively small share of the cost of transportation services. The second reason for
 demand inelasticity reinforces the first Tank cleaning is unavoidable; however, it comprises such a small
 share of overall transportation costs that users of TEC services have little incentive to undertake significant
    3 The price elasticity of demand is defined as the percentage decrease in quantity demanded caused by a
1 percent increase in price.  The price elasticity of supply is defined as the percentage change in quantity supplied
caused by  a 1 percent change in price.   Price elasticities  are used to summarize the  responsiveness of
consumers/producers to changes in market conditions. An elasticity less than one indicates that an increase in
price has relatively little impact on a consumer's decision on how much of a good to purchase or a producer's
decision onhowmuch of agood to supply. An elasticity greater than one indicates that a small price change will
have a large impact on such decisions.
                                               "5-8

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efforts to economize on TEC costs (as they might do if fuel prices, for example, increased significantly). The
price inelasticity of demand implies that the industry has the potential to offset increased costs of incremental
pollution control through higher prices.  In other words, an inelastic demand curve implies that producers may
pass through a significant percentage of compliance costs to their customers, who would rather pay the higher
price than forego tank cleanings. This cost pass-through effect is an integral link between the market analysis
and the facility closure analysis discussed in Section 5.4.
5.4     FACILITY-LEVEL IMPACTS

        EPA has assessed the impact of compliance costs on the financial health and viability of TEC
facilities using the closure model, financial ratio analysis, and the ratio of facility compliance costs to sales
(the sales test). Section 5.4.1 presents projected incremental closures by subcategory and associated impacts
(Section 3.3 and Appendix C). Both the revenues generated by a facility and employment in the facility are
assumed to be lost if a facility is projected as an incremental closure; these are the impacts associated with
facility closure. Section 5.4.2 presents the results of EPA's financial ratio analysis; this analysis measures
incremental financial distress short of closure.  Section 5.4.3 presents the results of the sales test The sales
test examines the ratio of annuali/ed compliance costs to facility revenues.
        5.4.1   Facility Closures Analysis

        Facility-level impacts are estimated using the closure model described in Chapter 3.  The closure
model addresses the impact of compliance costs on the financial health of the individual facility. In effect, the
closure analysis models the financial evaluation a facility owner might make when evaluating whether to
upgrade pollution controls.

        An important component of a facility's ability to bear the burden of regulatory cost is its ability to
pass the cost through to its customers in the form of higher prices; the regulatory costs can be partially offset
by an increase in the facility's revenues. At the market level, the cost pass-through is measured as the
percentage increase in price relative to the per unit regulatory cost (Section 3.2 and Appendix B). At the
facuity level, however, this price increase applies only to revenues earned from tank cleanings, not from all

                   '                  -          5-9              .    .                     .

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 facility activities. The market-level cost pass-through is therefore multiplied by each facility's ratio of TEC
 revenues to total facility revenues. Because of this, commercial facilities are able to pass through a larger
 percentage of regulatory costs than are in-house facilities; cost pass-through is assumed to be equal to zero
 for non-market transactions, thus in-house facilities generally do not benefit from cost pass through.4 In-
 house facilities, however, may perform some cleanings on a commercial basis, which explains why in-house
 facilities might experience an increase in revenues.  The difference in the ability of commercial and in-house
 facilities to pass through costs can be seen Table 5-3, which presents the effective facility cost pass-through
 by subcategoiy for commercial and in-house facilities.
        5.4.1.1 Facility Closures and Associated Impacts

        Table 5-4 presents projected facility incremental closures and associated impacts by technology
 option and subcategory for the TEC industry.  No closures are projected under any options for the Truck
 Chemical, Barge Chemical and Petroleum, Rail Food, Barge Food, Rail Hopper, Barge Hopper, Truck
 Petroleum, and Rail Petroleum subcategories.
                   ,  "'              !   "  •      .         • '     '•:>:!
        For indirect dischargers in the Rail Chemical subcategory, no facilities are projected to close under
 option 1; six facilities are projected to close under options 2 and 3. These six facilities comprise 16 percent
 of all facilities in the subcategory. They generate $25.3 million in annual revenues (41 percent of
 subcategoiy revenues) and employ 421 workers (19 percent of subcategory employment). Because 10
 facilities in the subcategory are cost centers (i.e., with zero revenues), the six incremental closures generate a
 very large percentage of total subcategory revenues.
                                  ' '(•'•''       '     ..  •
        There are no incremental closures projected under option 1 for indirect dischargers in the Truck Food
 subcategory. Under option 2, eight facilities are projected to close (5 percent of facilities in the subcategoiy).
 These facilities generate $22.9 million in revenues (0.6 percent) and employ 153 workers (0.7 percent).
   4 The argument can be made that some in-house faculties may pass 100 percent of compliance costs through
to customers.  This could occur, for example, when TEC services are provided by a facility in order to facilitate
primary operations (such as tank repair) for commercial customers. Because of the difficulty in analyzing such
opportunities for in-house facilities, however, EPA makes the conservative assumption that cost pass-through
is zero for non-market transactions.
                                                5-10

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                                 TABLE 5-3

           EFFECTIVE COST PASS-THROUGH BY SUBCATEGORY
Subcategory
TT/CHEM1
RT/CHEM1 ,.
TB/CHEM1
TT/FOOD1
RT/FOOD
TB/FOOD
TT/PETR
RT/PETR
TH/HOPPER
RH/HOPPER
BH/HOPPER
All Facilities
Commercial
Facilities
63.6%
60.3%
48.0%
61.1%
ND
ND
0.2%
ND
3.4%
ND
5.1%
55.7%
In-house
Facilities
7.5%
16.4%
19.5%
0.2%
ND
ND
0.2%
ND
0.0%
ND
, 0.0%
3.7%
All
Facilities
32.4%
37.7%
42.5%
15.1%
ND
ND
0.2%
ND
1.1%
ND
2.3%
21.6% '
Source: Market model, closure model and questionnaire data.
ND: Not disclosed due to business confidentiality.
1 Results for indirect discharging facilities contained in detailed questionnaire database.
                                  5-11

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         Five facilities (15 percent of the subcategory) would be projected to close under option 1 for the
 Truck Hopper subcategory.  These facilities generate $6.6 million in revenues (20 percent of subcategory
 revenues) and employed 38 workers (6 percent of subcategory employment),

         When all subcategories are considered together, from 0 to 19 faculties are projected to close under
 the range of options considered.  This represents a range from zero percent to nearly 3 percent of the industry
 population. Associated impacts include up to $54.8 million in lost revenues and 612 lost jobs. Although
 total impacts account for less than 1 percent of industry revenue and 1.4 percent of industry employment,
 within specific subcategories these losses comprise up to 41 percent of subcategory revenue and  19 percent of
 subcategory employment

        Two attributes of the TEC industry account for the lack of projected facility closures: the industry's
 ability to pass through costs, and the prevalence of in-house facilities.  First, a facility's ability to bear the.
 burden of regulatory cost increases with is its ability to pass the cost through to its customers in the form of
 higher prices. Cost pass-through increases as the price elasticity of demand becomes more inelastic, and the
 price elasticity of demand for TEC services is very inelastic. Second, in-house TEC operations tend to
 comprise just a small fraction of much larger operations at a facility (Section 2.6). Lot this case, the financial
 resources of the entire facility help bear the burden of the TEC compliance costs.
        5.4.1.2  Sensitivity Analysis: Facility Closures and Associated Impacts

        EPA also examined the results of the closure model under the alternative assumption of zero cost
pass-through (i.e., facilities are not allowed to pass any of their compliance costs through to customers in the
form of higher prices). The results of this sensitivity analysis for the proposed options are presented in
Table 5-5.

       In the Truck Chemical subcategory, 14 indirect dischargers (4.9 percent of the subcategory) are
projected to close under the proposed option if zero costs are passed through. These facilities earn
0.3 percent of subcategory revenues and account for 0.7 percent of subcategory employment
                                              5-14

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         For indirect dischargers in the Rail ffremical subcategory, the six facilities projected to close under
 options 2 and 3 assuming positive cost pass-through now also close under option 1 assuming zero cost pass-
 through. These six faculties comprise 16 percent of all facilities in the subcategory.  They generate $25.3
 million in annual revenues (41 percent of subcategory revenues) and employ 421 workers (19 percent of
 subcategory employment).  Because 10 facilities in the subcategory are cost centers (i.e., with zero revenues),
 the six incremental closures generate a very large percentage of total subcategory revenues.

        In the Barge Chemical and Petmleiim subcategory, there are no incremental closures assuming zero
 cost pass-through.
                                    i         , •              " ,           i
        Based on these results, it is clear that closure projections are sensitive to the cost pass-through
 assumption used. However, economic theory strongly supports the positive cost pass-through assumption.
 While it is true that a single facility in a competitive market is unable to raise its price if its competitors
 maintain their prices, the situation changes under an effluent guideline. Because all affected facilities incur
 compliance costs, they all have incentive to raise their price. In this case, it is aggregate market
 conditions—particularly the price elasticity of demand for tank cleaning services—that determines, on
 average, how much facilities will be able to raise their price.

        In. applying the concept of cost pass-through to the closure model, EPA made two additional
 assumptions to ensure that the estimate of effective cost pass-through would be conservative. First, EPA
 assumed that the preregulatory market supply would include commercial ZDT facilities; thus EPA calculated
 the estimated shift in the market supply curve to account for the fact that ZDT faculties incur zero costs and
 therefore provide downward pressure on prices (Section 3.2 and Appendix B).  Second, EPA assumed that
 facilities can only pass through costs on that percentage of tank cleanings that is performed for commercial
 clients (Section 3.3 and Appendix C). For example, an in-house facility that performs zero commercial tank
 cleanings is  assigned an effective cost pass-through of zero.  Therefore, although the closure results are
 sensitive to the cost pass-through assumption, EPA believes that economic theory supports the assumption of
positive cost pass-through, and has incorporated assumptions into its closure model to ensure that the cost
                                  ,:.,'„            'j    .   ;  '   ;
pass-through percentage used in the model is a conservative estimate.
                                               5-16

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        5.4.2   Financial Ratio Analysis

        EPA's financial ratio analysis examines whether a company could afford the cost of upgrading all
 the TEC facilities that it owns. For companies that own moire man one TEC facility, it could make
 economic sense to upgrade each facility, but the company may not be able to afford me total cost of
 upgrading all the facilities that it owns. Many banks use financial ratio analyses to assess the credit
 worthiness of a potential borrower.  If tile incidence of regulatory costs causes a company's financial ratios
 to move into an unfavorable range, the company will find it more difficult to borrow money. Under these
 conditions, EPA considers the company and each facility that it owns to be experiencmg."financial distress
 short of closure."

        Financial ratio analysis is performed at the level of the parent company because, hi general, major
 financial decisions are made at the company level, and because the company is ultimately responsible for
 repayment of a loan.  Financial institutions assess credit-worthiness at the company level, not at the  level
 of the facility. Because the sampling frame was developed on the basis of facility attributes, it is not
 possible to develop statistical weights for business entity results and the number of financially distressed
 business entities cannot be estimated (Denning,  1997). Instead, the impacts are passed to the facility level
 through the facilityrlevelweights (Section 3.4 and Appendix D).5
        5.4.2.1 AltmanZ" Financial Ratio Analysis

        EPA selected a weighted average of financial ratios, called the Altman Z"-score, to characterize
the baseline and post-regulation financial conditions of potentially affected firms (Section 3.4 and
Appendix D). The Altman Z"-score is a multidiscriminant function, originally developed to assess
   5 For example, say a company owns one TEC facility, that facility has a weight of seven, and the regulatory
costs place the company in financial distress. This report would describe the impacts as seven facilities are owned
by corporate parents that show financial distress, not as seven businesses show financial distress.  Because
business entities may own more than one facility, the number of business entities impacted by the regulation may
be smaller than the number of facilities.
                                              5-17

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 bankruptcy potential (Altman, 1993).6  The Z"-score has advantages over consideration of an individual

 ratio or a collection of individual financial ratios for two reasons. First, it provides simultaneous

 consideration of liquidity, leverage, profitability, and asset ratios. Second, it addresses the problem of

 how to interpret data sets in which some financial ratios look "good" while other ratios look "bad."
   .,                                  .                                   i,             ^


        Table 5-6 presents the results of the financial ratio analysis by option and subcategory.

 Incremental financial distress impacts occur to indirect discharging facilities hi the Truck Chemical and

 Truck Food subcategories. Seventeen facilities are owned by business entities that incur incremental

 financial distress under bom options 1 and 2 in the Truck Food subcategory.  Twenty-two facilities are

 owned by business entities that incur incremental financial distress under option 1 in the Truck Chemical

 subcategory, while 29 are owned by businesses mat incur financial distress under option 2.
        5.4.2.2 Sensitivity Analysis: Current Ratio and Times Interest Earned Ratio


        EPA also examined the current and times interest earned ratios to characterize the baseline and post-
 regulatory financial conditions of potentially affected firms (Appendix D).  The current ratio, measured as
 the ratio of current assets to current liabilities, is a liquidity ratio; that is, it measures how much cash a firm

 has on hand to repay debt Table 5-7 presents incremental financial distress as measured by the current ratio.


        Twenty-nine indirect discharging Truck Chemical facilities are owned by business entities that are

 projected to incur incremental financial distress under option 2; 14 incur incremental financial distress under

 option 1. Two direct discharging faculties in the Barge Chemical and Petroleum subcategory are owned by

 businesses that incur incremental financial distress under option 2. In the Truck Food subcategory- eight

 indirect dischargers are owned by business entities that incur incremental financial distress under both
 option 1 and option!.
   6 EPA uses the Altman Z"-score as an indication of financial distress, but not necessarily bankruptcy. A
Z"-score below the "bankruptcy likely" cutoff is a warning sign, not a determination of immediate bankruptcy.
There is a time lagbetween a warning (i.e., low Z"-score) and actual bankruptcy.  During this period, a company
has the opportunity to change its behavior to avoid the projected bankruptcy. The Chrysler Corporation is such
an example; Altman, 1993 cites other examples. If a business entity's Z"-score falls below the "bankruptcy
likely" cutoff as a result of the rule, EPA considers the option to have caused financial distress. The company
will likely have to change the way it does business to respond to the regulation.


                                               5-18

-------
                                             Table 5-6
                                    Incremental Financial Distress
                                         Altman-Z" Analysis
                                    Including Monitoring Costs [1]
 Subcategory
  Total
in Class
                                               Incremental Financial Distress by Option
Option 1   % of Class    Option!   % of Class    Option 3   % of Class
TT/CHEM[2]

RT/CHEM[2]

TB/CHEM
  ,  Direct
    Indirect

TT/PETR.

RT/PETR

TT/FOOD [2]

RT/FOOD [2]

TB/FOOD [2]

TE7HOPPER

RH/HOPPER

EH/HOPPER
    288

     38


     14
      1

     26

      3

    173

     86

      2

     34

      5

      6
     22

      0


    ,  0
     ND

      0

     ND

     17

     ND

     ND

      0

     ND

      0
7.6%

0.0%


0.0%
  ND

0.0%

 'ND

9.8%

  ND

  ND

6.0%

  ND

0.0%
 29

  0
 0
ND
 17

ND

ND
10.1%

 0.0%
 0.0%
   ND
 9.8%

   ND

   ND
ND
         0.00%
ND
Total Facilities
   676
     39
5.7%
46
 6.8%
                                                                                     0
                                                                           0.0%
[1] Monthly monitoring costs for all subcategories except TB/CHEM direct, which includes costs for combined
   weekly/monthly monitoring.
[2] Results for indirect discharging facilities contained in detailed questionnaire database presented here.
    See Section 5.5 for analysis of direct discharging facilities from screener survey database.
ND'not disclosed due to business confidentiality.            .
For 7 ftcilities in the BH/HDPPER subcategory and 9 facilities in the TT/PETR subcategory
   analysis was not conducted because insufficient data were provided.
                                                5-19

-------
                                            Table 5-7
                                    Incremental Financial Distress
                                       Current Ratio Analysis
                                    Including Monitoring Costs [1]
                                         Facilities Experiencing Incremental Financial Distress
Subcategory
 Total
in Class
Option 1   % of Class   Option 2   % of Class   Option 3    % of Class
TT/CHEM[2]

RT/CHEM[2]

TB/CHEM
   Direct
   Indirect

TT/EEIR

RI/PETR

TT/FOOD [2]

HI/FOOD [2]

IB/FOOD [2]

TH/HOEEER

RH/HOEEER

BH/HOEPER
     288

      38


      14
       1

      34

       3

     173

      86

       2

      34

       5

      12
       14

        0


        0
      ND

        0

      ND

        8

      ND

      ND

        0

      ND

        0
5.0%

0.0%


0.0%
  ND

0.0%

  ND

4.9%

  ND

  ND

0.0%

  ND

0.0%
29

 0
 2
ND
 8

ND

ND
10.0%

 0.0%
13.2%
   ND
 4.9%

   ND

   ND
ND
         0.0%
ND
Total Facilities
     692
      23
3.3%
39
 5.6%
         0.0%
[1] Monthly monitoring costs for all subcategories except TB/CHEM direct, which includes costs for combined
   weekly/monthly monitoring.
[2] Results for indirect discharging facilities contained in detailed questionnaire database.
ND: Not disclosed due to business confidentiality.
For 9 facilities in the il/e&LK. subcategory, 8 facilities in the IT/FOOD subcategory, and 7 faculties in
   the BH/HOFEER subcategory analysis was not conducted because insufficient data were provided.
                                             5-20

-------
        The times interest earned ratio, measured as the ratio of earnings before interest and taxes (EBIT)
plus depreciation to interest payments, is a leverage ratio.  It examines if a firm has sufficient income to meet
interest payment obligations on outstanding debt. Table 5-8 presents financial distress as measured by the
times interest earned ratio.

        Fourteen indirect discharging Thick Chemical faculties are owned by business entities that incur
incremental financial distress under option 2.  Six Rail Chemical indirect dischargers are owned by businesses
that incur incremental financial distress under options 2 and 3.  For Barge Chemical and Petroleim? direct
dischargers, two faculties are owned by businesses that incur incremental financial distress under options 1
and 2. Under options 1 and 2 for indirect dischargers in the Truck Food subcategory, 41 faculties are owned
by business entities that incur incremental financial distress, as are five facilities in the Truck Hopper
subcategory under option 1.
                 '  '                                       '          \
                    • /                       '                                        '
                                           i                                      •
        m the subcategories for which regulatory options have been proposed (PSES for Truck Chemical and
Rail Chemical, BPT, BAT, and BCT for Barge Chemical and Petroleum), similar magnitudes of impacts are
observed under the three financial ratios examined. Because the Altman Z" score examines a weighted
average of four different ratios, and because it answers the question of what to do when some ratios look
"good" and some ratios look "bad," the Altman Z" results were emphasized in determining financial ratio
impacts.  The current ratio and times interest earned ratio provide corroborating evidence for the Altman Z"
results.
        5.4.3   Sales Test Results

        In addition to projecting faculty closures, employment losses, and financial distress, EPA examines
other measures of economic achievability.  One such measure is the sales test (U.S. EPA, 1997b).  The sales
test is calculated as:                                                       . .
                           pre- or post-tax annualized compliance costs
                                      1994 facility revenues

EPA examines the number of faculties with compliance costs that exceed 1 percent of revenues and 3 percent
of revenues to determine if a substantial number of facilities in the subcategory are significantly impacted by

                               .   •  -          5-21   ;                  .      -          •

-------
                                            Table 5-8
                                    Incremental Financial Distress
                                          TIE Ratio Analysis
                                    Including Monitoring Costs [1]
Subcategory
 Total
in Class
	Facilities Experiencing Incremental Financial Distress  	

 Option!    % of Class   Option 2   % of Class   Option 3   % of Class
TT/CHEM[2]

RT/CHEM[2]

TB/CHEM
    Direct
    Indirect

TT/PETR

RT/PETR

TT/FOOD [2]

RT/FOOD[2]

TB/FOOD[2]

TEKHOPPER

RH7HOPEER

BH/HOPPER
     288

      38


      14
       1

      34

       3

     173

      86  •

       2

      34

       5

      12
         0

         0


         2
       ND

         0

       ND

       41

       ND

       ND

         5

       ND

         0
 0.0%

 0.0%


13.2%
   ND

 0.0%

   ND

23.4%

   ND

   ND

16.0%

   ND

 0.0%
 14

  6
  2
ND
41

ND

ND
 5.0%

15.3%
13.2%
   ND
23.4%

   ND

   ND
ND
        15.3%
ND
Total Facilities
     692
       48
 6.9%
63
 9.0%
         0.8%
[1] Monthly monitoring costs for all subcategories except TB/CHEM direct, which includes costs for combined
   weekly/monthly monitoring.
[2] Results for indirect discharging facilities contained in detailed questionnaire database.
ND: Not disclosed due to business confidentiality.
For 7 facilities in the TT/CBEM subcategory, 25 in the TT/FOOD subcategory, 14 in the TH/HDFPER
    subcategoiy, and 7 in the BH/HDFPER subcategory, analysis was not conducted because
    insufficient data were provided.
For 25 facilities in the TT/CHEM subcategory, 6 in the TB/CHEM direct subcategory, 17 in the
    TJ./i'iilK. subcategory, 3 in the RT/PETR subcategory, 8 in the TT/FOOD subcategory, 5 in the
    RH/HOPPER subcategory, and 2 in the BH/HOPPER subcategory, analysis was not conducted
    because the facilities did not make interest payments.
                                              5-22

-------
 the proposed regulation. The results of the sales test calculated on the basis of post-tax annualized costs are
 presented in Table 5-9; pre-tax annualized costs were used in the results presented in Table 5-10. Post-tax
 annualized costs represent the out-of-pocket expenses for the industry after tax shields, while pre-tax
 annualized costs are used as a proxy for the social cost of the regulation.

        As can be observed by comparing Tables 5-9 and 5-10 with Table 5-4, the sales test is a more
 sensitive measure of impacts than the closure model. First, unlike the closure model, the sales test does not
 account for a facility's ability to pass costs through to its customers. Second, the sales test is calculated using
 1 year's data only, while the closure model uses 3 years' data. Third, the closure model is a cash flow
 analysis; cash flow is a more sophisticated measure of a facility's financial health than sales revenues.
 Finally, the sales test results are not associated with specific measurable impacts such as closure or financial
 distress. EPA uses the sales test as one measure of the burden of compliance costs to facilities, but does not
 project specific impacts to the financial health of facilities with compliance costs exceeding either 1 or 3
 percent of revenues.
        »                                     •                             '
        In the Truck Chemical subcategory, up to 73 percent of indirect dischargers incur compliance costs
 that exceed 1 percent of facility revenues under option 2; 38 percent incur costs that exceed 3 percent of
 revenues under the same option.
        From 53 percent to 74 percent of Rail Chemical indirect discharging facilities i
the one percent threshold under all options. The range for the 3 percent threshold is 34 percent to 37 percent
of facilities in the subcategory.         '

        In the Barge Chemical and Petroleum subcategoiy, 64 percent nf dir«* Hi«-harging iyjl''t^ incur
compliance costs exceeding 1 percent of revenues under option 1 and 86 percent under option 2.  Sixty-four
percent of direct dischargers incur costs exceeding 3 percent of revenues under both options.

        For indirect dischargers in the Truck Food subcategory, 24 percent of facilities exceed the 1 percent
threshold under option 1, and 46 percent of facilities exceed it under option 2.  Fifteen percent of facilities
exceed the 3 percent threshold under option 1 and 20 percent exceed it under option 2.
                                                5-23

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                            ; 5-27—

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       Pnriy-one percent of facilities in the Truck Hopper subcategory and 50 percent of Barge Hopper
facilities exceed the 1 percent threshold (one option only).  Although 17 percent of Barge Hopper facilities
exceed the 3 percent threshold, no Truck Hopper facilities exceed it
       5.4.4   Sensitivity Analysis: NESHAP Compliance Costs and Barge Facilities

       On December 15,1995, the U. S. Environmental Protection Agency (EPA) issued a national
emission standard for hazardous air pollutants (NESHAP) to control air emissions from surface coating
operations at shipbuilding and ship repair facilities. Because many shipbuilding and repair facilities also
perform TEC operations—the TEC operations are often performed in order to undertake barge and ship
repairs—EPA examined whether the combined compliance costs of meeting both the NESHAP standards for
the shipbuilding and repair industry and the BPT, BAT, and BCT standards for the TEC industry might cause
barge facilities to incur additional impacts. As described in section 5.5, EPA expects no Barge Food facilities
to incur incremental compliance costs, therefore, this sensitivity analysis focuses on the 14 direct dischargers
in the Barge Chemical and Petroleum subcategory.

       the NESHAP applies to shipbuilding and repair facilities that use more than 1,000 liters or more of
paints, solvents and other surface coatings per year. Of the more than 470 shipbuilding and repair faculties
in the U.S., EPA projects that only about 35 faculties will be affected by the NESHAP (U.S. EPA, 1997a).
Thirty-one of the 35 affected facilities were identified by name; only one of these 31 facilities can be
identified as a member of the TEC Barge Chemical and Petroleum subcategory. For the purposes of this
analysis, however, EPA assumes that all Barge Chemical and Petroleum facilities that indicate they perform
repair, painting or related activities, and employ at least 75 workers will also be affected by the NESHAP
standards.7
                                                                      '               *   •

       Based on detailed questionnaire data on the number of workers employed and operations typically
performed at each, facility, EPA determined that one Barge Chemical and Petroleum faculty meet the
subcategorization classification for a large construction shipyard used for the NESHAP standards, and eight
facilities meet the subcategorization classification for a medium ship repair facility; it is unlikely that the five
    ' The smallest facility EPA identified as affected by the NESHAP standards employs 150 workers.

                                              5-28

-------
 remaining Barge Chemical and Petroleum direct discharging facilities will be affected by the NESHAP
 standards due to their small size. Average estimated compliance costs for meeting the NESHAP
 standard—$165,000 per year for the large shipbuilding faculty, $23,000 per year for the medium repair
 faculties (U.S. EPA, 1994)—were added to the estimated annualized compliance costs for the TEC standards
 for the purpose of this sensitivity analysis.

        Table 5-11 presents impacts projected under combined the combined NESHAP and TEC standards
 and compares them with impacts projected under the TEC standards alone. No additional incremental facility
 closures are projected nor is there any projected increase of incremental financial distress. An additional three
 faculties incur annualized post-tax compliance costs that exceed 1 percent of faculty revenues when the costs
 of meeting both the NESHAP and TEC standards are combined (Hyman,  1998b).
5.5     IMPACTS TO DIRECT DISCHARGERS BASED ON SCREENER SURVEY DATA

        The detailed questionnaire database contains no direct discharging faculties in the Truck Chemical,
Rail Chemical, Truck Food, and Barge Food subcategories.  EPA identified three direct dischargers in the
Truck Chemical subcategory, one direct discharger in the Rail Chemical subcategory, and 19 direct
dischargers in the Food grade subcategory from the screener survey. All analyses and projected impacts for
BPT, BAT, and BCT standards for the Truck and Rail Chemical subcategories, and BPT and BCT standards
in the Food grade subcategories are based on these 23  screener survey facilities.

        Table 5-12 summarizes estimated compliance costs for the direct dischargers in the Truck Chemical,
Rail Chemical and Food grade subcategories based on screener survey data. Pre-tax annualized costs,
including a combination of weekly and monthly monitoring, total $171,000 for the four faculties in the Truck
and Rail Chemical subcategories, or approximately $43,000 per faculty; total post-tax annualized costs are
$109,000, or approximately $27,000 per facility. Analysis sof treatment in place from the screener survey
indicates that the 19 Food grade direct dischargers have sufficient treatment in place to meet the proposed
standards. Because EPA is setting BPT and BCT standards, but not BAT standards in the Food
subcategories, these faculties most likely already perform adequate regular monitoring for conventional
pollutants. Thus, EPA projects no incremental costs for direct dischargers in the Food grade subcategories
(U.S. EPA, 1998).

                                              5-29

-------

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                     5-31

-------
        The screener survey contains one year's data on facility revenues, facility revenues from TEC
operations, facility employment, and facility employment for TEC operations. Because these data are
insufficient to analyze impacts using the same methodology for facilities contained in the detailed
questionnaire database, EPA used the screener survey data to choose an indirect discharging facility from the
detailed questionnaire database to serve as a "model" facility. The model facilities were chosen on the basis
of subcategory, the ratio of TEC revenues to non-TEC revenues, the ratio of revenues to tank cleanings, and
the ratio of TEC employees to the number of tank cleanings. Thus, for example, a Hopper facility would not
be considered an appropriate model for a Chemical facility, nor would an in-house facility be considered an
appropriate model for a commercial facility. All data for the model facility was then scaled to the size of the
direct discharging facility based on facility revenues.

        Table 5-13 presents projected impacts to the Truck and Rail Chemical direct dischargers.8 No
incremental closures are projected in either subcategory, nor are any facilities projected to incur incremental
financial distress.  Two facilities in these subcategories incur post-tax annuali/ed compliance costs that
exceed 1 percent of facility revenues (Hyman, 1998a).  Because all Food grade facilities that responded to the
screener survey questionnaire indicated that they have the proposed wastewater treatment technology in place.
EPA projects no incremental costs, and therefore no incremental impacts to direct dischargers in the Food
subcategories (U.S. EPA, 1998).
5.6     SECONDARY IMPACTS

        This section assesses national and regional output and employment impacts resulting from
compliance with the proposed effluent limitations guidelines for the TEC industry.  Compliance costs
decrease the output of the TEC industry, which may cause a loss in TEC employment9 The decrease in TEC
output decreases the demand for products in industries that supply inputs to the TEC industry.  As a result,
these industries may suffer reduced output and employment as well.  However, the need to manufacture,
   * One of the three direct dischargers in the Truck Chemical subcategory did not complete the screener survey.
Although this facility was costed for wastewater treatment technology, no impacts could be projected for it.
    9 The loss in employment is measured in "fiill-time-equivalent" (FTE) jobs, where one FTE equals 2,080
labor hours or 1 person-year of employment

                                  i   ;          5-32     ' "        '' .    !      '  .

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 install, operate and maintain the pollution control equipment required under the new regulation may generate
 increased economic activity in other industries. This increase in economic activity resulting from compliance
 with, the regulation can result in output and employment gains that offset the losses caused by the regulation.
 The impacts to output and employment in non-TEC industries caused by the regulation of the TEC industry
 are called secondary impacts.

        Secondary impacts are estimated based upon the decrease in TEC services projected by the market
 model (There are no estimated closures under the proposed options.)  Section 5.6.1 presents estimates of
 secondary output and employment losses, offsetting secondary output and employment gains, and net impacts
 on the national economy.  Section 5.6.2 analyzes regional impacts caused by the TEC regulation.  Due to the
 uncertainties involved with applying IO multipliers to the TEC industry, EPA provides a range of secondary
* ,                ,,                 i
 impact estimates. The assumption that the supply of TEC services is perfectly inelastic provides a lower
 bound estimate of secondary impacts; the assumption that the supply of TEC services is- perfectly elastic
 provides an upper bound estimate (Appendix E).
        5.6.1   Estimates of National Employment and Output Impacts

        The left-hand panel of Table 5-14 presents estimates of the impact of the proposed TEC regulation
 on national output Estimated losses to U.S. Gross Domestic Product (GDP), including direct, indirect, and
 induced impacts, range from $101.4 million (0.0015 percent of 1994 U.S. GDP [U.S. Department of
 Commerce, 1996]) to $118.4 million (0.0017 percent of 1994 U.S. GDP) in 1994 dollars. Impacts to U.S.
 employment range from 1,228 to 1,437 FTE job losses nationwide (less than O.Ol 1 percent of the 1994 U.S.
 labor force [U.S. Bureau of the Census, 1995]). Of these job losses, from 84 to 447 are projected to occur
 directly in the TEC industry (from 0.2 percent to 1.0 percent of TEC industry employment). Because most of
 the regulatory costs are passed through to customers under the assumption of perfectly elastic supply, the
 impact on TEC employment alone is much smaller than under perfectly inelastic supply (Appendix E).

        The center panel of Table 5-14 provides estimates of secondary output and employment gains due to
 the purchase of wastewater treatment equipment and to associated operating and maintenance expenditures.
 The potential gain from compliance expenditures ranges from $84.0 million to $84.8 million per year (0.001
 percent of 1994 U.S. GDP), including direct, indirect, and induced impact  The potential gains in

                                              5-34

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 employment total approximately 920 FTEs (0.007 percent of the 1994 U.S. labor force) when direct,
 secondary, and induced impacts are totaled.  Employment gains in the TEC industry due to O&M labor
 expenditure may total as many as 174 FTEs; these jobs would help offset projected employment losses.

        The right-hand panel of Table 5-14 provides a summary of net secondary impacts. Assuming
 perfectly inelastic supply of TEC services, the possible secondary gains attributable to the regulation offset
 the losses such that the net loss is reduced to $16.5 million of GDP (0.002 percent of 1994 U.S. GDP), while
 the net loss in jobs  is reduced to a total of 299 FTE jobs nationwide (0.002 percent of 1994 U.S. labor force)
 and 273 FTE jobs within the TEC industry (0.6 percent of TEC employment). Under the assumption of
 perfectly elastic supply, the projected net loss to GDP totals $34.4 million (0.0005 percent of 1994 U.S.
 GDP), 517 FTEs are lost (0.004 percent of 1994 U.S. labor force), and there is a net employment gain of 85
 FTEs within the TEC industry (0.2 percent of TEC employment).
        5.6.2   Regional Impacts

        Because the TEC industry detailed questionnaire was sent to a sample of TEC facilities stratified by
type of tank cleaned and certain financial characteristics, EPA cannot determine the geographical distribution
of TEC facilities with any degree of statistical confidence. In addition, the closure model projects no facility
closures under the proposed options,10 and market model projections of impacts provide no means of
ascertaining how these aggregate impacts are distributed across facilities. For these reasons, it is impossible
for EPA to accurately project impacts to any particular geographical region.

        It is possible, however, to provide a worse-case scenario for regional impacts by assuming that all
negative impacts occur within the confines of the smallest state. This method overestimates impacts for
several reasons: First, it is known that not all TEC faculties are in the same state and it is highly unlikely that
all secondary impacts would be confined to one state as well. Second, if all impacts actually occurred in
larger states, they would affect a smaller percentage of those states' output and employment Third, no
positive secondary impacts are assumed to occur in the same state as the negative impacts.
   10 In previous EAs, projected facility closures have been used to estimate regional and community impacts.

                                              5-36

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        Table 5-15 presents direct and total regulatory impacts as a percentage of state output and
 employment The state with the smallest 1994 GDP was Vermont, with an output of $13.3 billion (U.S.
 Department of Commerce, 1997). The largest projected decrease in total output comprises less than 1
 percent of Vermont's GDP.  la 1994> Alaska had the smallest labor force in the United States, with 305,000
 workers (U.S. Bureau of the Census, 1996). Under the worst case scenario, total estimated employment
 impacts are less than 0.5 percent of Alaska's labor force.
 5.7    NEW SOURCE PERFORMANCE STANDARDS AND PRETREATMENT STANDARDS
       FOR NEW SOURCES

       For New Source Performance Standards (NSPS) and Pretreatment Standards for New Sources
 (PSNS), EPA is proposing the following options for the Truck Chemical, Rail Chemical, Barge Chemical and
 Petroleum, and all Food subcategories:

       •     TruckChemical
              NSPS:Option2
              PSNS: Option!
       •     Rail Chemical
              NSPS: Option 3
              PSNS: Option 3                                                   ,
       •     Barge Chemical and Petroleum
              NSPS: Option 1
              PSNS: Option!
       •     Food grade subcategories
              NSPS: Option!

After considering the cost of NSPS/PSNS technology for new source facilities, EPA concluded that such
costs were not sufficient to present a barrier to entry. The cost of NSPS/PSNS technology is a small fraction
of the capital cost for a new facility; therefore, if a new facility is able to start up, it will have sufficient
capital to meet these costs. For the Truck Chemical (NSPS/PSNS), Barge Chemical and Petroleum (NSPS)
facilities, and Food grade subcategories, EPA is setting new source standards equivalent to existing source
standards; the standards for existing facilities have been found to be economically achievable and pose no
barrier to entry for new facilities. For the Rail Chemical (NSPS/PSNS) and Barge Chemical and Petroleum

                                            5-37

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                              5-38

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(PSNS) subcategories, EPA is proposing more stringent options for new sources than for existing sources.
The costs of incorporating the selected NSPS/PSNS technology as a facility is built are substantially less than
the costs of retrofitting existing facilities. EPA anticipates no barrier to entry for new faculties employing
these technologies at lower cost

        Table 5-16 presents the ratio of estimated capital compliance costs to both facility assets and facility
TEC assets for the Truck, Rail, and Barge Chemical and Petroleum subcategories and for the truck Food
subcategory.  Average facility assets serve as a proxy for the capital requirements for building a new facility
containing TEC operations. Although the ratio of capital compliance costs to existing TEC capital is quite
sizable in the Truck Chemical and Truck Food subcategories, the relevant parameter for a decision-maker is
how much the regulation adds to the capital cost of building the entire facility. The ratio of estimated capital
compliance costs to facility assets is less than 12 percent for all subcategories. EPA expects that incremental
TEC capital costs to meet new source standards will be less than 12 percent of the capital costs for building a
                                               » •       '   -       ,      ...
new facility."
5.8     SUMMARY AND OBSERVATIONS

        In general, the market level analysis projects a maximum decrease in tank cleanings of 4 percent for
any subcategory. Under the most stringent options for each subcategory, less than 3 percent of all facilities
are projected to close; associated employment losses are 1.4 percent of industry employment. The financial
ratio analysis indicates that less than 7 percent of all facilities incur financial distress over all options. The
sales test, a more sensitive measure of impacts, indicates that, under the most stringent option for each
subcategory, 63 percent of all potentially affected facilities incur post-tax annualized costs that exceed
1 percent of revenues; 24 percent of facilities exceed the 3 percent threshold.

        Under the proposed options for the Chemical subcategories, the market analysis projects a
    11 The average facility assets reported for the Truck Food subcategory is sensitive to one observation. To
provide a conservative estimate of NSPS costs, this observation was not included in the above analysis. When
this observation is included, average facility assets in the Truck Food subcategory exceed $11 million, and
average capital compliance costs comprise less than 3 percent of average facility assets.

                                               5-39

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                              5-40

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 1.1 percent decrease in tank cleanings.  As summarized in Table 5-17, closure impacts for the Chemical
 subcategories are zero; no facilities close and therefore no revenue or employment is lost under the proposed
 options. A total of 29 indirect discharging facilities incur incremental financial distress. Seventy percent of
 all Chemical subcategory facilities exceed the 1 percent threshold of the post-tax sales test; 38 percent exceed
 the 3 percent threshold.

        In trying to reach a coherent understanding of these divergent impact estimates it is key to remember
 that the demand for TEC services is price inelastic. The proposed regulation is expensive to many facilities;
 this is illustrated by the sales test results. The sales test, however, makes no allowances for a facility to
 recover compliance costs by increasing its price. The ability to raise prices due to the inelastic demand for
 TEC services enables many facilities to bear the burden of relatively large compliance costs without closure.
 This is indicated by the lack of incremental closures relative to the number of facilities with regulatory costs
 exceeding 3 percent of revenues. Providers of transportation services are willing to pay higher prices for
 cleaning rather than forgo the services,  and the facilities can therefore pass the increased costs on to their
 customers.
5.8     REFERENCES
Denning. 1997. Business entity weights: Phone call from George Denning, EPA, WAM, to Calvin Franz,
ERG. Memo to TEC Industry Project File. April 22.
Hyman. 1998a. Economic Impact Analysis for RT/CHEM and TT/CHEM Direct Dischargers Under
Proposed Options. Memorandum from Robert Hyman, ERG, to George Denning, EPA.  February 26.
Hyman. 1998b. Economic Analysis for TB/CHEM Direct Dischargers Impacted by Air Rule. Memorandum
from Robert Hyman, ERG, to George Denning, EPA. March 13.
.U.S. Bureau of the Census. 1995. Statistical abstract of the United States, 1995 (115th edition).
Washington, DC: U.S. Government Printing Office.
U.S. Bureau of the Census. 1996. Statistical abstract of the United States, 1996 (116th edition).
Washington, DC: U.S. Government Printing Office.
U.S. Department of Commerce. 1996. Improved estimates of gross domestic product by industry,
1959-1994. Survey of Current Business. 76(8):133.
                                              5-41

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Table 5-17
Summary of Impacts Under Proposed Options
Wife Monitoring Costs [1]
Subcaiegory Option Total b
ItvUrcct ujjcf^rzcn
i Class Cost Type

nVCHEM[3J Option 2 288 Capital
O&M
PosMax Anmiaiized
Prefix Armualized
RT/CHEM[3] Option, 1 38 Capital
O&M
Post-tax Attnualized
Pre-tax Armualized
Total Indirect Dischargers 326 Capital
O&M
PpsMax Armualized
Pre-tax Ammatized
Direct Dudurgcn
TB'CHEMP] Option 1 14 Capital
O&M
Post-tax Armualized
Pre-tax Armualized
TT/CHEM [4] Option2 3
R3VCHEM[4] Option 1 1
Capital
O&M
PosMax Armualized
Pre-tax Armualized
Capital
O&M
Post-tax Armualized
Pre-tax Armualized
FOOD [4] Option 2 19 Capital
O&M
Post-tax Annuitized
Pre-tax Armualized
Total Direct Dischargera 37 Capital
O&M
Post-tax Annualized
Pre-tax Armualized


[2] Post-tax armu«lized cost/facility revenues.
[31 Facilities coyrfitnftd in detailed qucstioflnaire database.
[4] Facilitiet contained in screener survey database.
ND: Not dbck*«l due to busjnea confidentiality

Cost Closures
$53,634,936 0
$24,733,050
$18,795,190
$29^34^87
$4,420,715 0
$675,125
$756,257
$1,115,512
$58,055,651 0
$25,408,175
$19,551,447
$31,050,499
$3,181339 0
$1,806,128
$1,347,581
$2,112^79
ND 0
ND
ND
ND
ND 0
ND
ND
ND
$0 0
$0
$0
$0
$3,428,603 0
$1,951,971
$1,456,143
$2,282,907
Impacts
Sales Test [2]
Financial
Distress 1 Percent 3 Percent
29 209 108
0 20 13
29 229 121
0 9 9
0 ND ND
0 ND ND
000
0 11 11
dy/morrthly monitoring for direct dischargers.
5-42

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U.S. Department of Commerce.  1997. Comprehensive revision of gross state product by industry,
1977-1994. Survey of Current Business.  77(6);15.

U.S. EPA. 1994. Surface Coating Operations at Shipbuilding and Ship Repair Facilities—Background
Information for Proposed Standards.  Research Triangle Park, N.C.:EPA 450-D-94-01 la. U.S.
Environmental Protection Agency. June.

U.S. EPA. 1997a. A Guide on How to Comply with the Shipbuilding and Ship Repair (Surface Coating)
Operations National Emission Standards for Hazardous Air Pollutants. EPA 453/B-97-001. Research
Triangle Park, N.C.:  U.S. Environmental Protection Agency. January.

U.S. EPA. 1997b. EPA interim guidance for implementing the Small Business Regulatory Enforcement
Fairness Act and related provisions of the Regulatory Flexibility Act Washington, DC: U.S. Environmental
Protection Agency. February.
                                                                     1               *
U.S. EPA. 1998. Development document for the proposed effluent limitations guidelines and standards for
the transportation equipment cleaning industry. EPA-821-B-98-011. Washington, DC: U.S. Environmental
Protection Agency, Office of Water. May.
                                             5-43

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5-44

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                                       CHAPTER6
                INITIAL REGULATORY FLEXIBILITY ANALYSIS
 6.1     INTRODUCTION

        This chapter analyzes the projected effects of incremental pollution control costs on small entities.
This analysis is required by the Regulatory Flexibility Act (RFA, 5 U.S.C. 601 et seq., Public Law 96-354)
 as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).  The RFA
 acknowledges that small entities have limited resources and makes it the responsibility of the regulating
 federal agency to avoid burdening such entities unnecessarily. In response to the RFA, EPA has prepared an
 initial regulatory flexibility analysis (IRFA).1 Section 6.2 reviews the steps in Agency guidance to determine
whether presentation of a regulatory flexibility analysis is required and how to identify significant impacts on
 small businesses. Section 6.3 responds to the regulatory flexibility analysis components for a proposed rule
required by Section 603 of the RFA. Sections 6.4 and 6.5 are a detailed description of the small business
economic analysis performed for the proposed regulation.
6.2    INITIAL ASSESSMENT

       The following initial assessment steps suggested in current EPA guidance (U.S. EPA, 1992 and U.S.
EPA, 1997) are posed as a series of questions and answers:

       •      Is the Rule Subject to Notice-and-CommentRulemakmg Requirements?
              The proposed Effluent Limitations Guidelines and Standards for the Transportation
              Equipment Cleaning Industry Point Source Category are subject to notice-and-comment
              rulemaking requirements.
       •      What is the Profile of Affected Entities?
   1 The preparation of an IRFA for a proposed rule does not legally foreclose the possibility of certifying
"no significant impact" for the final rule (U.S. EPA, 1997).
                                            6-1

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               EPA prepared a profile of the regulated universe of entities, see Chapter 2 and Section 6.3.

        •      Will the Rule Affect Small Entities?

               Yes,

        •      Will the Rule Have an Adverse Economic Impact on Small Entities?

               EPA has determined that some small entities may incur costs for incremental pollution
               control as a result of the rule, if promulgated as proposed. EPA examines the adverse
               impacts of these additional costs in Section 6.4.




63     REGULATORY FLEXIBILITY ANALYSIS COMPONENTS


        Section 603 of the RFA requires that an IRFA must contain the following:

                                    I          :.....••(
        •      An. explanation of why the rule may be needed.

        •      A short explanation of the objectives and legal basis for the proposed rule.
                  ,' ,'!                 i        "              „            '• !
        •      A description of, and where feasible, an estimate of the number of small business entities to
               which the proposed rule will apply.

        •      A description of the proposed reporting, recordkeeping, and other compliance requirements
               (including an estimate of the types of small entities that will be subject to the requirement
               and the type of professional skills necessary for the preparation of the report or record).

        •      An identification, to the extent practicable, of all relevant federal rules that may duplicate,
               overlap, or conflict with the proposed rule.

        •      A description of "any significant regulatory alternatives" to the proposed rule that
               accomplish the statement objectives of the applicable statutes and minimi^ any significant
               economic impact of the rule on small entities.


The following sections address these issues.
                                              6-2

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        6.3.1   Need for and Objectives of the Rule

        The rule is being proposed under the authority of Sections 301,304,306,307,308, and 501of the
Clean Water Act, 33 U.S.C. Sections 1311,1314,1316,1317,1318, and 1361. Under these sections, EPA
sets effluent limitations guidelines and pretreatment standards for the control of discharge of pollutants for
the Transportation Equipment Cleaning Industry Point Source Category. The regulations also are being
proposed pursuant to a Consent Decree entered inNRDCetal. v.Reilly(D.D.C. No. 89-2980, January 31,
1992), and are consistent with EPA's latest Effluent Guidelines Plan under Section 304(m) of the CWA (see
61FR 52582, October 7,1996).

        The objective of the CWA is to "restore and maintain the chemical, physical, and biological integrity
of the Nation's waters."  To assist in achieving this objective, EPA issues effluent limitations guidelines,
pretreatment standards, and new source performance standards for industrial dischargers. Sections 30 l(b)(l)
and 304(b)(l) authorize EPA to issue BPT effluent limitations guidelines. Section 304(bX4) authorizes EPA
to issue BCT guidelines for conventional pollutants; Sections 301(b)(2)(E) and 304(b)(2) authorize EPA to
issue BAT guidelines to control nonconventional and toxic pollutants; Section 306 authorizes EPA to issue
NSPS for all pollutants; and Sections 304(g) and 307(b) authorize EPA to issue PSES and PSNS for all
pollutants.         ,
       6.3.2   Estimated Number of Small Business Entities to Which the Regulation Will Apply

       The section begins with a discussion of the definition of "small business" for the purpose of
responding to the requirements of the regulatory flexibility analysis (Section 6.3.2.1). Section 6.3.2.2
summarizes EPA's determination of the universe of facilities considered in the small business analysis.
Section 6.3.2.3 summarizes the data available for the estimated number of small business entities.
                                              6-3

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        6.3.2.1 Definition                                -

        The RFA and SBREFA both define a "small business" as having the same meaning as the term
 "small business concern" under Section 3 of the Small Business Act (unless an alternative definition has been
 approved). The latter identifies a small business at the business entity or company level, not the facility level.
 The analysis, then, needs to determine whether a TEC facility is owned by a small business entity, not
 whether the facility itself may be considered "small."

        A small business is generally defined according to SIC code by standards set by the Small Business
 Administration (SBA). As discussed in the industry profile, the TEC industry spans a wide range in SIC
 codes with a concomitant range in small business definitions (see Section 2.7 and Table 2-13). For the TEC
 industry, small business standards range from $5 million to $20.5 million in annual revenues and from 500 to
 1,500 employees. Table 6-1 summarizes the number and percent of potentially affected TEC facilities
 covered under each SBA standard.  The most frequent standard specified is $5 million in annual revenues; 39
 percent of TEC facilities under 10 SIC codes are covered by this standard. The second most frequent
 standard is $18.5 million in annual revenues; 33 percent of facilities are covered by this standard.  No other
 single standard applies to more than 14 percent of facilities.

        EPA's proposed guidance for SBREFA standards permits the selection of a single small business
 standard when an industry covers several SIC codes. For the purpose of being responsive to the intent of the
 RFA, EPA defines a "small" business as having less than $5 million in annual revenues. A lower limit for the
 definition restricts the number of businesses classified as "small" but each affected business represents a
 larger proportion of small businesses, i.e., relative impacts may be magnified.
        6.3.2.2 TEC Universe for Evaluation
                  ',,!.,,                          !

        The industry profile discusses the relationship between two types of facilities that perform TEC
operations: potentially affected faculties discharge wastewater while ZDT facilities do not  For proposal,
EPA chose to limit the universe for the small business analysis to facilities mat discharge wastewater. This is
                                               6-4

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Table 6-1


SIC Codes, TEC Industry Potentially Affected Facilities
Categorized by Small Business Administration Standard

SB A Standard
$5,000,000
$17,000,000
$18,000,000 '
$18,500,000
$20,500,000
100 employees
500 employees
750 employees
1,000 employees
$5,000,000 or 1,500 employees
Total
Number of
SIC Codes
Reported
10
1
1
7
2
2
2
2
1
1


Weighted
Facilities [1]
267
3
9
230
4
19.
57
94
3
7
692
% of Total
Weighted
Facilities
38.6%
0.4%
1.3%
33.2%
0.6%
2.7%
8.2%
13.6%
0.4%
1.0%
100%
Numbers may not sum to totals due to rounding.
[1 ] Based on facilities contained in questionnaire database.
6-5

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 a conservative approach that has the effect of magnifying the perceived impacts on small businesses by

 restricting the universe against which to measure impacts.2
        6.3.2.3 Estimated Number of Smatt Business Entities


        The detailed questionnaire requested information for both the facility and the business entity that

owns the facility.  Based on the parent business entity data, EPA determined whether facilities are owned by

large or small business entities. The detailed questionnaire also indicated the structure of each faculty's.

corporate hierarchy; EPA determined from this data that in many instances the facility is identical to the

business entity ("stand alone" business). EPA was therefore able to estimate the number of stand alone

business entities and the number of facilities owned by a larger business entity (which itself may be a "small
business") in the TEC industry.


        The sampling frame for the detailed questionnaire, however, was stratified on the basis of facility

characteristics (Section 2.3).  Thus, it is possible to identity stand alone small businesses and "facilities

owned by small businesses" while not being able to produce a statistically sound estimate of the number of

small businesses.  Therefore the number of potentially affected small entities and impacts to those entities are

estimated using facility level weights. This will lead to an accurate count of stand alone businesses, but will

probably overestimate the number of and impacts to facilities owned by larger entities.3
        2 The economic analysis for the Coastal Oil and Gas Industry effluent guideline (U.S. EPA,
1996a) provides several reasons to include zero discharge facilities and businesses in me universe against
which the measure impacts for the purpose of evaluating regulatory flexibility. First, ZDT facilities
provide a technological basis for zero discharge options such as contract hauling of wastewater.  Second,
should these facilities change their practices and begin discharging effluent, they would be covered under
the regulation.  Finally, in the response to comments on the proposed coastal oil and gas effluent guideline,
EPA noted mat regulatory flexibility was not intended  to provide an unlevel playing field for small
businesses. For example, suppose mere are 100 small businesses and 99 of mem are already in
compliance with or exceed the requirements of the proposed rule. Impacts on the last remaining small
business should not be considered as affecting 100 percent of the small businesses, nor should mat small
business be exempted from complying with requirements already met by the majority of small businesses
(U.S. EPA, 1996b).

        3 Through statistical weighting, each detailed questionnaire observation may represent several
facilities. Because some business entities own many facilities, an observation with a weight representing
seven facilities, for example, may represent only one or two parent business entities (Section D. 1).

                                               6-6

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       Table 6-2 presents the Dumber stand alone businesses, the number of facilities that are owned by a
larger entity, and the total number of entities in each business size category. A total of 184 potentially
affected entities (27 percent) are small business owned under the $5 million standard. Of those 184 small
entities, 127 are stand alone businesses (69 percent) and the remaining 58 (31 percent) are owned by small
businesses. In the Truck Chemical, Rail Chemical, and Barge Chemical and Petroleum subcategories, 61 of
87 (70 percent) affected small entities are stand alone businesses.4 The Truck Food subcategory contains the
most small entities, 72 (42 percent of the subcategory), followed by Truck Chemical with 70 small entities
(24 percent of subcategory).  The subcategory with the highest percentage of small entities is the Rail
Petroleum subcategory (100 percent).5
       6.3.3   Description of the Proposed Reporting, Recordkeeping, and Other Compliance
               Requirements

       To evaluate regulatory flexibility, EPA considered several monitoring options in addition to
technology options. Monitoring requirements add cost while not increasing pollutant removals from a
properly-operated technology. EPA considered up to six monitoring frequencies: weeldy, combination of
weeMy and monMy, monthly, bimonthfy, quarterly, and no monitoring.  Chapter 5 presents costs for
pollution control options with monthly monitoring requirements for indirect dischargers and a combination of
monthly and weekly requirements for direct dischargers. Personnel skills, training, and time requirements
needed to perform the recordkeeping for meeting the requirements are included in the estimated costs for the
rule and are described in the Development Document (U.S. EPA, 1998a) accompanying the proposed
rulemaking. Chapter 4 and the Development Document also contain a description of the other compliance
requirements.                     '
       4 Thus, for 70~percent of all small entities (the stand alones), the analysis mat follows is a business
level analysis.  For the remaining 30 percent of small entities, the size of the entity is determined by the
size of the parent business entity; closure and sales test results, however, are analyzed at the faculty level.
         \         .    >   • "             -          .                                     ,
       5 Although the detailed questionnaire contains direct discharging facilities hi only the Barge
Chemical and Petroleum and Barge Hopper subcategories, based on screener survey data EPA believes
they exist hi other subcategories.  At this tune, however, EPA has not attempted to estimate the number of
small entities in those subcategories.  Neither will it attempt to undertake a RFA on direct dischargers in
the Truck Chemical, Rail Chemical, or Food grade subcategories although it is proposing options in those
subcategories.  No impacts are projected for direct discharging facilities hi me Food grade subcategories.

                                               6-7

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                                            6-8

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        6.3:4   Identification of Relevant Federal Rules That May Duplicate, Overlap, or Conflict
               With the Proposed Rule
        EPA addressed this concern by excluding entities that were already covered by another effluent
guideline from the analysis, see Section 2.2.1.
        6.3.5   Significant Regulatory Alternatives

        EPA took steps to minimize the regulatory burden associated with the rulemaking. First, EPA
subcategorized the TEC industry to tailor the pollution control requirements for each group. Second, EPA
considered multiple regulatory alternatives within subcategories when making its determination of economic
achieyability. Third, EPA performed a small business analysis of all alternatives considered for each
subcategory. The regulatory alternatives that EPA has considered are discussed in Sections 6.5.1
through 6.5.5.
6.4     SMALL BUSINESS ANALYSIS

        EPA has developed internal guidance for deciding when to prepare a regulatory flexibility analysis
(U.S. EPA, 1997). The guidance provides methods for assessing whether a rule would have a significant
impact on a substantial number of small entities.  The analysis contained in Section 6.4 demonstrates that'
the regulation may not have a significant impact on a substantial number of small entities.
       6.4.1   Sales Test

       EPA (U.S. EPA, 1997) identifies the sales test—annualized compliance costs as a percentage of
revenues—as one method of screening whether the proposed rule's perceived significant impact on a
substantial number of small entities.-EPA.firstperfonned.the sales test under a conservative set of
assumptions by examining the ratio of pre-tax annualized costs to revenues in order to determine the need to
prepare an IRFA.  EPA subsequently performed the sales test incorporating less conservative but more
                                               6-9

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 realistic assumptions including the use of post-tax annualized compliance costs and cost pass-through
 (Sections 3.2 and 3.2, Appendixes B and C).
        6.4.1.1  Sales Test with Pre-tax Annualized Costs

 °                  V      •            '                                   1
        Table 6-3 presents the results of the sales test based on pre-tax annualized costs by subcategory and
 small business status. Results are presented for all facilities contained in the detailed questionnaire, but not
 for direct dischargers from the screener survey.

        In the Truck Chemical and Rail Chemical subcategories, the number of large entities incurring
 compliance costs in excess of 1 and 3 percent of revenues is greater than the number of small entities
 exceeding those thresholds. When expressed as a percentage of class in the subcategory, however, a greater
 percentage of small entities are impacted than large entities. Bom small and large entities are impacted, but
 the impacts to small entities are relatively more severe. In the Barge Chemical and Petroleum subcategory,
 100 percent of small entities within the subcategory incur compliance costs that exceed both the 1 and 3
 percent thresholds; note that only eight small entities exist in the Barge Chemical and Petroleum subcategory.

        The sales test results for the remaining subcategories are also presented for completeness. In the
 Truck Hopper subcategory, 50 percent of small entities and 38.3 percent of large entities exceed the 1 percent
 sales test threshold.  For indirect dischargers in the Truck Food subcategory, 100 percent of small entities and
 25 percent of large entities exceed the 1 percent threshold under option 2. Only small entities are impacted at
 the 3 percent threshold under option 2, and at both the 1 and 3 percent thresholds under option 1.  In the
 Barge Hopper subcategory, 100 percent of small entities exceed both thresholds.  When measured as a
 percent of small entities, the impacts of the proposed regulation as estimated by the pre-tax sales test tend to
fall disproportionately on the small entities.
        6.4.1.2 Sal^s Test with Post-tax Annualized Costs and Cost Pass-through
                   :•                 I         ,•'.',      •        I
        Table 6-4 presents the results of the sales test based on post-tax annualized costs by subcategory and
small business status. Using post-tax annualized compliance costs in the sales test accounts for the affect of

                                               6-10

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 tax shields that partially offset out-of-pocket costs for affected entities. Results for the post-tax sales test are
 presented for all facilities contained in the detailed questionnaire, but not for direct dischargers from the
 screener survey.

        The pattern of impacts based on post-tax annualized compliance costs as exhibited in Table 6-4 is
 similar to the pattern based on pre-tax costs. la terms of the number and percent of entities exceeding the
 thresholds under each option, the impacts measured using post-tax costs are lower than those under pre-tax
 costs; however, the impacts of the proposed regulation tend to fall disproportionately on small entities.

        Table 6-5 presents the results of the sales test ussng both pre-tax and post-tax annualized costs
 incorporating the cost pass-through assumption.  The proposed effluent standards increase the cost of
 cleaning tank containers which decreases the supply of TEC services. A decrease in the supply of TEC
 services when the demand for TEC services is unchanged will cause an increase in the price of those services.
 Cost pass-through accounts for this regulatory impact on entity revenues (Section 3.2 and 3.2). Results
 incorporating the cost pass-through assumption are presented for the proposed PSES standards in the Truck
 Chemical and Rail Chemical subcategories, and the proposed BPT, BAT, and BCT standards in the Barge
 Chemical and Petroleum subcategory.                                           -

        For comparison, a total of 75 small affected entities incur pre-tax annualized compliance costs that
 exceed 1 percent of revenues (Table 6-3) under the proposed standards. Using post-tax annualized costs
 combined with the cost pass-through assumption, 68 small affected entities exceed the 1 percent threshold
 (Table 6-5). Similarly, 64 small affected entities incur pre-tax annualized costs exceeding 3 percent of
 revenues (Table 6-3). Under a combination of post-tax annualized costs and cost pass-through, 17 small
 affected entities exceed the 3 percent threshold (Table 6-5).
        6.4.2   Closures, Employment Losses, and Revenue Losses

        EPA examined projected closure impacts and the associated employment and revenue losses to
evaluate whether they fall disproportionately on small entities.  The results of this analysis are presented in
Table 6-6. Unlike the sales test results, closure impacts are projected to fall primarily on large entities.
Projected closures occur in the Rail Chemical subcategory under options 2 and 3, the Truck Hopper

                                               6-17

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                          6-22

-------
subcategory under option 1, and to indirect dischargers in the Truck Food subcategory under option 2. In all
cases except the Truck Hopper subcategory, the projected closures occur to large faculties; note, however,
that there are no projected closures under the proposed options.
        6.4.3   Financial Distress

        Table 6-7 presents the projected incremental financial distress impacts by subcategory and small
business status. Incremental financial distress occurs only in the Truck Chemical and Truck Food
subcategories. For indirect dischargers in the Truck Chemical subcategory, financial distress is incurred by
the same number of small entities as large entities. However, because there are fewer small entities in the
subcategory, the percentage of small entities that incur financial distress exceeds the percentage of large
entities incurring financial distress under both options. For indirect dischargers in the Truck Food
subcategory, only large business-owned facilities experience incremental financial distress; PSES standards
are not proposed at this time for indirect dischargers in the Truck Food subcategory.
        6.4.4   Observations

        The proposed regulation for the TEC industry specifies option 2 for the Truck Chemical subcategory,
and option 1 for the Rail Chemical subcategory and for direct dischargers in the Barge Chemical and
Petroleum subcategory.61 Under these proposed options, a total of 75 small entities in the three Chemical
subcategories incur pre-tax annualized compliance costs that exceed 1 percent of revenues, and 64 small
entities incur pre-tax annualized costs that exceed 3 percent of revenues. However, using post-tax annualized
compliance costs ins the sales test under the alternative assumption of cost pass-through, 68 small entities
incur costs exceeding Lpercent of revenues and 17 small entities incur costs exceeding 3 percent of revenues.
As explained in Section 6.4.1, EPA may certify that the proposed rule will not have a significant impact on a
substantial number of small entities.  EPA, however, chose to perform a regulatory flexibility analysis, see
Section 6.5.
       6 EPA was unable to determine the size of the parent business entity for the four direct discharging
screener survey facilities hi me Truck and Rail Chemical subcategories.  There are no projected impacts to
the 19 direct discharging screener survey facilities in the Food grade subcategories (Section 5.5).

.     '                                        6-23

-------
                                                         Table 6-7
                                 Incremental Financial Distress, by Small Business Status
                                              Including Monitoring Costs [1]
                                   Total
                   Business      Analyzed
                       Size	in Class
                                                                   Incremental Financial Distress by Option
                             Option 1     % of Class
                                                       Option 2
                                                                   % of Class
                                                                                 Option 3     % of Class
TT/CHEMp]


RT/CHEMP]


1B/CHEM
    Direct

    Indirect


TT/PETR


RT/PETR


XT/FOOD P)


RTffOOD P]


TB/FOODPJ


TOHOPPER


RWHOPPER


BH/HOPPER
Small
Other

Small
Other
Small
Other
Small
Other

Small
Other

Small
Other

Small
Olhcr

Small
Other

SmaH
Other

Small
Other

Small
Other

Small
Other
 70
218

  9
 29
  g
  6
  0
  1

  1
 25

  3
  0

 72
102

  0
 86

  0
  2

 11
 23

  0
  5

  2
  3
  7
 14

  0
  0
 0
 0
NA
ND

 0
 0

ND
NA

 0
17

NA
ND

NA
ND

 0
 0

NA
ND

 0
 0
10.3%
 6.6%
 0.0%
 0.0%
 0.0%
 0.0%
   NA
   ND

 0.0%
 0.0%

   ND
   NA

 0.0%
16.7%

   NA
   ND

   NA
   ND

 0.0%
 0.0%

   NA
   ND

 0.0%
 0.0%
 14
 14
 0
 0
NA
ND
 0
17

NA
ND

NA
ND
20.6%
 6.6%

 0.6%
 0.0%
 0.6%
 0.0%
   NA
   ND
NA
ND
                                      0.0%
                                      0.0%
NA
ND
 0.0%
16.7%

   NA
   ND

   NA
   ND
[1] Monthly monitoring costs for all subcategories except TB/CHEM direct, which includes costs for combined weekly/monthly monitoring.
P] Remits for indirect dischargers contained in detailed questionnaire database; does not include direct dischargers from screener survey.
Note: Entities displayed in table do not total to those presented in Table 5-5 due to rounding; however percentages are calculated from the exact data.
NA: Calculation not applicable.
ND: Not disclosed due to business confidentiality.
For 7 entities in the BH/HOPPER subcategory and 9 entities in the TT/PETR subcategory
   anah/sts was not conducted because insufficient data were provided.
Entity is «""1 business-owned if parent business entity earned less man S5 million in revenues in 1994.
                                                            6-24

-------
6.5     REGULATORY FLEXIBILITY ANALYSIS

        The regulatory flexibility analysis focuses on characterizing entities by variables, such as tank
cleanings, revenues, and employment, to determine if some distinct subgroup of small entities is especially
impacted by the proposed regulation.  The regulatory flexibility analysis is presented for die detailed
questionnaire facilities in the three Chemical subcategories that EPA proposes to regulate (Sections 6.5.1
through 6.5.3); the results of the analysis are summarized in Section 6.5.5.

        The EPA examined impacts under a variety of criteria for options under consideration in each
subcategory. Impacts examined were:

        •      Incremental closures
        •      Incremental financial distress
        •      Pre-and post-tax sales test

Impacts were examined under the following criteria, both individually and in combination:

        •      Tank cleanings per year
        •      Parent business revenues
        •      Parent business employment
        •      Gallons of wastewater discharged per day
        •      Commercial status
           r                                  •
        •      $5 million revenue small business definition
        •      $18.5 million revenue small business definition
       >                  •                              •
Impacts were evaluated as a percentage of:

        •      Affected entities
        •      Affected and ZDT entities
                                              6-25

-------
        •      Small entities
        •      Entities in the subcategory
        •      Entities in the commodity group
        •      Potentially affected entities
            ,!       '           •      i  •  •       '      '.;••••,:       I           f

EPA examined the sensitivity of impacts to excluding a certain proportion of entities from the regulation for
each subcategory. The results summarized below in Tables 6-8 through 6-14 present the results of the sales
test for the proposed regulation.7 EPA emphasized the sales test results because no entities are projected to
close under the proposed options and because the pattern of financial distress impacts occurring in the Truck
Chemical subcategory generally resemble the sales test results.
       65.1   Truck Chemical Subcategory

       Table 6-8 shows the number of entities and pollutant load distribution for indirect dischargers in the
Truck Chemical subcategory based on different categories whose subdivisions are based on revenues, tanks
cleaned per year, employment, and wastewater flow. The left-hand block of columns are the numbers and
pollutant loads for all entities in the subcategory. The right-hand set of columns are the number of entities
that meet EPA's definition of small (i.e., $5 million in annual revenues at the parent business entity level) and
also meet the subdivision criterion. For example, $5 million in annual revenues is the EPA definition of small
business for the TEC industry effluent guideline. Seventy entities in the Truck Chemical subcategory meet
this criterion. The 70 entities form 24 percent of the 288 entities in the subcategory. These 70 entities are
listed in Table 6-2, and in both sets of columns in Table 6-7 (see line labeled "$5.0"). Of these 70 entities,
only 18 clean 1,500 tanks per year or fewer while 91 entities in the whole subcategory meet this criterion
(sec Table 6-8).
       7 Although results presented in the EA are only for the sales test under the proposed options, all
criteria and impacts specified in the bullet list were examined and those analyses are contained in the
rulemaking record.
                                               6-26

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                                  6-27

-------
        Baseline pound equivalent loads measure the pollutants discharged by a facility to U.S. surface
•waters.  Each pollutant discharged by an entity is multiplied by a toxic weighting factor; toxic weighting
factors provide a measure of pollutant toxicity relative to the benchmark toxicity of copper.  This enables the
aggregation of, as well as comparisons between, dissimilar pollutants on a common scale. In addition,
facilities that discharge wastewater indirectly to a POTW have pollutants multiplied by a POTW removal
factor. This factor adjusts loads to account for pollutants removed at the treatment works and not discharged
to surface waters; see the Cost-Effectiveness Document (U.S. EPA, 1998b) for details.  EPA must balance
the requirements of the Clean Water Act with the potentially conflicting goals of providing regulatory relief.
Hence, both the number of entities and the pollutant loads are given in Table 6-8, which also provides the
cost of regulatory relief—the amount of unregulated pollutants that still enter U.S. waters—if EPA selects to
exclude a category.

        Table 6-8 illustrates some of the complexities involved in selecting a potential exclusion for the
Truck Chemical subcategory. For almost all but the smallest subdivisions, the proportion of excluded
facilities is very similar to the proportion of excluded pollutants.  This means there is no obvious breakpoint
for selecting an exclusion on the basis of revenues or employment The technologies considered for pollution
control include flow reduction measures, raising the possibility that flow reduction technologies used to meet
the requirements of an effluent guideline might also have the potential to exclude an entity from meeting the
                                •,,'!'"     ,          •      ,,'•",'!
requirements.  Finally, if an exclusion were based on the number of tanks cleaned per year, there are more
large TEC entities that meet a given criterion than small entities that meet the same criterion. Thus, an
exclusion based only on the number of tanks cleaned per year would benefit large businesses more than small
businesses. Excluding entities that clean fewer than 1,500 tanks per year would exclude 91 affected entities,
only 18 of which are small.

        Table 6-9 examines the results of the pre-tax sales test based on the proposed option (Option 2); it
provides the estimated benefit of regulatory relief—the number of impacted small entities that no longer have
to meet the effluent guideline requirements.  The column labeled "Small Entities" corresponds to the number
of entities that meet both, the $5 million revenue for small business and the subdivision criterion. That is, it is
the number of entities listed in the right-hand block of columns in Table 6-8. The column labeled "Percent of
Small Entities" is the ratio of the number of entities that meets both criteria over the number of entities that
meet the $5 million revenue small business definition (i.e., 70 entities for the Truck Chemical subcategory).
  •. '               ,'      .,           r  .      •'           ,'',',  i • •    i
The remaining columns show the results of the 1 percent and 3 percent thresholds for the pre-tax sales test.

                                              6-28

-------
                                           Table6-9
               Pre-Tax Financial Distribution for Small Business-Owned Entities
                                  TT/CHEMSubcategory [1]
                              $5 Million Small Business Definition
                                           Option 2
    Criteria
                                             >1% Sales Test
  Small
Entities
% of Small
   Entities
  Small
Entities
% of Small
   Entities
                                                        >3% Sales Test
  Small
Entities
% of Small
   Entities
   Maximum
Annual Revenue
   (millions')
     $0.5
     $1.0
     $2.5
     $5.0
    14
    47
    61
    70
    20.6%
    67.0%
    87.7%
   100.0%
    14
    39
    54
    61
    20.6%
    56.7%
    77.3%
    87.7%
     14
     29
     43
     50
    20.6%
    41.3%
    61.9%
    72.2%
  Maximum
 Tanks Cleaned
   Per Year
    1,500
    2,500
    5,000
    10,000
    18
    32
    47
    70
    25.8%
    46.4%
    67.0%
   100.0%
    18
    32
    47
    61
    25.8%
    46.4%
    67.0%
    87.7%
     7
    22
    36
    50
    10.3%
    31.0%
    51.6%
    72.2%
  Maximum
 Employment
      5
     10
     25
     50
     7
    22
    43
    52
    10.3%
    31.0%
    61.9%
    74.2%
     7
    22
    36
    43
    10.3%
    31.0%
    51.6%
    61.9%
     7
    22
    36
    43
    10.3%
    31.0%
    51.6%
    61.9%
  Maximum
    Flow
 (gallons/day)
    2,000
    4,000
    6,000
    8,000
     7
    32
    39
    54
    10.3%
    46.4%
    56.7%
    77.3%
     7
    32
    39
    54
    10.3%
    46.4%
    56.7%
    77.3%
     7
    22
    29
    43
    10.3%
    31.0%
    41.3%
    61.9%
[1] Results for indirecfcliscnargers contained in detailed questionnaire database; does not include direct dischargers from
   screener survey.
Entity is classified as small if its parent business entity earned less than $5 million in revenues in 1994.
Numbers may not sum due to rounding.                       ,
                                               6-29

-------
The percentage of entities showing an impact is very similar to the percentage of small entities in the
                 i1 "ii!i       .,'•,"•,,,!,,  i ". •   '         '"      '    i     ;     i
subdivision. There is no obvious breakpoint at which to draw an exclusion. As mentioned above, the total
number of small entities for all regulated subcategories in the TEC industry may not meet EPA's guidance for
a substantial number of small entities; hence, there is no overriding need to develop such an exclusion.

        For example, if EPA excluded small entities that employ 50 workers or fewer in the Truck Chemical
subcategory, 52 entities and 70,282 pe of pollutants (nearly 20 percent of the subcategory pollutant load)
would be excluded (Table 6-8). These 52 entities would incur no incremental pollution control costs and 43
entities would no longer be impacted, as measured by the 1 percent or the 3 percent sales test (Table 6-9);
however, 18 entities (26 percent of small entities) would still have pollution control costs that exceed 1
percent of sales while excluding 20 percent of the subcategory pollutant load.

        Table 6-10 is the Table 6-9 counterpart for Option 1. Excluding the smallest subdivision would not
change the results of me 3 percent sales test for three of the four criteria.
        6.5.2   Rail Chemical Subcategory

        Tables 6-11 and 6-12 summarize the findings for the Rail Chemical subcategory. No entities exist
where the business earns less than $1 million or employs 25 workers or fewer. As with the Truck Chemical
subcategory, there are no clear breakpoints for identifying excluded subdivisions.
        6JS3   Barge Chemical and Petroleum Subcategory (Direct Dischargers)

        Tables 6-13 and 6-14 summarize the findings for the Barge Chemical and Petroleum subcategory.
No entities exist where the business earns less than $1 million. As with the Truck Chemical subcategory,
there are no clear breakpoints for identifying excluded subdivisions.
                                              6-30

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                                          Table 6-10
              Pre-Tax Financial Distribution for Small Business-Owned Facilities
                                  TT/CHEM Subcategory [1]
                             $5 Million Small Business Definition
                        .                   Option 1
                                             >1% Sales Test
   Criteria
  Small
Entities
% of Small
   Entities
  Small
Entities
% of Small
  Entities
                                                        >3% Sales Test
  Small
Entities
% of Small
- Entities
  Maximum
Animal Revenue
  (millions)
    $0.5
    $1.0
    $2.5
    $5,0
     14
     47
     61
     70
    20.6%
    67.0%
    87.7%
   100.0%
     7
    32
    47
    54
   . 10.3%
    46.4%
    67.0%
    77.3%
     7
    14
    22
    29
    10.3%
    20.6%
    31.0%
    41.3%
  Maximum
Tanks Cleaned
   Per Year
    1,500
    2,500
    5,000
    10.000
    18
    32
    47
    70
    25.8%
    46.4%
    67.0%
   100.0%
    18
    25
    39
    54
    25.8%
    36.1%
    56.7%
    77.3%
     0
     7
    14
    29
     0.0%
    10.3%
    20.6%
    41.3%
  Maximum
 Employment
      5
     10
     25
     50
     7
    22
    43
    52
    10.3%
    31.0%
    61.9%
    74.2%
     0
    14
    29
    36
     0.0%
    20.6%
    41.3%
    51.6%
     0
    14
    22
    22
     0.0%
    20.6%
    31.0%
    ,31.0%
  Maximum
    Flow
 (gallons/day)
    2,000
    4,000
    6,000
    8,000
     7'
    32
    39
    54
    10.3%
    46.4%
    56.7%
    77.3%
     7
    32
    39
    47
    10.3%
    46.4%
    56.7%
    67.0%
     0
    14
    22
    29
     0.0%
    20.6%
    31.0%
    41.3%
[1] Results for indirect~dischargers contained in detailed questionnaire database; does not include direct dischargers from
   screener survey.                                           .                            .
Entity is classified as small if its parent business entity earned less than $5 million in revenues in 1994.
Numbers may not sum due to rounding.
                                             6-31

-------
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                                      6-32

-------
                                          Table6-12
               Pre-Tax financial Distribution for Small Business-Owned Entities
                                  RT/CHEMSubcategory [1]
                              $5 Million Small Business Definition
                                             >1% Sales Test
    Criteria
  Small
Entities
% of Small
  Entities
                                                        >3% Sales Test
  SmaU
Entities
% of Small
   Entities
  Small
Entities
% of Small
  Entities
   Maximum
Annual Re venue
   (millions)
     $1.0
     $2.5
     $5.0
     0
     6
     9
     0.0%
    72.0%
   100.0%
     0
     6
     6
     0.0%
    72.0%
    72.0%
     0
     6
     6
     0.0%
    72.0%
    72.0%
  Maximum
 Tanks Cleaned
   Per Year
     750
    1,000
    2,000
    3.000
     2
     2
     9
     9
    28.0%
    28.0%
   100.0%
   100.0%
     0
     0
     6
     6
     0.0%
     0.0%
    72.0%
    72.0%
     0
     0
     6
     6
     0.0%
     0.0%
    710%
    72.0%
  jMaximum
 Employment
     25
     50
     0
     6
     0.0%
    72.0%
     0
     6
     0.0%
    72.0%
     0
     6
     0.0%
    72.0%
  Maximum
    Flow
 (gallons/day)
    5,000
    10.000
     2
     2
   28.0%
   28.0%
     0
     0
    0.0%
    0.0%
     0
     0
     0.0%
     0.0%
.[1] Results for indirect dischargers contained in detailed questionnaire database; does not include direct dischargers from
   screener survey.
Entity is classified as small if its parent business entity earned less man $5 million in revenues in 1994.
Numbers may not sum due to rounding.
                                           6-33

-------
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                                            6-34

-------
Table 6-14
Pre-Tax Financial Distribution for Small Business-Owned Entities
TB/CHEM Subcategory
$5 Million Small Business Definition
, , >!%SalesTest
Criteria
Small % of Small
Entities Entities
Small
Entities
% of Small
Entities
>3% Sales Test
Small
Entities
% of Small
Entities
Maximum ,
Annual Revenue , . ••-..'"
(niillions)
$1.0
$2.5
$5.0
0
3
8
0.0%
38.1%
100.0%
0
3
8
0.0%
38.1%
100.0%
0
3
8
0.0%
38.1%
100.0%
Tanks Cleaned
Per Year
150
250
500
1,000
1,500
2
5
8
8
8
23.8%
61.9%
100.0%
100.0%
100.0%
2
5
8
8
8
23.8%
61.9%
100.0%
100.0%
100.0%
2
5
8
8
8
23.8%
61.9%
100.0%
100.0%
100.0%
Maximum
Employment
20
50
3
3
38.1%
38.1%
3
-• 3"
38.1%
38.1%
3 :
3
38.1%
38.1%
Maximum . '. .
Flow
(gallons/day)
5,000
10,000
5 .
8
61.9%
100.0%
5
8
61.9%
100.0%
. 5
8
61.9%
100.0%

Entity is classified as small if its parent business entity earned less than $5 million in revenues in 1994.
Numbers may not sum due to rounding.
6-35

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           6.5.4   Sensitivity Analysis of Additional Regulatory Relief Options in the Truck Chemical
                  Subcategory
           EPA considered two additional forms of relief for the Truck Chemical subcategory:
           •      Allowing eligible small entities a five-year grace period before they are required to comply
                  \viththeproposedregulation
           •      Allowing eligible small entities to meet the less stringent requirements set for option 1 rather
                  than option 2
   Four sets of criteria for small entities were examined for these two forms of regulatory relief:
    , ., •        •      •'                 |   ,      •'•.•.       |, • ;     i
                 •                :               ''     ,                    i
                                      I          •                         !'
                                                         • j    u      :,
          •      Small entities where the business employs fewer than 10 workers
          •      Small entities where the business employs fewer than 30 workers
          •      Small entities where the business earns less than $500,000 in revenues
          •      Small entities where the business earns less than $2 million in revenues

   EPA considered the effect of these two forms of relief on financial distress and sales test impacts.
                                      i                                   !
          The results of this sensitivity analysis are presented in Table 6-15. The five-year grace period has no
   effect on financial distress incurred by small entities. The grace period decreases the number of small entities
   incurring post-tax compliance costs exceeding 3 percent of revenues by a minimum of seven faculties under
   all four relief criteria examined.  The grace period has no effect on the number of small entities exceeding the
   1 percent sales test threshold.

          Permitting small entities to meet option 1 requirements rather than option 2 requirements reduces
.   financial distress impacts by seven under all criteria. This form of relief also reduces the number of small
   entities exceeding both the 1 and 3 percent sales test thresholds.
                                                 6-36

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                                 6-37

-------
       6.5.5   Summary and Conclusion of the Regulatory Flexibility Analysis

       Based on the results presented in Tables 6-8 through 6-15, the EPA chose not to provide regulatory
relief to small entities hi the TEC industry. This decision is based primarily on the proportionality of entities
and entity loads in each subcategory. In all Chemical subcategories, the percentage of small entities and the
percentage of pollutant loads attributable to those entities is highly correlated. It is therefore impossible to
provide regulatory relief to a significant percentage of entities without simultaneously excluding a similar
percentage of subcategory pollutant discharges from regulation. For example, excluding small Rail Chemical
entities that clean fewer than 2,000 tanks per year provides relief to all small entities in the subcategory (23
percent of the subcategory); it also excludes 24 percent of pollutant loads from the regulation.

       EPA has, however, proposed to exclude IBC wastewater from the scope of the regulation.  This
provides relief to 39 small TEC industry entities. EPA is also requesting comment on exclusions based on
wastewater flow or tanks cleaned.
6.6    REFERENCES
                                      ',               •    •        >
US. EPA. 1992. EPA guidelines for implementing the Regulatory Flexibility Act Washington, DC: U.S.
Eavkonmental Protection Agency, Office of Policy, Planning, and Evaluatioa April.
U.S. EPA. 1996a. Economic impact analysis for final effluent limitations and standards for the coastal
subcategory of the oil and gas extraction point source category.  Washington, DC:  U.S. Environmental,
Protection Agency, Office of Water.  October.
U.S. EPA. 1996b. Responses to public comments on effluent limitations guidelines and standards for the
coastal oil and gas subcategory of the oil and gas extraction point source category.  Washington, DC: U.S.
Environmental Protection Agency. Rulemaking Docket, item number m.B.(c).l. October 30.
U.S.EPA. 1997. EPA~interim guidance for implementing the Small Business Regulatory Enforcement
Fairness Act and related provisions of the Regulatory Flexibility Act Washington, DC: U.S. Environmental
Protection Agency. Februarys.
U.S.EPA. 1998a. Development document for the proposed effluent limitations guidelines and standards for
the transportation equipment cleaning industry. EPA-821-B-98-011. Washington, DC: U.S. Environmental
Protection Agency, Office of Water.  May.                               ,
                                              6-38

-------
U.S. EPA. 1998b. Cost-effectiveness analysis of proposed effluent limitations guidelines and standards for
the transportation equipment cleaning industry point source category. EPA-821-B-98-013. Washington,
DC: U.S. Environmental Protection Agency, Office of Water. May.
                                             6-39

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6-40

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                                        CHAPTER 7
                              BENEFITS METHODOLOGY
7.1    PROJECTED WATER QUALITY IMPACTS

       The water quality impacts and associated risks/benefits of TEC discharges at various treatment
levels are evaluated by: (1) comparing projected instream concentrations with ambient water quality criteria,1
(2) estimating the human health risks and benefits associated with the consumption offish and drinking water
from waterbodies impacted by the TEC industry, (3) estimating the ecological benefits associated with
improved recreational fishing habitats on impacted waterbodies, and (4) estimating the economic productivity
benefits based on reduced sewage sludge contamination at POTWs receiving the wastewater of TEC
facilities. These analyses are .performed for a representative sample set of six direct Barge Chemical and
Petroleum facilities, one indirect Barge Chemical and Petroleum facility, 12 indirect Rail Chemical faculties,
and 40 indirect Truck Chemical facilities. Results are extrapolated to the national level based on the
statistical methodology used for estimated costs, loads, and economic impacts. The methodologies used in
this evaluation are described in detail below.
       7.1.1   Comparison of Instream Concentrations with Ambient Water Quality Criteria

       Current and proposed pollutant releases are quantified and compared, and potential aquatic life and
human health impacts resulting from current and proposed pollutant releases are evaluated using stream
modeling techniques. Projected instream concentrations for each pollutant are compared to EPA water
   1 In performing this analysis, EPA used guidance documents published by EPA that recommend numeric
human health and aquatic life water quality criteria for numerous pollutants. States often consult these guidance
documents when adopting water quality criteria as part of their water-quality standards. However, because those
State-adopted criteria may vary, EPA used the nationwide criteria guidance as the most representative values.
EPA also recognizes that currently there is no scientific  consensus on the most appropriate  approach for
extrapolating the dose-response relationship to the low-dose associated with drinking water exposure for arsenic.
EPA's National Center for Environmental Assessment and EPA's Office of Water sponsored an Expert Panel
Woikshop, May 21-22,1997, to review and discuss the relevant scientific literature for evaluating the possible
modes of action underlying the carcinogenic action of arsenic.
                                              7-1

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 quality criteria or, for pollutants for which no water quality criteria have been developed, to toxic effect levels
 (i.e., lowest reported or estimated toxic concentration). Inhibition of POTW operation and sludge
 contamination are also evaluated. The following three sections (i.e., Section 7.1.1.1 through Section 7.1.1.3)
 describe the methodology and assumptions used for evaluating the impact of direct and indirect discharging
 facilities.
        7.1.1.1 Direct Discharging Facilities

        Using a stream dilution model that does not account for fate processes other than complete
 immediate mixing, projected instream concentrations are calculated at current and proposed BAT treatment
 levels for stream segments with direct discharging facilities. For stream segments with multiple facilities,
 pollutant loadings are summed, if applicable, before concentrations are calculated. The dilution model used
 for estimating instream concentrations is as follows.

                     r   _    L/OD   v „„
                     ,C-  =  - x CF                                             rca  \\
                       a    FF + SF                                                   <• q'  ;

 where:
        Q,     =      instream pollutant concentration (micrograms per liter [^g/L])
        L      =      facility pollutant loading (pounds/year [Ibs/year])
        OD    =      facility operation (days/year)
        FF     =      facility flow (million gallons/day [gal/day])
        SF     =      receiving stream flow (million gal/day)
        CF     =      conversion factors for units

        The facility-specific data (i.e., pollutant loading, operating days, facility flow, and stream flow) used
ittEq. 1 are derived from various sources as described in Section 3.1.1 of this report  One of three receiving
stream flow conditions (1Q10 low flow, 7Q10 low flow, and harmonic mean flow) is used for the two
treatment levels; use depends on the type of criterion or toxic effect level intended for comparison. The 1Q10
and 7Q10 flows are the lowest 1-day and the lowest consecutive 7-day average flow during any 10-year
period, respectively, and are used to estimate potential acute and chronic aquatic life impacts, respectively, as

                                               7-2

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recommended in the Technical Support Document for Water Quality-based Toxics Control (U.S. EPA,
1991a). The harmonic mean flow is defined as the inverse mean of reciprocal daily arithmetic mean flow
values and is used to estimate potential human health impacts.  EPA recommends the long-term harmonic
                      '  /             •'                    -  '     ' '           r          -  -
mean flow as the design flow for assessing potential human health impacts, because it provides a more
conservative estimate than the arithmetic mean flow. 7Q10 flows are not appropriate for assessing potential
human health impacts, because they have no consistent relationship with the long-term mean dilution.

       For assessing impacts on aquatic life, the facility operating days are used to represent the exposure
duration; the calculated instream concentration is thus the average concentration on days the facility is
discharging -wastewater.  For assuming long-term human health impacts, the operating days (exposure
duration) are set at 365 days; the calculated instream concentration is thus the average concentration on all
days of the year. Although this calculation for human health impacts leads to a lower calculated
concentration because of the additional dilution from days when the facility is not in operation, it is consistent
with the conservative assumption that the target population is present to consume drinking water and
contaminated fish every day for an entire lifetime.
              ~i •
       Because stream flows are not available for hydrologically complex waters such as bays, estuaries,
and oceans, site-specific critical dilution factors (CDFs) or estuarine dissolved concentration potentials
(DCPs) are used to predict pollutant concentrations for facilities discharging to estuaries and bays, if
applicable, as follows:                      ,                          >
                                                                                         CEq.2)
where:
        Ca     =    ^estuary pollutant concentration
        L      =      facility pollutant loading (Ibs/year)
        OD    =      faculty operation (days/year)
        FF     =      facility flow (million gal/day)
        CDF   =      critical dilution factor     =
        CF     =      conversion factors for units
                                               7-3

-------
                      C,, = L x DCP x CF                                               (Eq. 3)

 \vhcte:
        Cw     =      estuary poUutant concentration (^g/L)
        L      =      facility pollutant loading (Ibs/year)
        DCP   =      dissolved concentration potential (milligrams per liter [mg/L])
                                    i          -           .      • •   •      i
        CF     =      conversion factor for units
                        1          ' „ '   '       '                           !
            "                        !    '                '                 j               '
 Site-specific critical dilution factors are obtained from a survey of States and Regions conducted by EPA's
 Office of Pollution Prevention and Toxics (OPPT)M»«g Zone Dilution Factors for New Chemical
 Exposure Assessments, Draft Report, (U.S. EPA, 1992a). Acute CDFs are used to evaluate acute aquatic life
 effects; whereas, chronic CDFs are used to evaluate chronic aquatic life or adverse human health effects. It is
 assumed that the drinking water intake and fishing location are at the edge of the chronic mixing zone.
                                     •                              •      |       '       i
        The Strategic Assessment Branch of the National Oceanic and Atmospheric Administration's
 (NOAA) Ocean Assessments Division has developed DCPs based on freshwater inflow and salinity gradients
  • '" '        "     :':/'" \           I    ' '  "'  '     ''  "I1  '  '' il'  ;l'" ' .       ,      ,'"!,"!"
 to predict pollutant concentrations in each estuary in the National Estuarine Inventory (NEI) Data Atlas.
 These DCPs are applied to predict concentrations. They also do not consider pollutant fate and are designed
 strictly to simulate concentrations of nonreactive dissolved substances, In addition, the DCPs reflect the
 predicted estuary-wide response and may not be indicative of site-specific locations.

        Water quality excursions are determined by dividing the projected instream (Eq. 1) or estuary (Eq. 2
 and Eq. 3) pollutant concentrations by EPA ambient water quality criteria or toxic effect levels. A value
 greater than 1.0 indicates an excursion.
        7.1.1.2 Indirect Discharging Facilities
        Assessing the impacts of indirect discharging facilities is a two-stage process. First, water quality
impacts arc evaluated as described in Section (a) below. Next, impacts on POTWs are considered as
described in Section (b) that follows.
                                                7-4

-------
        (a)     Water Quality Impacts

        A stream dilution model is used to project receiving stream impacts resulting from releases by
indirect discharging facilities as shown in Eq. 4. For stream segments with multiple facilities, pollutant
loadings are summed, if applicable, before concentrations are calculated. The facility-specific data used in
Eq. 4 are derived from various sources as described in Section 3.1.1 of this report  .Three receiving stream
flow conditions (1Q10 low flow, 7Q10 low flow, and harmonic mean flow) are used for the current and
proposed pretreatment options. Pollutant concentrations are predicted for POTWs located on bays and
estuaries using site-specific CDFs or NOAA's DCP calculations (Eq. 5 and Eq. 6).
                   . (T70D) x
where:
 Q,
 L
 OD
 TMT
-PF
 SF
 CF
                      instream pollutant concentration (/^g/L)
                      facility pollutant loading (Ibs/year)
                      facility operation (days/year)
                      POTW treatment removal efficiency
                      POTW flow (million gal/day)
                      receiving stream flow (million gal/day)
                      conversion factors for units
where:
 L
 OD
 TMT
 PF
                                          CF   / CDF
                      estuary pollutant concentration
                      facility pollutant loading (Ibs/year)
                      facility operation (days/year)
                      POTW treatment removal efficiency
                      POTW flow (million gal/day)
                                              7-5

-------
                      CDF   —       critical dilution factor
                      CF     —       conversion factors for units     .                                     '

                            C^  = L x (1-TMT) x DCP x CF                                      (Eq. 6)
                                                      .                               :                      I
              where:                                                                                    "
                      CM     =       estuary pollutant concentration (ug/L)
                      L      =       facility pollutant loading (Ibs/year)
                      TMT,  =       POTW treatment removal efficiency
                      DCP   = .      dissolved concentration potential (mg/L)
                      CF     =       conversion factors for units

                      Potential impacts on freshwater quality are determined by comparing projected instream pollutant
              concentrations (Eq. 4) at reported POTW flows and at 1Q10 low, 7Q10 low, and harmonic mean receiving
              stream flows with EPA water quality criteria or toxic effect levels for the protection of aquatic life and human
              health; projected estuary pollutant concentrations (Eq. 5 and Eq. 6), based on CDFs or DCPs, are compared
              to EPA water quality criteria or toxic effect levels to determine impacts. Water quality criteria excursions are
              determined by dividing the projected instream or estuary pollutant concentration by the EPA water quality
              criteria or toxic effect levels. (See Section 7.1.1.1 for discussion of streamflow conditions, application of
              CDFs or DCPs, assignment of exposure duration, and comparison with criteria or toxic effect levels. A value
              greater than 1.0 indicates an excursion.
                     (b)     Impacts on POTWs

                     Impacts on PQTW operations are calculated in terms of inhibition of POTW processes (i.e.,
              inhibition of microbial degradation) and contamination of POTW sludges. Inhibition of POTW operations is
              determined by dividing calculated POTW influent levels (Eq. 7) with chemical-specific inhibition threshold
              levels. Excursions are indicated by a value greater than 1.0.
                                                            7-6
liLIS

-------
where:                                                        ,
        Cpi     =      POTW influent concentration 0*g/L)
        L      =      facility pollutant loading (Ibs/year)
        OD    =      facility operation (days)                                    ,
        PF     =      POTW flow (nuffion gal/day)
        CF     =      conversion factors for units

Contamination of sludge (thereby limiting its use for land application, etc.) is evaluated by dividing projected
pollutant concentrations in sludge (Eq. 8) by available EPA-developed criteria values for sludge. A value
greater than 1.0 indicates an excursion.
              CSP = Cpi x TMT x PART x SGF                                      (Eq. 8)

where:
        Cjp     =      sludge pollutant concentration (milligrams per kilogram [mg/kg])
        C^     =      POTW influent concentration Cug/L)
        TMT   =      POTW treatment removal efficiency
        PART  —      chemical-specific sludge partition factor
        SGF   =      sludge generation factor (5.96 parts per million [ppm])

        Facility-specific data and information used to evaluate POTWs are derived from the sources
described in Sections 3J.. land 3.1.2. For facilities that discharge to the same POTW, their individual
loadings are summed, if applicable, before the POTW influent and sludge concentrations are calculated.

        The partition factor is a measure of the tendency for the pollutant to partition in sludge when it is
removed from wastewater. For predicting sludge generation, the model assumes that 1,400 pounds of sludge
are generated for each million gallons of wastewater processed (Metcalf& Eddy, 1972). This results in a
                                              7-7

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            sludge generation factor of 5.96 mg/kg per //g/L (that is, for every 1 //g/L of pollutant removed from

            wastewater and partitioned to sludge, the concentration in sludge is 5.96 mg/kg dry weigh!).
                    7.1.1.3 Assumptions and Caveats


                    The following major assumptions are used in this analysis:
                           Background concentrations of each pollutant, both in the receiving stream and in the POTW
                           influent, are equal to zero; therefore, only the impacts of discharging facilities are evaluated.

                           An exposure duration of 365 days is used to determine the likelihood of actual excursions of
                           human health criteria or toxic effect levels.

                           Complete mixing of discharge flow and stream flow occurs across the stream at the
                           discharge point This mixing results in the calculation of an "average stream" concentration,
                           even though the actual concentration may vary across the width and depth of the stream.

                           The process water at each facility and the water discharged to a POTW are obtained from a
                           source other than the receiving stream.

                           The pollutant load to the receiving stream is assumed to be continuous and is assumed to be
                           representative of long-term facility operations. These assumptions may overestimate risks
                           to human health and aquatic life, but may underestimate potential short-term effects.

                           1Q10 and 7Q10 receiving stream flow rates are used to estimate aquatic life impacts, and
                           harmonic mean flow rates are used to estimate human health impacts.  1Q10 low flows are
                           estimated using the results of a regression analysis conducted by Versar, Inc. for EPA's
                           Office of Pollution Prevention and Toxics (OPPT) of 1Q10 and 7Q10 flows from
                           representative U.S. rivers and streams taken from Upgrade of Flow Statistics Used to
                           Estimate Surface Water Chemical Concentrations for Aquatic and Human Exposure
                           Assessment (Versar, 1992). Harmonic mean flows are estimated from the mean and 7Q10
                           flows as recommended in the Technical Support Document for Water-Quality-based
                           Toxics Control (U.S. EPA, 1991a). These flows may not be the same as those used by
                           specific States to assess impacts.

                           Pollutant fate processes, such as sediment adsorption, volatilization, and hydrolysis, are not
                           considered.  This may result in estimated instream concentrations that are environmentally
                           conservative (higher).
                                             i,  ''      '    .
                           Pollutants without a specific POTW treatment removal efficiency provided by EPA or found
                           in th^e literature are assigned a removal efficiency of zero; pollutants without a specific
                           partition factor are assigned a value of zero.
                                                          7-8
lit III: nr ii, .' i,in  , £ ;,i!!I

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               Sludge criteria levels are only available for seven pollutants—arsenic, cadmium, copper, lead,
               mercury, selenium, and zinc.
               Water quality criteria or toxic effect levels developed for freshwater organisms are used in
               the analysis of facilities discharging to estuaries or bays.
        7.1.2   Estimation of Human Health Risks and Benefits

        The potential benefits to human health are evaluated by estimating the risks (carcinogenic and
noncarcinogenic hazard [systemic]) associated with reducing pollutant levels in fish tissue and drinking water
from current to proposed treatment levels. Reduction in carcinogenic risks is monetized, if applicable, using
estimated willingness-to-pay values for avoiding premature mortality. The following three sections (i.e.,
Section 7.1.2.1 through Section 7.1.2.3) describe the methodology and assumptions used to evaluate the
human health risks and benefits from the consumption offish tissue and drinking water derived from
waterbodies impacted by direct and indirect discharging facilities.
        7.1.2.1 Fish Tissue

        To determine the potential benefits, in terms of reduced cancer cases, associated with reducing
pollutant levels in fish tissue, lifetime average daily doses (LADDs) and individual risk levels are estimated
for each pollutant discharged from a faculty based on the instream pollutant concentrations calculated at
current and proposed treatment levels in the site-specific stream dilution analysis. (See Section 7.1.1.)
Estimates are presented for sport anglers, subsistence anglers, and the general populatioa LADDs are
calculated as follows:

    LADD = (C x IR x BCF x F x D ) / ( BW x LT )                              (Eq. 9)

where:
        LADD     =    potential lifetime average daily dose (milligrams per kilogram per day
•   -                      [mg/kg/day])
   -     C          =    exposure concentration (mg/L)
        IR         =    ingestion rate (See Section 7.1.2.3 -Assumptions)

                                               7-9

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        BCF       =    bioconcentration factor, (liters per kilogram [LAg] (whole body x 0.5)
        F          -    frequency duration (365 days/year)
        D         =    exposure duration (70 years)
        BW       =    body weight (70 kg)
        LT        =    lifetime (70 years x 365 days/year)

        Individual risks are calculated as follows:

                        R = LADD x SF                                                (Eq. 10)

•wfaere:
        R       -   individual risk level        '
        LADD   -   potential lifetime average daily dose (mg/kg/day)
        SF      -   potency slope factor (mg/kg-day)'1

        The estimated individual pollutant risk levels are then applied to the potentially exposed populations
of sport anglers, subsistence anglers, and the general population to estimate the potential number of excess
annual cancer cases occurring over the life of the population. The number of excess cancer cases is then
summed on a pollutant, facility, and overall industry basis. The number of reduced cancer cases is assumed
to be the difference between the estimated risks at current and proposed treatment levels.

        A monetary value of benefits to society from avoided cancer cases is estimated if current wastewater
discharges result in excess annual cancer cases greater than 0.5. The valuation of benefits  is based on
estimates of society's willingness-to-pay to avoid the risk of cancer-related premature mortality. Although it
is not certain that all cancer cases will result in death, to develop a worst case estimate for this analysis,
avoided cancer cases ar^ valued on the basis of avoided mortality. To value mortality, a range of values
recommended by an J5PA, Office of Policy Analysis (OPA) review of studies quantifying individuals'
willingness-to-pay to avoid risks to life is used (Fisher, Chestnut, and Violette, 1989; and Violette and
Chestnut, 1986). The reviewed studies used hedonic wage and contingent valuation analyses in labor markets
to estimate the amounts that individuals are willing to pay to avoid slight increases in risk of mortality or will
need to be compensated to accept a slight increase in risk of mortality. The willingness-to-pay values
estimated in these studies are associated with small changes in the probability of mortality. To estimate a

                                               7-10

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willingness-to-pay for avoiding certain or high probability mortality events, they are extrapolated to the value
for a 100 percent probability event2 The resulting estimates of the value of a "statistical life saved" are used
to value regulatory effects that are expected to reduce the incidence of mortality.

        From this review of willingness-to-pay studies, OPA recommends a range of $ 1.6 to $8.5 million
(1986 dollars) for valuing an avoided event of premature mortality or a statistical life saved. A more recent
survey of value of life studies by Viscusi (1992) also supports this range with the finding that value of life
estimates are clustered in the range of $3 to $7 million (1990 dollars). For this analysis, the figures
recommended in the OPA study are adjusted to 1992 using the relative change in the Employment Cost Index
of Total Compensation for All Civilian Workers from 1986 to 1994 (38 percent). Basing the adjustment in
the willingness-to-pay values on change in nominal Gross Domestic Product (GDP) instead of change in
inflation, accounts for the expectation that willingness-to-pay to avoid risk is a normal economic good, and,
accordingly, society's willingness-to-pay to avoid risk will increase as national income increases. Updating
to 1994 yields arangeof $2.2 to $11.7 million.

        Potential reductions in risks due to reproductive, developmental, or other chronic and subchronic
toxic effects are estimated by comparing the estimated lifetime average daily dose and the oral reference dose
(RfD) for a given chemical pollutant as follows:

                        HQ =  ORI/RfD                                               (Eq.  11)

where:
       HQ            =      hazard quotient
        OKI           =      oral intake (LADDxBW,mg/day)
       RfD           =      reference dose (mg/day assuming a body weight of 70kg)

       A hazard index (i.e., sum of individual pollutant hazard quotients) is then calculated for each faculty
or receiving stream.  A hazard index greater than 1.0 indicates that toxic effects may occur in exposed
populations. The size of the subpopulations affected are summed and compared at the various treatment
levels to assess benefits in terms of reduced systemic toxicity. While a monetary value of benefits to society
   2 These estimates, however, do not represent the willingness-to-pay to avoid the certainty of death.
                                               7-11

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 associated with a reduction in the number of individuals exposed to pollutant levels likely to result in
 systemic health effects could not be estimated, any reduction in risk is expected to yield human health related
 benefits.                                                                          ,
        7.1.2,2 Drinking Water

        Potential benefits associated with reducing pollutant levels in drinking water are determined in a
similar manner. LADDs for drinking water consumption are calculated as follows:

        LADD  = (C x IR x F x D ) / ( BW x LT )                                (Eq. 12)

where:
        LADD         =      potential lifetime average daily dose (mg/kg/day)
        C              s      exposure concentration (mg/L)
        IR             =      ingestionrate(2L/day)
        F              =      frequency duration (365 days/year)
        D              -      exposure duration (70 years)
        BW            =      body weight (70 kg)
        LT             =      lifetime (70 years x 365 days/year)

Estimated individual pollutant risk levels greater than 10"6 (1E-6) are applied to the population served
downstream by any drinking water utilities within SO miles from each discharge site to determine the number
of excess annual cancer cases that may occur during the life of the population. Systemic toxicant effects are
evaluated by estimating the sizes of populations exposed to pollutants from a given facility, the sum of whose
individual hazard quotients yields a hazard index (HI) greater than 1.0. A monetary value of benefits to
society from avoided cancer cases is estimated, if applicable, as described in Section 7.1.2.1.
                                              7-12

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7.1.2.3 Assumptions and Caveats             '   „'    ..


The following assumptions are used in the human health risks and benefits analyses:
       A linear relationship is assumed between pollutant loading reductions and benefits attributed
       to the cleanup of surface waters.

       Synergistic effects of multiple chemicals on aquatic ecosystems are not assessed;  therefore,
       the total benefit of reducing toxics may be underestimated.

       The total number of persons who might consume recreationally caught fish and the number
       who rely upon fish on a subsistence basis in each State are estimated, in part, by assuming
       that these anglers regularly share their catch with family members. Therefore, the number of
       anglers in each State are multiplied by the average household size in each State. The
       remainder of the population of these States is assumed to be the "general population"
       consuming commercially caught fisk                                      -

       Five percent of the resident anglers in a given State are assumed to be subsistence anglers;
       the other 95 percent are assumed to be sport anglers.

       Commercially or recreationally valuable species are assumed to occur or to be taken in the
       vicinity of the discharges included in the evaluation.

       Ihgestion rates of 6.5 grams per day for the general population, 30 grams per day (30 years)
       + 6.5 grams per day (40 years) for sport anglers, and 140 grams per day for subsistence
       anglers are used in the analysis offish tissue (Exposure Factors Handbook, U.S. EPA,
       1989a)
                                                                                     v
       All rivers or estuaries within a State are equally fished by any of that State's resident anglers,
       • and the fish are consumed only by the population within that State.

       Populations potentially exposed to discharges to rivers or estuaries that border more than
       one State are estimated based only on populations within the State in which the facility is
       located

       The size of the population potentially exposed to fish caught in an impacted water body in a
       given State is estimated based on the ratio of impacted river miles to total river miles in that
       State or impacted estuary square miles to total estuary square miles in that State.  The
       number of miles potentially impacted by a facility's discharge is assumed to be 50 miles for
       rivers and the total surface area of the various estuarine zones for estuaries.

       Pollutant fate processes (e.g., sediment adsorption, volatilization, hydrolysis) are not
       considered in estimating the concentration in drinking water or  fish; consequently, estimated
       concentrations are environmentally conservative (higher).
                                       7-13

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        7.13   Estimation of Ecological Benefits

        The potential ecological benefits of the proposed regulation are evaluated by estimating
 improvements in the recreational fishing habitats that are impacted by TEC wastewater discharges. Stream
 segments are first identified for which the proposed regulation is expected to eliminate all occurrences of
 pollutant concentrations in excess of both aquatic life and human health ambient water quality criteria
 (AWQC) or toxic effect levels. (See Section 7.1.1.) The elimination of pollutant concentrations in excess of
 AWQC is expected to result in significant improvements in aquatic habitats.  These improvements in aquatic
 habitats are then expected to improve the quality and value of recreational fishing opportunities. The
 estimation of the monetary value to society of improved recreational fishing opportunities is based on the
 concept of a "contaminant-free fishery" as presented by Lyke (1993).
                  11                 ' '          '•','!      I1
                                                                  :;     |                          •
        Research by Lyke (1993) shows that anglers may place a significantly higher value on a
 contaminant-free fishery than a fishery with some level of contamination. Specifically, Lyke estimates the
 consumer surplus3  associated with Wisconsin's recreational Lake Michigan trout and salmon fishery, and the
 additional value of the fishery if it was completely free of contaminants affecting aquatic life and human
 health. Lyke's results are based on two analyses:

        1.      A multiple site, trip generation, travel cost model was used to estimate net benefits
                associated with the fishery under baseline (i.e., contaminated) conditions.
                                   .                .        '      .  ,     j.
       2.      A contingent valuation model was used to estimate willingness-to-pay values for the fishery
               if it was free of contaminants.

Both analyses used data collected from licensed anglers before the 1990 season. The estimated incremental
benefit values associated with freeing the fishery of contaminants range from 11.1 percent to 31.3 percent of
the value of the fishery under current conditions.
   3 Consumer surplus is generally recognized as the best measure from a theoretical basis for valuing the net
economic welfare or benefit to consumers fromconsuming a particular good or service. An increase or decrease
in consumer surplus for particular goods or services as the result of regulation is a primary measure of the gain
or loss in consumer welfare resulting from the regulation.
                                               7-14

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        To estimate the gain in value of stream segments identified as showing improvements in aquatic
habitats as a result of the proposed regulation, the baseline recreational fishery value of the stream segments
are estimated on the basis of estimated annual person-days of fishing per segment and estimated values per
person-day of fishing. Annual person-days of fishing per segment are calculated using estimates of the
affected (exposed) recreational fishing populations. (See Section 7.1.2.)  The number of anglers are
multiplied by estimates of the average number of fishing days per angler in each State to estimate the total
number of fishing days for each segment.  The baseline value for each fishery is then calculated by
multiplying the estimated total number of fishing days by an estimate of the net benefit that anglers receive
from a day of fishing where net benefit represents the total value of the fishing day exclusive of any fishing-
related costs (license fee, travel costs, bait, etc,) incurred by the angler. In this analysis, a range of median
net benefit values for warm water and cold water fishing days, $29.47 and $37.32, respectively, in 1994
dollars is used.  Summing over all benefiting stream segments provides a total baseline recreational fishing
value of TEC facility stream segments that are expected to benefit by elimination of pollutant concentrations
in excess of AWQC.

        To estimate the increase in value resulting from elimination of pollutant concentrations in excess of
AWQC, the baseline value for benefiting stream segments are multiplied by the incremental gain in value
associated with achievement of the "contaminant-free" condition.  As noted above, Lyke's estimate of the
increase in value ranged from 11.1 percent to 31.3 percent Multiplying by these values yields a range of
expected increase in value for the TEC facility stream segments expected to benefit by elimination of
pollutant concentrations in excess of AWQC.
        7.1.3.1 Nonuse Benefits

        Individuals who never visit or otherwise use a natural resource may nevertheless be affected by
changes in its status or quality. Empirical estimates indicate that such "nonuse value" can be substantial for
some resources. Most studies find nonuse values to exceed use Values. For example, based on a review of
recent contingent valuation studies in which both use and nonuse values were estimated, Bergstrom estimates
the relative magnitude of nonuse value to use value by estimating the ratio of the former to the latter. The 34
ratios estimated by Bergstrom range from 0.1 to 10, with the median ratio of 1.92. Because the nonuse value
is a sizable component of the total economic value of water resources, EPA estimated the change in nonuse

                                              7^15

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 values in proportion to recreational fishing benefits. For this analysis, EPA conservatively estimated that
 nonuse benefits compose one-half of recreational fishing benefits.
        7.1.3.2 Assumptions and Caveats
                  ',',"'   •!'  •    '                              i


        The following major assumptions are used in the ecological benefits analysis:
               Background concentrations of the TEC pollutants of concern in the receiving stream are not
               considered.
                   ;,!•,'                      ' •             i „          -
                   , •                 i •   '  '•  „      ' '      '         ' ''    !
               The estimated benefit of improved recreational fishing opportunities is only a limited
               measure of the value to society of the improvements in aquatic habitats expected to result
               from the proposed regulation; increased assimilation capacity of the receiving stream,
               improvements in taste and odor, or improvements to other recreational activities, such as
               swimming and wildlife observation, are not addressed.

               Significant simplifications and uncertainties are included in the assessment This may
               overestimate or underestimate the monetary value to society of improved recreational fishing
               opportunities. (See Sections 7.1.1.3 and 7.1.2.3.)

               Potential overlap in valuation of improved recreational fishing opportunities and avoided
               cancer cases from fish consumption may exist This potential is considered to be minor in
               terms of numerical significance.
        7.1.4   Estimation of Economic Productivity Benefits


        Potential economic productivity benefits are estimated based on reduced sewage sludge
contamination due to the proposed regulation. The treatment of wastewaters generated by TEC facilities
produces a sludge that contains pollutants removed from the wastewaters. As required by law, POTWs must
use environmentally sound practices in managing and disposing of this sludge. The proposed pretreatment
levels are expected to generate sewage sludges with reduced pollutant concentrations. As a result, the
POTWs may be able to use or dispose of the sewage sludges with reduced pollutant concentrations at lower
costs.                                                                     .
                                              7-16

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        To determine the potential benefits, in terms of reduced sewage sludge disposal costs, sewage sludge
pollutant concentrations are calculated at current and proposed pretreatment levels. (See Section 7.1.1.2.)
Pollutant concentrations are then compared to sewage sludge pollutant limits for surface disposal and land
application (minimum ceiling limits and pollutant concentration limits). If, as a result of the proposed
pretreatment, a POTW meets all pollutant limits for a sewage sludge use or disposal practice, that POTW is
assumed to benefit from the increase in sewage sludge use or disposal options. The amount of the benefit
deriving from changes in sewage sludge use or disposal practices depends on the sewage sludge use or
disposal practices employed under current levels.  This analysis assumes that POTWs choose the least
expensive sewage sludge use or disposal practice for which their sewage sludge meets pollutant limits.
POTWs with sewage sludge that qualifies for land application in the baseline are assumed to dispose of their
sewage sludge by land application; likewise, POTWs with sewage sludge that meets surface disposal limits
(but not land application ceiling or pollutant limits) are assumed to dispose of their sewage sludge at surface
disposal sites.

        The economic benefit for POTWs receiving wastewater from a TEC facility is calculated by
multiplying the cost differential between baseline and post-compliance sludge use or disposal practices by the
quantity of sewage sludge that shifts into meeting land application (minimum ceiling limits and pollutant
concentration limits) or surface disposal limits. Using these cost differentials, reductions in sewage sludge
use or disposal costs are calculated for each POTW (Eq. 14):

               SCR = PF x S x CD x  PD  x CF                                     (Eq.  13)
where:
        SCR   =       estimated POTW sewage sludge use or disposal cost reductions resulting from the
                       proposed regulation (1994 dollars)
        PF     =    ~  POTW flow (million gal/year)                          '  ;       ...
        S      =       sewage sludge to wastewater ratio (1,400 Ibs (dry weight) per million gallons of
                       water)
        CD    =       estimated cost differential between least c»stfy composite baseline use or disposal
                       method for which POTW qualifies and least costly use or disposal method for
                       which POTW qualifies post-compliance ($1994/dry metric ton)
        PD     =       percent of sewage sludge disposed

                                              7-17

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        CF    =      conversion factor for units
                                   I       " ' '           •          '•     !    ,     .



        7.L4.1 Assumptions and Caveats


        The following major assumptions are used in the economic productivity benefits analysis:
               13.4 percent of the POTW sewage sludge generated in the United States is generated at
               PpTWs that are located too far from agricultural land and surface disposal sites for these
               use or disposal practices to be economical. This percentage of sewage sludge is not
               associated with benefits from shifts to surface disposal or land application.

               Benefits expected from reduced record-keeping requirements and exemption from certain
               sewage sludge management practices are not estimated.
                 „" !           ,IJ    '  ' ...  "      .•,„          ."'''!
               No definitive source of cost-saving differential exists.  Analysis may overestimate or
               underestimate the cost differentials.

               Sewage sludge use or disposal costs vary by POTW. Actual costs incurred by POTWs
               affected by the TEC regulation may differ from those estimates.

               Due to the unavailability of such data, baseline pollutant loadings from all industrial sources
               are not included in the analysis.
12    POLLUTANT FATE AND TOXICTTY


       Human and ecological exposure and risk from environmental releases of toxic chemicals depend

largely on toxic potency, inter-media partitioning, and chemical persistence. These factors are dependant on
   jf               " •          '                                         ' '
chemical-specific properties relating to lexicological effects on living organisms, physical state,

hydrophobicity/h'pophilicity, and reactivity, as well as the mechanism and media of release and site-specific

environmental conditions.


       The methodology used in assessing the fate and toxicity of pollutants associated with TEC

wastewaters is comprised of three steps: (1) identification of pollutants of concern; (2) compilation of

physical-chemical and toxicity data; and (3) categorization assessment These steps are described in detail
                                              7-18

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below. A summary of the major assumptions and limitations associated with this methodology is also
presented.
        7.2.1   Pollutants of Concern Identification

        From 1994 through 1996, EPA conducted 20 sampling episodes to determine the presence or
absence of priority, conventional, and nonconventional pollutants at TEC faculties located nationwide. EPA
visited seven truck faculties, five rail faculties, seven barge facilities, and one closed-top hopper barge
facility. There, EPA collected grab and composite samples of untreated process wastewater and treated final
effluent Most of these samples were analyzed for 478 anarytes to identify pollutants at these faculties.
Using these data, EPA applied three criteria to identify non-pesticide/herbicide pollutants effectively removed
(i.e., pollutants of concern) by technology options: (1) detected at least two times in the subcategory influent,
(2) average concentration of the pollutant in the influent greater than five times the detection limit, and (3)
effectively treated with a removal rate of 50 percent or more. EPA applied two criteria to identify
pesticide/herbicide pollutants effectively removed by technology options: (1) detected at least one time in
subcategory wastewater, and (2) treated with a removal rate greater than 0 percent

        m the Barge Chemical and Petroleum subcategory, EPA detected 67 pollutants (25 priority
pollutants, three conventional pollutant parameters, and 39 nonconventional pollutants) in waste streams that
met the selection criteria. In the Rail Chemical subcategory, EPA detected 106 pollutants (23 priority
pollutants, two conventional pollutant parameters, and 8,1 nonconventional pollutants) in waste streams that
met the selection criteria. In the Truck Chemical subcategory, EPA detected 86 pollutants (25 priority
pollutants, three conventional pollutant parameters, and 58 nonconventional pollutants) in waste streams that
met the selection criteria.

        These pollutants are identified as pollutants of concern and are evaluated to assess their potential fate
and toxicity based on known characteristics of each chemical. As many of these pollutants as possible are
modeled in the environmental assessment based on the availability of fate and toxicity information.
                                               7-19

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        7.2.2   Compilation of Physical-Chemical and Toxicity Data

        The chemical specific data needed to conduct the fate and toxicity evaluation for this study include
 aquatic life criteria or toxic effect data for native aquatic species, human health reference doses (RfDs) and
 cancer potency slope factors (SFs), EPA maximum contaminant levels (MCLs) for drinking water
  '•        ,,       "• :,                :                       •            j        ,
 protection, Henry's Law constants, soil/sediment adsorption coefficients (K^, bioconcentration factors
 • ,„ •              ' „ ii        ,;„'•!      '        '  . •      '"       :, '.    i,       ,    •
 (BCFs) for native aquatic species, and aqueous aerobic biodegradation half-lives (BD).

        Sources of the above data include EPA ambient water qualify criteria documents and updates, EPA's
 Assessment Tools for the Evaluation of Risk (ASTER) and the associated AQUatic Information REtrieval
 System (AQUIRE) and Environmental Research Laboratory-Duluth fathead minnow data base, EPA's
 Integrated Risk Information System (JRIS), EPA's 1993-1995 Health Effects Assessment Summary Tables
 (HEAST), EPA's 1991-1996 Superfund Chemical Data Matrix (SCDM), EPA's 1989 Toxic Chemical
 Release Inventory Screening Guide, Syracuse Research Corporation's CHEMFATE data base, EPA and other
 government reports, scientific literature, and other primary and secondary data sources.  To ensure that the
 examination is as comprehensive as possible, alternative measures are taken to compile data for chemicals for
 which physical-chemical property and/or toxicity data are not presented in the sources listed above. To the
 extent possible, values are estimated for the chemicals using the quantitative structure-activity relationship
                  ,;                i	    '.i    .     -     i
 (QS AR) model incorporated in ASTER, or for some physical-chemical properties, utilizing published linear
regression correlation equations.
        (a)     Aquatic Life Data
                  ':'•' |             ' '  j , .  ' '        '     1                 i'
        Ambient criteria or toxic effect concentration levels for the protection of aquatic life are obtained
primarily from EPA ambient water quality criteria documents and EPA's ASTER.  For several pollutants,
EPA has, published ambient water quality criteria for the protection of freshwater aquatic life from acute
effects.  The acute value represents a maximum allowable 1-hour average concentration of a pollutant at any
time that protects aquatic life from lethality. For pollutants for which no acute water quality criteria have
been developed by EPA, an acute value from published aquatic toxicity test data or an estimated acute value
from the ASTER QSAR model is used. In selecting values from the literature, measured concentrations from
flow-through studies under typical pH and temperature conditions are preferred In addition, the test

                                              7-20

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organism must be a North American resident species offish or invertebrate. The hierarchy used to select the
appropriate acute value is listed below in descending order of priority.

        •      National acute freshwater quality criteria,
        •      Lowest reported acute test values (96-hour LCX for fish and 48-hour ECy/LCyy for
               daphnids).                              -
        •      Lowest reported LCX test value of shorter duration, adjusted to estimate a 96-hour exposure
               period.
        •      Lowest reported ICX test value of longer duration, up to a maximum of 2 weeks exposure.
        •      Estimated 96-hour LCjo from the ASTER QSAR model.

        BCF data are available from numerous data sources, including EPA ambient water quality criteria
documents and EPA's ASTER. Because measured BCF values are not available for several chemicals,
methods are used to estimate this parameter based on the octanol/water partition coefficient or solubility of
the chemical. Such methods are detailed in Lymanetal. (1982). Multiple values are reviewed, and a
representative value is selected according to the following guidelines:

        •      Resident U.S. fish species are preferred over invertebrates or estimated values.
        •      Edible tissue or whole fish values are preferred over nonedible or viscera values.
        •      Estimates derived from octanol/water partition coefficients are preferred over estimates
               based on solubility or other estimates, unless the estimate comes from EPA Criteria
               Documents.

The most conservative value (i.e., the highest BCF) is selected among comparable candidate values.
       (b)     Human Health Data

       Human health toxicity data include chemical-specific RED for noncarcinogenic effects and potency
SF for carcinogenic effects. RfDs and SFs are obtained first from EPA's IRIS, and secondarily from EPA's
HEAST.  The RfD is an estimate of a daily exposure level for the human population, including sensitive
subpopulations, that is likely to be without an appreciable risk of deleterious noncarcinogenic health effects
                                              7-21

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 over a lifetime (U.S. EPA, 1989b). A chemical with a low RfD is more toxic than a chemical with a high
 RED. Noncarcinogenic effects include systemic effects (e.g., reproductive, immunologicaL, neurological,
 circulatory, or respiratory toxicity), organ-specific toxicity, developmental toxicity, mutagenesis, and
 lethality. EPA recommends a threshold level assessment approach for these systemic and other effects,
 because several protective mechanisms must be overcome prior to the appearance of an adverse
 noncarcinogenic effect In contrast, EPA assumes that cancer growth can be initiated from a single cellular
 event and, therefore, should not be subject to a threshold level assessment approach. The SF is an upper
 bound estimate of the probability of cancer per unit intake of a chemical over a lifetime (U.S. EPA, 1989b).
 A chemical with a large SF has greater potential to cause cancer than a chemical with a small SF.

        Other chemical designations related to potential adverse human health effects include EPA
 assignment of a concentration limit for protection of drinking water, and EPA designation as a priority
 pollutant EPA establishes drinking water criteria and standards, such as the MCL, under authority of the
 Safe Drinking Water Act (SDWA). Current MCLs are available from IRIS. EPA has designated 126
 chemicals and compounds as priority- pollutants under the authority of the Clean Water Act (CWA).
        (c)     Physical-Chemical Property Data

        Three measures of physical-chemical properties are used to evaluate environmental fate: Henry's
Law constant (HLC), an organic carbon-water partition coefficient (K^), and aqueous aerobic biodegradation
half-life (BD).
                                                                      i

        HLC is the ratio of vapor pressure to solubility and is indicative of the propensity of a chemical to
volatilize from surface water (Lyman et al., 1982). The larger the HLC, the more likely the chemical will
volatilize. Most HLCs,are obtained from EPA's Office of Toxic Substances' (OTS) 1989 Toxic Chemical
Release Inventory Screening Guide (U.S. EPA, 1989c), the Office of Solid Waste's (OSW) Superfund
Chemical Data Matrix (U.S. EPA, 1994a), or the quantitative structure-activity relationship (QSAR) system
(U.S. EPA, 1993a), maintained by EPA's Environmental Research Laboratory (ERL) in Duluth, Minnesota.

        K,,,. is indicative of the propensity of an organic compound to adsorb to soil or sediment particles and,
therefore, partition to such media.  The larger the K^, the more likely the chemical will adsorb to solid

                                              7-22

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material. Most K^ are obtained from Syracuse Research Corporation's CHEMFATE data base and EPA's
1989 Toxic Chemical Release Inventory Screening Guide.

        BD is an empirically-derived time period when half of the chemical amount in water is degraded by
microbial action in the presence of oxygen. BD is indicative of the environmental persistence of a chemical
released into the water column.  Most BDs are obtained from Howard et al. (1991) and ERL-Duluth's QSAR,
        7.23   Categorization Assessment

        The objective of this generalized evaluation of fate and toxicity potential is to place chemicals into
groups with qualitative descriptors of potential environmental behavior and impact  These groups are based
on categorization schemes derived for:

        •      Acute aquatic toxicity (high, moderate, or slight).
        •      Volatility from water (high, moderate, slight, or nonvolatile).
        •      Adsorption to soil/sediment (high, moderate, slight, or nonadsorptive).
        •      Bioaccumulation potential (high, moderate, slight, or nonbioaccinnulative).
        •      Biodegradation potential (fast, moderate, slow or resistant).
       Using appropriate key parameters, and where sufficient data exist, these categorization schemes
identify the relative aquatic and human toxicity and bioaccumulation potential for each chemical associated
with TEC wastewater. In addition, the potential to partition to various media (air, sediment/sludge, or water)
and to persist in the environment is identified for each chemical. These schemes are intended for screening
purposes only and do not take the place of detailed pollutant assessments analyzing all fate and transport
mechanisms.

       This evaluation also identifies chemicals that:  (1) are known, probable, or possible human
carcinogens; (2) are systemic human health toxicants; (3) have EPA human health drinking water standards;
and (4) are designated as priority pollutants by EPA. The results of this analysis can provide a qualitative

                                              7-23

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indication of potential risk posed by the release of these chemicals. Actual risk depends on the magnitude,
frequency, and duration of pollutant loading; site-specific environmental conditions; proximity and number of
human and ecological receptors; and relevant exposure pathways. The following discussion outlines the
categorization schemes. Ranges of parameter values defining the categories are also presented.
        (a)     Acute Aquatic Toxicify

        Key Parameter: Acute aquatic life criteria/LCso or other benchmark

     *   Using acute criteria or lowest reported acute test results (generally 96-hour and 48-hour durations for
fish and invertebrates, respectively), chemicals are grouped according to their relative short-term effects on
aquatic life.                                                                          •
                 1 :                 '                 "',,,„.       t
                                   i   ,              „         L
        Categorization Scheme:

        AT < 100                            Highly toxic
        1,000 > AT > 100                     Moderately toxic
        AT > 1,000                          Slightly toxic

        This scheme, used as a rule-of-thumb guidance by EPA's OPPT for Premanufacture Notice (PMN)
evaluations, is used to indicate chemicals that could potentially cause lethality to aquatic life downstream of
discharges.


        (b)     Volatility from Water

        Key Parameter: Henry's Law constant (HLC) (atm-mVmol)
                TTT ~    Vapor Pressure (atm)
                HLC =  —	-—-                                        rpr, \A\
                          Solubility (mol/m3)                                         V  H'   '
                                              7-24

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       HLC is the measured or calculated ratio between vapor pressure and solubility at ambient conditions.
This parameter is used to indicate the potential for organic substances to partition to air in a two-phase (air
and water) system. A chemical's potential to volatilize from surface water can be inferred from HLC.
       Categorization Scheme:

       HLC>10-3                           Highly volatile
       10-3>HLC>10-5                     Moderately volatile
       10-*>HLC>3xlO-7                  Slightly volatile
       HLC<3xlO-7   -.                   Essentially nonvolatile

       This scheme, adopted from Lyman et al. (1982), gives an indication of chemical potential to
volatilize from process wastewater and surface water, thereby reducing the threat to aquatic life and human
health via contaminated fish consumption and drinking water, yet potentially causing risk to exposed
populations via inhalation.
       (c)     Adsorption to Soil/Sediments

       Key Parameter: Soil/sediment adsorption coeffici
       K^. is a chemical-specific adsorption parameter for organic substances that is largely independent of
the properties of soil or sediment and can be used as a relative indicator of adsorption to such media. K^. is
highly inversely correlated with solubility, well correlated with octanol-water partition coefficient, and fairly
well correlated with BCJ.
                                              7-25

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        Categorization Scheme:
             10,000                         Highly adsorptive
        10,000 >]£«>. 1,000                  Moderately adsorptive
        1,000>KOC>10                      Slightly adsorptive
        Koc<10                             Essentially nonadsorptive

        This scheme is devised to evaluate substances that may partition to solids and potentially
contaminate sediment underlying surface water or land receiving sewage sludge applications.  Although a
high KB, value indicates that a chemical is more likely to partition to sediment, it also indicates that a chemical
may be less bioavailable.
        (d)     Bioaccumulation Potential

        Key Parameter Bioconcentration Factor (BCF)
          _ Equilibrium chemical concentration in organism (wet weight).
                       Mean chemical concentration in water                             "'  '
       BCF is a good indicator of potential to accumulate in aquatic biota through uptake across an external
surface membrane.

       Categorization Scheme:

       BCF > 500   ...                      High potential
       500 > BCF > 50                      Moderate potential
       50>BCF>5                        Slight potential
       BCF < 5                             Nonbioaccumulative
                                              7-26

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        This scheme is used to identify chemicals that may be present in fish or shellfish tissues at higher
levels than in surrounding water. These chemicals may accumulate in the food chain and increase exposure to
higher trophic level populations, including people consuming their sport catch or commercial seafood.
        (e)     Biodegradation Potential

        Key Parameter: Aqueous Aerobic Biodegradation Half-life (BD) (days)

        Biodegradation, photolysis, and hydrolysis are three potential mechanisms of organic chemical
transformation in the environment A BD is selected to represent chemical persistence because of its
importance and the abundance of measured or estimated data relative to other transformation mechanisms,

        Categorization Scheme:

        BDs 7                             Fast
        7
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       7.2.4   Assumptions and Limitations


       The major assumptions and limitations associated with the data compilation and categorization

schemes are summarized in the following two sections.
       (a)     Data Compilation
       •      If data are readily available from electronic data bases, other primary and secondary sources
               are not searched.

       •      Much of the data are estimated and, therefore, can have a high degree of associated
               uncertainty.

       •      For some chemicals, neither measured nor estimated data are available for key categorization
               parameters. In addition, chemicals identified for this study do not represent a complete set
               of wastewater constituents. As a result, this study does not completely assess TEC
               wastewater.
       (b)     Categorization Schemes
              Receiving waterbody characteristics, pollutant loading amounts, exposed populations, and
              potential exposure routes are not considered.

              Placement into groups is based on arbitrary order of magnitude data breaks for several
              categorization schemes.  Combined with data uncertainty, this may lead to an overstatement
              or understatement of the characteristics of a chemical.

              Data derived from laboratory tests may not accurately reflect conditions in the field.

              Available aquatic toxicity and bioconcentration test data may not represent the most
              sensitive species.

              The biodegradation potential may not be a good indicator of persistence for organic
              chemicals that rapidly photoxidize or hydrolyze, since these degradation mechanisms are not
              considered.
                                              7-28

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7.3    DOCUMENTED ENVIRONMENTAL IMPACTS


       State and Regional environmental agencies ate contacted, and State 304(1) Short Lists, State Fishing

Advisories, and published literature are reviewed for evidence of documented environmental impacts on

aquatic life, human health, POTW operations, and the quality of receiving water due to discharges of

pollutants from TEC facilities. Reported impacts are compiled and summarized by study site and facility.
7.4    REFERENCES
Bergstrom, J.C., 1993. Benefits and Cost Transfer in Natural Resource Planning. Sixth Interim Report
Athens, GA: University of Georgia, Department of Agricultural and Applied Economics.

Fisher, A; L. Chestnut; and D. Violette. 1989. "The Value of Reducing Risks of Death: A Note on New
Evidence." Journal of Policy Analysis and Management, Vol. 8, No. 1.

Fisher, A., and R. Raucher, 1984.  "Intrinsic benefits of improved water quality: Conceptual and empirical
perspectives." In V. Kerry Smith and Anne White, Editors. Advances in Applied Microeconomics. Vol. 3,
pp. 37-66. Greenwich, CT: JAI Press.

Harpman, D.A., M.P. Welsh, and R.C. Bishop, 1994. "Nonuse economic value: Emerging policy analysis
tool." Rivers. Vol. 4, No. 4.

Howard, P.H. Editor. 1991. Handbook of Environmental Degradatin Rates. Chelsea, MI: Lewis Publishers,
Inc.

Knight-Ridder Information. 1996. Knight-Ridder Information Database - DIALOG, Knight-Ridder
Information, Inc., Palo Alto, CA.

Lyke, A.  1993.  "Discrete Choice Models to Value Changes in Environmental Quality: A Great Lakes Case
Study." Thesis submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy
(Agricultural Economics) at the University of Wisconsin-Madison.

Lyman, W.J.; W.F. Reehl; and D.H. Rosenblatt 1982. Handbook of Chemical Property Estimation Methods
- Environmental Behavior of Organic Compounds. New York, NY;  McGraw-Hill Book Company.

Metcalf& Eddy, Inc. 1972. Wastewater Engineering. New York, NY: McGraw-Hill Book Company.

National Oceanic and Atmospheric Administration and U.S. Environmental Protection Agency. 1989a.
Strategic Assessment of Near Coastal Waters. "Susceptibility of East Coast Estuaries to Nutrient
Discharges: Albemarle/Pamlico Sound to Biscayne Bay." Rockville, MD: Strategic Assessment Branch.
NOAA.
                                            7-29

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National Oceanic and Atmospheric Administration and U.S. Environmental Protection Agency. 1989b.
Strategic Assessment of Near Coastal Waters. "Susceptibility of East Coast Estuaries to Nutrient
Discharges: Passamaquoddy Bay to Chesapeake Bay." Rockville, MD: Strategic Assessment Branch.
NOAA.

National Oceanic and Atmospheric Administration and U.S. Environmental Protection Agency. 1989c.
Strategic Assessment of Near Coastal Waters. "Susceptibility and Status of Gulf of Mexico Estuaries to
Nutrient Discharges." Rockville, MD:  Strategic Assessment Branch. NOAA.
   :•. • '   ,    •     •'":',  '      •  •   'i'. !'   ,. I  " •- •:''•,    '"  '' ;    •  '" :••':}'      ',
National Oceanic and Atmospheric Administration and U.S. Environmental Protection Agency. 1991.
Strategic Assessment of Near Coastal Waters. "Susceptibility and Status of West Coast Estuaries to Nutrient
Discharges: San Diego Bay to Puget Sound" Rockville, MD: Strategic Assessment Branch. NOAA.

U.S. Bureau of the Census. 1995. Statistical Abstract of the United States: 199S. Washington, DC: U.S.
Bureau of the Census.

U.S. Environmental Protection Agency. 1980. Ambient Water Quality Criteria Documents. Washington, DC:
U.S. EPA, Office of Water. EPA 440/5-80 Series. [Also refers to any updated criteria documents (EPA
440/5-85 and EPA 440/5-87 Series)].

U.S. Environmental Protection Agency. 1982. Fate of Priority Pollutants in Publicly-Owned Treatment
Works "50 POTW Study." Washington, DC: U.S. EPA, Office of Water. EPA 440/1-2/303.
                 " ;'  '        :  '   I'.'      .  '     ' ,  '    '','•.'.:  I
U.S. Environmental Protection Agency. 1986. Report to Congress on the Discharge of Hazardous Wastes to
Pubticty-Owned Treatment Works (Domestic Sewage Study). Washington, DC: U.S. EPA, Office of Water
Regulations and Standards.

U.S. Environmental Protection Agency. 1987. Guidance Manual for Preventing Interference at POTWs.
Washington,DC: U.S.EPA.

U.S. Environmental Protection Agency. 1989a.  Exposure Factors Handbook. Washington, DC: U.S.EPA,
Office of Health and Environmental Assessment EPA/600/8-89/043.

U.S. Environmental Protection Agency. 1989b. Risk Assessment Guidance for Superfund (RAGS), Volume
I, Human Health Evaluation Manual (Part A). Washington, DC: U.S. EPA, Office of Emergency and
Remedial Response. EPA/540/1-89/002. Available from NTIS, Springfield, VA. PB-90-155581.

U.S. Environmental Protection Agency. 1989c. Toxic Chemical Release Inventory - Risk Screening Guide.
Washington, DC: U.SrEPA, Office of Pesticides and Toxic Substances. EPA/560/2-89-002.

US. Environmental Protection Agency. 1990a, CERCLA Site Discharges to POTWs: Guidance Manual.
Washington, DC: U.S. EPA, Office of Emergency and Remedial Response. EPA/540/G-90/005.

U.S. Environmental Protection Agency. 1990b. National Water Quality Inventory - Report to Congress.
Washington, DC: U.S. EPA, Office of Water.
                                            7-30

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 U.S. Environmental Protection Agency. 1991& Technical Support Document for Water Quality-Based
 Toxics Control. Washington, DC: U.S. EPA, Office of Water. EPA/505/2-90-001. Available from MTIS
 Springfield, VA. PB91-127415.

 U.S. Environmental Protection Agency. 1991b. National 304(1) Short List Database. Compiled from Office
 of Water Files dated April/May 1991. Washington, DC; U.S. EPA, Office of Water.

 U.S. Environmental Protection Agency. 1992a. Mixing Zone Dilution Factors for New Chemical Exposure
 Assessments, Draft Report, October 1992. Washington, DC: U.S. EPA, Contract No. 68-D9-0166 Task
 No. 3-35.                                   ,

 U.S. Environmental Protection Agency. 1992b. Needs Survey. Washington, DC: U.S. EPA, Office of
 Wastewater Enforcement and Compliance.    .                         .                .

 U.S. Environmental Protection Agency. 1993a. QSAR. Duluth,MN: U.S. EPA, Environmental Research
 Laboratory.                                     •

 U.S. Environmental Protection Agency. 1993b. Environmental Assessment of the Pesticide Manufacturing
 Industry. Washington, DC: U.S. EPA, Office of Water.
                                                                           f
 U.S. Environmental Protection Agency. 1993-1996.  Permit Compliance System. Washington, DC: U.S.
 EPA, Office of Wastewater Enforcement and Compliance.

 U.S. Environmental Protection Agency. 1994a. Superfund Chemical Data Matrix. Washington, DC: U.S.
 EPA, Office of Solid Waste.

 U.S. Environmental Protection Agency. 1994b. 1994 Detailed Questionnaire for the Transportation
 Equipment Cleaning Industry. Washington, DC: U.S. EPA, Office of Water, Engineering and Analysis
 Division.                        '

 U.S. Environmental Protection Agency. 1994-1996a. Industrial Facilities Discharge (IFD) Fila Washington,
 DC: U.S..EPA, Office of Wetlands, Oceans, and Watersheds.

 U.S. Environmental Protection Agency. 1994-1996b. Gage File. Washington, DC: U.S. EPA, Office of
 Wetlands, Oceans and Watersheds.

U.S. Environmental Protection Agency. 1995a. National Risk Management Research Laboratory Data Base.
 Cincinnati, Ohio: U.S. EPA, Office of Research and Development

U.S. Environmental Protection Agency. 1995b. Environmental Assessment of the Proposed Effluent
 Guidelines for the Metal Products and Machinery Industry (Phase I). Washington, DC: U.S. EPA, Office of
Water.

U.S. Environmental Protection Agency. 1995c. Environmental Assessment of Proposed Effluent Guidelines
for the Centralized Waste Treatment Industry. Washington, DC: U.S. EPA, Office of Water
EPA821-R-95-003.
                                           7-31

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U.S. Environmental Protection Agency. 1995d Standards for the Use and Disposal of Sewage Sludge: Final
Rules. 40CFRPart257etseq. Washington, DC: Federal Register. October 1995.

U.S. Environmental Protection Agency; 1995e. Regulatory Impact Analysis of Proposed Effluent Limitations
Guidelines and Standards for the Metal Products and Machinery Industry (Phase I). Washington, DC: U.S.
EPA, Office of Water. EPA/821-R-95-023.

U.S. Environmental Protection Agency. 1995f. National Listing of Fish and Wildlife Consumption
Advisories. Washington, DC: U.S. EPA, Office of Water.

U.S. EnvironmentalProtection Agency. 1996a. PATHSCAN. Washington, DC: U.S. EPA, Office of Water
WQAB Interactive Procedure.

U.S. EnviromneBtal Protection Agency. 1996b. Drinking Water Supply (DWS) File. Washington, DC: U.S.
EPA, Office of Wetlands, Oceans and Watersheds.

U.S. Environmentai Protection Agency. 1996c. Federal Reporting Data System (FRDS). Washington, DC:
US, EPA, Office of Ground Water and Drinking Water.

U.S. Environmental Protection Agency. 1997. TEC Pollutant Loading Files. Washington, DC: U.S. EPA,
Office of Water, Engineering and Analysis Division.

U.S. Department of the Interior Fish and Wildlife Service. 1991. National Survey of Fishing, Hunting and
Wildlife Associated Recreation.

Versar, Inc. 1992. Upgrade of Flow Statistics Used to Estimate Surface Water Chemical Concentrations for
Aquatic and Human Exposure Assessment Report prepared by Versar Inc. for the U.S. EPA, Office of
Pollution Prevention and Toxics.

Violette, D., and L. Chestnut 1986. Valuing Risks: New Information on the Willingness to Pay for Changes
in Fatal Risks. Report to the U.S. EPA, Washington, DC. Contract No. 68-01-7047.
                                                        l
Viscusi,K 1992. Fatal Tradeoffs: Public & Private Responsibilities for Risk. New York, NY: Oxford
University Press.

Walsh, R.; D. Johnson; and J. McKean. 1990. Nonmarket Values from Two Decades of Research on
Recreational Demand. Advances in Applied Micro-Economics, Vol.  5.
                                            7-32

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                                         CHAPTERS
          ENVmONMENTAL ASSESSMENT AND BENEFITS ANALYSIS
 8.1    OVERVIEW

        The environmental assessment quantifies the water quality-related benefits for TEC facilities based
 on site-specific analyses of current conditions and the conditions that would be achieved by process changes
 under proposed BAT (Best Available Technology) and PSES (Pretreatment Standards for Existing Sources)
 controls. The U.S. EPA estimated in-stream pollutant concentrations for 157 priority and nonconventional
 pollutants from three subcategories (Truck Chemical, Rail Chemical, Barge Chemical and Petroleum) of
 direct and indirect discharges using stream dilution modeling. The potential impacts and benefits to aquatic
 life are projected by comparing the modeled in-stream pollutant concentrations to published EPA aquatic life
 criteria guidance or to toxic effect levels.

        Potential adverse human health effects and benefits are projected by: 1) comparing estimated in-
 stream concentrations to health-based water quality toxic effect levels or criteria (based on a target risk of
 ID"6 for carcinogens), as discussed in Sections 8.2. and 8.3 of this chapter; and 2) estimating the potential
 reduction of carcinogenic risk and noncarcinogenic hazard (systemic) from consuming contaminated fish or
 drinking water, discussed in Section 8.4. Upper-bound individual cancer risks, population risks, and systemic
 hazards are estimated using modeled in-stream pollutant concentrations and standard EPA assumptions.
 Modeled pollutant concentrations in fish and drinking water are used to estimate cancer risk (based on a
 target risk of 10*6 for carcinogens) and systemic hazards among the general population, sport anglers and
 their families, and subsistence anglers and their families.         .

       EPA uses the findings from the analyses of reduced occurrence of in-stream pollutant concentrations
 in excess of both aquatic life and human health ambient water quality criteria (AWQC) or toxic effect levels
 to assess improvements in recreational fishing habitats that are impacted by TEC wastewater discharges
 (ecological benefits).  The elimination of pollutant concentrations in excess of AWQC is expected to result in
, significant improvements in aquatic habitats. EPA evaluates these recreational benefits by applying a model
 that considers the increased value of a contaminant-free fishery. The monetary value of improved

                                              8-1

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recreational fishing opportunity is estimated by first calculating the baseline value of the receiving stream
using a value per person day of recreational fishing, and the number of person-days fished on the receiving
stream. The value of improving water quality in this fishery, based on the increase in value to anglers of
achieving contaminant-free fishing, is then calculated.

        In addition the Agency expects the proposed regulation would augment "nonuse" value (e.g. option,
existence, and bequest value) of the water resources affected by TEC discharges. Nonuse benefits are not
associated with current use of the affected ecosystem or habitat, but arise rather from 1) the realization of the
improvement in the affected ecosystem or habitat resulting from reduced effluent discharges, and 2) the value
that individuals place on ibs potential for use sometime in the future.  This nonuse value is also included in
this analysis; it is calculated using a conservative ratio of use to nonuse values. Improvements in aquatic
habitats, discussed in Section 8.5, are then expected to improve the quality and value of recreational fishing
opportunities and nonuse values of the receiving streams.

        Potential inhibition of operations at publicly owned treatment works (POTW) and sewage sludge
contamination (thereby limiting its  use for land application) are also evaluated based on current and proposed
prctreatment levels. This discussion can be found in Section 8.6 of this chapter. Inhibition of POTW
operations is estimated by comparing modeled POTW influent concentrations to available inhibition levels;
contamination of sewage sludge is estimated by comparing projected pollutant concentrations in sewage
sludge to available EPA regulatory standards. Economic productivity benefits are estimated on the basis of
the incremental quantity of sludge that, as a result of reduced pollutant discharges to POTWs, meets criteria
for the generally less expensive disposal method, namely land application and surface disposal.

       la addition, the potential fate and toxicity of pollutants of concern associated with TEC wastewater
are evaluated based on known characteristics of each chemical. See Section 8.7 for this discussion. Recent
literature and studies are also reviewed and State and Regional environmental agencies are contacted for
evidence of documented environmental impacts on aquatic life, human health, POTW operations, and on the
quality of receiving water. Reported impacts are summarized in Section 8.8 of this chapter.

       These analyses are performed for discharges from representative sample sets of six direct Barge
Chemical and Petroleum facilities, 40 indirect Truck Chemical facilities, 12 indirect Rail Chemical facilities,
and one indirect Barge  Chemical and Petroleum facility. Results are extrapolated to the national level based

                ,   '    •           •  '   "''   8-2     '        '''":  ,  :       -   '    -

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on the statistical methodology used for estimated costs, loads, and economic impacts. This chapter provides
the results of these analyses, organized by the type of discharge (direct and indirect) and type of facility
(Truck Chemical, Rail Chemical, and Barge Chemical and Petroleum). The methodology and data used in
these analyses are described in detail in the ET^viyonmsntflll Assessment of Proposed Effluent Guidelines for
the Transnortation Eauinment Cleaning Ihdustrv
8.2    WATER QUALITY IMPACTS: DIRECT DISCHARGERS

       The water quality impacts of direct TEC discharges at current and proposed BAT treatment levels
are evaluated by comparing projected in-stream pollutant concentrations with aquatic life and human health
AWQC using stream modeling techniques. Human health criteria or toxic effect levels are developed in two
ways: 1) for consumption of both water and organisms, and 2) lor consumption of organisms only.  The
following sections summarize potential human health and aquatic life impacts on receiving stream water
quality for direct Barge Chemical and Petroleum dischargers.
       8.2.1 Sample Set for Barge Cliemical and Petroleum Facilities                            '

       Water quality modeling is performed for a representative sample set of six direct Barge Chemical
and Petroleum facilities discharging 60 pollutants to six receiving streams. Under the proposed BAT
regulatory option, modeled pollutant loadings are reduced 95 percent

       Human Health: At current discharge levels, in-stream concentrations of two pollutants are projected
to exceed the human health criteria or toxic effect levels developed for consumption of both water and
organisms in two of the_six receiving streams.  The proposed BAT regulatory option will reduce excursions
of these criteria to one receiving stream.  Excursions of human health criteria or toxic effect levels developed
for consumption of organisms only are projected in one of the six receiving streams due to the discharge of
these two pollutants. The proposed BAT regulatory option will eliminate excursions of these criteria or toxic
effect levels.
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         Aquatic Life: At both current and proposed BAT discharge levels, in-stream concentrations are not
 projected to exceed aquatic life criteria (acute or chronic) or toxic effect levels.
        8.2.2 National Extrapolation for Barge Chemical and Petroleum Facilities

        Modeling results of the sample set are extrapolated to 14 Barge Chemical and Petroleum facilities
 discharging the same 60 pollutants to 14 receiving streams.
                1 „«',:•           .      !                 ,.           *  ,, „    ;
        Human Health: Extrapolated in-stream concentrations of two pollutants are projected to exceed
 human health criteria or toxic effect levels developed for water and organisms consumption in six of the 14
 receiving streams at current discharge levels. A total of nine excursions is projected in these streams.  The
 proposed regulation, will reduce these excursions to two pollutants in three receiving streams.  Total
 excursions will be reduced from nine to six at proposed BAT discharge levels. In addition, six excursions of
 hitman health criteria or toxic effect levels developed for organisms consumption only are projected in three
 of the 14 receiving streams at current discharge levels. These excursions will be eliminated at proposed BAT
 discharge levels.

        Aquatic Life:  At both current and proposed BAT discharge levels, in-stream concentrations are not
 projected to exceed aquatic life criteria (acute or chronic) or toxic effect levels. Therefore, results are not
 extrapolated to the national level.
8.3     WATER QUALITY IMPACTS AND POTW IMPACTS: INDIRECT DISCHARGES
    :               i               '  '  '     '     ,          '            'I
        The water quality impacts of indirect TEC discharges at current and proposed PSES treatment levels
are evaluated by comparing projected in-stream pollutant concentrations with aquatic life and human health
AWQC using stream modeling techniques. Human health criteria or toxic effect levels are developed in two
ways: 1) for consumption of both water and organisms, and 2) for consumption of organisms only.  The
following sections summarize potential human health and aquatic life impacts on POTW operations and their
receiving stream water quality for indirect Truck Chemical, Rail Chemical, and Barge Chemical and
Petroleum dischargers.

                .   ",          ,      .  •     ,  :,  8-4     '    ',  '       '"'  ;

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        8.3.1  Truck Chemical Facilities

        8.3.1.1 Sample Set

        Water quality modeling is performed for a representative sample set of 40 Truck Chemical facilities
which discharge 80 pollutants to 35 POTWs with outfalls on 35 receiving streams. Under the proposed
pretreatment regulatory option, modeled pollutant loadings are reduced 80 percent.

        Human Health:  In-stream concentrations of one pollutant are projected to exceed human health
criteria or toxic effect levels in two of the 35 receiving streams at current discharge levels. This result applies
to both the criteria developed for water and organisms consumption and the criteria developed for organisms
consumption only. The proposed pretreatment regulatory option eliminates excursions of human health
criteria or toxic effect levels.

        Aquatic Life:  In-stream pollutant concentrations are also projected to exceed chronic aquatic life
criteria or toxic effect levels for one pollutant in eight of the 35 receiving streams at current discharge levels.
Proposed pretreatment discharge levels reduce projected excursions to this one pollutant in six of the 35
receiving streams. No excursions of acute aquatic life criteria or toxic effect levels are projected.

        POTW Operations: In addition, the potential impact of the 40 Truck Chemical facilities are
evaluated in terms of inhibition of POTW operation and contamination of sludge. No inhibition or sludge
contamination problems are projected at the 35 POTWs receiving wastewater discharges.
        8.3.1.2 National Extrapolation

        Modeling results of the sample set are extrapolated to 288 Truck Chemical faculties discharging the
same 80 pollutants to 264 POTWs located on 264 receiving streams.

        Human Health: Extrapolated in-stream pollutant concentrations of one pollutant are projected to
exceed human health criteria or toxic effect levels in 14 of the 264 receiving streams at current discharge
                                                                                   \    ' "
levels. This result applies to both the criteria developed for water and organisms consumption and the

                                               8-5

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 criteria developed for organisms consumption only.  Excursions of human health criteria or toxic effect
 levels are eliminated at the proposed pretreatment regulatory option.

         Aquatic Life: Extrapolated in-stream concentrations of one pollutant are also projected to exceed
 chronic aquatic life criteria or toxic effect levels in 49 of the 264 receiving streams at current discharge levels.
 Proposed pretreatment discharge levels reduce excursions to one pollutant in 37 of the 264 receiving streams.
 A total of 49 excursions in 49 receiving streams at current conditions will be reduced to 37 excursions in 37
 receiving streams at the proposed pretreatment regulatory option.

        POTW Operations: Since no .impacts at POTWs are projected for the sample set, results are not
 extrapolated to the national level.
        833 Rail Chemical Facilities

        8.3.2.1 Sample Set

        Water quality modeling is performed for a representative sample set of 12 indirect Rail Chemical
facilities that discharge 103 pollutants to 11 POTWs with outfalls on 11 receiving streams. Under the
proposed pretreatment regulatory option, modeled pollutant loadings are reduced 42 percent

        Human Health:  At current discharge levels, in-stream concentrations of three pollutants are
projected to exceed human health criteria or toxic effect levels developed for water and organisms
consumption in five of the 11 receiving streams. At the proposed pretreatment discharge levels, one pollutant
is projected to exceed these criteria in the five receiving streams. Excursions of human health criteria or toxic
effect levels developed-for organisms consumption only are projected for one pollutant in two of the 11
receiving streams.  The proposed pretreatment regulatory option will eliminate these excursions.

        Aquatic Life: la-stream concentrations of four pollutants are also projected to exceed chronic
aquatic life criteria or toxic effect levels in two of the 11 receiving streams at current discharge levels.
Proposed pretreatment discharge levels reduce projected excursions to three pollutants in one of the 11
                                               8-6

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receiving streams. The one excursion of acute aquatic life criteria or toxic effect levels is eliminated by the
proposed pretreatment regulatory option.

        POTW Operations: In addition, the potential impact of the 12 Rail Chemical facilities, which
discharge to 11 POTWs, are evaluated in terms of inhibition of POTW operation and contamination of
sludge. At current discharge levels, inhibition problems from four pollutants are projected at six of the 11
POTWs receiving wastewater discharges.  The proposed pretreatment regulatory option reduces inhibition
problems to four POTWs. No sludge contamination problems are projected at the 11 POTWs receiving
wastewater discharges.                                    ,
        8.3.2.2 National Extrapolation

        Modeling results of the sample set are extrapolated to 38 Rail Chemical facilities discharging the
same 103 pollutants to 37 POTWs with outfalls on 37 receiving streams.

        Human Health: Extrapolated in-stream pollutant concentrations are projected to exceed human
health criteria or toxic effect levels developed for water and organisms consumption in 16 of the 37 receiving
streams at both current and proposed pretreatment discharge levels. A total of 32 excursions due to the
discharge of three pollutants will be reduced to 16 excursions due to the discharge of one pollutant
Additionally, eight excursions of human health criteria or toxic effect levels developed for organisms
consumption only are projected in eight of the 37 receiving streams. These excursions will be eliminated by
the proposed pretreatment regulatory option.

        Aquatic Life: Extrapolated in-stream pollutant concentrations are also projected to exceed chronic
aquatic life criteria or texic effect levels in eight of the 37 receiving streams at current discharge levels.  A
total of four pollutants at current discharge levels are projected to exceed in-stream criteria or toxic effect
levels. Proposed pretreatment discharge levels will reduce projected excursions to three pollutants in six of
the 37 receiving streams.  A total of 26 excursions at current conditions will be reduced to 17 excursions as a
result of the proposed pretreatment regulatory option. The six excursions of acute aquatic life criteria or
toxic effect levels projected in six receiving streams will be eliminated by the proposed pretreatment
regulatory option.

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        POTW Operations: In addition, extrapolated inhibition problems are projected at 21 of the 37 of
 the POTWs receiving wastewater discharges at current discharge levels. Proposed pretreatment discharge
 levels will reduce projected problems to 13 of the 37 POTWs. A total of 42 inhibition problems at current
 conditions will be reduced to 34 inhibition problems as a result of the proposed pretreatment There are no
 sludge contamination problems projected at any of the 37 POTWs.
        8.3.3 Barge Chemical and Petroleum Facilities

        8.3.3.1 Sample Set

        The one indirect Barge Chemical and Petroleum facility is not being proposed for pretreatment
                  M!    ,   •    ' "     "	!"   '              ',,"',!     ,               .  ,t
 standards.  EPA did, however, evaluate the effects of the faculty's discharge on a POTW and its receiving
 stream.  Water quality modeling is performed for the one indirect Barge Chemical and Petroleum facility that
 discharges 60 pollutants to one POTW with an outfall on one receiving stream. Under the proposed
 pretreatment regulatory option, modeled pollutant loadings are reduced 54 percent
                . l|"' !|               ,.,          ,l! "  :'  i1  * •       '           J
        Human Health:  At current and proposed pretreatment discharge levels, the in-stream
 concentrations are not projected to exceed human health criteria or toxic effect levels.  This result applies to
 both the criteria developed for water and organisms consumption and the criteria developed for organisms
 consumption only.

        Aquatic Life: At both current and proposed pretreatment discharge levels, no in-stream pollutant
concentrations are expected to exceed aquatic life criteria (acute or chronic) or toxic effect levels.

        POTW Operations: In addition, the potential impact of the one Barge Chemical and Petroleum
facility is evaluated in terms of inhibition of POTW operations and contamination of sludge.  No inhibition or
sludge contamination problems are projected at the one POTW receiving wastewater.
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        8,3.3.2 National Extrapolation

        Since no excursions of aquatic life and human health AWQC or impacts at POTWs are projected for
the sample set, results ate not extrapolated to the national level.                         ,
8.4     HUMAN HEALTH RISKS AND BENEFITS

        The results of this analysis indicate the potential benefits to human health by estimating the
(carcinogenic and systemic) associated with current and reduced pollutant levels in fish tissue and drinking
water. The following two sections summarize potential human health impacts from the consumption of fish
tissue and drinking water derived from water bodies impacted by direct and indirect TEC discharges.
        8.4.1 Potential Reduction of Carcinogenic Risk

        The excess annual cancer cases at current discharge levels and, therefore, at proposed BAT and
proposed pretreatment discharge levels are projected to be far less than 0.5 for all populations evaluated from
the ingestion of contaminated fish and drinking water for both direct and indirect TEC (Truck Chemical, Rail
Chemical, and Barge Chemical and Petroleum) wastewater discharges. A monetary value of this benefit to
society is, therefore, not projected.
        8.4.2 Potential Reduction of Noncarcinogenic (Systemic) Hazard

        Systemic'toxicant effects are projected from fish consumption only for indirect Truck Chemical
discharges. For Truck Chemical discharges (sample set), systemic effects are projected to result from the
discharge of one pollutant to seven receiving streams at current discharge levels.  An estimated population of
4,284 subsistence anglers and their families are projected to be affected at current discharge levels. At
proposed pretreatment discharge levels, systemic effects are projected to result from the discharge of one
pollutant to three receiving streams.  The affected population is reduced to 687 subsistence anglers and their
families. When results are extrapolated to the national level, an estimated population of 14,173 subsistence

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 anglers and their families are projected to be affected from the discharge of one pollutant to 39 receiving
 streams at current discharge levels. As a result of the proposed pretreatment regulatory option, the affected
 population is reduced to 3,492 (on 16 receiving streams). Monetary values for the reduction of systemic
 toxic effects cannot currently be estimated.
 8.5    ECOLOGICAL BENEFITS

        Potential ecological benefits of the proposed regulation, based on improvements in recreational
 fishing habitats, are projected for only direct Barge Chemical and Petroleum wastewater discharges and
 indirect Truck Chemical wastewater discharges. The proposed regulation is not projected to completely
 eliminate in-stream concentrations in excess of aquatic life and human health AWQC in any stream receiving
 wastewater discharges from indirect Barge Chemical and Petroleum and indirect Rail Chemical facilities.
 Results of the analysis, including non-monetizable benefits are presented in the following sections.
        8.5.1 Direct Barge Chemical and Petroleum Discharges

        For the direct Barge Chemical and Petroleum sample set, concentrations in excess of AWQC are
projected to be eliminated at one receiving stream as a result of the proposed BAf regulatory option. The
resulting estimate of the increase in value of recreational fishing to anglers on the improved receiving stream
is $54,400 to $194,000 (1994 dollars). Based on extrapolated data to the national level, the proposed
regulation is projected to completely eliminate in-stream concentrations in excess of AWQC at three
receiving streams. The resulting estimate of the increase in value of recreational fishing to anglers ranges
from $157,000 to $562,000.

        Individuals who never visit or otherwise use a natural resource might nevertheless be affected by
changes in its status or quality. For this analysis, EPA conservatively estimated that nonuse benefits
compose one-half of recreational fishing benefits.  The resulting estimate of the nonuse value of the proposed
BAT regulatory option on the improved receiving stream is $27,200 to $97,000 (1994 dollars). Based on
extrapolated data to the national level, the resulting increase in nonuse value ranges from $78,500 to
$281,000 (1994 dollars).
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        8.5.2 Indirect Truck Chemical Discharges

        For the indirect Truck Chemical sample set, concentrations in excess of AWQC are projected to be
eliminated at two receiving streams as a result of the proposed pretreatment regulatory option.  The resulting
estimate of the increase in value of recreational fishing to anglers on the improved receiving streams is
$248,000 to $886,000 (1994 dollars). Based on extrapolated data to the national level, the proposed
regulation is projected to completely eliminate in-stream concentrations in excess of AWQC at 12 receiving
streams. The resulting estimate of the increase in value of recreational fishing to anglers ranges from
$1,494,000 to $5,334,000.

        Individuals who never visit or, otherwise use a natural resource might nevertheless be affected by
changes in its status or quality.   For this analysis, EPA conservatively estimated that nonuse benefits
compose one-half of recreational fishing benefits.  The resulting estimate of the nonuse value of the proposed
PSES regulatory option on the improved receiving streams is $124,000 to $443,000 (1994 dollars).  Based
on extrapolated data to the national level, the resulting increase in nonuse value ranges from $747,000 to
$2,667,000 (1994 dollars).
       8.5.3 Non-monetizable Benefits

       The estimated benefit of improved recreational fishery opportunities is only a limited measure of the
value to society of the improvements in aquatic habitats expected to result from the proposed regulation.
Additional benefits, which could not be quantified in this assessment, include increased assimilation capacity
of the receiving stream, protection of terrestrial wildlife and birds that consume aquatic organisms,
maintenance of an aesthetically pleasing environment, and improvements to other recreational activities such
as swimming, water siding, boating, and wildlife observation.  Such activities contribute to the support of
local and State economies.
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 8.6    ECONOMIC PRODUCTIVITY BENEFITS

        Potential economic productivity benefits, based on reduced sewage sludge contamination and sewage
 sludge disposal costs, are evaluated at POTWs receiving the wastewater discharges from indirect TEC
                                                                      i
 facilities. No sludge contamination problems are projected at the 35 POTWs receiving wastewater from 40
 Truck Chemical facilities, at the 11 POTWs receiving wastewater from 12 Rail Chemical facilities, or at the
 one POTW receiving wastewater from the one Barge Chemical and Petroleum facility. Therefore, no
 economic productivity' benefits are projected as a result of the proposed regulation.
 8.7     POLLUTANT FATE AND TOXKTTY

        Human exposure, ecological exposure, and risks from environmental releases of toxic chemicals
 depend largely on toxic potency, inter-media partitioning, and chemical persistence. These factors are
 dependent on chemical-specific properties relating to physical state, hydrophobicity/lipophilicity, reactivity,
 and lexicological effects on living organisms. For example, volatile pollutants potentially cause risk to
 exposed populations via inhalation, and pollutants with high potential to bioaccumulate in aquatic biota
 potentially accumulate in the food chain and can cause increased risk to higher trophic level organisms and to
 exposed human populations via consumption offish and shellfish. They are also dependent on the media of
 release and site-specific environmental conditions. The following sections present the potential fate and
 toxicity of pollutants discharged by Truck Chemical, Rail Chemical, and Barge Chemical and Petroleum
 facilities, as well as a discussion on pollutants not evaluated in the environmental assessment •
        8.7.1 Truck Chemical Discharges

        EPA identified 86 pollutants of concern (priority, nonconventional, and conventional) in waste
streams from Truck Chemical facilities. Most of the 86 pollutants have at least one known toxic effect
Based on available physical-chemical properties and aquatic life and human health toxicity data for these
pollutants, 32 exhibit moderate to high toxicity to aquatic life; 52 are human systemic toxicants; 19 are
classified as known or probable carcinogens; 29 have drinking water values; and 25 are designated by EPA as
priority pollutants.  In terms of projected environmental partitioning among media, 28 of the evaluated

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pollutants are moderately to highly volatile; 46 have a moderate to high potential to bioaccumulate in aquatic
biota; 29 are moderately to highly adsorptive to solids; and 21 are resistant to biodegradation, or are slowly
biodegraded.
        8.7.2  Rail Chemical Discharges

        EPA identified 106 pollutants of concern (priority, nonconventional, and conventional) in waste
streams from Rail Chemical facilities. Most of the 106 pollutants have at least one known toxic effect.
Based on available physical-chemical properties and aquatic life and human health toxicity data for these
pollutants, 55 exhibit moderate to high toxicity to aquatic life; 62 are human systemic toxicants; 28 are
classified as known or probable carcinogens; 22 have drinking water values; and 23 are designated by EPA as
priority pollutants. In terms of projected environmental partitioning among media, 22 of the evaluated
pollutants are moderately to highly volatile; 64 have a moderate to high potential to bioaccumulate in aquatic
biota; 48 are moderately to highly adsorptive to solids; and 43 are resistant to biodegradation, or are slowly
biodegraded.
        8.7.3  Barge Chemical and Petroleum Discharges
                                        .                       \
                  /                           '
        EPA identified 67 pollutants of concern (priority, nonconventional, and conventional) in waste
streams from Barge Chemical and Petroleum facilities. Most of the 67 pollutants have at least one known
toxic effect Based on available physical-chemical properties and aquatic life and human health toxicity data
for these pollutants, 20 exhibit moderate to high toxicity to aquatic life; 10 are classified as known or
probable human carcinogens; 33 are human systemic toxicants; 23 have drinking water values; and 25 are
designated by EPA as priority pollutants. In terms of projected partitioning, 27 of the evaluated pollutants
are moderately to highly volatile; 29 have a moderate to high potential to bioaccumulate in aquatic biota; 24
are moderately to highly adsorptive to solids; and eight are resistant to biodegradation, or are slowly
biodegraded.
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        8.7.4 Pollutants Not Included in the Environmental Modeling

        The impacts of three conventional and four nonconventional pollutants are not evaluated when
 modeling the effect of the proposed regulation, on receiving stream water quality and POTW operations or
 when evaluating the potential fate and toxicity of discharged pollutants. These pollutants are total suspended
 solids (TSS), 5-day biological oxygen demand (BOD5), total recoverable oil and grease, chemical oxygen
 demand (COD), total dissolved solids (TDS), total organic carbon (TOC), and total petroleum hydrocarbons.
 The discharge of these pollutants can have adverse effects on human health and the environment For
 example, habitat degradation, can result from increased suspended paniculate matter that reduces light
 penetration, and thus primary productivity, or from accumulation of sludge particles that alter benthic
 spawning grounds and feeding habitats. Oil and grease can have lethal effects on fish, by coating surface of
 gills causing asphyxia, by depleting oxygen levels due to excessive biological oxygen demand, or by reducing
 stream, reaeration because of surface film  Oil and grease can also have detrimental effects on water fowl by
 destroying the buoyancy and insulation of their feathers. Bioaccumulation of oil substances can cause human
 health problems including tainting offish and bioaccumulation of carcinogenic polycyclic aromatic
 compounds. High COD and BOD5 levels can deplete oxygen concentrations, which can result in mortality or
 other adverse effects on fish. High TOC levels may interfere with water quality by causing taste and odor
 problems and mortality in fish.
8.8     DOCUMENTED ENVIRONMENTAL IMPACTS

        Documented environmental impacts on aquatic life, human health, POTW operations, and receiving
stream water quality are also summarized in this assessment The summaries are based on a review of
published literature abstracts, State 304(1) Short Lists, State Fishing Advisories, and contact with State and
Regional environmental agencies. Five POTWs receiving the discharge from four Truck Chemical facilities
and one Rail Chemical facility are identified by States as being point sources causing water quality problems
and are included on their 304(1) Short List All POTWs listed currently report no problems with TEC
wastewater discharges. Past and potential problems are reported by the POTWs for oil and grease, pH, TSS,
surfactants, gfycol ethers, pesticides and mercury. Several POTW contacts stated the need for a national
effluent guidelines for the TEC industry.
                                              8-14

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        Current and past problems (violation of effluent limits, POTW pass-through and interference
problems, POTW sludge contamination, etc.) caused by direct and indirect discharges from all three
subcategories of TEC facilities (Truck Chemical, Rail Chemical and Barge Chemical and Petroleum) are also
reported by State and Regional contacts in seven regions. Pollutants causing the problems include BOD,
cyanide, hydrocarbons, metals (copper, chromium, silver, zinc), oil and grease, pesticides, pH, phosphorus,
styrene, surfactants, and TSS. In addition, one Barge Chemical and Petroleum facility and 19 POTWs
receiving wastewater discharges of 20 Truck Chemical and two Rail Chemical facilities are located on water
bodies with State-issued fish consumption advisories. However, the vast majority of advisories are based on
chemicals that are not pollutants of concern for the TEC industry.
                                              8-15

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8-16

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                                        CHAPTER9

      COSTS AND BENEFITS OF THE TEC INDUSTRY PROPOSED RULE

9.1    INTRODUCTION

       9.1.1   Requirements of Executive Order 12366

       This chapter has been prepared to comply with Executive Order 12866, which requires federal
agencies to assess the costs and benefits of each significant rule they propose or promulgate. A significant
rule is one that has an associated annual cost of at least $ 100 million. The proposed option does not meet the
definition of a significant rule; however, EPA is responsive to the requirements of Executive Order 12866
and prepared an assessment of the social costs and benefits of the proposed option.

       The Executive Order principally requires that EPA identify the need for the rule, compare the
benefits of the regulation to the costs of the regulation, and analyze alternative approaches to the rule.
Wherever possible, the costs and benefits of the rule are to be expressed in monetary terms.  To address the
analytical requirements specified by the Executive Order, Section 9.2 discusses the social costs of the rule
and Section 9.3 compares cost and benefits. Chapter 8 discusses the benefits associated with the proposed
TEC industry effluent limitations guidelines, Chapter 2 profiles the industry; Chapter 4 presents technology
options and regulatory alternatives; and Chapter 5 discusses the impacts of the rule and its alternatives.
Section 9.1,2, below, presents the need for the regulation.


       9.1.2   Need for the Regulation

       Executive Order 12866 requires that EPA identify the need for the regulation being proposed The
discharge of pollutants into effluent and ultimately into surface water pose a threat to human health and the
environment. Risks from these discharges include the potential for cancer and other adverse noncancer health
effects and degradation of the environment These discharges may also cause inhibition problems at POTWs.
This section discusses: 1) the reasons the marketplace does not provide for adequate pollution control absent
appropriate incentives or standards, 2) the environmental factors that indicate the need for additional

                                              9-1

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 pollution controls for this source category, and 3) the legal requirements that dictate the necessity for and
 timing of this regulation.

        The need fat effluent limitations guidelines for this source category arises from the failure of the
 marketplace to provide the optimal level of pollution control desired by society.  Correction of such a market
 failure can require federal regulation. The Office of Management and Budget (OMB) defines market failure
 as the presence of externalities, natural monopolies, and inadequate information (Katzen, 1996).  This section
 addresses the category of externalities, which is the category of market failure most relevant to the general
 case of environmental pollution.

        The concept of externalities partially explains the discrepancy between the supply of pollution
 control provided by owners and operators of pollution sources and the level of environmental quality desired
 by society. The case of environmental pollution can be classified as a negative externality because it is an
 unintended byproduct of production that creates undesirable effects on human health and the  environment

        In making production decisions, owners and operators will consider only those costs  and benefits that
 accrue to their business (i.e., internalized cost and benefits); however, the cost of environmental pollution is
 not assumed solely by the creators of the pollution. All individuals in the polluted area share the social cost of
 exposure to the pollution. Although owners and operators might be the creators of pollution, they do not
 exclusively bear the full costs of the pollution. Government regulation is an attempt to internalize the costs of
 pollution.

                                                       >  	     •
       If those affected by a particular pollution source could negotiate with the those responsible for that
 source, the two parties could negotiate among themselves to reach an economically efficient solution. The
 solution would be efficient because it would involve only those who are affected by the pollution,  m effect,
 the solution would involve the trading of pollution and compensation among the owner or operator and those
 affected by that pollution.

       Individual negotiation often does not occur in an unregulated market because of high transaction
costs, even if trade among the affected parties would be beneficial to all parties involved. For the majority of
environmental pollution cases, the costs of identifying all the affected individuals and negotiating an
                                               9-2

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agreement among those individuals is prohibitively high. Another obstacle preventing negotiations from
taking place is that our current market system does not clearly define liability for the effects of pollution.
            /

        In the case of environmental quality, an additional problem is the public nature of this "good."
Environmental quality is a public good because it is predominantly nonexcludable and nonrival.  Individuals
                /                                                        •
who willingly pay for reduced pollution cannot exclude others who have not paid from also enjoying the
benefits of a less polluted environment Because many environmental amenities are nonexcludable,
individuals utilize but do not assume ownership of these goods, and therefore will not invest adequate
resources in their protection. In the absence of government intervention, the free market will not provide .
public goods, such as a clean environment, at the optimal quantity and quality desired by the general public.

        In the TEC industry, the result of the market's failure to promote water pollution control is that
pollution of the nation's surface waters and ground waters is not controlled to the optimal level.  Certain
subcategories within this industry release significant amounts of pollutants to surface waters and wastewater
treatment sludges through wastewater treatment plants. Despite state and local regulatory programs, many
areas are still adversely affected by pollutant discharges by this industry.

        The regulation is proposed under the authorities of Sections 301,304,306,307, and 501 of the
Clean Water Act (the Federal Water Pollution Control Act Amendment of 1972,33 U.S.C. 1251 et seq., as
amended by the Clean Water Act of 1987, Pub. L. 100-4, also referred to as the CWA or the Act).
        SOCIAL COSTS OF THE RULE
        In the Development Document (U.S. EPA, 1998), EPA developed annual costs of the rule based on
the costs of labor, equipment, material, and other resources needed for regulatory compliance. Although
these costs are a major portion of the costs to society of the proposed regulation, they are not the only costs.
The costs investigated earlier in this document reflect the costs from the perspective of the regulated
community, not from the perspective of the whole society. In this section, EPA estimates the social cost of
the regulation, including the costs to society for the resources needed to comply with the proposed regulation,
and other significant cost categories, described brieffy below.
                                               9-3

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        9.2.1    Cost Categories

        Social costs of a regulation comprise costs that go beyond compliance costs, the costs of purchasing,
installing., and operating pollution control equipment Some of these additional costs are monetary, but many
are nonmonetary. Additional monetary costs include the costs of administering a regulation and the costs of
administering unemployment benefits (unemployment benefits themselves are transfer payments, not a cost)
including the cost of relocating displaced workers. Additional nonmonetary costs include the inconvenience,
discomfort, and time loss associated with unemployment, possible losses in consumer and producer
surpluses, and possible slowdown in the rate of innovation. This section discusses in more detail the types of
costs that may be components of a social cost estimate. Section 9.2.2 presents the estimates for the cost
categories to which EPA could assign monetary values.
        9.2.1.1  Compliance Costs

        The largest component of social cost is the cost to the TEC industry of complying with the
regulation. These costs have been discussed in Chapter 5 and reflect the cost of upgrading all facilities to
meet effluent limitations guidelines. Chapter 5 includes post-tax and pre-tax annualized costs. Post-tax costs
measure the costs to industry after compliance costs have been expensed or depreciated for tax purposes and
income taxes have been paid on earnings. Post-tax costs reflect the tax shield on compliance costs and reflect
the costs the industry would incur to respond to the rule. The tax shield is the cost to the state and federal
governments of subsidizing, in effect, the cost of the regulation. Tax shields are also a cost to society and
must be included in the estimate of social costs.  Pre-tax costs, then, are an appropriate measure for
„        '         '..if'",'1   '     '  ' "i, I1    •     :•,,  ,,•,•'.  i ' ' i     : .  "  i '  • , i
estimating the social costs. In addition, because the costs to society are being calculated in this section, EPA
uses the social discount rate of 7 percent, as recommended by OMB (Katzen, 1996) rather than the private
discount rate (although the average private rate is almost identical to the social discount rate in this instance).1
        1 The annualized costs presented in Table 5-1 were calculated using the facility specific discount, not
the social discount rate.
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        9.2.1.2 Administrative Costs

        Implementing the proposed TEC industry effluent limitations guidelines and standards \villrequke
permitting authorities incur costs for -writing, monitoring, and enforcing permits under the regulation. These
                           s         •         '              '                                  .
administrative costs add to the resource cost of regulatory compliance and are part of the total social cost of
the regulation. Sections 9.2.2.2 and 9.2.2.3 present the methodology and estimates for administrative costs of
the proposed rule.
        9.2.1.3 Worker Dislocation and Benefit Administration Costs

        Because no faculties are projected to close as a result of the costs of the proposed regulation, neither
worker dislocation nor unemployment benefit administrative costs associated with facility closures have to be
considered. Secondary impacts analysis projects that the change TEC industry employment ranges from a
gain of 85 employees to a loss of 447 (Section 5.5). The unemployment administrative cost associated with
this impact is simply the cost of processing unemployment claims multiplied by the number of unemployed
workers. As mentioned earlier, the unemployment benefits themselves are a transfer payment, not a net loss
to society.

        EPA believes the total pre-tax annualized cost of the regulation, annualized at the social rate of
return, provides the best measure for the social cost of the regulation, which can be estimated as the loss in
consumer and producer surplus plus the social cost of worker dislocation (U.S. EPA, 1995).  Figure 9-1
illustrates the regulatory impact on the market supply of tank cleanings.  The total loss in consumer and
producer surplus is represented by the rectangle (P1 minus P2) times Q1 (areas a and b) plus the triangle
represented by areas c and d. Total pre-tax annualized costs are represented by the larger rectangle (P1 minus
P2) times Q* (sum of areas a through f), thus pre-tax costs overstate the loss in consumer and producer
surplus by the area of triangles e and f.
                                                      >                             '
        Note, however, that the loss in consumer and producer surplus is measured by changes in market
transactions. The TEC industry contains a significant number of in-house facilities that do not participate in
the commercial TEC market. The outsourcing component of the market model projects no output loss in the
in-house sector (Section 5.2). If the imposition of regulatory control costs (i.e., a decrease in supply) causes

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Price
                                                                   SI






                                                                   } per unit compliance costs



                                                                   S
                                   Ql      Q*
Tanks Cleaned
                                        Figure 9-1



                          Total Pre-tax Annualized Compliance Costs





                                           9-6

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no change in output, the implicit supply curve for in-house facilities is perfectly inelastic.  Pre-tax annualized
costs for in-house facilities are then identical to their loss in producer surplus.  There is no loss in consumer
surplus layoffs, so no worker dislocation costs exist Furthermore, the loss in producer surplus is not a net
loss to society, but a transfer from the TEC industry to the producers of wastewater treatment systems.

        In the commercial market, the social cost of worker dislocation is not easily measured. An initial
attempt was made by Anderson and Chandran (1987).  This study is flawed by its reliance on measures of
workers' willingness to pay to avoid a small increase in the probability of unemployment.  When this measure
is extrapolated out to estimate willingness to pay to avoid 100 percent probability of unemployment, the
conclusion is reached that workers are willing to pay up to three times their annual salary in order to avoid
100 percent probability of job loss.  Logic suggests that workers' willingness to pay to avoid job loss should
be a fraction of their annual salary rather than a multiple of it Workers may be willing to  accept a lower
wage in order to avoid losing their job, but they would not be willing to pay their employer to allow them to
work

        The pre-tax social cost of the regulation contains components that may be used as proxies for the
social cost of worker dislocation. In Figure 9-1, the pre-tax social cost of the regulation is measured by the
rectangle (P1 minus P2) times Q*; as discussed above, the loss in consumer and producer surplus is
overestimated by the triangle above the demand curve (area e) and the triangle below the supply curve (area
f). At least some of the worker dislocation costs are accounted for by these two triangles.  In addition, the
rectangle (P1 minus P2) times Q1 (areas a and b) represent the increase in demand for wastewater treatment
capital equipment, maintenance, and operating materials. Thus, the social dislocation of TEC workers is at
least partially offset by the benefits accruing to newly employed workers in other industries not accounted for
by this measure of the social cost of the regulation.         ,

        In summary: •

        •      Because there is no change in in-house facility output:
               The pre-tax annualized social cost of the regulation is identical to the loss in producer
               surplus.                                               ,
               There are zero worker dislocation costs.
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                The loss in producer surplus is a transfer payment to other industries, not a net loss to
                society.
                The existing methodology for calculating the social dislocation cost of worker
                unemployment is seriously flawed.
                In the commercial sector, the pretax annualized social cost of the regulation overestimates
                the loss in producer and consumer surplus, thus providing a proxy for some social
                dislocation cost of worker unemployment
                The pre-tax annualized social cost of the regulation takes no account of the benefits of
                offsetting output and employment gains in industries providing wastewater treatment
                services and equipment
EPA believes that the pre-tax social cost of the regulation is the best proxy for the social cost of the
regulation.
        9.2.1.4 Nonmonetary Costs

        The cost estimate section does not disciiss the cost associated with a slowdown in the rate of
innovation. Monetizing the loss associated with a slowdown in the rate of innovation is a very difficult task
This industry, however, does not have a high rate of innovation.  Much of the technology currently in use is
Very old, and there has not been a major trend toward innovative technology. In addition, most likely,
facilities with in-house TEC operations would focus on innovations in their primary business rather than TEC
operations; nevertheless, the rule might have some, although slight, impact on the rate of innovation. The
industry might invest in newer technologies if it does not have to allocate resources to meeting the
requirements of the proposed TEC standards.
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        9.2.2   Estimate of Social Costs


        9.2.2.1 Costs of Compliance
                                                                          \

        Table 9-1 presents the capital and annual costs for the proposed option for each regulated

subcategory. As described above, an OMB-recommended 7 percent real discount rate is used to annualize the

costs. 'The proposed rule has a pre-tax aromatized compliance cost of $34 million.
        9.2.2.2 Administrative Costs


        EPA used the methodology developed for the Metal Products and Machinery (MP&M) effluent

guideline to estimate administrative costs of the proposed rule (U.S. EPA, 1995).  EPA estimated the

incremental administrative costs of administering the regulation for these facilities in the following five

categories:
        •      Permit application and issuance (developing and issuing either concentration-based or mass-
               based permits, providing technical guidance, conducting public hearings, and conducting
               evidentiary hearings)

        •      Inspection (conducted for initial permit development or subsequent inspection)

        •      Monitoring (sampling and analyzing permittee's effluent; reviewing and recording
               permittee's compliance self-monitoring reports; receiving, processing, and acting on a
               permittee's non-compliance reports; and reviewing a permittee's compliance schedule report
               for a permittee in compliance and a permittee not in compliance)

        •      Repermitting                                                               ,

        »      Enforcement


Although other administrative costs (e.g., identifying facilities to be permitted, providing technical guidance

to permittees in years other than the first year of the permit, and repennitting a facility in significant

noncompliance) might be incurred infrequently by some POTWs, EPA believes the above five categories

captures the bulk of the administrative burden of the proposed rule.
                                               9-9

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         TABLE 9-1
SOCIAL COST OF COMPLIANCE
Proposed
Subcategory Option
Tank Truck 2
Chemical
RailTank 1
Chemical
Tank Barge 1
Chemical
Sum
Costs ($1994)
Captial
$53,634,936
$4,400,575
$3,181,339
$61,216,850
O&M
$24,733,050
$1,362,020 .
$1,893,814
$27,988,884
Annualized
$30,358,466
$1,824,977
$2,226,582
$34,410,025
          9-10

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        Table 9-2 lists permitting activities and their associated costs and assumptions: The proposed rule

incorporates mass-based permits and the costs reflect this basis for the permit EPA adjusted the costs from-;

1989 dollars, as presented in U.S. EPA, 1995, to 1994 dollars by using the change in the Producer Price
Index (CEA, 1997).             ,


        The administrative cost estimate assumptions specific to the proposed TEC rule include:
               EPA does not expect the administrative costs associated with the NPDES industrial permit
               program to increase as a result of the proposed TEC rule. All faculties in the Tank Barge
               Chemical and Petroleum subcategory are direct dischargers; therefore, there are no
               incremental administrative costs exist for this subcategory. Administrative costs for this
               subcategory may decrease because the technical guidance provided by EPA as a component
               of the rule may provide information to the permitting authorities that is likely to reduce the
               research required to develop permits. These cost savings have not been estimated and are
               not included in the administrative costs of the rule.

               All 326 estimated facilities in the Rail Chemical and Truck Chemical subcategories are
               assumed to bear the costs of issuing a mass-based permit to a previously unpermitted
               facility. This is conservative because approximately 22 of the 38 Rail Chemical and 180 of
               the 288 Truck Chemical facilities have some type of wastewater permit  These permits may
               vary widely in form and function, but it is assumed that they are generally not of the scope
               mandated by the federal pretreatment standard permit system.

               All 326 estimated facilities are assumed to incur permitting costs in the first year. This is a
               conservative assumption.  Spreading the one-time costs of initial permits over a multi-year
               compliance schedule would lower the annualized costs.
The frequency and percent of facilities associated with certain permitting activities varies by the amount of

wastewater generated (see U.S. EPA, 1995 for details).  Table 9-3 summarizes the facility counts by flow

category.


       Table 9-4 summarizes the number of facilities incurring costs by activity for a 16-year period

following promulgation of the rule. The 16-year period is consistent with the period used in the cost

annualization model for the compliance costs. The only change is the use of the 7 percent real social discount

rate for calculating the present value and annualized cost EPA used the information in Tables 9-2 and 9-4 to

calculate low, average, and high estimates for administrative costs of the proposed rule. The estimated

average annualized cost of $569,512 is used in the social cost (Table 9-5). Even with the conservative
                                              9-11

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                                       TABLE 9-2
                   ADMINISTRATIVE COST COMPONENTS AND FREQUENCY
                                     PER FACILITY
Percent of Facilities
for Which Activity
Activity
Develop and issue a mass-based
permit at a. previously
unpennitted facility
Provide technical guidance
Conduct a public bearing
Conduct an evidentiary hearing
Permittee Inspection
Flow<= 1 milliongal/yr
Flow> 1 million gal/yr
Sample and Analyze Permittee's Effluent
Flow<= 1 million gal/yr
Flow> 1 million gal/yr
Review and Data Entry of Permittee's
Self-monitoring Reports
Flow<= 1 million gal/yr
Flow> 1 million gal/yr
Receive, Process, and Act on a
Permittee's Non-compliance Reports
Flow < 6.25 million gal/yr
Flow = > 6.25 million gal/yr
Review a Compliance Report for a
Permittee Meeting Milestones
Flow < 6.25 million gal/yr
Flow= > 6.25 million gal/yr
Review a Compliance Schedule Report
Permittee Not Meeting Milestones
Minor Enforcement Action, e.g.,
Issue an Administrative Order
Minor Enforcement Action, e.g.,
Impose an Adminstrative Fine
Repermit
Frequency
1 time
1 time
1 time
Itime
every 5 years
annual
every 5 years
annual
every 5 years
annual
annual
1.5 reports
a year
1.5 reports
a year
annual
annual
every 5 years
is Required
100%
100%
5%
5%
100%
100%
100%
10%
30%
1
90%
95%
20%
10%
5%
100%
Cost Estimates ($1994)
Low
$345
$40
$1,182
$9,851
' $55
$320
$30
$118
$8
$118
$315
$3,152
$40
Average
$966
$197
$1,576
$13,792
$500
$766
$40
$138
$10
$158
$631
$4,728
$296
High
$1,576
$355
$1,970
$17,731
$946
$1,476
$50
$158
$12
$197
$946
$6,305
$551
Sources: EPA, 1995, AppendixE and CEA, 1997, TableB-63.
                                        9-12

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                           TABLE 9-3
           FACILITY COUNTS BY FLOW CATEGORY
Flow
                                   Number of Facilities [1]
Rail Tank Tank Truck
 Chemical    Chemical
           Total
Less than 1 million.
gallons per year

Between 1 and 6.25
million gallons per year

At least 6.25
million gallons per year

Total
       16
       15
       38
 66
194
                   29
288
 82
208
             36
326
Numbers may not sum to total due to rounding.
[1] Based on detailed questionnaire data.
                                 9-13

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                          9-14

-------
                    TABLE 9-5
   ADMINISTRATIVE COST OF THE REGULATION
Estimate
 Annualized Administrative
 Cost of the Proposed Rule
	($1994)
Low

Average

High
         $225,189

         $569,512

         $988,566
                        9-15

-------
 assumptions used in the analysis, administrative costs ate less than 2 percent of the estimated compliance
 costs.             "             ....        •     •             .       i  •   .
        9.2.2.3  Cost of Administering Unemployment Benefits

        Based on data from the Interstate Conference of Employment Security Agencies, the average
 administrative cost per worker of processing unemployment claims was $93.25 in 1989. This cost reflects
 only the administrative cost of processing claims; unemployment benefits are not included because they are a
 transfer payment, not a net cost The cost per unemployment claim was inflated to $109.78 in 1994 dollars
 using the GDP deflator.  This figure is multiplied by the number of unemployed workers and the resulting
 cost is annualized at the 3 percent opportunity cost of deferred consumption over the 16 years of the project
 life (U.S. EPA, 1995). Total annualized costs of administering unemployment benefits range
 from$0-$5,231.2
 93     COMPARISON OF ESTIMATED COSTS AND BENEFITS

        Table 9-6 presents the social costs and benefits of the proposed rule. As the table shows, the
 proposed TEC industry options are associated with costs totaling $35 million, with total benefits ranging
 from $2.5 million to $8.8 million.  The benefits estimate does not include the dollar value of many important
 benefits for which monetized estimates could not be developed. Examples of nonmonetized benefit
 categories include: Noncancer related health benefits, reduced POTW maintenance, reduced costs for POTWs
 to write individual permits, enhanced diversionary uses, improved aesthetic water quality near discharge
 outfalls, enhanced water-dependent recreation other than fishing, benefits to wildlife or endangered species,
 tourism benefits, and biodiversity benefits.
       2 Because other costs and benefits are estimated to the nearest $100,000, the entry for Table 9-6 for
the Total Social Cost of the regulation is unchanged.

                                              9-16

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                                     TABLE9-6

              TOTAL COSTS AND BENEFITS OF THE PROPOSED TEC RULE
                                   (Millions $1994)
Type of Cost or Benefit
Compliance Costs
Administrative Costs
Administrative Costs of Unemployment
Total Social Costs
Total Social Costs or Benefits
$34.4
$0.6
$0.0 -$0.005
$35.0
f f *
' ,, <.'"•', '•
Human Health Benefits
Recreational Benefits1
Truck-Chemical
Barge-Chemical
Nonuse Benefits
Truck-Chemical
Barge-Chemical
Total Benefits

$1.5 -$5.3
$0.2 -$0.6
$0.7-$2.7
$0.1 -$0.3
$2.5 - $8.8
Numbers may not sum to totals due to rounding.
Source: Briefing Package
^proved recreational value for Rail-Chemical cited only for Option 3 (not selected).
                                         9-17

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9.4    REFERENCES
Anderson and Chandran. 1987. Anderson, D. W. and R. V. Chandran. Market estimates of worker
dislocation costs. Economics Letters. 24:381-384.

CEA. 1997. Economic report to the president Table B-63. Washington, DC:  Council of Economic
Advisors.  February.

Katzen.  1996. Katzen, Sally. Economic analysis of federal regulations under Executive Order No. 12866.
Memorandum from Sally Katzen, OMB, to members of the regulatory working group. Washington, DC:
Office of Management and Budget January 11.

U.S. EPA. 1995. Regulatory impact analysis of proposed effluent limitations guidelines and standards for
the metal products and machinery industry (phase I). Appendix E. EPA 821-R-95-023. Washington, DC:
U.S. Environmental Protection Agency, Office of Water. April.

U.S. EPA. 1998. Development document for the proposed effluent limitations guidelines and standards for
the transportation equipment cleaning industry. EPA-821-B-98-011. Washington, DC: U.S. Environmental
Protection Agency, Office of Water.  May.
                                           9-18

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                                       CHAPTER 10

                       UNFUNDED MANDATESREFORM ACT

       Title H of the Unfunded Mandates Reform Act of 1995 (Public Law 104-4; UMRA) establishes
requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal
governments as well as the private sector. Under Section 202(a)(l) of UMRA, EPA must generally prepare a
written statement, including a cost-benefit analysis, for proposed and final regulations that "includes any
Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate or
by the private sector" of annual costs in excess of $100 million.1 As a general matter, a federal mandate
includes Federal Regulations that impose enforceable duties on State, local, and tribal governments, or on the
private sector (Katzen, 1995).  Significant regulatory actions require Office of Management and Budget
review and the preparation of a Regulatory Impact Assessment that compares the costs and benefits of the
action.

       The proposed TEC industry effluent limitations guidelines are not an unfunded mandate on state,
local, or tribal governments because the cost of the regulation is borne by industry. .The proposed rule does
not impose total costs in excess of $100 million/year. EPA, however, is responsive to all required provisions
of UMRA.  In particular, the Economic Analysis (EA) addresses:

       •      Section 202(a)(l)—authorizing legislation (see EA Chapter 1 and the preamble to the rule);
       •      Section 202(a)(2)—a qualitative and quantitative assessment of the anticipated costs and
               benefits of the regulation, including administration costs to state and local governments (see
               EA Chapters 5 and 8);
       •      Section 202(a)(3XA)—accurate estimates of future compliance costs (as reasonably
               feasible; see EA Chapter 5);
       •      Section 202(a)(3)(B>—disproportionate effects on particular regions or segments of the
               private sector. No TEC faculties are projected to close as a result of the costs of the
               proposed option (see EA Chapter 5); therefore there are no disproportionate effects on
               particular regions or segments of the private sector;
   1 The $100 million in annual costs is the same threshold that identifies a "significant regulatory action"
hi Executive Order 12866.
                                             10-1

-------
        •      Section 202(aX3)(B)—-disproportionate effects on local communities (see EA Chapter 6).
               No TEC facilities are projected to close as a result of the costs of the proposed option (see
               Chapter 5); therefore there are no disproportionate effects on local governments;
        •      Section 202(a)(4)—estimated effects on the national economy (see EA Chapter 5);
        •      Section 205(a)—least burdensome option or explanation required (this chapter).

The preamble to the proposed rule summarizes the extent of EPA's consultation with stakeholders including
industry, environmental groups, states, and local governments (UMRA, sections 202(a)(5) and 204).
Because this rule does not "significantly or uniquely" affect small governments, section 203 of UMRA does
not apply.

        Pursuant to section 205(aXl)-(2), EPA has selected the "least costly, most cost-effective or least
        ',    . "   i'!'1)1      ,     f      I1      :• .;, •••• . •' .: ;  •••'.•  .	 ',:   •           .    .
burdensome alternative" consistent with, the requirements of the CWA for the reasons discussed in the
preamble to the rule. Under the CWA, EPA is required under Best Available Technology Economically
Achievable (BAT) and Pretreatment Standards for Existing Sources (PSES) to require effluent limitations
guidelines and standards based on BAT considering factors listed in section 304 of the CWA and under
NSPS and PSNS based on Best Available Demonstrated Technology considering factors listed in section 306
of the CWA. EPA determined that the rule constitutes the least burdensome alternative consistent with the
CWA.
10.1   REFERENCES
Katzen. 1995. Guidance for implementing Title n of S.L, Memorandum for the Heads of Executive
Departments and Agencies from Sally Katzen, Ad, OKA. March 31,1995.
                                              10-2

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                                        APPENDIXA
                            COST ANNUALIZATION MODEL


        Figure A-l provides an overview of the cost annualization model. Inputs to the model come from
three sources: 1) the capital and annual costs for incremental pollution control developed by EPA, 2) financial
assumptions based on secondary sources, and 3) financial data taken from the 1994 Detailed Questionnaire
for the Transportation Equipment Cleaning Industry (1994 Questionnaire; U.S. EPA, 1995). The cost
annualization model calculates four types of compliance costs for a facility:

        •      Present value of expenditures—before-tax basis
        •      Present value of expenditures—after-tax basis
        •      Annualized cost—before-tax basis
        •      Annualized cost—after-tax basis

        There are two, key reasons why the capital and annual costs should be annualized. First, the initial
capital outlay should not be compared against a facility's income in the first year because the capital cost is
incurred only once in the equipment's lifetime. That initial investment should be spread over the equipment's
life. Second, money has a time value. A dollar today is worth more than a dollar in the future; expenditures
incurred 15 years from now do not have the same value to the firm as the same dollar expenditure incurred
tomorrow.

        The cost annualization model is defined in terms of 1994 dollars because 1994 is the most recent
year for which financial data are available from the survey. Pollution control capital and operating and
maintenance costs are estimated in 1994 dollars and used to project cash outflows. The cash outflows are
then discounted to calculate the present value of future cash outflows in terms of 1994 dollars. This
methodology evaluates what a business would pay in constant dollars for all initial and future expenditures.
Finally, the model calculates the annualized cost for the cash outflow as an annuity that has the same present
value of the cash outflows and includes the cost of money or interest  The annualized cost is analogous to a
mortgage payment that spreads the one-time investment of a home into a defined series of monthly payments.
                                               A-l

-------
Data Sources
 Inputs
      Outputs
Engineering
Incremental
Pollution  Control
Costs
Secondary
Sources
Capital Costs
                  Annual Costs
Cost Deflator to
$1994

Depreciation
Method (MACRS)

Federal Tax Rate


State Tax Rate
Questionnaire      Discount Rate
Present Value
     of
Expenditures
                                                 Cost
                                             Annualization
                                                Model
                  Tax Status
tr


.


                                    Figure A-l

                             Cost Annualization Model
                                       A-2

-------
        Section A. 1 discusses the data sources for inputs to the cost annualization model. Section A.2
 summarizes the financial assumptions in the model. Section A.3 presents all steps of the model with a
 sample calculatioa  Section A 4 compares the cost annualization model with the Total Cost Assessment
 (TCA) approach.
A.1    INPUT DATA SOURCES

        Table A-l illustrates the cost annualization model using fictitious data. The inputs and assumptions
for the analysis are listed in the spreadsheet's top portion. The first input is the survey identification number
for the facility analyzed. The second line is the number of the regulatory option or alternative for which the
costs are calculated.

        The capital and operating and maintenance (O&M) costs used in the cost arni^^liyation model are
developed by the firm's engineering staff. The capital cost is the initial investment needed to purchase and
install the equipment; it is a one-time cost The O&M cost is the annual cost of operating and maintaining
the equipment  O&M costs are incurred every year of the equipment's operation.

        The depreciable life of the asset is based on information in the 1994 Questionnaire and the Internal
Revenue Code (see Section A.2.3).

        The discount/interest rate is the either the discount rate or the interest rate that a facility supplied in
the 1994 Questionnaire (as long as it falls between 3 and 19 percent)—whichever is higher.  It is used to
calculate the present value of the cash flows.  The discount rate represents an estimate of a facility's marginal
cost of capital, i.e. what it will cost the facility to raise additional money for capital expenditure whether ,
through debt (a loan), equity (sale of stock), or working capital (opportunity cost). For companies that do not
use a discount rate, or provide a discount rate less than 3 percent or greater than 19 percent, the interest rate is
used in the calculations. Where facility-specific data are available and fall between 3 and 19 percent, the
facility-specific data are used in the cost annualization model (see Section A.2.5).1
   1 For example, if a facility provides a discount rate greater than 19 percent and an interest rate less than
19 percent, the interest rate is used in the cost annualization model. If both the discount rate and the interest
                                                                                      (continued...)
    ..'.'•'                 ;   -'            A-3       -  '          •'.'-'

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-------
        Since the cost annualization model is developed in terms of constant 1994 dollars, the
 discount/interest rate must be adjusted for inflation before used in the model. Table A-2 lists the average
 inflation rate from 1984 to 1994 as measured by the Consumer Price Index. The 10-year average inflation
 rate of 3.6 percent is used in the cost annualization model as the expected average inflation rate over the
 15-year life of the project to convert the nominal discount rate to a real discount rate. The nominal discount
 rate is deflated to the real discount rate using the following formula (OMB, 1992):
                      Real DiBcouut Rate  =  <* * Nominal P***** Rate> -  l
                                            [(1 + Expected Inflation Rate)    J

The nominal industry average discount rate of 10.4 percent is equivalent to a real discount rate of 6.6 percent
using this formula.

        The next two lines in Table A-l are the flag identifying corporate structure and the taxable income.
The flag identifies whether the facility pays taxes at the 1) corporate or 2) individual rate. The amount of
taxable income identifies the tax bracket of the facility; the tax bracket is determined by the taxable income of
the parent business entity, not the facility.                                                  ,

        Table A-3 lists each state's top corporate .and individual tax rates and calculates national average
state tax rates (CCH, 1994a). The cost annualization model uses the average state tax rate because of the
complexities of the industry; for example, a facility could be located in one state, while its corporate
headquarters are located in a second state.  Given the uncertainty over which state tax rate applies to a given
facility's revenues, the average state tax rate is used in the cost annualization model 'for all facilities.

      ,  The cost annualization model incorporates variable tax rates according to the type of business entity
and level of income to address differences between small and large businesses. For example, a large business
   '(...continued)
rate are less than 19 percent, the higher of the two rates is used. If both rates are greater than 19 percent, the
industry average discount rate of 10.4 percent is used. A rate less than 3 percent is suspiciously low given
that, in 1994, banks charged a prime rate of 7.15 percent, and the discount rate at the Federal Reserve Bank
of New York was 3.6 percent (CEA, 1995). A rate greater than 19 percent is more likely to be an internal
"hurdle" rate-Hhe rate of return desired in a project before it will be undertaken. Ninety percent of facilities
provided a discount rate that fell into the accepted range.

                                                A-5

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TABLE A-2
INFLATION RATE 1984-1994
      Year
Consumer
    Price
    index
Change
     1984           103.9
     1985           107.6
     1986           109.6
     1987           113.6
     1988           118.3
     1989           124.0
     1990           130.7
     1991           136.2
     1992           140.3
     1993           144.5
     1994           148.2
Average Inflation Rate
                       3.6%
                       1.9%
                       3.6%
                       4.1%
                       4.8%
                       5.4%
                       4,2%
                       3.0%
                       3.0%
                       2.6%
                       3.6%
Source:    CEA, 1995, Table B-59.
                     A-6

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TABLE A-3
STATE INCOME TAX RATES

Corporate Income
State Tax Rate
Alabama 5.00%
Alaska 9.40%
Arizona 9.00%
Arkansas 6.50%
California 9.30%
Colorado 5.00%
Connecticut 11.50%
Delaware . 8.70%
Florida 5.50%
Georgia 6.00%
Hawaii 6.40%
Idaho 8.00%
Illinois 4.80%
Indiana 3.40%
Iowa 12.00%
Kansas 4.00%
Kentucky 8.25%
Louisiana 8.00%
Maine 8.93%
Maryland 7.00%
Massachusetts 9.50%
Michigan 2.30%
Minnesota 9.80%
Mississippi 5.00%
Missouri 6.25%
Montana 6.75%
Nebraska 7.81%
Nevada 0.00%
New Hampshire 7.00%
New Jersey 7.25%
New Mexico 7.60%
New York 9.00%
North Carolina 7.75%
North Dakota 10.50%
Ohio 8.90%
Oklahoma 6.00%
Oregon 6.60%
Pennsylvania 9.90%
Rhode Island * 9.00%
South Carolina 5.00%
South Dakota 0.00%
Tennesee 6.00%
Texas ' , 0.00%
Utah 5.00%
Vermont * 8.25%
Virginia 6.00%
Washington 0.00%
West Virginia 9.00%
Wisconsin 7.90%
Wyoming 0.00% '
Average: 6.61%
Basis for States
Basis for States
With Graduated Personal Income Tax With Graduated
Tax Tables

-:V $90,000+

$100,000+



• • -


$100,000+



$250,000+
$50,000+
$250,000+
$200,000+
$250,000+




$10,000+


$50,000+



$1 Million*


$50,000+
Based on Stock Value


1997 and thereafter






$250,000+



,


Upper Rate
5.00%
0,00%
6.90%
7.00%
11.00%
5.00%
4.50%
7.70%
0.00% '
6.00%
10.00%
8.20%
3.00%
3.40%
9.98%
7.75%
6.00%
6.00%
8.50%
6.00%
5.95%
4.40%
8.50%
5.00%
6.00%
11.00%
6.99%
0.00%
0.00%
6.65%
8.50%
7.88%
7.75%
12.00%
7.50%
7.00%
9.00%
2.80%
10.40%
7.00%
0.00%
0.00%
0.00%
7.20%
9.45%
5.75%
0.00%
6.50%
6.93%
0.00%
5.84%
Tax Tables
$3,000+

$150,000+
$25,000+
$215,000+


$40,000+

$7,000+
$21,000+
$20,000+


$47,000+
$30,000+
$8,000+
$50,000+
$33,000+
$100,000+


$50,000+
$10,000+
$9,000+
$63,000+
$27,000+


$75,000+
$42,000+
$13,000+
$60,000+
$50,000+
$200,000+
$10,000+
$5,000+

$250,000+
$11,000+



$4,000+
$250,000+
$17,000+

$60,000+
$20,000+


Notes: Basis for rates is reported to nearest $1 ,000.
Personal income tax rates for Rhode Island and Vermont based on federal tax (not taxable income).
Tax rates given here are equivalents for highest personal federal tax rate.
Source: , CCH, 1994b; CCH, 1995.



                                       A-7

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might have a combined tax rate of 40.6 percent (34 percent Federal plus 6.6 percent State). After tax shields,
the business would pay 59.4 cents for every dollar of incremental pollution control costs. A small business,
say a small sole proprietorship, might be in the 20.8 percent tax bracket (15 percent Federal plus 5.8 percent
State). Alter tax shields, the small business would pay 79.2 cents for every dollar of incremental pollution
control. The net present value of after-tax cost is used in the closure analysis because it reflects the impact
the business would actually see in its net income.
        KOSANCIAL ASSUMPTIONS
                  ',. 
-------
       The Modified Accelerated Cost Recovery System (MACRS) applies to assets put into service after
December 31,1986. MACRS allows businesses to depreciate a higher percentage of an investment in the
early years, and a lower percentage in the later years. la contrast, straight-line depreciation writes off a
constant percentage of the investment each year. MACRS offers companies a financial advantage over the
straight-line method because a company's taxable income may be reduced under MACRS by a greater amount
in the early years when the time value of money is greater.

       Table A-4 illustrates the effects of the difference in depreciation timing oh a $100,000 capital
investment The absolute amount depreciated over the 16-year period is the same—$ 100,000 for both
depreciation methods. The sum of the tax shields is also the same for both methods—$100,000 times 40.6
percent or $40,600. The difference in timing, however, means that MACRS provides a $1,664 benefit over
straight-line depreciation (i.e., the difference between the present values of the tax shields).
       *•                         •           >                •  .

       Section 169 of the Internal Revenue Code provides an option to amortize pollution control equipment
over a 5-year period (U.S. IRS, 1995).  Under this provision, 75 percent of the investment could be rapidly
amortized in a 5-year period using a straight-line method The 75 percent figure is based on the ratio of
allowable lifetime (15 years) to the estimated usable lifetime (20 years) as specified in Section 169,
Subsection (f). Although the tax provision enables the facility to expense the investment over a shorter time
period, the advantage is substantially reduced because only 75 percent of the capital investment can be
recovered.

       Table A-5 illustrates the Section 169  tax provision using hypothetical costs. In comparison with
MACRS, the present value of the tax shield from depreciation increases slightly, from $24,126 (Table A-l)
to $24,716 (Table A-5). Because the benefit of the provision is slight and facilities might not get the required
certification to take advantage of it, the provision was not included in the cost annualization model. Its
exclusion results in a more conservative (i.e., higher) estimate of the after-tax annualized compliance cost for
the facility. MACRS is the depreciation method used in the cost annualization model.
                                              A-9

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1": jilj,!
'•' II	
            TABLEAU
            DEPRECIATION METHODS
            COMPARISON OF STRAIGHT LINE VS. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Inputs:
CapftalCost($):
Discount Rate :
Depreciable Lifetime (yrs):
Starting Convention:
Marignal Tax Rates:
Federal
State
Overall
$100,000
13.0%
15
mid-year
34.0%
6.6%
40.6%

Straight-Line
Depreciation Depreciation
Year
1
2
3
4
•. ' " 5
6
'. , , 7
8
9
10
11
12"
13
14
15
16
Rate
3.33%
6.67%
6.67%
6.67%
6.67%
6.67%
6.67%
6.66%
6.67%
6.66%
6.67%
6.66%
6.67%
6.66%
6.67%
3.33%
Sum 100.00%
Present Value
Net Benefit of Using MACRS

for Year
$3,330
$6,670
$6,670
$6,670
$6,670
$6,670
$6,670
$6,660
$6,670
$6,660
$6,670
$6,660
$6,670
$6,660
$6,670
$3,330
$100,000
$45,888
Tax-Shield
$1,352
$2,708
$2,708
$2.708
$2,708
$2,708
$2,708
$2,704
$2,708
$2,704
$2,708
$2,704
$2,708
$2,704
$2,708
$1,352
$40,600
$18,630



MACRS
Depreciation Depreciation
Rate
5.00%
9.50%
8.55%
7.70%
6.93%
6.23%
5.90%
5.90%
5.91%
5.90%
5.91%
5.90%
5.91%
5.90%
5.91%
2.95%
100.00%

for Year.
$5,000
$9,500
$8,550
$7,700
$6,930
$6,230
$5,900
$5,900
$5,910
$5,900
$5,910
$5,900
$5,910
$5,900
$5,910
$2,950
$100,000
$49,987
over Straight-Line Method (Year 1 dollars)
Tax-Shield
, $2,030
$3,857
$3,471
$3,126
$2,814
$2,529
$2,395
$2,395
$2,399
$2,395
$2,399
$2,395
$2,399
$2,395
$2,399
$1,198
$40,600
$20,295
$1,664
                                                  A-10

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                                                                                           ion is
                                                                        ilization model may result in
       EPA also considered the Internal Revenue Code Section 179 provision to elect to expense up to
$17,500 the year the investment is placed into service (U.S. IRS, 1995).2 EPA assumes that this provisi
applied to other investments for the business entity. Its absence in the cost annua
a slightly higher estimate of the after-tax annualized cost for the faculty.
               Timing Between Initial Investment and Operation
        A business cannot begin to depreciate a capital investment before it goes into operation. A mid-year
depreciation convention may be used for equipment that is placed in service at any point within the year
(CCH, 1994b). EPA chose to use a mid-year convention in the cost annualization model because of its
flexibility and the likelihood that the equipment considered for pollution control could be built and installed
within a year of initial investment  Because a half-year of depreciation is taken in the first year, a half-year
needs to be taken in the 16th year of operation. Consequently cost annualization model spans a 16-year time
period (see Table A-l).
        AJ.3 Depreciable Lifetime for the Equipment

        An asset's depreciable life can differ from its actual service lifetime. The Internal Revenue Code
Section 168 classifies an investment as 15-year property if it has a class life of 20 years or more but less than
25 years. Section 168(e)(3)(E) lists a municipal wastewater treatment plant as an example of 15-year
property (U.S. IRS, 1995). The average estimated service life for existing wastewater treatment equipment
                                                                 i
as reported by TEC facilities hi the 1994 Questionnaire is 20 years. The cost annualization model, therefore,
incorporates a 15-year depreciable lifetime.
   2 This assumes that the investment costs do not exceed $200,000 (Internal Revenue Code, Section
!79
-------
        A2.4  Tai Shields on Interest Payments

        The cost annualization model does not consider tax shields on interest paid to finance new pollution
control equipment A facility could finance the investment through a bank loan (debt), from working capital,
issuance of a corporate bond, or selling additional stock (equity shares).  The cost annualization model
assumes a cost to the facility to use the money (the discount/interest rate), whether the money is paid as
interest or is the opportunity cost of internal funding. According to current tax law, if a facility finances the
investment using debt, the associated interest expenses can be deducted, thereby reducing taxable income
(CCH, 1994b). The tax shield on the interest payments, therefore, would reduce the after-tax annualized
cost

        It is not known what mix of debt and capital a facility will use to finance the cost of pollution control
equipment Table A-6 illustrates the effects of 100-percent debt financing on after-tax annualized cost
After-tax annualized cost would decrease by approximately 3 percent due to tax shields on the interest
payments for a facility in the highest corporate tax bracket paying a nominal 13 percent interest rate. If the
facility financed the entire investment out of working capital, there would be no associated tax benefit and the
after-tax cost should be calculated without interest tax shields. To maintain a conservative estimate of the
after-tax annualized cost, tax shields on interest payments are not included in the cost annualization model.
        A.2.5  Discount Rates

        A company can use either internal financing (e.g. retained earnings, working capital), external
financing (e.g. debt, external equity), or some combination of both to raise the capital for upgrading its
wastewater treatment system.  Facilities provided their discount rate (defined as the weighted average
marginal cost of capital given their mix of debt and equity) in the 1994 Questionnaire.  The discount rate is
assumed unaffected by the need to finance the purchase of pollution control equipment in order to comply
with the regulation; in other words, the capital structure of the firm is* assumed to be unchanged by the
regulation (Brigham, 1997).

        The EPA uses either the interest rate or the discount rate—whichever is higher—provided by the
facility in its cost annualization model. This decision assigns the higher rate to the opportunity cost for
                              •.                                                    *•
                                               A-13

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                                           A-14

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internal financing. The decision generates the appropriate ahmialiVfld cost if the capital needed for the
pollution control upgrades is raised by:                                       '

        •      Internal funding only                                                    ,
        •      A mix of internal funding, debt, and equity as long as the mix reflects the capital structure
               used to calculate the discount rate
        •      A mix of debt and equity as long as the mix reflects the capital structure used to calculate the
               discount rate
                       -  •     .,                   '   •             •.•/.'
The decision will lead to a slightly higher annualized cost if only debt or a mix of debt and internal funding is
used to raise the capital. The decision, however, will not underestimate industry compliance costs or impacts.
       SAMPLE COST ANNUALIZATION SPREADSHEET
       In Table A-l, the spreadsheet contains numbered columns ithat calculate the before- and after-tax
annualized cost of the investment to the facility. The first column lists each year of the equipment's life span,
from its installation through its 15-year depreciable lifetime.

       Column 2 of Table A-l represents the percentage of the capital costs that can be written off or
depreciated each year. These rates are based on the MACRS and are taken from CCH, 1994b.  Multiplying
these depreciation rates by the capital cost gives the annual amount the facility may depreciate, which is listed
in Column 3. Depreciation expense is used to offset annual income for tax purposes; Column 4 shows the
tax shield provided from the depreciation expense— the overall tax rate times the depreciation amount for the
year.

       Column 5 of Table A-l is the annual O&M expense.  Year 1 and Year 16 show only six months of
O&M expenses because of the mid-year convention assumption for depreciation. For Years 2 through 15,
O&M is a constant amount Column 6 is the tax shield or benefit provided from expensing the O&M costs.
                                              A-15

-------
        Column 7 lists a facility's annual cash outflow or total expenses associated with the additional
 pollution control equipment Total expenses include capital costs, assumed to be incurred during the first
 year when the equipment is installed, plus each year's O&M expense.
 r               'in. '              ' ",  !         " "            i        ' ' ' '   !'
 ,'            •    ':[      '.'''  '''..'.   'l|1'"    •    '       /     I  ' .
        Column 8 lists the annual cash outflow less the tax shields from the O&M expenses and
 depreciation; a facility will recover these costs in the form of reduced income taxes. The sum of the 16 years
 of after-tax expenses is $148,500 (1994 dollars). The present value of these payments is $125,711. The
 present value calculation takes into account the time value of money and is calculated as:
                                                    *       cash outflow, year.
                  Present Value of Cash Outflows =
                                                    i-i   (1 + real discount rate)'"1

The exponent in the denominator is i-1 because the real discount rate is not applied to the cash outflow in
Year 1. The present value of the after-tax cash outflow is used in the closure analysis to calculate the post-
regulatory present value of future earnings for a faculty (Appendix C).

        The present value of the cash outflow is transformed into a constant annual payment for use as the
tfhnnaligftd facility compliance cost The ammaliggd cost is calculated as a 16-year annuity that has the same
present value as the total cash outflow in Column 8.  The annualized cost represents the annual payment
required to finance the cash outflow after tax shields.  Li essence, paying the annnalized cost each year and
paying the amounts listed in Column 8 for each year are equivalent The annualized cost is calculated as:
         Annualized Cost = Present value of cash outflows *        IBal discount
                                                             1 - (real discount rate  + l)'tt
                                                                f                            ,
where n is the number of payment periods. In this example, based on the capital investment of $100,000,
O&M costs of $10,000 per year, a tax rate of 40.6 percent, and a nominal discount rate of 13 percent, the
facility's annualized cost is $22,223 on a pre-tax basis and $15,192 on a post-tax basis.3
   3 Note that post-tax annualized cost can be calculated in two ways. The first way is to calculate the
anniis1J7cd cost as the difference between the annuity value of the cash flows (Column 7) and the tax shields
(Columns 4 and 6).  The second way is to calculate the annuity value of the cash flows after tax shields
                                                                                      (continued...)
                                               A-16

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       The pre-tax anmialized cost is used in calculating the cost of the regulati

        U.S. EPA, 1992 describes the Total Cost Assessment (TCA) approach for evaluating pollution

prevention alternatives. TCA is comprehensive financial analysis of the life cycle costs and savings of a

pollution prevention project A TCA approach includes:
               Internal allocation of environmental costs to product lines or processes through full cost
               .accounting;

               Financial analysis of direct and indirect costs, short- and long-term costs, liability costs, and
               less tangible benefits of an investment;

               Evaluation of project costs and savings over a long-time horizon, e.g., 10 to 15 years;

               Measures of profitability that capture the long-term profitability of the project, e.g., net
               present value and internal rate of return.
TCA approaches are being developed as alternatives to traditional financial analysis methods in order to
capture and properly evaluate the long-term costs and savings inherent in pollution prevention activities.
   3(...continued)
(ColumnS). Bom methods yield the same result
                                              A-17

-------
        The cost annualization model incorporates several features of a total cost assessment analysis,

 including:


        •      Long-time horizon (the annualization model uses a 15-year time frame)

        •      Short- and long-term costs

        •      Cost savings due to reduced chemical usage, etc., which are included in the cost estimates
               prepared by the EPA engineers (see Development Document)

        •      Depreciation, taxes, inflation, and discount rate


 In addition, the output of the cost annualization model is used in the closure analysis (Appendix C), which:


        •      Uses the net present value of the investment calculated in the .cost annualization model to
               evaluate the long-term impacts on profitability


 The economic analysis differs from the TCA approach in that it does not include a "liability avoided"

 component or an evaluation of the less tangible benefits of the regulation. There are insufficient data to

 estimate potential fixture liability costs for each facility.  The exclusion of this parameter results in a more

 conservative analysis where potential impacts are not offset by avoiding future liability costs.
        REFERENCES
Brigham.  1997. Brigham, Eugene, F and Louis C. Gapenski. Financial management: theory and practice.
Stheditioa Chicago, IL: The Dryden Press.

CEA. 1995. Council of Economic Advisors.  Economic report of the president Washington, DC. Tables
B-59andB-72.

CCH. 1994a, Commerce Clearing House, Inc. State tax handbook  Chicago, IL.

CCH. 1994b. Commerce Clearing House, Inc.  1995 U.S. master tax guide. Chicago, IL.

CCH. 1995. Commerce Clearing House, me. Conversations with Maureen F.Kaplan, Eastern Research
Group, Inc. to resolve discrepancies on tax rates for Missouri and Rhode Island. March 30.

ENR. 1995. Engineering News Record Construction cost index.


                                             A-18

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U.S. EPA. 1992. Total cost assessment Accelerating mdustrialpoUution through
financial analysis. Washington, DC: U.S. Environmental Protection Agency, Office of Pollution Prevention
and Toxics.

U.S. EPA. 1995. 1994 Detailed questionnaire far tits transportation equipment cleaning industry. OMB No.
2040-0179. Washington, DC: U.S. Environmental Protection Agency, Office of Water.

IRS. 1995. The Research Institute of America, Inc.  The complete internal revenue code. New York, NY.
January 1995 edition.

OMB.  1992. Guidelines and discount rates for benefit-cost analysis of federal programs.  Appendix A.
Revised circular No. A-94. Washington, DC: Office of Management and Budget October 29.
                                             A-19

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A-20

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                                       APPENDIX B
                              MARKET METHODOLOGY
       The economic impact analysis of the effluent limitations guideline for the TEC industry examines
the potential changes in price and production level for TEC services induced by the cost of increased
pollution control. A market model consisting of two components, the commercial component and the
outsourcing component, was used to analyze supply and demand within the TEC industry. A market
analysis is appropriate only for TEC facilities that offer commercial services because market interactions
can o;nly be analyzed where'prices and quantities are observable.  Questionnaire data, however, indicates
that a large proportion of facilities are not commercial TEC facilities (see Section Two, Industry Profile).
These noncommercial facilities, called in-house facilities, perform TEC for themselves and claim another
business operation as their primary focus; in-house facilities thus  perform most, and perhaps all, of their
cleanings without a market transaction.  These facilities can choose to meet their TEC needs by
outsourcing their cleanings to a commercial facility; this would impact the market analysis. The market
model therefore incorporates these in-house, noncommercial facilities through an outsourcing component.

        The outsourcing component investigates the quantity of cleanings that could shift from in-house
provision to the purchase of TEC services from the commercial market as a result of increased pollution
                              *             *
control costs.  At the current market price, a decision to outsource TEC services shifts the market demand
curve, changing market price.  The change hi price will cause in-house providers to reevaluate their
decision to outsource. If any in-house providers 'change their behavior in light of the new market price,
the demand curve will again shift.  The commercial and outsourcing components iterate until no one has
incentive to change their TEC decision, i.e., the model reaches a new, long-run equilibrium for
commercial cleaning price and quantity.

       Output from the market model includes:
               An estimated pre- and post-regulatory commercial price and quantity for each market
               group
               A percentage cost pass-through for each commercial market group to be used La the
               closure analysis
                                              B-l

-------
         •      The estimated magnitude of line closures within in-house facilities deciding to outsource
         •      Revised estimates of total annualized costs for in-house facilities deciding to outsource for
                use in the closure analysis

 Noncommercial, in-house facilities are analyzed to the extent that they may enter the commercial market;
 the calculations of the market model encompass only the commercial portion of the industry.

        This, appendix begins by presenting a graphical overview of the changes caused in a commercial
  i,':u ^   ''  :  . .'.    :»,;i. .    "  , '  'I-  • '•'  ".   "' ''"  '"   '<'•>..'•: "'  > ' ;'   "  ,  •  •':' ' "^      •       -       '  >'
 market by the imposition of increased pollution control costs. Second, a description is provided of the
  1111.71 n .   "" ,.»  •  ,   ,,,[.,, in    ,      '.:,'" i   n> i ,     '   i ,• ',:' •     "•    , • • , .1 •   " '.:',,     !        •          •     ,  •
 methodology used to obtain each variable in the supply and demand equations and the steps in which die
 model was operationalized. The model is based primarily on questionnaire data because of the limited
 amount of time-series data available from industry and publicly-available sources.  Once the commercial
 demand and supply system is explained, the shifts in supply and demand are discussed hi detail. Finally,
 the market model's iteration process with the outsourcing component is traced both graphically and with
 equations.
 B JL    GRAPHICAL ANALYSIS OVERVIEW OF COMMERCIAL MARKET CHANGES

        The market impacts of the effluent limitations guideline on the TEC industry will depend on the
 extent to which cost increases 1) cause a decline in the quantity of tank cleanings performed, and 2) can be
 passed on to consumers through higher prices.  Since tank cleanings are inputs into the service of
 transportation and since transportation is an input into the final product delivered, the demand for cleaning
 ultimately depends on the demand for the final products delivered by the transportation industry.

        Figure B-l illustrates a commercial market for TEC.  Preregulatory conditions are shown by S1
 (supply), D1 (demand), and equilibrium (their intersection) at F™ and Q*™ (price and quantity). Imposing
 the effluent limitations guideline causes an increase hi the cost of providing TEC services.  This changes
the commercial TEC supply curve, shifting it upward (to the left); the supply shift is shown as Xs in Figure
B-l. At the same time, the cost of in-house cleaning, a substitute service, increases. Therefore, die
potential exists for faculties to switch from providing the service for themselves to outsourcing their TEC
needs into the commercial market.  If in-house facilities do shift to commercial providers, the demand

                                              B-2

-------
                             TEC COMMERCIAL MARKET GROUP g
ppost
ppre
                                 Qpost   Qpre
                                                                            S1
                                                        Increase in quantity
                                                        demanded from
                                                        outsourcing component
Q
                                                                           g
        D1, S1 = preregulatory market conditions
        D2, S2 = postregulatory market conditions
            Qpre = pre-requlatory equilibrium price and quantity
           t> Qpost - post-requlatory equilibrium price and quantity
          = supply shift = weighted average increase in marginal cost from regulation
          = demand shift = change in price due to change in quantity demanded
                                      Figure B-l

             Impact of the Effluent Guideline on a Commercial Market With Outsourcing


                                        B-3

-------
 function in die commercial TEC market groups shifts upward (to the right). This demand shift is derived
 from the outsourcing component of the model. The change in price due to this
 shown as A,D.
outsourced quantity is
        At toe intersection of the new supply and demand curves, S2 and D2, Figure B-l shows me
postregulatory equilibrium at a higher price and lower quantity, P*0" and Q""", man the preregulatory
equilibrium of P*1* and (y™. Because the regulation would change both the supply and demand for
commercial services, the change in quantity cannot be predicted; the only predictable movement is an
increase in price.  Figure B-l can be redrawn to show an increased or an equivalent postregulatory
quantity compared to the preregulatory environment  The actual result would depend on the relative
 • 	»ii, i'    „     , . '  !. I'lBlliH     i  : , , :•    i" i I     ',  "	  '.,.•:    	    ,.,„"!    I'
magnitudes of the supply and demand function shifts.  In other words, it is feasible mat the market analysis
will show an overall increase in the amount of business realized by commercial TEC facilities.  This will
occur if the amount of cleanings outsourced to the commercial market (the change in demand) exceeds the.
decline in cleanings due to increases in price (the change in supply).
B.2   ESTIMATING PREREGULATORY COMMERCIAL MARKET CONDITIONS

       The demand and supply curves need to be estimated prior to the imposition of regulatory costs in
order to estimate baseline industry conditions. The change from the baseline is a measure of the impacts
caused by increased pollution control costs. Both die commercial supply and demand equations can be
estimated with information from the detailed questionnaire and other sources. Commercial TEC supply is
a function of the price of commercial TEC service and the regulatory compliance cost (which is zero under
preregulatory conditions). Commercial TEC demand is a function of the price of commercial TEC
services and the cost and availability of substitute services (e.g., in-house provision). In addition to these
variables, die supply and demand equations are both functions of other exogenous variables such as the
price of inputs to provide TEC, the frequency of required tank inspections, and die commodities
transported.  These variables are assumed to be unaffected by die regulation and are, therefore, considered
exogenous; exogenous variables enter die market model tiirough die constant terms in the demand and
supply equations.
                                             B-4

-------
        The demand and supply curves are based on two equations solved for quantity; Q, as an


exponential function of price, P, for each market group, g. The demand curve is specified as:
where:
                           Qg = quantity demanded in market group g




                           Pgd = price at which quantity is
                            ag = demand constant
                            TI  = price elasticity' of demand
                             J5                  s
and the supply curve is:
                                        Q; - Pg(pg*)
where:
                            Qg*  = quantity supplied in market group g




                            Pg  = price at which quantity is supplied



                            P_  = supply constant
                              o          '     '            i               '        ,.



                            eg  = price elasticity of supply







This particular specification of supply and demand has the property that the price elasticity of supply and


demand, the percentage change in quantity supplied or demanded caused by a 1 percent change in price, is


constant at all points along me respective curves.
                                             B-5

-------
        Setting quantity demanded equal to quantity supplied in die above equations and solving yields the
 following solution for the preregulatory equilibrium commercial price, P,1:
                                             0°(".> - "(P.))
Substituting P,1 into the demand equation (or, equivalently, the supply equation) results in the
corresponding preregulatory equilibrium commercial quantity, Q,1:
                                        • Q.1
        Figure B-2 presents a flow diagram of the steps necessary to obtain quantitative estimates of the
supply and demand for commercial facilities using the above equations.  The process begins by identifying

commercial facilities and weighting questionnaire data from the facility level to the market level.  The
process continues with grouping data by mode of equipment cleaned, and estimating the supply and
demand elasticities.                                            .
       B.2.1  Identifying Commercial Cleaners
       Facilities that perform transportation equipment cleaning (TEC) fell into two categories:
               IMiause fadM.es
               The in-house category has two subcategories—facilities with mixed activities and facilities
               with only TEC activities. Faculties with mixed activities perform TEC as part of other
               business activities. They primarily perform cleaning for themselves (i.e., on an in-house
               basis), although they may do a small amount of cleaning on a commercial basis for others.
               These facilities have the option of outsourcing TEC to a commercial facility while
               (xmtinuing to operate their primary business. The decision to outsource TEC activities at
               in-house facilities that perform only TEC results in the closure of these facilities but may
               have minimal effect on the larger business entity.  In the questionnaire database are 447
               in-house facilities that perform mixed activities and nine in-house facilities mat only
               perform TEC activities.
                                              B-6

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                     Commercial Facilities

                                         t
            Total Number of
           Tanks Cleaned per
                 Facility
                 (Q?)

                 Typical Cleaning
                Price per Tank for
                   Each Facility

                     (Pi)     ,
                  Weight Each Facility's Price
                         and Quantity
                     Categorize Facilities
                     Into Market Groups
 Aggregate
 Number of
Cleanings for
Each Market
   Group

    (Qg)
Take Natural Logs of Price
 (Pg) and Quantity (QgPj)
  Linear Regression of
   Quantity and Price
                  Interpret Supply Elasticity
                      for Each Group
Estabfsh Basefine
  Price for Each
  Market Group

      
                                              Estimate of Supply
                                              Shift From Poflufon
                                                Control Costs
                                               Demand and
                                             Supply Equations

                            TEC Cost Share of
                           Overall Transportation
                           Costs for Carriers for
                            Each Market Group
                                                               Demand Elasticity of
                                                                 Transportation for
                                                                Each Market Group
                                                                         Elasticity of
                                                                         Substitution
                                                                      Between TEC and
                                                                        Other Inputs to
                                                                        Transportation
                                                         Derived Demand
                                                             Equation
                                                         Demand Elasticity
                                                          for Each TEC
                                                          Market Group
                                                              (ns)
                                                        Calculate Demand
                                                          Constant Using
                                                          Pg.Qgartdna
New Price and
Quantity for Each
Commercial Market
Group g


Commercial Price
for Outsourcing
Component
(Pg)
                                                                       *v39vfK"
                                             Figure B-2

                            Commercial Component for TEC Market Model
                                                 B-7

-------
        •      Commercial facilities
                These facilities perform the majority of tank cleanings for commercial clients. One
                hundred fourteen commercial facilities perform only TEC operations; one hundred twenty
                two facilities perform a mix of operations. These facilities must upgrade their wastewater
                treatment systems to meet effluent guidelines. If unable to doso, a facility must close.

        Facilities were separated into these two categories using Part B, Question 17 of the Detailed TEC
 Industry Questionnaire (U.S. EPA, 1995).  This question asked what percentage of cleanings are done on a
 commercial basis, Table B-l shows the range of facility responses mat are skewed toward both tails,
 supporting the concept of differentiating between in-house and commercial faculties.  For the purposes of
 i '. »I   " '    " '   •  • ''...LilhiM ' . '    »" ,i '   i , I1'  II1'  » .. I, ' • , '"i • Hll '  ' nil "' , I.,.1"  ,   „  '  •    , ,  '.'     .1  • •  .     ,      , *
 the analysis, facilities responding that 50 percent or more of their cleanings were commercial are
 categorized as commercial; those responding mat less man SO percent of their cleanings were commercial
 are categorized as in-house faculties.
        B.2.2  Weighting Questionnaire Responses to Estimate Market Information From Survey
               Information

        The detailed questionnaire was sent to a sample of all TEC faculties.  Faculty-level statistical
weights are used to adjust the price and quantity data to national estimates prior to performing the market
analysis (see equations below). The demand and supply equations are built from weighted observations,
not by weighting the final results.
       B.2.3  Categorizing Facilities by Market Groups/Transportation Modes

       The market methodology does not assess potential shifts between transportation modes. Each
market group exists and operates independently of the others. (See Section B.2.7.4 for substitutability
assumptions between modes.) Roth (1991) indicates mat truck and rail modes are competitive only within
a narrow range of weight and distance and mat they compete for freight at the limit of their inherent
advantages. The effluent guideline might cause a shift between modes, but only if 1) increased pollution
control costs fall disproportionately on the different modes and 2) these cost increases lead to a significant
change in overall transportation costs for mat mode. These two conditions can be examined outside of the
market and outsourcing components.

                              ,   "      .     '  B-8

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                           TABLEB-1
FACILITIES CATEGORIZED BY PERCENT OF COMMERCIAL CLEANINGS
Percent
Commercial
Cleanings
0%
1-10%
11-20%
21-30%
31-40%
41-50%
51-60%
61-70%
71-80%
81-90%
91-99%
100%
Number of Facilities
in Range1
310
102
8
9
0
24
0
5
7
10
2
/
214
Percent of Facilities
in Range
44.9%
14.7%
1.2%
1.3%
0,0%
3.5%
0.0%
0.7%
1.0%
1.5%
0.3%
31.0%
     Numbers may not sum to total due to rounding.
     'Based on detailed questionnaire data.
                              B-9

-------
        Facilities are separated into subcategories based on commodities carried and tank types cleaned.
 In general, the commodity transported affects the types of pollutants to be found in the wastewater stream.
 The three major commodities for TEC industry are chemical products, petroleum products and food
 products; hoppers tend to carry distinct products such as pelletized plastic.  The mode of transportation
 affects the volume of wastewater produced.  Rail tank cars are larger than tank trucks and tank barges are
 larger man bom.  Larger tanks produce larger volumes of wastewater.

        The key features of the industry mat determined the subcategorization of the industry also are
 significant in determining the division into market groups for the market analysis.  Transportation modes
 are competitive only over certain distances and load weights. Tanks tend to be used to transport narrow
 ranges of commodities.  For example, the Sanitary Food Transportation Act of 1990 (P.L. 101-500)
 requires the permanent marking of food grade tanks and restricts the use of these tanks to food grade and
 acceptable nonfood grade products. Thus, dividing the industry into subcategories based on transportation
 mode and commodity carried provides a natural division into market groups for the economic analysis.

        Facilities may clean a mixture of tank types; each tank type may have a different cleaning cost that
 can potentially affect the average cost-per-tank-cleaned. In practice, however, mis effect is relatively
 minor. The percentage of tank trucks cleaned hi rail facilities and vice versa is small relative to "own"
 tanks cleaned (see Table 2-4, Chapter 2 Industry Profile for details). The market model is designed to
 permit the use of a weighting scheme mat converts various tank types into "tank-equivalents," but the
 subcategorization by tank type and commodity obviated the need to invoke mis model feature.
       B.2.4  Calculating the Quantity of Tanks Cleaned, Q,1

       The aggregate preregulatory quantity of tanks cleaned will be calculated as the average annual
number of tanks cleaned within each group.  In order to smooth fluctuations and present a picture of each
facility's market situation over an extended period, the facility data were averaged over the number of
years of operation between 1992 and 1994 and for which questionnaire data are available.  The following
equation was used:
                             o1  -
                            - *=
                                              B-10

-------
where:
                   Q^ = average annual preregulatory cleanings by facility i, market group g

                   Q^y = preregulatoiy facility cleanings by facility for year y (Question 23)
                    w£ = facility-specific weight for facility i
                    wt = weight by tank type (i.e., tank-equivalents)
         % commercial = percentage of commercial, cleanings by facility i (Question 17)
                       ~ number of years in operation and for which data  is available
        Second, the preregulatory quantity for each market group is calculated as the aggregate of all the
average weighted annual quantities for each facility in group g:
        B.2.5  Calculating Preregulatory Commercial Price Per Facility, P^1

        This part of the model calculates a preregulatory commercial price by facility and adjusts it to
1994 dollars. First, the average facility price for each year is calculated by averaging the facility price for
each tank type cleaned.  The price per tank type is estimated by dividing the TEC revenues for mat tank
type by the number of the tanks cleaned:
            i _ Y^       Revenues, year y * Percent revenues, tank type t, year y * PPL
            v                     Number of cleanings, tank type t, year y
or, using the questionnaire data:
                                               B-ll

-------
                                    Question 34y * Question 35^ * PPI
                                               Question 23^
 where:
                          f-y = commercial price per cleaning, facility i, year y
                          t = tank type
                          y = year (1992,  1993, or 1994)
                            =  producer price index, year y
        In order to smooth price variations, the final facility price is the average price per tank cleaning
 foe the number of years in which the facility was hi operation (1992 to 1994) and for which data are
 available:1
        B.2.6  Estimating Price Elasticity of Supply, e,

        A separate price elasticity of supply is estimated for each market group. Since the TEC industry is
not a well-defined industry based on SIC codes, mere are no published time series data available from
which to estimate supply and demand relationships. Instead, a supply curve is constructed from detailed
  : „,      ^  , '    	; , ,      \ .         „ '    ;  ;  ' ,    '  • / 	  : „  ,    ,; ,   '       ,
questionnaire data and the price elasticity of supply is estimated econometrically.
   1 Ihe decision to upgrade wastewater treatment at a facility is assumed to have a multi-year effect. EPA
assumes that the facility owner would make a decision with a multi-year effect based on multiple years of data.

                                             B-12

-------
        Figure B-3 illustrates the derivation of a supply curve from a hypothetical market group consisting
of five facilities. The five facilities are first ordered from lowest to highest price. The price for each
facility is then plotted with a quantity equal to the cleanings offered by that facility plus die total cleanings
offered by all facilities with lower prices. Accordingly, in Figure B-3, Facility 2 is plotted with its cleaning
price and die quantity QgP21; die difference between Q^1 and Q^1 is equal the number of cleanings
performed by Facility 2 alone at its own price, while the sum of Q^1 and Q^1 is equal to the total number
of cleanings offered at that price or below. The quantity Q,1, therefore, is equal to the total number of
cleanings offered by all facilities in mis market group.2 The baseline-preregulatory price Pg1, the
preregulatory market equilibrium price, is the highest facility price, P^1, hi each market group prior to. die
regulation.  P/ and Q/ are illustrated in Figure B-3. This is die operationaHzation of the textbook
definition of a market supply curve with the implicit assumption that each facility is operating on its
marginal cost CUTVe.                                            >

        Next,  natural logariduns are taken of prices and tiieir corresponding quantities. Ordinary least
squares regression is tiien used to estimate die following equation:
where die quantity Op^1 is die weighted aggregate of all facility cleanings offered at die particular marginal
price.3 The estimated coefficient on the log of price, e, in the log-linear supply equation, is the price
elasticity of supply.

       Following die derivation of die equilibrium price and quantity and die price elasticity of supply
through regression analysis, die constant hi die supply equation remains to be calculated. The regression
analysis used to calculate die supply elasticity also estimates a constant term based on die available data.
Due to wide variations hi the data, however, die line defined by die regression does not necessarily
intersect  die equilibrium point that we had defined, i.e., P,1 and Q,1. The constant, therefore is calculated
    2 Note that hi die actual estimation procedure, dte weighted quantity of cleanings for each facility in die
market group will be used.
   3 This estimation procedure is adapted and revised from die coke oven charging RIA (U.S. EPA, 1992).

                                               B-13

-------
 p1
 r a
a
  S   |
Facility #2's
quantify
                         Qi
            gP2
Q;
                                                                       Best-fit line
                                                                       (regression)
Q,
       P a = Baseline price for commercial market g
       Q g = Baseline aggregate quantity for commercial market g
        a =  a* = y-intercept of supply (i.e., the constant in the linear equation)
        b = 6g  = price elasticity of supply (i.e., the slope in the linear equation)
                                   Figure B-3
                       Estimating Price Elasticity of Supply, eg
                                      B-14

-------
separately by substituting the defined equilibrium price and quantity and the estimated price elasticity into
die original supply equation and solving for p. The supply curve is then "forced" to pass through die
equilibrium point calculated using questionnaire data as shown in Figure B-3.
        B.2.7  Estimating Price Elasticity of Demand, TI,

        The price elasticity of demand for TEC is estimated using the derived-demand relationship that
exists between TEC and transportation output as a whole. The price elasticity of demand for TEC services
depends on the price elasticity of demand for transportation output and on die share hi die cost of
transportation services accounted for by TEC services.  These characteristics can be numerically
calculated using data from current literature, questionnaire data, and die following relationship:
                                              * S    + 9 * S   )
                                                a*tK     8   from'
where:

      TI    = demand elasticity of TEC services in market g
       'S          ,          J                    •    '           •     •        ' •*
            = demand elasticity of transportation services in market g
                                   <           , * •              -            •       ' •
      Sg   = share of cleaning costs in total transportation costs for market g

         6  = elasticity of substitution between TEC and other transportation inputs in market g

      S     = cost  share of all inputs to transportation  other than TEC for market g
       o
                                              B-15

-------
        B.2.7.1 Transportation Demand Elasticity

        The price elasticity of demand for each transportation market group (TI    ) is obtained from
                                                                        oThnr
 transportation literature.  Transportation services are themselves inputs into production of other services
 and goods.  Demand for transportation is a derived demand depending on the demand for goods to be
 transported.  The price elasticity of demand for transportation is related to the price elasticity of demand
 foe the product being shipped and the importance of transportation costs hi the total cost of the final
 product (i.e., the share of transportation in the total cost of the products). If transportation costs comprise
 a relatively small share of the total product cost, producers have little incentive to find ways of avoiding
 transportation costs if the price of transportation rises; the demand for transportation will be price inelastic.
 The price elasticity of demand for transportation, therefore, is a smaller value man the price elasticity of
 demand for the final market product. By the same reasoning, the price elasticity of TEC demand will be
 an even smaller value than the price elasticity of demand for transportation.
        Literature Review of Demand Elasticity Estimates for Transportation Modes

        Price elasticities of demand were estimated from a literature review of previously published
studies of transportation demand elasticities. This search was conducted through several databases. One
literature search used CD-ROM databases that search for journal articles using key words, subjects, or
authors.  SilverPlaJteris the database searched for government publications; mere were no relevant articles
or citations that would yield elasticity estimates. American Business Information (ABI) provided several
articles from major economics journals such as Review of Economics and Statistics and Bell Journal of
Economics.  However, the majority of "hits" were for public transportation elasticities.  These articles
considered methodologies and estimates for car, bus, rail, and public transit elasticities.  In addition to CD-
ROM sources, the Boston Library Consortium (consisting of all Boston libraries) provides access to a
database mat provides bibliographic citations and abstracts for over 10,000 journals published since 1988.
This resource provided several articles relevant to freight transportation but, again, the majority of "hits"
were for passenger transportation.
                                              B-16

-------
        Following this library search, an on-line search was conducted teougb a service known as
DIALOG/Knight Rider Information Services. The following'databases were searched through this service:


        •      Current Contents Search (Institute for Scientific Information-File 440). Provides
               bibliographic citations from current issues of leading journals in the sciences,
               social sciences, and arts and humanities.  ,

        •      Economic Ltierantre Index (Tte American Ecomnuc Association-File 139). An index of
               journal articles and book reviews from 260 economic journals and approximately 200
               monographs.

        •      Dissertation Abstracts Online (UMI-File 35). Contains abstracts and citations for
               aU American dissertations accepted at accredited institutions since 1861.

        •      TRIS (U.S. Department of Transportation and Transportation Research Board NAS/NRC-
               File 63). Contains transportation research information on air, highway, rail, and maritime
               transport, mass transit, and other transportation modes.


Searches were done in the first three  databases by keyword searches of demand?, elastic?, and trans?

(The question mark designates a wild character mat represents any words that begin with the letters up to

the question mark.) From these three databases 14 "bits" were made. The final database searched, TRIS,

was a much better source; 268 articles match from a search of demand and elastic?  Again, the large
majority of titles related to passenger demand elasticities. From these various exhaustive searches, 26

articles and two books were deemed relevant to freight transportation demand elasticities;  these sources
were collected, reviewed, and evaluated.
       Observations Regarding Elasticities of Demand


       Table B-2 summarizes the findings relevant to the TEC market groups for rail and trucks.  Table
    '                                -                        - '
B-3 summarizes the findings relevant to the TEC market groups for waterways (bom barge and ocean/sea

tanker). Bom Tables B-2 and B-3 also summarize any substitution elasticities or cross-price elasticities mat

authors included in these studies.  Table B-4 briefly lists the reasons some articles were excluded from

further consideration.
                                             B-17

-------
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                       B-18

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                            B-20

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                          B-23

-------
     Hiiiilfj"
B-24

-------
                                        TABLEB-4

   REFERENCES OBTAINED, REVIEWED, BUT NOT USED TO DEVELOP ESTIMATES
Author(s)  •
(year of
publication)
Reason for Exclusion
Abdelwahab
and Sargious
(1992)
Presented a simultaneous demand model for freight transportation that combines
mode choice and shipment size decisions.  Because the dependent variable is the
probability of mode choice, no traditional demand elasticities are estimated.
Call an and
Thomas
(1992)
Studied the household goods carrier market, therefore was not relevant to our tank
transportation market groups.
Damns (1984)
Developed methodology to examine Ramsey Pricing alternatives in the deregulatoiy
environment.
Estimated nothing •with actual data, only theories are developed.  	
Friedlaender
and Wang
Chiang (1983)
Estimated productivity using railroad firm level data for 1965-1973.
Estimates of demand elasticity are not available from the cost functions developed.
Published cost elasticities.
Friedlaender et
al.(1993)
Estimated only cost models of specific railroad companies.
Included no demand elasticity estimates.
Concluded that capital is not variable enough, therefore there is still a dead weight
loss even though some deregulation has occurred.	
Gemmell,
Ufam, and
Shaw (1983)
Estimates empirical measurements of the economies of scale,of Canadian water
carrier on the Great Lakes and the St Lawrence River. Specifies cost per ton-mile by
various size factors such as: revenue per ton-mile, fleet size, vessel size, shipment
size, and length of haul.  Although a table of cost elasticities is published, these
elasticities have a different interpretation than demand elasticities.  (The cost
elasticity would be interpreted as the percentage change in average costs for a one
percent change in a characteristic such as size of fleet)        	'..; •
Hale and
Vanags(1989)
Derived a model of the relationship between spot and period rates for the dry-bulk
market The results do not include demand elasticity estimates.	
Jara-Diaz,
Donoso, and
Araneda
(1992)
Estimated marginal transportation costs for a highway in Chile, therefore was not
relevant to our tank transportation market groups.
Lackman
(1980)
Obtained counter-intuitive results (i.e., positive demand elasticities).
Concluded that better data, more explanatory variables, and a better service index was
required for future studies.	•   	
                                          B-25

-------
                                                  TABLE B-4 (continued)

                   REFERENCES OBTAINED, REVIEWED, BUT NOT USED TO DEVELOP ESTIMATES
 ii'ii <
 t't
 (if i ;
: f'li
                Authors)
                (year of
                publication)
                Lewis and
                Widup(1982)
                Westbrook and
                Buckley
                (1990)
                Winston
                (1981)
 Reason for Exclusion
 Calculated the demand elasticities of rail and truck services for transporting
 assembled automobiles. Used methodologies and data that are good for only this
 commodity group. No detailed data on other commodities exist  The rail elasticity
 for assembled automobiles is -0.94. The author states that Oum (1979) has a
 comparable 1970 estimate of Canada's metallic products of-1.18. The truck
 elasticity for assembled automobiles is -0.62. Author states that Oum (1979) has a
 comparable 1970 estimate of Canada's metallic products of-0.33.
 However, assembled automobiles are not relevant to our tank transport market
 groups.	
Calculated estimates of substitution and demand elasticities for the transportation of
fresh fruits and vegetables in order to analyze the impacts of deregulation. Rail
demand elasticity estimates ranged from -0.06 to -0.55 and truck elasticities ranged
from-0.11 to-0.59.
However, transportation of fresh fruits and vegetables is not relevant to our tank
transport market groups.                	
Establishes that there are barriers to entering the ocean sea shipping business due to
the large capital requirements.
Estimated a disaggregated freight demand model based on data from American
Pacific Container Line.
Obtained 110 observations of origin and destination pairs located on the West Coast
Used a probit model to estimate shares of the rail and truck surface modes and then
enters the choice of ocean sea shipping to determine the potential share it can gain.
Predicts that ocean sea shipping could gain about 10% of the surface mode traffic.
No demand elasticities are included, because container shipping data are not
available.
                                                         B-26

-------
        The majority of articles address rail elasticity demand estimates. Several studies estimated the
demand elasticity of truck transportation. No U.S. estimates of barge demand elasticity were found, but
one estimate of Canadian barge demand elasticity was obtained. No studies were found mat estimate the
demand elasticity of ocean/sea tanker.  The major reason for such limited studies of truck and waterway
modes is the very limited transportation data available. A second reason for the more numerous studies of
rail elasticity is that policy analysts have had reason to study rail transportation; deregulation of the
railroad industry, which occurred in the early 1980s, prompted the need for analysts to estimate demand
elasticities in order to assess the welfare impacts of deregulation.
       Rail Service Demand Elasticity
                                                f                 ^                      •
                                                                            '  '•          •>     • -
       Fourteen studies reviewed published rail elasticity estimates.  Three of these studies used Canadian
data to estimate elasticities.  The demand elasticity estimates range from very inelastic (-0.06) to elastic
(-3.547). The studies use different methodologies, aggregate rail services in. different ways, and use
various years and time periods of data. Because of the large range of estimates, it was not appropriate to
Use the average or median value of all estimates.  Instead, elasticities were categorized by a number of
criteria and me most relevant were used to determine an estimate for use in me market model.

       In general, the studies based on regulatory data feat were pre-1980 yielded less elastic demand
elasticities. Studies based on deregulated data that were post-1980 yielded estimates closer to unity or
larger. The most recently published study by Hsing (1994) confirms mis observation.  Hsing estimated
elasticities annually from 1961 to 1990. The elasticities were very inelastic in 1961 (-0.066) and 1980
(-0.295). After deregulation the estimates were larger in absolute value. For 1990, the most recent year
Hsing had data, the estimate was very close to unity (-1.057).
         \                                  ' .     -
       Table B-2 also displays elasticity estimates by commodity groups when the author(s) used
desegregated data.  Analyzing these elasticities, it is observed that the more desegregated the date, the
more varied the estimates.  Intuitively, mis makes sense.  Individual commodity estimates will vary
                         :                                                      •         *       °
because of the wide range of product elasticities for the commodities in question. In addition, for some
commodities, transportation is a larger cost share of the overall product man for other commodities.
                                              B-27

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        Placing more weight on more recent estimates and on more aggregated estimates, a qualitative
 approximation based on me literature reviewed is -1.0 (unit elasticity).  This estimation relies primarily on
 Hang (1994) and Oiim et al. (1992), which are the two most recent attempts to study aggregate rail
 Services. Quantitatively, the average of all point estimates and of the range averages is -1.01, which is
 Vfery close to the qualitative estimate of unity.        ,
        Land/Highway Demand Elasticity

        Nine studies estimated demand elasticities for tire trucking industry, two of which are based on
 Canadian data. Authors who estimated bom truck and rail elasticities have generally concluded that the
 demand for truck services is generally more elastic than for rail services.  On average, truck estimates are
 24 percent larger in absolute value; the median difference is 37 percent. All truck estimates date from me
 1960s through the early 1980s, and provide point estimates ranging from -0.587 to -2.023. Given me large
 range of the estimates and the age of the data used in the studies, the historical relationship between truck
 and rail established by these nine studies was benchmarked to die rail elasticity estimate of -1.0 that is
 based on more recent estimates.  Therefore, the truck demand elasticity estimate used hi the model is
 -1.3 (30% more than the rail estimate).
        Barge and Ocean/Sea Tanker Demand Elasticity

        Table B-3 presents the information from the two articles we found containing water carrier
elasticity estimates. The only study to address ocean/sea tanker services demand is an analysis of the
world tanker market by Beenstock and Vergottis (1989). This study assumes mat demand is completely
inelastic (i.e., no matter what price, the same quantity is demanded), but because the facilities responding
to the questionnaire reported zero ocean/sea tankers cleaned, mis study is irrelevant. The single estimate
of demand elasticity for barge travel is based on Canadian data for grain transportation from Thunder Bay,
through the Great Lakes and the St Lawrence Seaway, to me east coast ports.  Oum (1989) used this data
to approximate all inland waterway traffic. The demand elasticity estimates ranged from -0.738 to -0.750.
Since mis is the best information available, the market model will assume a barge elasticity of -0.7.
                                             B-28

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        Summary of Demand Elasticities  ..-•'••

        Table B-5 summarizes title assumptions for demand elasticities used for die market groups.


        B.2.7.2        Cost Share

        The second piece of information necessary to estimate the price elasticity of demand for TEC is
me cost share of transportation output accounted for by TEC services (^g7K)-  This can be estimated using
the detailed questionnaire data from carriers.  For each carrier, cost share is calculated by taking an
average of TEC costs as a percentage of its overall operating costs for the years 1992, 1993, and 1994.
For each transportation mode, cost share is calculated as the average of the cost share for each carrier
within that mode.                                                             .

        Table B-6 summarizes the results for each transportation mode calculated on the basis of data at
the facility level, me business entity level, and a composite of the two. The most relevant estimate of cost
share is the business entity level; mere is no reason to expect the cost share of TEC services at any one
facility to reflect the overall TEC cost share for a multi-facility business. The detailed questionnaire,
however, is structured in such a way that single facility businesses are grouped with faculties that have a
larger corporate parent. The composite construction ensures mat the cost share for single facility
businesses is included in the estimate for the business entity level.  Finally, the estimate for railroad
carriers is based on only one facility; this estimate cannot be disclosed because it is based on confidential
business information.

        As can be seen in Table B-6, TEC costs make up a relatively small share of overall transportation
costs. For both truck and water transportation, whether estimated at the facility, business entity or
composite level, the estimates are significantly less than 10 percent.4
   4 The cost shares used to calculate the derived price elasticity of demand for TEC services in the market
model were set at 10 percent for water and rail, and IS percent for land.  The smaller the cost share, the less
elastic is the demand for TEC services. When demand curves become less elastic, all other things equal, the
impact on output becomes smaller and the impact on price and cost pass through becomes larger. Setting the
cost shares at 10 and IS percent provides more conservative (i.e., larger) estimates of impacts on output, and

                                              B-29

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           TABLE B-S




SUMMARY OF DEMAND ELASTICITIES
Market Group
Truck
Rail
Barge
Transportation Services
Demand Elasticity Estimate
-1.3 (elastic)
-1.0 (unitary elastic)
-0.7 (inelastic)
             B-30

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                                 TABLEB-6




                 WEIGHTED AVERAGE OF TEC COST SHARE (%)
Transportation Mode
Land
Rail
Water
Facility
7.19
ND
5.38
Business Entity
5.38
ND
0.46
Composite
4.75
ND
0.46
ND: Not disclosed due to business confidentiality.
                                    B-31

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        Additional evidence that the cost share of TEC services is small can be observed hi comments
 made on fee detailed questionnaire. One company specifically slated mat it estimates Its TEC costs as less
 man 1 percent of total company costs.  Out of roughly 50 other carriers hi the sample, another half dozen
 stated that they do not track, or "break out," TEC costs from other costs.  One interpretation of such
 comments is mat TEC costs are so small that firms simply are not mat concerned about them. The
 primary impact of these small estimates of TEC cost share is mat estimates of the derived demand for TEC
 services will tend toibe very inelastic.
        B.2.7.3       Substitutability
        The third element needed to estimate the demand elasticity of TEC is the degree of substitutability
between TEC services and alternatives for this service within a market group's
demand for transportation
services (6,). Price elasticity of demand varies with the degree of substitutability between TEC and
alternative inputs that may fulfill the same need. If good substitutes for TEC services are readily
available, snippers have incentive to avoid the expense of an increase hi TEC costs by substituting now
relatively cheaper alternatives mat provide die same service. An increase hi the price of TEC services
would lead to a large decrease hi quantity demanded; demand would be price elastic.
                                   1                      '        '.,„
       One substitute for TEC is the elimination of the need to clean tanks. This is not a major
consideration for several reasons. Most cleanings are required to main^in the integrity of the commodity
transported, to permit repair, or to maintain cargo capacity (i.e., unavoidable needs). Cargo integrity is
particularly important for food-grade commodities.  The largest documented outbreak of single-source
food poisoning (an estimated 224,000 cases) has been attributed to the absence  or improper cleaning of
food-grade tanker trucks (Gibson, 1994; Hennessy, et. al., 1996).

       The use of dedicated tanks mat do not need to be cleaned between each shipment is one way to
reduce the number of cleanings required. Even dedicated tanks, however, need to be cleaned periodically,
so dedicated tanks are not perfect substitutes. Dedicated tanks are not widely used by the market because
of the initial investment for the tank and the need to let it sit unused between shipments of the specific
facility closures (Appendix C).
                                             B-32

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cargo. Most firms find it more economical to clean the tanks between shipments and to maximize die time
die tanks are in use. Another possible substitute is die use of disposable tank liners, but mis method is new
and does not have a major share of die market (Modern Bulk Transporter, 1994). The model therefore
assumes substitutability will have a minimal Impact and does not incorporate it (by assumption,  6g = 0).

       Another substitute for commercial cleaning is in-house cleaning. While die outsourcing
component estimates die portion of TEC demand shifting to die commercial market, the possible shift from
commercial to in-house services would be very difficult to model; Facilities mat outsource all their TEC
needs are not included in die  screener or detailed surveys because diey do not currently discharge any TEC
effluent. Switching from commercial to in-house  cleaning is not likely because capital start-up costs pose a
barrier. Under these circumstances, EPA assumes die switch from commercial to in-house TEC services
would be insignificant.
       B.2.7.4  Observations on Substitution and Cross-Price Elasticities

       Seven articles estimated cross-price elasticities (see Tables B-2 and B-3).  One estimate included
rail, barge, and truck cross-price elasticities and die others estimated just rail and truck cross-price
elasticities. Overall, die almost completely unified conclusion is tiiat modes of transportation services
operate independently of each other; die cross-price elasticities of demand are essentially zero.  One
exception is the estimate between barge and rail traffic of corn tiirough die Midwest by Fitzsimmons
(1981); a second study, Morton (1969), was inconclusive. The model assumes transportation modes work
independently of each other and, overall, the literature reviewed to date supports that assumption.
       £.2.7.5 Final Demand Elasticity Equation                                     ,

       Since die elasticity of substitution, 6C, is assumed to approach zero (i.e., no TEC input substitution
is available), die equation for price elasticity of demand becomes:
                                      T»    = —n   *  S_
                                       '         'ft*.   , Snsc
                                              B-33

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 This formula is used to estimate the price elasticity of demand for TEC services in each market group.
B.3    ESTIMATING THE SHIFT IN THE SUPPLY FUNCTION FROM COMPLIANCE
        COSTS, X^

        After the effluent guideline goes into effect, the supply function will shift because of die increase
 "•I"'  ',   ,„"    .i»  |n|1 !: 'i'itJ  ! .  '    ..'  "i: '  ',:i'"i!11!  i' r i.. i '' ,.'  ' ',!'i.!' ., : : ' ":.•,' ",.'„' ',   '"" • ,  «,"    ' Ji!r   !  I,    '     '•  '         .1,
fa pollution control costs.  Potentially, the per unit cost increase will be different for each firm and may
not be correlated with firm size or price. To calculate me shift in the supply function, EPA uses the
expected value of the change in marginal cost for the given market group.  The expected shift of the supply
function is equal to a weighted average of the facility-specific pollution control costs per unit of output.
 rtji in 'i      ;  ,"    if ijl	il  ; ,  •  •' '" •," ,•  '	  f . '• "'     '"' ,• i  '! " • i,  »' ,• .1! '•  • ,, • ", • ''i1  r,'i ' •    I .
This shifts the entire supply curve upward (i.e., to the left), parallel to the preregulatory supply curve, by
the average per unit pollution control cost. The equation for mis shift factor is:
where:
              A* = weighted average pollution control cost per unit of output in market g

               J£ = average  annual weighted quantity, facility i, market g
                 = total pre-tax annualized compliance costs, facility i, market  g
The facility-specific pre-tax annualized cost of complying with pollution control requirements are
calculated separately in the Cost Annualization Model (see Appendix A for details).

        In order to maintain the constant elasticity property of the supply curve, me shift due to regulatory
controls is expressed as the percentage shift hi supply price evaluated at the preregulatory equilibrium
                                               B-34

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quantity, relative to the preregulatory equilibrium price.  The posttegulatory supply curve is now written as:
where k is equal to Ag/P1 (i.e. the per unit pollution control costs divided by equilibrium price).
        Setting the above supply equation equal to die original demand equation and solving for price
results hi:
                            t
Each of the parameters on the right are known; their derivations are described hi Section B.2.  The
variable k will change when different regulatory options are considered, changing posttegulatory
equilibrium price and quantity.

        The new equilibrium price, P2, can now be substituted into demand equation to solve for the new
                         \      -        .'                     '         ,  '                '
equilibrium quantity, Q2:
This new equilibrium quantity and price are best thought of as an intermediate solution.  It is an
equilibrium; quantity supplied equals quantity demanded by those currently participating hi the commercial
market at the going market price P2. It is an interim equilibrium in the sense mat in-house providers of
TEC services may now have incentive to outsource their TEC needs. If any of these facilities do choose to
enter the commercial market, the demand curve will shift and the market will move to a new equilibrium
point The market will not be hi final equilibrium until all demanders and suppliers of TEC services, both
                                             B-35

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 commercial and in-house, no longer have any incentive to change (heir behavior at the existing market
 price.

        Finally, a cost pass-through percentage (CPT) is calculated for use in the closure model. CPTis
 the difference between me baseline and postregulatoty prices as a proportion of me average pollution
 control cost per unit.  CPT estimates me relative burden of the cost of me regulation borne by the
 producers and consumers of TEC services by determining what percentage of pollution control costs is
 " 'J'.ill ,;!',  ,;,   ! ,  ,    , i'J'SI,  '.   ,  	'  " i  I  .' '  ' • , '' "|. ,v.  ! ,• : ; !.: ' '   ..I'.'   ".'•''    '
 actually paid by the facility, and what percentage of those costs may be recovered by passing mem along to
 consumers ha the form of higher prices.  Each market group will have a different cost CPT as calculated in
 the following equation:
                                        CPT
                                            e
where:
   CPT  == cost pass-through, market g

      P* s postregulatory commercial equilibrium price, market g

      Pg  = preregulatory commercial equilibrium price, market g

           weighted average pollution control cost per unit of output, TEC facilities only, market g
       In order to estimate CPT, the weighted average pollution control cost is adjusted to include only
affected facilities in the market group, not zero discharge (ZDT) facilities. It is important to include ZDT
facilities when estimating A, because ZDT facilities put downward pressure on market price. They do not
incur regulatory control costs and, therefore, do not have to raise the price of TEC services they offer to
customers as a result of the rule. Because of ZDT facilities, affected facilities are unable to increase the
price they offer customers as much as they would in the absence of ZDT competitors. Excluding ZDTs
from the calculation of Af would overestimate the decrease in market supply caused by the regulation;
however, Ag is a weighted average of two distinct groups of facilities: one group that incurs no regulatory

                                              B-36

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costs and a second feat incurs all the regulatory costs. The average compliance costs are overestimates
for the ZDT group of facilities and underestimates for the affected group of faculties.  Because A.g is
smaller man A^EC, estimating CPT for affected facilities only using A,c overestimates the percentage of
costs that are passed through to consumers. EPA therefore uses A.^^. to estimate CPT.
       B.3.1  Shift in Demand From Outsourcing Component
         -.                        /                •                          -
       B.3.1.1        Description of Outsourcing Component                                 .

       Figure B-4 illustrates the logic flow for the outsourcing component.  The outsourcing module
calculates the relative increase in cleaning cost for in-house facilities, compares it to Ihe facility's
willingness to switch to commercial cleaning (obtained from questionnaire data), calculates the cost of
having the same cleaning performed commercially, and determines whether or not the facility should
outsource its cleaning.  This section provides a detailed description of the subcomponents shown in
Figure B-4.


       B.3.1.2        Incremental Pollution Control Costs

       ' The cost annualization model calculates the annualized incremental pollution control costs for each.
facility (Appendix A). These are inputs to the outsourcing component of the market model illustrated hi .
Figure B-4. The outsourcing component uses pre-tax annualized costs for two reasons:       -
               The facilities themselves will probably use the pre-tax cost when making this evaluation.
               Only large, multi-facility organizations are likely to have the 'accounting specialization
               required to perform the analysis on an after-tax basis.                             •
               All other costs and revenues in the model are taken from the questionnaire on a pre-tax
               basis.
                                              B-37

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                 Calculate incremental
                Pollution Control Costs
                        Pre-tax
                     Annualized
                                                       [From Cost
                                                       Amualization
                                                       Model]
                                 Identify Facilities With In-House Operations
Identify Commercial Cleaners
          Calculate Pre-Regulatory Cost
               Pre-tax Annualized
                                      Calculate Percent Cost Increase
                                              Cleaning Basis,
                                              NotWastewater
                                              Treatment Basis
                                           Compare Against Data
                                        (Question #16) Questionnaire
[From
Commercial
                                                        Percent Increase
                                                       Exceeds Switching
                                                             Point
 Percent Increase Is
Less Than Switching
       Point
         Commercial
           Price per
            Tank
         _CIeanwig__
                                                                       Would Not Switch
                                       [Cloiure
                                      'Anofytit]
                          [ClotureAnofytii]
                                                                                    {Get Q", the
                                                                                    Quantity
                                                                                    That Will
                                                                                    Switch to
                                                                                    Commercial]
                                   Figure B-4

                   Outsourcing Component of TEC Market Model

                                    B-38

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        B.3.1.3        Preregulatory In-House Cleaning Cost Calculation

        The right side of Figure B-4 illustrates the logic path for facilities that have the option of
outsourcing their TEC needs. In-house cleaning costs have capital and annual components; EPA will use
depreciation and amortization to represent the portion of the capital cost paid each year by the facility,
inflated to 1994 dollars:5                                             .-   '

                  Capital^ = depreciation and amortization, facility i, year y *PPIy
or, using the questionnaire data:
                            Capitalil992 = Question 39 for
                            Capitaltl993 = Question 43 for
                                       = Question 47 for
The annual costs, also known as variable costs, are the portion of operating and maintenance (O&M) and
sales, general, and administrative (SG&A) costs assigned to TEC operations by facility i, inflated to 1994
dollars:
              VariableU992 =  (Question 37c for TEC  + Question 38 for
              Variableil993 =  (Question 41c for TEC  + Question 42 for
              Variableil994 =  (Question 45c for TEC  + Question 46 for TEC)i*PPIig94

The, facility's average preregulatory cost:

                                         ~~            - VariableJil
   5 The depreciation and amortization taken on the equipment and the loans used to finance their purchase
reflect one year's, share of the capital investment for mis analysis.

                                              B-39

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is used to smooth year-to-year variations in cost for those years in which the facility was in operation and
for which data are available.

        B.3.1.4        Comparison With Respondents'Decision Point

        The model then calculates the facility's increase hi cleaning costs due to additional wastewater
  -  ',      .:     .!•'*.     '   •'",.. ',, \,	.'•  .."/ . .  • . ,. •   ••.,;.     .(."    \                         *
pollution control, as a percentage of average preregulatory cleaning costs:
                                         (total anmialJ3!ed COSt)-
                                                C(pie)i
The logic flow then compares nils percentage increase in cost to Has response given to Question 16 hi the
detailed questionnaire; this question asks respondents to identify the percent increase hi cleaning costs at
which they would consider outsourcing tank cleaning to a commercial facility. As indicated by the trio of
boxes hi the middle of Figure B-4, a facility is assumed to upgrade its wastewater treatment if the increase
in cost is less than the switching point identified hi Question 16, or if the respondent would not switch to a
commercial cleaning service.6

        For a few faculties, the pre-regulatory calculations might indicate that it is less expensive to use a
commercial cleaning service rather than perform cleanings on an in-house basis. EPA assumes that the
respondent has evaluated the commercial cleaning option and retained control over tank cleaning for
reasons other than cost, e.g., liability concerns. The model does not switch these facilities hi the pre-
regulatory calculation; rather, they appear as  "incremental" switches at the point where the percentage
pollution control cost increases  are greater than the switching point given hi the questionnaire.
   6 Question 16 identifies the switching point for each tank type that a facility cleans. If the facility indicates
that they would NOT switch for any of the tanks, then the model does not switch mem (i.e., they are analyzed
as if wastewater treatment upgrade is made); if they indicated different switching points, then the minimum
switching percentage is used.  The model does not, however, switch anyone unless the commercial costs
calculated hi the next section are less than then* in-house costs.

                                               B-40

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        B.3.L5        Estimation of Total Cost of Commercial Services to Facility

        If the percentage cost increase exceeds die switching point, EPA assumes that the facility would
 investigate the costs associated with outsourcing TEC needs to a commercial cleaner.  The facility must
 consider the total commercial cost—not only the commercial price of cleaning, but also the cost associated
 with getting the tank to and from the cleaner.  EPA calculates the total commercial cost in four stages.

        First, using questionnaire data, the model calculates the average annual cleanings by tank type for
 years hi which the facility was in operation and for which data are available:
                                  y _ Sy (Question 23^wt
        Second, the model calculates the average annual cleaning cost for the facility by multiplying its
 average number of tanks cleaned by the postregulatory commercial cleaning price
 for its market group:
                                      Cleaning cost, = NJ*Pg


        Third, the model calculates the transportation costs associated with sending the tanks to a
 commercial facility:

                            Transport costj = NJ*( Question 25*2 )£*C
; where:
                                              B-41

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 i	ai	!"!?;	>•: f'..ff	•:fir. Tf<>ff |.;;'-;,;"i  •; fi; '•;'!'T;;•'\";• t	;;';v;' .»y"T;?l:">";l	:"'!	'?.••''• 'P'?:!: •'  ;''
                          Nj = average annual number of tanks cleaned, facility i

           (Question 25 * 2). = round-trip distance to nearest commercial cleaner, facility i

                          Cg = estimated cost per mile, market group g




 Question 25 provides the one-way distance to ihe nearest commercial cleaner from the in-house facility;.

 therefore, a factor of 2 is used to calculate the cost of a round-trip to the nearest cleaning faculty.7

                         i     ,   ,              , "                 " ' '    i

        Finally, the total cost to a facility of outsourcing TEC seeds to a commercial cleaner is die sum of

 cleaning costs over all tank types and transportation costs over all transport modes:

  H"! : ,    ,          "            ,.'.,..,           .       ' •    ,'"    i,
  :i, "'     ,          •:'".        "«    "             ' •.        '       • ,     , .     I •

                      Total commercial costj = Cleaning costj + Transport costj
        B.3.L6        Comparison of Total Commercial and In-House Cleaning Costs


        Whether to outsource TEC or not depends on a comparison of the total commercial cost and the

postregulatory in-house cleaning cost (the sum of the preregulatory cost and the incremental pollution

control cost):

  , ' '                '         '                     '        ,','!.     i

                     [Total commercial cost]  vs.  [C(pre) + Annualized cost]
   7 Estimates of cost per mile were obtained from me Private Fleet Benchmarks of Quality and Productivity
(PFMI, 1996) for trucks, and the Uniform Railroad Costing System Phase 3 (Association of American
Railroads, 1996) for rail tank cars; estimates of cost per ton mile were obtained from the U.S. Maritime
Administration (1996) for tank barges. Due to uncertainty in the cost per mile figures, sensitivity analyses
were performed setting transportation costs to zero; if a facility does not switch when transportation costs are
zero, it will not switch when they are positive.


                                              B-42

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Three outcomes from mis comparison are possible:


        •      There is no commercial facility available (the respondent cannot provide an answer to
               Question 25); EPA assumes the facility will upgrade, its wastewater treatment.

        •      The total commercial cost is greater man the postregulatory in-house cleaning cost. EPA
               assumes the facility will not switch and will have to upgrade its wastewater treatment even
               though the cost increase may exceed me switching point identified in Question 16.

       ' •      The total commercial cost is lower man the postregulatory in-house cleaning cost; EPA
               assumes me facility will outsource its TEC needs.
        The model assumes mat facilities indicating mat they either would not switch or would consider
switching, but only at a percentage cost increase larger man the regulation created, would all upgrade their
wastewater treatment.
       B.3.2  Implications of Outsourcing Component Results


       B.3.2.1       Industry Compliance Cost


       In previous effluent guidelines, EPA calculated the total annual and capital costs associated with
the regulatory options by totaling all such costs over all faculties or, hi the case of a sample, weighting the

costs then totaling mem. For this industry, however, if a facility decides to outsource its TEC needs, it

will not incur either the capital costs of the additional pollution control equipment nor the incremental

annual costs of operating mat equipment.  These costs, therefore, will be excluded when calculating the
total industry compliance cost.               .                                           ,




       B.3.2.2       Costs Used in Closure Analysis


       The cost borne by a facility mat decides to outsource its TEC needs rather man upgrade its

wastewater treatment system is the total commercial cost of TEC less the average preregulatory variable

cost of in-house TEC:
                                              B-43

-------
                   ^       -           ~  i         - ,        (H Variable^
                   Outsourcing costSj = Total commercial costj -  ^	Z-L
 If the facility decides to outsource its TEC, it will no longer incur die annual cost of labor and chemicals
 from performing TEC itself; these cost savings are'Subtracted from outsourcing costs.  EPA assumes mat
 there are no capital cost savings from outsourcing because the cost of removing the equipment already in
 place is equal to die salvage value of the equipment This net outsourcing cost of switching to a
 commercial TEC facility is used in the facility and business entity closure analyses.
        B.3.2.3        Impacts Quantified by Outsourcing Component

        The outsourcing component identifies faculties that would begin using commercial facilities for
tank cleaning. The switch, however, results in employment losses at those faculties because the personnel
who performed the in-house cleaning are no longer needed.  The effects of the switch can be interpreted in
  „',:: i'     , , , '   " '    ,|', :\   .    '        „„    '   ,   " '<"    i1"      ' .  '    ,.  ' "  . '   !„
two ways:

        •      Closure for in-house faculties dedicated to TEC operations.
        "      TEC Una closure for in-house faculties with mixed activities.  The analogy is shutting
               down a product line in a manufacturing faculty while the rest of the plant continues
               operations.

        Should outsourcing be projected, EPA calculates employment losses from line closures as full-
time-equivalent job losses using the assumption that 40 hours per week (2,080 hours per year) is full-time
employment:
                 ' , ,         Question 53b (total number of TEC employee hours).
                Job losses, =	••	3__i	2
                          1                          2,080
                                              B-44

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For dedicated facility closures, EPA calculates the employment losses on the basis of total facility
employment (Question 53a).  The results of the outsourcing component and closure model are cross-
checked to avoid double-counting TEC employment losses.  This could occur if a facility decides to
outsource its TEC needs, leading to TEC employee job losses in the market model, but incremental costs
force the entire facility into closure, leading to total employment loss including TEC employees in the
closure model.
        B.3.3  Incorporating the Outsourcing Change in Demand and Iterating the Model

        After the first pass-through, the commercial component is made and a new commercial price is
projected, the outsourcing component of the model is used. The outsourcing component estimates the
number of in-house facilities mat will switch to using commercial facilities for their TEC needs.  This
creates additional demand for the commercial facilities in the appropriate market group. Unlike most
effluent guideline market analyses, the position of the demand curve is not constant  The process for
integrating the outsourcing and commercial components is ghnunariMd in Figure B-5 and illustrated in
Figure B-6.  The preregulatory equilibrium is shown as Point A on Figure B-6.  Increased pollution
control costs are then added; Point B at P2, Q2, marks the initial solution from the commercial component.
The demand curve shifts right; the magnitude of the shift is Q,*1, which is the weighted quantity of
cleanings that in-house facilities now outsource.  A new demand curve is created (D,2 in Figure B-6) by
adding quantity Qg'1 to Q/at price P/.

        The market is now at P,2 and Q/ +Q,'1 (Point C hi Figure B-6); however, the market is not hi
equilibrium because more facilities are requesting cleanings than commercial facilities are willing to
provide at the going price.  This excess demand would lead to an increase hi the price of commercial
cleanings. To calculate the new increased price, the market model is run with the new higher demand
curve, Dg2, and the same supply curve as hi the first iteration, S(2. The only complication at mis step is
that hi the case of the supply curve, the vertical shift, the per unit pollution control cost, was known; hi the
case of the demand curve, the horizontal shift is known and the vertical shift must be calculated from it.

        The logic of transforming the measured horizontal shift in the demand curve to the vertical shift
necessary to. solve the model relies on the fact that the price elasticity of demand is constant along each

                                              B-45                       •'.'...'

-------
         Initial Market
          Conditions
      (Point A on Rg. B-6)
       Run Commercial
         Component
      Obtain Preliminary
     Post-regulatory Price
         and Quantity
            £-X-^nMvv:<:OvC>X-Kwfr>Xf>:
^[Holding
*'Demand
 Constant]
Move to P2 and Q2 1
(Point B in Rg. B-6)


,. ,M
Calculate New 1
CofnrriBfcifll Price

^-wvvTOCTVVVrfifgvv>6f^vv«iW»W9W«OJ^tf&9M
T

Run Out&ourcAg
Component with
New Price

Obtain QS1 tha

In-House Demand
that Win Now Switch
to Commercial
Cleaners
™~Jj™—^
Demand Shifts
Outward by Q3'
^^^^^«m«^«^
Move to P2 and 1
Q2+QS1 (point C •„
Rg. B-6) |
[











-*-



I
I











Whim QS1 nr OS2
approaches Zero,
Final Equilibrium is
Reached and the
Model Has Stabilized
/Poinf P in Pin R_fi\
«35J!35!?!??S??!SJS5!SBS8HSJJ!?J5??S
















-





[Figun B-6 illustrates a
singlt iteration]
/

Recalibrate Market
Model to Obtain New
Equilibrium Price
and Quantity (P**,
QP°* in Rg. B-6)

,»»~_P_^
Demand Shifts |
Inward By Q82 I
*™™™™"™™™"jr
T
Obtain Q82, the
Quantity of Facilities
that Decide to Not
Switch at Higher Price
——j^™—*
Rerun Outsourcing \
Model with Higher
Price |
¥
Calculate the Higher I
Commercial Price \

       Cleaning Supply
          Shortage
                        I
   Recalibrate Market
     Model to Obtain
   Market Equflibrium
 Move to P3 and Q3
(Point D in Rg. B-6)
                           Figure B-S

Steps for Int^radng die Outsourcing and Commercial Components
                             B-46

-------
                               TEC COMMERCIAL MARKET GROUP g
                                                                                 S1
                                                                   [Quantity Shifting to Commercial
                                                                   Market from In-Housc Facilities]

                                                                        [Quantify that Will Not Switch After
                                                                               ncrease]
                                                                     D2
                                                             D1
                                                                D3
Q2
                                         Q3Q1(Q2
A = Q1, P1  = before regulation equilibrium
B = Q2, P2  = post-regulation equilibrium prior to inclusion of increased outsourcing demand
C = Q2 + QS1, P2 = increased demand at P2
D = Q3, P3  = intermediate equilibrium before outsourcing facilities adjust

E = QP084, PP054 = final equilibrium after several iterations (only one is illustrated)
Xs = supply shift = weighted average increase in marginal cost from regulation
XD = demand shift = change in price due to change in quantity demanded
                                         Figure B-6

                            Graphical Analysis of the Integration of the
                   Outsourcing and Commercial Components of die Market Model
                                          B-47

-------
demand curve and equal for both demand curves. If die number of cleanings outsourced under a given
option is equal to Q,"1, men the total number of cleanings demanded at price P,2 is now equal to (Q/ +
Q,^). By solving for the price, P,'1, at which (Q/ + Q,'1) wiU be demanded on the original demand
ciirve, the percentage change in price, (P,2 - P,'1)/?,'1, required to cause a (^/(Q,2 -4- Q,*1) percentage
change in quantity  demanded can be calculated. Because bom demand curves have identical constant price
elasticities of demand, if the (percentage) horizontal distance between the two curves is Qg*V(Qg2 + Qg'1),
the (percentage) vertical distance between the two curves must be (P,2 - P,*1)/?,*1.
...... .  .            !JI 'i           !'    ..  . ,       ;      •      i,      '   '      I
        The percentage shift hi the demand curve, m, is calculated as:
                                           .  (p.2
where P,2 is as calculated above and P/1 is solved for by:

                                           ln(at)  -
       In order to maintain the constant price elasticity of die new demand curve, the shift must enter the
demand equation in a manner exactly analogous to the supply curve. Thus, the new market price, Pg3, is
calculated by setting the new demand curve:
equal to the postregulatory supply curve and solving for price.  The resulting price is:
                                              B-48

-------
                                    8)  - In(p8) + egln(l+k)  - T|sln(l-nn)
        Once the new equilibrium price, Pg3, has been calculated, die new equilibrium quantity at that
price can be solved for^ as before, by substituting that price into the demand equation:
Economic reasoning determines lhat Pg3 is higher than price P,2; however, Q,3 may be higher, lower, or
remain the same as die preregulatory quantity in each market group.8 The new equilibrium is shown as
Point D in Figure B-6.  Because P,3 is higher than die price expected by die managers of die in-house
facilities, P,2, these facilities will reconsider tiieir decision to outsource at this new, higher price.  The
initial decision to outsource was based on a  specific expected commercial price; however, that decision led
to a change La die key variable on which die decision was based.

        The next step is to rerun die outsourcing component witii die new price.' At die new, higher price,
die cost of outsourcing will be greater; die result may be fewer facilities deciding to outsource; therefore,
Qj"2, die new quantity dial switches at die new price of P,3, is lower titan Q,'1.  Thus, die demand curve
decreases by die difference between Q/2 and Q,*1, die weighted quantity of cleanings performed by die
facilities that now do not switch.

        The market model is again rerun with this third, lower demand curve, Dg3 to find die new
equilibrium price and quantity, P* and Q/; the resulting price will be smaller than Pg3. This price is run
through die outsourcing component to estimate die revised quantity of cleanings tiiat now will shift into die
commercial market, Qg*3. The process will iterate between die market model and outsourcing component
   8 It is possible, albeit unlikely, that die final cost pass-through percentage in die commercial market could
be more than 100 percent, if die increased demand from outsourcing drives up price enough in me short-run.

                                              B-49

-------
 until the changes in price become so small that facilities no longer have incentive to change their decision.

 The final market equilibrium (Point E in Figure B-6) will stabilize at a price somewhere between P/ and

 P,3 and a quantity between Q/ and Q,3.  The final price will not only be higher man the preregulatory

 picice, P,1, it must also be higher man. Pg2 as well because market demand can not fall below D1.9 It is
 impossible to predict theoretically the relationship between the final quantity and the preregulatory

 quantity, Qlf; Figure B-6 illustrates a scenario with a lower postregulatory quantity.
 Abdelwahab, W. and M. Sargious.  1992. Modelling the demand for freight transport: a new approach.
 Journal of Transport Economics and Policy.  January:49-70.

 Association of American Railroads. 1996. Uniform railroad costing system phase 3 1994 movement
 costs. Facsimile from Paul Posey, Association of American Railroads, to Calvin Franz, Eastern Research
 Group, IDC. May 6.
 •M ,i  '•'••.•'  •'  • !'•»! •'••'.   •   ••;•''  :,'  ;;•' .'i •  v:,: •  • " ••',.••.. •  •  ' ,, i  ««'"•'  .. | ,:    :,  , •
 Babcock, M.W. and H.W. German. 1989. Transportation policy impacts on railroad and motor carrier
 market shares. Journal of Transportation Research Forum. 30(1): 112-120.

 Beenstock, M. and A. Vergottis.  1989.  An econometric model of the world tanker market. Journal of
 Transport Economics and Policy. September:263-280.

 Borger, B. and W. Nonneman. 1981. Statistical cost functions for dry bulk carriers. Journal of
 Transport Economics and Policy. May: 155-165.

 Braeutigam, R.R. and R.G. Noll. 1984.  The regulation of surface freight transportation: The welfare
 effects revisited. Review of Economics and Statistics. 66(l):80-87.

 Callan, S. J. and J.M. Thomas. 1992.  Cost differentials among household goods carriers. Journal of
 Transport Economics and Policy. January: 19-34.

Damus, S.  1984. Ramsey pricing by U.S. railroads.  Journal of Transport Economics and Policy.
January:51-61.

Fitzsimmons, E.L.  1981. A statistical sketch of the demand for rail transport of grain and soybeans.
Transportation Journal. 20(3):59-65.
   9 Demand can fall lower than D1 only if initial clients of commercial facilities choose to leave the market
and create their own in-house facility; as noted earlier, it is assumed that start-up costs are sufficiently large
to discourage that behavior.

                                             B-50

-------
Friedlaender, A.F. and S.J. Wang Chiang.  1983. Productivity growth in the regulated trucking industry.
in: Research in transportation economics: a research annual, edited by T.E. Keeler.  Greenwich, CT:
JAI Press Inc.  Volume 1:149-184.

Friedlaender, A.F. and R.H. Spady. 1981. Freight transportation regulation: Equity, efficiency, and
competition in the rail and trucking industries.  Cambridge, MA: MFT Press.

Friedlaender, A.F. and R.H. Spady. 1980. A derived demand function for freight transportation.
Review of Economics and Statistics.  62(3):432-441.

Friedlaender, A.F. et al.  1993. Rail costs and capital adjustments in a quasi-regulated environment.
Journal of Transport Economics and Policy. May: 131-152.

Gemmell, A.W., I.H. Uhm, and G.C. Shaw.  1983. Economics of Canadian water carriers on die Great
Lakes and St. Lawrence seaway system. Journal of Transport Economics and Policy. May: 191-209.

Gibson, R.  1994. Dirty trucks may have hurt ice cream mix. Wall Street Journal.  October 31 :B1.

Hale, C. and A. Vanags.  1989. Spot and period rates in the dry bulk market: Some tests for the period
1980-1986.  Journal of Transport Economics and Policy. September:281-291.

Hennessy, T. W., et. al.  1996. A national outbreak of Salmonella enteritidis infections from ice cream.
The New England Journal of Medicine.  May  16:1281-1286.

Hsing, Y.  1994. Estimating the impact of deregulation on the elasticity of demand for railroad services.
International Journal of Transport Economics.  21(3):301-311.

Jara-Diaz, S.R., P.P. Donoso, and J.A. Araneda. 1992. Estimation of marginal transportation costs.
Journal of Transport Economics and Policy. January:35-48.

Lackman, C.L.  1980. The elasticity of demand for rail freight  Transportation Planning and
Technology. 6:1-8.

Levin.  R.C. 1981.  Railroad rates, profitability, and welfare under deregulation. Bell Journal of
Economics.  12(1): 1-26.

Lewis, K.A. and D.P. Widup.  1982. Deregulation and rail-truck competition: Evidence from a translog
transport demand model for assembled automobiles.  Journal of Transport Economics and Policy.
16(2): 139-149.                                                                           .

Morton, A.L. .1969.  A statistical sketch of intercity freight demand.  Highway Research Record.
296:47-65.

Modern Bulk Transporter. 1994. Environmental Linings, Inc. provides disposable tank liners. Modern
Bulk Transporter. May:154.

Oum, T.H.   1979. Derived demand for freight transport and inter-modal competition in Canada. Journal
of Transport Economics and Policy.  13(2): 149-168.


                                            B-51                            ;

-------
 Oum, T.H. 1989. Alternative demand models and their elasticity estimates. Journal of Transport
 Economics and Policy. 23(2): 163-187.

 bum, T.H..W.G. Waters, and J.Yong.  1992. Concepts of price elasticities of transport demand and
 recent empirical estimates: An interpretative survey.  Journal of Transport Economics and Policy.
 26(2):139-154.

 PFML  1996.  Private Fleet benchmarks of quality and productivity, vol. 7. Alexandria, VA: Private
 Fleet Management Institute.

 Rao, P.S.  1978.  Demand for railway freight services.  Journal of Transport Economics and Policy.
 January:7-26.

 Rom R.D. 1991. America's private carriers: Who are these guys: A graphical profile of the private
 carrier segment of the trucking  industry. Fredericksburg, VA: Transportation Technical Services.

 Tye W.B. and H.B. Leonard.  1983. On the problems of applying ramsey pricing tome railroad industry
 with uncertain demand elasticities. Transportation Research: Part A. 17A(6):439-450.
 i'l't'l1   •• .    ' ;    -iliij  • •   i1   . '."i,   ' i111  , ' i'•  : • i..;r;:'! i, i'»i ', .	•'.•'.  i,  ••'''' i'Th> •,•!.:.
 U.S. EPA. 1992.  Regulatory impact analysis of national emissions standards for hazardous air pollutants
 for by product coke oven, charging, door leaks, and topside leaks. EPA 453/D-92-014.  Research Triangle
 Park, NC: U.S. Environmental Protection Agency, Office of Air Quality Planning and Standards.

 U.S. Maritime Administration.  1996. Cost per ton-mileof freight transported for tank barges. Phone
 call from Calvin. Franz, Eastern Research Group, Inc., to Rob Sienklewicz, U.S. Maritime
 Administration. May 10.

 Westbrook, M.D. and P.A. Buckley.  1990. Flexible functional forms and regularity: Assessing the
 competitive relationship between truck and rail transportation. Review of Economics and Statistics.
 72(4):623-630.

Wilson, G. 1978.  Notes on the elasticity of demand for freight transportation.  Transportation Journal.
 17(3):5-15.

Winston, C.  1981. A multinomial probit prediction of the demand for domestic ocean container service.
Journal of Transport Economics  and Policy.  15(3):243-252.
                                             B-52

-------
                                        APPENDIX C
                                     CLOSURE MODEL
C.1     BACKGROUND

        EPA developed a financial model to estimate whether the additional costs of complying with the
proposed regulation rendered a TEC facility unprofitable.  If so, the facility is projected to close as a result of
the regulation, leading to facility-level impacts such as losses in employment and revenue. The model is
based on facility-specific data from the detailed questionnaire (U.S. EPA, 1995) because such data are not
available elsewhere.                                                -

        In terms of perspective, the outsourcing module of the market model (Appendix B) focuses on TEC
operations within a facility. The closure model focuses on die entire facility (Appendix C); and the financial
distress model evaluates whether a company could afford to upgrade all of its facilities (Appendix D).
Although there are points of interaction, e.g., the market model estimates the industry proportion of costs that
a TEC provider passes through to its customers through increased price, each model provides a different
perspective on the industry and the impacts potentially caused by the effluent limitations guidelines
requirements.
                       A            ,                              '   •    '            .
        The closure decision is modeled as:       .

        Post-regulatory status   =  Present value of future earnings
                                     (Present value of after-tax incremental pollution control costs
                                     * (1-percent cost pass-through))
                                     Salvage value

The model calculates the long-term effects on earnings reduced by the added pollution control costs, and then
compares it to the liquidation value of the facility. If the post-regulatory status is less than zero, it does not
make economic sense for the facility owner to upgrade the facility. Under these circumstances, the facility is
                                              C-l

-------
  projected to close.1  Section C.2 describes the methods used to estimate the present value of future earnings.
  The cost annualization model (Appendix A) calculates the present value of after-tax incremental pollution
  control costs.  The market model (Appendix B) calculates the industrywide cost pass-through (CPT). Section
  C.3 describes the how EPA adjusts the CPT from an industrywide value to the facility-specific value in the
  closure model. Section C.4 describes the options investigated for salvage value. Section C.5 presents EPA's
  methodology for determining facility closure when evaluating multiple approaches for estimating future
  earnings and salvage value. Section C.6 illustrates sample closure analyses. Section C.7 describes the
  business entity level analysis, which is performed when insufficient information is available at the facility
  level.
 C2     PlffiSENTVALTJOEOFFliniiffiEARNmGS

         C.2.1   Basis for Projections

         EPA examined two alternatives far estimating the present value of future plant operations:

         •      Net income from all operations, calculated as revenues less operating costs; selling, general,
                and administrative expenses; depreciation; interest; and taxes (as these items are recorded on
                the faculty's income statement).
         •      Cash flow, which equals net income plus depreciation.

Depreciation reflects previous, rather than current, spending and does not actually absorb incoming revenues.
Transportation equipment cleaning is an industry that does not show continuing capital investment for
increased efficiency and expansion. For this reason, cash flow is more likely to indicate the funds available
for operation than net income. EPA, therefore, selected cash flow as the basis for measuring the present value
of future facility operations in the closure analysis.
   1 When a facility is liquidated, EPA assumes mat it no longer operates and closure-related impacts
result. In contrast, facilities that are sold because a new owner presumably can generate a greater return
are considered transfers.  Transfers cause no closure-related impacts, even if the transfer was prompted by
increased regulatory costs.  Transfers are not estimated hi mis analysis.
                                               C-2

-------
        C.2,1.1 Adjusting Earnings to an After-Tax Basis


        Depending on the corporate hierarchy for the faciHty, the eaniings reported in the questioimake may
 have to be adjusted for taxes. A facility may fall into one of three categories:


        •     It is part of a multi-facility corporation. Facility earnings before interest and taxes (EBIT)
               are adjusted to an after-tax basis according to the taxable income of the business entity using
               the appropriate corporate tax rate.
                i                       '   . •            •           '
        •     It is part of a multi-facility organization whose income is taxed at the rate for individuals
               (e.g., Subchapter S corporations, partnerships, sole proprietorships, etc.). Facility earnings
               before interest and taxes (EBU) are adjusted to an after-tax basis according to the taxable
               income of the business entity using the appropriate individual tax rate.

        •     The facility is the business entity; therefore, the complete income statement data is supplied
               for the facility. (These facilities have corporate hierarchy type "E".)  Because net income is
               presented on an after-tax basis, no adjustments need to be made.
        C.2.1.2 Adjusting After-Tax Earnings to Cash Flow


        For first two categories (multiple facilities under the same ownership), cash flow is calculated as:

               Cash Flow = [(EBIT)  *  (1  - (federal + state tax rates)]  + depreciation


where the federal and state tax rates are dependent on corporation type and income at the business entity
level, see Section A. 1 for more details. Table C-1 lists the components used in the cash flow calculations,
their location in the questionnaire, and the data element name.


        For the third category—single facility businesses, cash flow is calculated as:

                              Gash  flow = net income + depreciation


        The capital expenditures associated with additional pollution control for the transportation
equipment cleaning industry are depreciated over a 16-year period in the cost annualization model (see

Appendix A). The same time frame is used for the present value analysis. To maintain consistency with the
cost annualization model, the first year of cash flow is not discounted.
                                               C-3

-------
                                       TABLE C-l




                     COMPONENTS FOR CALCULATING FACILITY CASH FLOW
Parameter
Revenues-Costs
Net Income
Depreciation
1992
1993
1994
1992
1993
1994
1992
1993
1994
Tax status variable
Corporate hierarchy
Corporate type
Business entity
1994 Earnings before interest
and taxes
1994 Interest
Location in Part B
of Questionnaire
(Question No.)
49e
49e
49e
50e
50e
50e
39
43
47

7
8

84a
84b
Data Element
Dictionary
Field Name
B49E92
B49E93
B49E94
B50E 92
B50E 93
B50E 94
B39 92F
B43 93F
B47 94F

B07
BOS

B84A94
B84B94
i ft.
                                          C-4

-------
        C22   Forecasting Methods for Future Cash Flow


        FaciUty cash flow miist be forecast over the 16-year project lifetime. AU forecasting methods
examined for and used in the closure analysis incorporate the following assumptions and procedures:


        •      No growth in real terms.

        •      Constant 1994 dollars. Data from 1992 and 1993 are inflated using the change in the
               Consumer Price Index (CEA, 1995).                      -


The "no growth" assumption is made so that a facility is not assumed to grow its way out of an economic

impact associated with additional pollution control costs; essentially, facilities are assumed to be running at

or near capacity and significant growth is assumed to be unlikely without a major capacity addition.


       Although the, financial health of the TEC industry is expected to follow that of the transportation

sector in the general economy, an examination of the pretest survey data indicated that cash flow for a facility

sometimes showed pronounced year-to-year variations. EPA examined five different forecasting methods in

order to address facility-specific variations:


       •      Most recent year (1994 data) as best indicator of future cash flow.

       •      Three-year average (1992 to 1994 data after inflation to 1994 dollars).
                                                          \         ;-
       •      Time-varying cash flow optional
               Cash flow follows a three-year pattern:
               1994 = 1994 cash flow
               1995 = 1993 cash flow
               1996 = 1992 cash flow
               1997 = 1993 cash flow
               1998 = 1994 cashflow (pattern begins again)
               1999 = 1993 cash flow, and so forth

               If the facility had a good/bad year in 1993, the result is a good/bad year every two years.

       •      Time-varying cash flow option #2 '
               Cash flow follows a three-year pattern:                                       '
               1994 =1994 cash flow
               1995 = 1994 cash flow
               1996 = 1993 cash flow
               1997 =1992 cash flow

                                             C-5

-------
               1998 = 1992 cash flow
               1999 =1993 cashflow
               2000 =1994 cash flow (pattern begins again)
               201)1 = 1994 cashflow, and so forth

               If the facility had a good/bad year in 1993, the result is a good/bad year every three years.

        •      Time-varying cash flow option #3
               Cash flow follows a three-year pattern:
               If H= 1994 cash flow
               1^95-1992 cashflow
               1996 =1993 cash flow
               1^97 = 1994 cashflow
 •'.;, ,   ,. '   '  .  1$98=' 1993cashflow ,     ; ,	,         	    |
               1999 = 1992 cash flow (pattern begins again)
               2060 = 1993 cash flow, and so forth

               Ifthe facility had a good/bad year in 1993, the result is a good/bad year every two years, but
               the timing of that good year differs from that in Optional.


Table C-2 uses data representative of that seen in the pretest survey. The single year option generates a

present value of estimated cash flow about half that of the other options.2 For new or newly-acquired

facilities, however, one year of data may be all that is available for analysis. For facilities with a trend in

income, the most recent year may be the best estimate for future cash flow.


       The three-year average and Option #2 have similar results. Both would have one good year every

three years and the smoothing effect of the average does not have a large impact on the present value.


       Option # land Option #3 have similar results. The present values are higher than those seen for

Option #2/three-year average results because a good/bad year is assumed to occur every two years. Timing
                            t                                                   .
considerations on when the good/bad year happens has less an effect on the present value than the assumed

frequency of a good/bad year.


       Forecasted earnings estimates depend on the estimation methods used and the quality of the available

data. To address uncertainties in the long-term estimates from these factors, EPA chose to incorporated more
   2 EPA requested three years of data in the questionnaire to mitigate die uncertainty hi the analysis resulting
ftpm a single datum point (i.e., one year of data) illustrated in diis example.

                                               C-6

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TABLE C-2 .
FORECASTINGMETHOD ALTERNATIVES
PRESENT VALUE:

REAL DISCOUNT RATE

 PAST CASH FLOW ($1994):
10%
                                  Inflate Cash Flow to 1994 Dollars
1
Cash Flow
Cash Flow
Cash Flow
FORECASTED CASH FLOW:

' " 1
2
3
4
5
6
7
8
9
10
11
12
13.
14
15
16

1992
1993
1994

Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Currents
12,500
60,000
15,000

1994
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$1994
$13,271
$61,794
$15,000
Forecasting Methods
C




Average Variation 1
$30,022
$30,022
$30,022
$30,022
$30,022
-• $30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$61,794
$13,271
$61,794
$15,000
$61,794
$13,271
$61,794
$15,000
$61,794
$15,000
$61,794
$13,271
$61,794
$15,000
$61,794
$13,271
Consumer Price
1992
1993
1994

Variation 2
$15,000
$61,794
$13,271
$13,271
$61,794
$15,000
$15,000
$61,794
$13,271
$13,271
$61,794
$15,000
$15,000
$61,794
$13,271
$13,271
Index for Trai
126.5
130.4
134.3

Variations
$13,271
$61,794
$15,000
$61,794
$13,271
$61,794
$15,000
$61,794
$13,271
$61,794
$15,000
$61,794
$13,271
$61,794
$15,000
$61,794
BASELINE PRESENT VALUE
       $129,091
                                                $258,370    $336372   ,$254,064    $316,593
                                           -   C-7

-------
 than one forecasting method when evaluating closure (see Section C.S). Based on the information in Table
                                                                        j      ,    f-
 C-2, three methods appeared sufficient to address a range in the estimated present value of future cash flow.
 The closure model incorporates the:

        •     Most recent year
        »     Three-year average, and
        •     Option #1

 methods for forecasting future cash flow.
        C.2J3  Discount Rate

        The final step in estimating each facility's preregulatory present value is to discount the cash flow
stream back to the first year in the time series. This step does not adjust the stream for inflation because the
projections are in constant dollars. Thus, the discount rate used for discounting must be a real discount rate,
obtained by adjusting the nominal discount rate for the expected annual rate of inflation (see Appendix A).
As in the cost annuali/ation model, the facility-specific nominal discount rate must lie between 3 and 19
percent to be used in the model; otherwise, the industry average nominal rate is used instead. That is, the
same facility-specific real discount rate is used in both the cost annualization and closure models.
        C.2.4  Summary of Forecasted Cash Flow

        EPA examined the present value of future cash flow calculated by the three forecasting methods for
the 681 facilities that provided sufficient information hi the questionnaire. Table C-3 summarizes the results.
The three forecasting methods produce average present values of future cash flow that are within 27 percent
of each other. For specific facilities, the estimates may show a wider variatioa A facility closure may depend
on the forecasting method. For this reason, the closure analysis incorporates multiple forecasting methods in
the evaluation of facility closure.
                                               C-8

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                                     TABLE C-3

                   SUMMARY OF CASH FLOW FORECAST RESULTS
                         (681 of 692 Potentially Affected Facilities)
Method
1994
Average
Variation #1
Percent Value of
Forecasted Cash Flow
Average
$10,346,050
$14,126,591
$14,184,920
Total
$7,042,294,436
$9,615,613,039
$9,655,316,244
Percent of
Time Method
Produced
Highest
Estimate
50.6%
11.5%
389%
Source: Closure model and detailed questionnaire data.
                                        C-9

-------
 C3    FACILITY-SPECIFIC COST PASS-THROUGH FACTOR

        The market model estimates the percentage of incremental pollution control costs that are passed to
 tbe consumer through higher prices. The price increase applies only to TEC services; although most facilities
 earn revenues from non-TEC operations as well.  For in-house faculties, in particular, TEC services form
 only a small fraction of overall revenues. The price increase does not apply to these non-TEC operations, hi
 order not to overestimate the increase in facility revenues due to higher prices for TEC services (and therefore
 underestimate the impacts of the rule), EPA adjusted the industrywide cost pass-through factor (CPT) by the
 facility-specific ratio of TEC revenues to total revenues. The result is a facility-specific cost pass-through
 factor, also called the effective cost pass-through.

        For example, suppose a facility earns total revenues of $1 million, of which 25 percent ($250
 thousand) is attributable to tank cleaning. A 20 percent increase in the price of tank cleanings (cost pass-
 through) will increase the facility's revenues by $50 thousand ($1 million x .2 x .25), not $200 thousand ($1
 million x.2). Table C-4 presents the average effective CPT by subcategory. Because commercial
 facilities—as a group—earn a higher percentage of revenues from TEC operations, the average effective CPT
 for commercial facilities is substantially higher than for in-house facilities.
C.4    SALVAGE VALUE

        C4.1   Service Industries, Manufacturing Industries, and Salvage Value

        Service industries frequently require little capital investment relative to manufacturing industries.
The value of a service industry facility may be more closely related to its customer list, location (potential
service area), and existing cash flow rather than to the value of its assets. In effect, for a service industry, the
year-long performance shown by a faculty's income statement may be more important than the snapshot
provided by the balance sheet Under these circumstances, the salvage value based on assets is effectively
zero. Because a manufacturing facility produces products, fixed assets—such as buildings and
equipment—may play a more important role in estimating its liquidation or salvage value.
                                             C-10

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                             TABLE C-4

     AVERAGE EFFECTIVE COST PASS-THROUGH BY SUBCATEGORY
Subcategory
TT/CHEM
RT/CHEM
TB/CHEM
TT/FOOD
RT/FOOD
TB/FOOD
TT/PETR
RT/PETR
TH/HOPPER
RH/HOPPER
BH/HOPPER
All Facilities
Commercial
Facilities
63.6%
60.3%
48.0%
61.1%
ND
ND
0.2%
ND
. 3.4%
ND
5.1%
55.7%
In-house
Facilities
7.5%
16.4%
19.5%
0.2%
ND
ND
0.2%
ND
0.0%
ND
0.0%
3.7%
All
Facilities
32.4%
37.7%
42.5%
15.1%
ND
ND
0.2%
ND
1.1%
ND
2.3%
21.6%
Source: Market model, closure model and questionnaire data.
ND: Not disclosed due to business confidentiality.
                                C-ll

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                        The industry regulated in the TEC effluent limitations guidelines, however, consists of facilities in
                both service and manufacturing industries. Even within a subcategory, there may be a mix of commercial
                providers of TEC services and in-house operations that ate part of manufacturing facilities. EPA examined
                each subcategoty and determined that a zero salvage value was appropriate for all but one subcategory
                (Denning, 1996). Under this approach, the closure decision described in Section C. 1 simplifies to whether
                the facility retains a positive long-term cash flow after responding to the regulation.

                        The remaining subcategory is the Rail Chemical subcategory. In the subcategories for which effluent
                limitations guidelines are proposed, the 1994 book value of fixed assets was $5.2 million for the Rail
                Chemical facilities compared to $2.3 million for Truck Chemical and Barge Chemical and Petroleum
                facilities; 80 percent of Rail Chemical facilities have fixed assets greater than the median value for the
                 .iiiiii  ,   i-"  „  •'.'•', . • liijiiifi , ' 	 '„, '  "  'Y  ,', \! ( '•  I ';  '" -! ''ii,, ,' :••: .", " '  I";1: i ;•.'(. ,:• ':':' ' i;1!;,-  ']    ••••.!'
                industry. In addition, Rail Chemical facilities hold a much smaller percentage of total assets in the form of
                current assets; on average Rail Chemical faculties hold 38 percent of total assets in the form of current assets
                compared to 52 percent for the industry. EPA determined that it was appropriate to develop salvage value
                estimates for this subcategory based on the value of current and long-term assets (see Section C.2).
                        C.4.2  Salvage Value Estimates
                                          1     '  "                                        '                       t
                        Salvage value is calculated assuming the facility will be closed and not transferred. Thus, assets are
                evaluated based not on their potential contributions to operations, but only on their market value in a
                liquidation sale of plant and equipment Salvage value is estimated assuming that all cash transactions are
                realized in the current year and that discounting is not required. The most recent data in the survey (1994) is
                used in the salvage value calculation.

                        Salvage value includes the value of short-term (or current) assets and long-term assets. Short-term
                assets are defined as those assets not expected to be held beyond a year.  Long-term assets include financial
                instruments expected to be held beyond a year and fixed assets of plant, equipment, and land. All assets,
                both short-term and long-term, that are held on facility balance sheets are included in the closure analysis
                (a company has the option of recording all assets at the business entity or company level and not recording
                assets at the facility level.).  EPA developed two methods of valuing long-term assets, ie., there are two
                estimates for salvage value (Figure C-l).  Table C-5 lists the components used in the cash flow calculations,
                 '"   '	•• •   •  •  "''»" "         "    •  '      	  ;     •  '•'' •'"  ' •	*;     i
                                 ""'   ' ' ' '  '    '"    "  !            C-12	!  "'    ''  ; '
I*J|i(' ,!• i Mi';, "I' fii  ;• i •, 1,3,1,t „;';.'.,. 	, ;\!  '"g;;":; '.",  Hiii „;; 1	;... ;,-„', , 	i	- ' ,'j; i  i, /,'.,.,;	:.rt.i:, it'i,.Jiw :; w •! i" '••. i'v i»xa.i:riil	JKwii'i	,' Iliii	iv .,,ii•.'

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Current Assets
(Non-Inventory)
                                 Book Value of Land,
                                    Buildings, and
                                   Equipment Less
                                    Depreciation
                                Assessed/Appraised
                                   Value of Land,
                                   Buildings, and
                                     Equipment
                                                                  Salvage Value
                                                                  (Book Value Method)
                                                                  Salvage Value
                                                                  (Tax Assessment
                                                                  Method)
                                 Figure C-l

                           Salvage Value Estimation
                                   C-13

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TABLEC-5
Description
1994 Book value of current assets
1994 Book value of inventories
1994 Book value of land
1994 Book value of buildings
1994 Book value of equipment
1994 Book value of other non-current assets
1994 Cumulative depreciation
1994 Assessed value of fixed assets
1994 Percent of market value
Location in
Questionnaire
(Question No.)
32a
32b
32c '
32d
32c
32f
32*
51d
52
Data Element
Dictionary
Field Name
B32A94F
B32B94F
B32C94F
B32D94F
B32E94F
B32F94F
B32G94F
B51D94
B52
 C-14

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 their location in the questionnaire, and the data element name. Individual components in the salvage value
 estimate are discussed in more detail below.
        C.4.2.1 Valuing Current Assets

        Current assets are divided into two categories: inventories and all other current assets. Current assets
 other than inventories include cash, near-cash financial assets—such as certificates of deposit and other short-
 term, investments, and accounts receivable. EPA assumes that cash and near-cash assets would maintain their
 book value in the event of an auction and would be recovered at face value.  Some items, such as certificates
 of deposit and other short-term investments, may appreciate in value compared to their book value. Accounts
 receivable, however, could be worth less than their book value, depending on each facility's accounting
 practices for recognizing bad accounts. Overall, EPA assumes that the book value of these current assets
 accurately reflects their actual market value and they are valued at 100 percent in the salvage value
 calculations.

        Inventories are not as marketable as the rest of current assets because of their unique or specialized
 purposes. In the event of liquidation, a facilitywould have to sell its inventories at a fraction of their recorded
 book value.  For this reason, the analysis values inventories by applying a recovery factor that represents the
 portion of book value expected to be recouped in a sale. A 40 percent recovery factor is used to calculate the
 salvage value of inventories.3
        C.4.2.2 Valuing Faced Assets

        Two approaches are used to estimate the value of the fixed or long-term assets at each faculty: tax
assessment value and book value of fixed assets.
   3 Companies might maintain their inventories under a First In First Out (FIFO) approach or under the
Last In First Out (LJFO) approach.  During inflationary periods, LIFO will tend to undervalue inventories,
generally as a means of limiting tax liability. The survey did not ask the respondent to identify the
inventory accounting system used; however, the system used is unlikely to create a significant difference in
die analysis.
                                               C-15

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        Tax Assessment

        Most of the facilities pay local property taxes based on the assessed value of the facility's fixed
 assets. Questionnaire responses provide information about the 1993 and 1994 assessed value of each
 facility's land, buildings, and equipment the questionnaire also provides the percent of market value on
 which the tax assessment was based. Each facility's market value is calculated as the facility's 1994 assessed
 value divided by the percent of market value rate. A 20 percent recovery factor is applied to the result to
 reflect the fact that the assets would be liquidated at a fraction of their value.

        Not all facilities could provide both tax assessments and percentage of market value; questionnaire
 responses indicate the following reasons:

 /          •      'Si          '       "    ••  •'  .v '   ""'"  .  • '   .  • • .  p  \••   '•.!  '
        •       Some facilities were not assessed for tax purposes.
        •       Some assessments bear no relationship to current market value of the assets.
        Book Value

        An alternative approach for estimating the salvage value of each facility's fixed assets is based on the
book value of its fixed assets. The questionnaire requested 1994 balance sheet data that show the original
cost basis for fixed assets, including the faculty's land, buildings and improvements, equipment and
machinery, and cumulative depreciation. The book value of fixed assets is equal to the original cost less
accumulated depreciation. Similar to the tax assessment approach, a 20 percent recovery factor is applied to
the book value of the fixed assets to reflect the liquidation value of those assets.

        There are potential difficulties with using the book value of assets to estimate the salvage value of a
facility. The book value understates the true value of some assets while overstating the value of others.  For
instance, a faculty's land could have been purchased long ago and has since appreciated in value
tremendously. Other assets, however, such as a cement settling tank, might have no market value, but could
continue to cany a book value if they have not yet been completely depreciated.
                                               C-16

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        C.4.2.3 Summary of Salvage Value Estimates

        In summaiy, the closure model relies on two estimates of salvage value TOT each facility:

        •      Tax assessment value of fixed assets plus inventories and other current assets
        •      Book value of fixed assets plus inventories and other current assets

The values of fixed assets and inventories are reduced by recovery factors to reflect liquidation values.
Facility closure costs, which reduce the overall salvage value of the facility, are difficult to estimate even by
facility executives. These costs can include pension administration, payout costs, and site cleanup prior to
sale. These costs are not included in the salvage value calculation. As a result, the estimated salvage value
could be high, which would mate the facility more likely to be projected to close in the analysis. This
approach leads to a conservative estimate of the number of facility closures. Table C-6 presents a
comparison of the salvage value calculation under both the tax assessment and book value methods for the
Rail Chemical subcategory.

                       .               '"""^    •   (   -                        '        •
OS     PROJECTING FACILITY CLOSURES AS A RESULT OF THE RULE

        C5.1  Scoring Methodology

        With three forecasting methods and two salvage value estimates, there are six ways to evaluate a
facility's status. If a facility's post-regulatory status is less than zero, the facility is assigned a score of "1"
for that forecasting method/salvage value estimate comparison. A facility, then, may have a score ranging
fromOto6.4                          •'.',-'.'-'.'
                                                         \                                  •  .
        Closure is the most severe impact that can occur at the facility level and represents a final,
irreversible decision in the analysis.  The decision to close a facility is not made lightly; the business is aware
   4Inorder touse the same methodology and models for all subcategories, bom the book and tax assessment
estimates are set to zero for all subcategories but Rail Chemical. These facilities, men, may have scores of
0,2,4, or 6.                                              '    - '
                                              C-17

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                                 TABLE C-6

         SUMMARY OF TECHNIQUES FOR DETERMINING SALVAGE VALUE
                RAIL CHEMICAL SUBCATEGORY (28 of 38 Facilities)
Basis
Tax assessment
Book value
Salvage Value
Average
$1,063,538
$1,512,067
Total
$30,063,060
$42,741,660
Percent of Time
Basis Produced
Greater Value
24.8%
75.2%
Source: Closure model and detailed questionnaire data.
                                    C-18

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of and concerned •with the turmoil introduced into its workers' lives, community impacts, and how the action
might be interpreted by stockholders. The business will likely investigate several business forecasts and
several methods of valuing their assets. Not only all data, assumptions, and projections of future market
behavior would be weighed in the corporate decision to close a facility, but also the uncertainties associated
with the projections. When examining the results of several analyses, the results are likely to be mixed.
Some indicators may be negative while others indicate mat the facility can weather the current difficult
situation. A decision to close a facility is likely to be made only when the weight of evidence indicates that
this is the appropriate path for the company to take.

       EPA emulated corporate decision-making patterns when determining when a facility would close. A
score of 3 means that half of the comparisons indicate a financially viable concern. A business is unlikely to
close a facility when the uncertainty in the data means there is a 50-50 chance of it being viable.  EPA
selected a score of 4 or higher to indicate closure because it meant that the majority of the comparisons (i.e.,
at least 4 of 6) now indicate poor financial health. EPA believes that this scoring approach represents a
reasonable and conservative method for determining closure.
        C5.2  Pre-Regulatory Conditions

        The closure analysis begins with an evaluation of the pre-regulatory status of each facility. Several
conditions may lead to a facility having a score of 4 or greater under pre-regulatory conditions:
               The company does not record sufficient information at the facility-level tor the closure
               analysis to be performed.
               The company does not assign costs and revenues that do not reflect the true financial health
               of the facility.  Two important examples are cost centers and captive facilities, which exist
               primarily to serve other faculties under the same ownership. Captive faculties may show
               revenues, but the revenues are set approximately equal to the costs of the operation. (Cost
               centers have no revenues assigned to them).
               The faculty appears to be in financial trouble prior to the implementation of the rule.
                                               C-19

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Under the first two conditions, the impacts analysis defaults to the company level because that is the decision-
making level.  For example, assets are held at the company level, not the facility level or the company has
intentionally established facilities that will not show a profit but exist to serve the larger organization.

        The third condition also indicates a facility for which the impacts of the regulation cannot be
analyzed at the facility level The facility was in operation during the period included in the industry survey
and is, therefore, part of the market model. Because accounting practices allow a company flexibility on
whether it keeps records at the facility level at all, how it allocates corporate expenses to a company, and
other factors, the survey data may not indicate the reasons why the company operated what appears to be an
unprofitable facility. On the other hand, the facility may be unprofitable. In this case, the company may
decide to sell or close the facility. The closure of a facility that is unprofitable prior to a regulatory action
should not be attributed to the regulation. In either case, EPA does not have sufficient information to
evaluate impacts at the facility level as a result of the rule.
 ,,,,,,                                „           *  *

        Table C-7 summarizes the pre-regulatory status by subcategory.  The facility-level closure analysis
can be pre of 4 or higher after incumng the costs to respond to the regdation.  That is, the facility
is profitable before the regulation, but not after.
C6     SAMPLE CLOSURE ANALYSES
 1 "• !     ,      ,i.   i :. ''ii'i       ""'          i   •   '   " • " •  ...  i "       •     ,  ' ii     i1                     .
        The calculations are more complex for the case where salvage value is estimated with the book or tax
assessment value of fixed assets. This case is presented in Section C.6.1. The calculations are simpler for
                                               C-20

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                                       TABLE C-7

                     PRE-REGULATORY STATUS BY SUBCATEGORY



Subcategory


TT/CHEM
RT/CHEM
TB/CHEM
TT/FOOD
RT/FOOD
TB/FOOD

Tr/PETR
RT/PETR
TH/HOPPER
RH/HOPPER
BH/HOPPER
Total



Cost
Centers*


0
10
1
0
0
0
9
0
5
0
0
26

Insufficient
Information
at Facility
Level*


0
9
0
0
0
2
0
0
9
0
0
20
Facilities
withPre-
regulatory
Scores 4 or
Higher


14
10
4
8
0
0
0
0
5
5
0
48
•


Total

X
14
30
6
8
0
2
9
0
20
5
0
94


Total
Potentially
Affected
Faculties in
Subcategory1
288
38
15
173
86
2
34
3
34
5
12
692
Source: Closure model and detailed questionnaire data.
Numbers may not sum to total due to rounding.
RT/CHEM estimated on a salvage value basis; all others estimated on a cash flow basis.
*Analysis performed at me business entity level, not the facility level.
1Based on detailed questionnaire data.
                                         C-21

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the subcategories where salvage value is set to zero (also called cash flow approach, see Section C.4.1). This
case is presented in Section C.6.2.
        C.6.1  Sample Closure Analysis Using Salvage Value

        Tables C-8A and C-8B are annotated printouts of the closure model based on salvage value using
hypothetical data. When actually used, the closure model output closely resembles Tables C-8A and C-8B,
but contains facility-specific confidential informatioa

        In Table C-8A, panel A contains input variables for the calculation. The estimated inflation rate of
3.6 percent is based on the change in the Consun^Priw Index from 1984 to 1994 (Table A-2). Thefacility-
specific discount rate is taken from survey data.  The industry average nominal discount rate of 10.4 percent
is calculated from, all admissible facility-specific discount rates contained in the survey database. The
company-specific discount fell between 3 and 19 percent for 622 of 692 affected facilities.  The next line
shows the nominal discount rate used in the present value calculations. The real discount rate is calculated as
the nominal discount rate adjusted for inflation.  Recovery factors for inventories and fixed assets are given as
40 and 20 percent, respectively.

        Salvage values for the facility are calculated in panel B of Table C-8A. The salvage value of currents
assets is: $10,000+ ($100x40%) = $10,040. Under tb£ tax assessment method, the facility's salvage value
for its fixed assets is $100,000, which is 20 percent of its $500,000 market value. The book value of the
faculty is the sum of the book value for the individual components minus the cumulative depreciation ($0 +
$0 + $600,000 + $1,000 - $140,000 = $461,000). Liquidation value is 20 percent of the book value:
$92,200. The total salvage value for the facility is:

        •      Tax assessment=$10,040+ $100,000 = $110,040
        »      Book value = $10,040 + $92,200 = $102,040
                ii •,!!'      '         ',i ;         ' , '   • .      ,'''"•   '     I          ' '   . '

        Cash flow are forecasted in panel C of Table C-8B. The first three lines list the cash flow as
calculated from the survey data. The data for 1992 and 1993 are inflated to 1994 dollars using the Consumer
                                              C-22

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TABLE C-8A
FACILITY CLOSURE MODEL - HYPOTHETICAL INPUTS AND SALVAGE VALUES
      CLOSURE MODEL          Survey ID*

      , ALL FIGURES IN DOLLARS
                1234 Class:
                                                                     run date:  11-May-SS
      INPUT VARIABLES

      Inflation Rate (1995-2010):
      Co.-Specific Discount Rate (Norn.):
      Avg. Discount Rate (Nominal):
      Nominal Discount Rate:
      Real Discount Rate:
      Inventory Recovery Factor
      Fixed Asset Recovery Factor
                3.6%
               13.6%
               10.4%
               13.6%
               10.0%
               40.0%
               20.0%
    B
      SALVAGE VALUE
       CURRENT ASSETS:
        1994 Cash:
        1994 Inventories:

         Total:
 $10.000
    $100

 $10,040
       FIXED ASSETS
            t
       Tax Assessed Value:
       Total:

       Book Value:

       1994 Land:
       1994 Buildings:
       1994 Equipment
       1994 Other Noncurrent Assets
       Less Cum. Deprec.:'

       Total:
       Recoverable Value:
   Value
$500,000
     $0
     $0
$600,000
  $1,000
$140,000

$461,000
 $92,200
                                                      int
                                                    Rate
                                                   100%
  Market Recoverable
   Value      Value
$500.000    $100,000
      TOTAL SALVAGE VALUE OF MILL
          Using Tax Assessments:
          Using Book Value:
            $110,040
            $102,240
                                                                C-23

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ParJ^B: Financial and Economic Information—Part B Specific Instructions	


                   PART B SPECIFIC INSTRUCTIONS (continued)


8.     Include financial statements.  With your completed questionnaire include financial statements
       (i.e., balance sheet, income statement, and accompanying notes) for 1992, 1993, and 1994 for
       the facility (if available), for the business entity that owns this facility (if requested), and, if
       applicable, the corporate parent.  The statements need not be audited but should conform to
       generally accepted accounting  principles  (GAAP).  You may submit annual reports if they
       contain the relevant information.

9.     Sign and return to EPA the Questionnaire Certification Form for Part B (blue pages B-11
       and B-12). Include the Certification Form with the completed questionnaire.

10.    If you separated "Part B:  Financial and Economic Information" of the questionnaire from
       Part A, please return both Part A and Part B together. Return the entire questionnaire to:

       Mr. David Hoad'ley
       Document Control Officer
       U.S. Environmental Protection Agency
       Transportation Equipment Cleaning Questionnaire
       Room E913C (4303)
       401 M Street, SW
       Washington,  DC 20460

11.    Call in questions. If you have  any questions about Part B, please telephone the Financial
       and Economic Information Helpline, operated by Eastern Research Group, Inc. (ERG), EPA's
       economics contractor, at i-800-945-9545. The helpline is in operation Monday through Friday
       from 9:00 AM until 5:00 PM, Eastern Standard Time.
Page B-6                               F-10

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Part 8: Financial and Economic information—Definitions of Key Terms
                              DEFINITIONS OF KEY TERMS
 Appraised or
 assessed value
 Business entity
 Closed-Top Hopper
 Rail Tank Cars
 Closed-Top Hopper
 Tank Trucks
 Closed-Top Inland
 Hopper Tank Barges
An official or formal estimated value of real or personal property.
"Appraised" is generally used when referring to a value estimated for
insurance purposes.  "Assessed" is generally used when referring to the
value estimated for tax purposes.

The proprietorship, partnership,  corporation, or other legal entity that
directly owns this facility.  A business entity is distinguished by being able
to provide complete financial statements through net income, and may
own more than one facility. If the facility has no other ownership and has
complete financial statements, there is no business entity.

A completely enclosed storage vessel pulled by a locomotive that is used
to transport dry bulk commodities or cargos over railway access lines.
Closed-top hopper rail cars are not designed or contracted to carry liquid
commodities or cargos and are typically used to transport grain,
soybeans, soy meal, soda ash, fertilizer, plastic.pellets, flour, sugar, and
other similar commodities or cargos. The commodities or cargos
transported  come in direct contact with the tank interior.  Closed-top
hopper rail cars are typically divided into three compartments, carry the
same commodity or cargo in each compartment, and are generally top
loaded and  bottom unloaded. The hatch covers on closed-top hopper
rail cars are typically longitudinal hatch covers or round manhole covers.

A motor-driven vehicle with a completely enclosed storage vessel used to
transport dry bulk commodities or cargos over roads and highways.
Closed-top hopper tank trucks are not designed or constructed to carry
liquid commodities or cargos and are typically used to transport grain,
soybeans, soy meal, soda ash, fertilizer, plastic pellets, flour, sugar, and
other similar commodities or cargos. The commodities or cargos
transported  come in direct contact with the tank interior.  Closed-top
hopper tank trucks are typically divided into three compartments, carry
the same commodity or cargo in each compartment, and are generally
top loaded and bottom unloaded.  The hatch covers used on closed-top
hopper tank trucks are typically longitudinal hatch covers or round
manhole covers. Closed-top hopper tank trucks are also commonly
referred to as dry bulk cargo tanks.

A self- or non-self-propelled vessel constructed or adapted primarily to
carry dry commodities orr cargos in bulk through inland rivers and
waterways, and may occasionally carry commodities or cargos through
oceans and  seas when in transit from  one inland waterway to another.
Closed-top inland hopper barges are not designed to carry liquid
commodities or cargos and are typically used to transport corn, wheat,
soy beans, oats,  soy meal, animal pellets, and other similar commodities
or cargos. The commodities or cargos transported come in direct
contact with the tank interior. The basic types of tops on closed-top
inland hopper barges are telescoping rolls, steel lift covers, and fiberglass
lift covers.
                                           F-ll
                                                                                    Page B-7

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. nil
                      I"!1	if
       Part B: Financial and Economic Information—Definitions of Key Terms
                              DEFINITIONS OF KEY TERMS (continued)
        Commercial TEC
        Operations
        Commodity or Cargo
        Corporate Parent


        Discount Rate
        Extraordinary revenues
        or costs
       Facility
       Financial statements
       Heel
       In-house TEC
       Operations
       Inland Tank Barge
  Cleaning activities performed on a fee basis for clients.  Cleaning is the
  sole focus of the transaction; it is not offered as part of a larger service
  to the client (Larger services include services such as leasing, repairing,
  transporting/hauling, etc.)  Commercial TEC operations bring revenue
  into the company that offers the cleaning.

  Any chemical, material, or substance transported in a tank truck, closed-
  top hopper tank truck, intermediate bulk container  (IBC) or tote,
 jntenppdal tank container, rail tank car, closed-top  hopper rail tank car,
  inland tank barge, closed-top inland hopper barge, ocean/sea tanker, or
  other similar tank that comes in direct contact with the chemical, material,
  or substance.  A commodity may also be referred to as a cargo.
II  '» ...  I ,!'  " ' " I-, '' '' In '!, . ".,:.• 'I'liii" h '.' i ,: ?  ' •' '!"  ' '  ' " J1 „ ,  "  ' •	|.,'l |!  ' 'I         .' i ,
  The proprietorship, partnership, corporation, or other legal entity that is at
  the top of the chain of corporate ownership of the business entity.

  The rate,your facility would pay to raise money for capital investments,
  given the facility's mix of debt and equity.  The discount rate is also
  known as marginal weighted average cost of capital.

  Extraordinary revenues or costs include items that caused total revenues
  or total costs to deviate significantly from historical trends. Extraordinary
  revenues might include revenues from selling land or other significant
  assets.  Extraordinary costs might include capital expenditures needed to
  repair damage from fire, flood, or some other extraordinary event.

  Physical location corresponding to the site listed on the facility
  identification label (affixed to the cover page of each part of this
  questionnaire) where industrial and nonindustrial activities are conducted.
 The activities conducted include, but are not limited to:  transportation
 equipment cleaning, manufacturing, rebuilding, repair, maintenance,
  painting, and associated office operations, cafeteria operations, or
 sanitary/shower facilities.

 Balance sheet and income statement  that were derived from accounting
 records according to generally accepted accounting principles (GAAP).

 Any material remaining in a tank or container foljowing unloading,
 delivery, or discharge of the transported commodity or cargo. Heels may
 also be referred to as residual materials or residuals.
                                 ',„:,,          /
 Cleaning activities that take place at a facility in order to maintain or
 operate other business activities. The equipment may or may not belong
 to the facility. For example, a trucking company may clean its own tank
 trucks between shipments or a milk processor may rinse out tank trucks
 (not owned by them) after a shipment is delivered.

 A self- or non-self-propelled vessel constructed or adapted primarily to
 carry commodities or cargos  in bulk in cargo spaces (or tanks) through
 rivers and inland waterways, and may occasionally carry  commodities or
 cargos through oceans and seas when in transit from one inland
 waterway to another,  the commodities or cargos transported are in
 direct contact with the tank interior. There are no maximum or minimum
 vessel or tank volumes.
      Page B-8
                                                F-12

-------
Part B: Financial and Economic Information—Definitions of Key Terms
                      DEFINITIONS OF KEY TERMS (continued)
 Intermediate Bulk
 Container (IBC) or Tote
 Intermodal Tank
 Container (ITC)
 Ocean/Sea Tanker
 Rail Tank Car
 Standard Industrial
 Classification (SIC)
 Tank
 Tank truck
A completely enclosed storage vessel used to hold liquid, solid, or
gaseous commodities or cargos that are in direct contact with the tank
interior.  Intermediate bulk containers may be loaded onto flat beds for
either truck or rail transport or onto ship decks for water transport.  There
are no maximum or minimum values for intermediate bulk container
volumes, although larger containers are generally considered to be
intermodal tank containers. IBCs also are commonly referred to as totes
ortote bins.                                                   •  s

A completely enclosed storage vessel used to hold liquid, solid, or
gaseous commodities that are in direct contact with the tank interior.
Intermodal tank containers may be loaded onto flat beds for either truck
or rail transport or onto ship decks for water transport. There are no
maximum or minimum  values for intermodal tank containers, although
smaller containers are generally considered to be intermediate  bulk
containers or totes.

A self-.or non-self-propelled vessel constructed or adapted to transport
commodities in bulk in cargo spaces (or tanks) through oceans and
seas, where the commodity or cargo earned comes in direct contact with
the tank interior. There are no  maximum or minimum vessel or tank
volumes.

A completely enclosed storage vessel pulled by a locomotive and used to
transport liquid, solid, or gaseous commodities or cargos over railway
access lines. A rail tank car storage vessel may have one or more
storage  compartments  and the stored commodities come in contact with
the tank interior. There are no  maximum or minimum vessel or tank
volumes.

The four-digit industry-classification assigned to this facility by the federal
government The SIC number is used when reporting financial and other
information to the U,S.  Department of Commerce and other federal
agencies.  Facilities are assigned both primary and secondary SICs.

A generic term used to describe any closed container used to transport
commodities or cargos. The commodities or cargos transported come in
direct contact with the container interior, which is cleaned by TEC
facilities. Examples of containers that are considered tanks include: tank
trucks, closed-top hopper tank trucks, intermediate bulk containers,
intermodal tank containers, rail tank cars, closed-top hopper rail tank
cars, inland tank barges, closed-top inland hopper barges, ocean/sea
tankers, and other similar tanks (excluding drums).  Containers used to
transport pre-packaged materials are not considered tanks.

A motor-driven vehicle with a completely enclosed storage vessel used to
transport liquid, solid, or gaseous materials over roads and highways.
The storage vessel or tank may be detachable, as with tank trailers, or
permanently attached.  The commodities or cargos transported come in
direct contact with the tank interior. A tank truck may have one or more
storage  compartments. There are no maximum or minimum vessel or
tank volumes.  Tank trucks are also commonly referred to as cargo  ten/cs.
                                          F-13
                                                                                   Page B-9

-------
 Part B: Financial and Economic Information—Definitions of Key Terms
  Totes or Tote Bins
  Transportation
  Cleaning Equipment
  (TEC) operations
                       DEFINITIONS OF KEY TERMS (continued)
A completely enclosed storage vessel used to hold liquid, solid, or
gaseous commodities or cargos which come in direct contact with the
tank interior. Totes may be loaded onto flat beds for either truck or
rail transport, or onto ship decks for water transport.  There are no
maximum or minimum vessel for tote volumes, although larger
containers are generally considered to be intermodal tank containers.
fote^ or tote bins are also referred to as intermediate bulk containers
or/fiCs.

TEC operations include cleaning the interiors of tanks.  The tank
interiors cleaned  include but are not limited to: tank trucks, closed-top
hopper tank trucks, intermediate bulk containers (IBCs), intermodal
tank containers (ITCs), rail tank cars, closed-top hopper rail tank cars,
inland tank barges, closed-top inland hopper barges, ocean/sea
tankers, and/or other similar tanks.
                                          F-14
Page B-10

-------
 Part B: Financial and Economic Information—Checklist and Certification	-•'.,.•''•   •


                            CHECKLIST AND CERTIFICATION

 CHECKLIST

 Be sure that the following additional information is included with the completed questionnaire, unless
 instructed otherwise:

        Q      Questions 54, 86, and 92: Supply 1992, 1993, and 1994 financial statements,
               including income statements,  balance sheets, and accompanying notes, (as
               appropriate.)


 QUESTIONNAIRE CERTIFICATION

 When Part B: Financial and Economic Information of the questionnaire has been  completed and all
 additional requested information has been assembled, the individual responsible  for directing or
 supervising the preparation of Part B must read and sign the certification statement listed below. The
 certifying official must  be a responsible corporate official or a duly authorized representative.
I certify under penalty of law that the attached Part B of the questionnaire (Financial and Economic
Information) was prepared under my direction or supervision in accordance with a system designed to
assure that qualified personnel properly gather and evaluate the information submitted.  Based on my
inquiry of the person or persons who manage the system, or those persons directly responsible for
gathering the information, the information submitted is, to the best of my knowledge and belief, true,
accurate and complete.  I am aware that there are significant penalties for submitting false information,
including the possibility of fine and imprisonment.
Signature of Certifying Official for Financial and Economic Information   Date
Printed Name of Certifying Official
Title of Certifying Official
                                          F-15

                                                                                 Page B-11

-------
   Part B: Financial and Economic Information—Checklist and Certification
                     CHECKLIST AND CERTIFICATION (continued)
  SPECIAL CASES
  If you use contract personnel to perform TEC operations or operate a mobile facility as described
  l|nder Special Cases on page B-2, AND are unable to complete any section of this questionnaire,
  because only the contract company or mobile facility has access to the information, in the space
  b§low provide: the name, company name, and phone number of the person who should be contacted
  to supply the missing information. In addition, list the question numbers or sections you were unable
  to complete and expect the contact person to complete.
  Name of Contact Person
  Company Name
 Telephone Number
 Mailing Address
 City                                State                   Zip Code
 Question Numbers or Sections Not Completed
                                        F-16
Page B-12

-------
                       SECTION 1:  FACILITY IDENTIFICATION
PART B INFORMATION CONTACT AND FACILITY IDENTIFICATION
1.
                                       .  ATTACH
                                       IABELHERE
If the mailing address shown on the label above is correct, check the box in 1a. If the
information is not correct, check the box in 1b, and enter the correct information in the spaces
below.

a.     Yes, the mailing address above is correct	D

b.     No, the mailing address is not correct (Please correct below)	 . n

       Name of facility  	;	.	:	
              Mailing address or P.O. box

              pity. _	_	•.
                                         State
Zip
       If the street (i.e., physical) address of the facility is different from the mailing address given in
       Question 1, provide the street address in the spaces below.  If the street address is the same
       as the mailing address check the box in 2a.
a.

b.
              The street address for this facility is the same as the mailing address
              The street address for this facility is not the same as the mailing
              address.  List the correct address below ..... ....... ................... Q
              Name of facility

              Street address _

              City  	'	
                                         State
Zip
       Indicate the county in which your facility is located.  (For Alaskan facilities only, please indicate
       the borough.  For facilities in Louisiana, please indicate the parish.)
                                          F-17
                                                                                 Page B-13

-------
        Part B, Section 1: Facility Identification
        4.      Please list the street names at the intersection closest to your facility.

         ,. ;. •;  . a.   „    :	t	{	     ,,              	 :i

         ":"'l!   "b.   '  __!	'	'                  	_
              c.

              d.
              (For example, if two streets:  a. Elm Street; b. Maple Street.)

          5.  Provide the name, title, and telephone number of the individual who can answer questions
Y*« n         concerning information provided in Part B: Economic and Financial Information.
Mo  n
              a.     Contact name	
              b.     Contact title
              c.     Telephone number (       )
              d.     When is the most convenient day and time to call?

                     (Circle best days)     Mon.   Tues.   Wed.    Thurs.    Fri.   Any day

                     	_      AM/PM (local time)

          6,  Confirm the type of transportation equipment cleaning (TEC) activities performed at this facility.
Y«* a         Check all that apply.
.NO', a    ';„;,;	   '   ,;,;	;  '    ,„       „ '        .  .     .       ,        ......
              a.     Tank Trucks	n

              b.     Closed-Top Hopper Tank Trucks	D

              c.     Intermodal Tank Containers (ITCs)	n
 • '  '         •    "     •   •	/    •      ',,,,•,'      ...    ,    ,   ,    ,   i ,     i ^ ,
              d.     Intermediate Bulk Containers (IBCs) and Totes . '.	 D

              e.     Rail Tank Cars	n

              f,      Closed-Top Hopper Rail Tank Cars  	'.".		'. .  . Q

              g.     Inland Tank Barges	n

              h.     Closed-Top Inland Hopper Tank Barges	Q

              i.      Ocean/Sea Tankers	n

              j.      Other Container - please describe	  	Q

              k.     None of the above (see below)	D

              IF NONE OF THE ABOVE OR IF YOU  BELIEVE THAT YOU HAVE RECEIVED THIS
              QUESTIONNAIRE IN  ERROR, CALL THE FINANCIAL INFORMATION HELPLINE AT
              1-800-945-9545.

                                                 F-18
Page B-14

-------
       Part B, Section 1:  Facility Identification
Y«»  n
NO  n
CORPORATE HIERARCHY

7.  Please review the corporate hierarchy chart below. Which example describes the chain of
    ownership for this facility?

    a.     Example A . '.	'..		...		,.	£}

    b,     Example B				 D

    c.     Example C	,	Q

    d.     Example D		'..... n

    e.     Example E	 Q
                                     CORPORATE HIERARCHY
        Level in Hierarchy
        Corporate
        Parent
        (Section 4
        Information)
        Business Entity
        (Section 3
        Information)
Business
Entity
l
r
Facility
                                  e
o
Business
Entity
i
f
Facility
        Facility
        (Section 2
        Information)
           Financial Statements requested at this level in the corporate hierarchy
                                               F-19
                                                                                    Page B-15

-------
        Part B, Section 1: Facility Identification
               All respondents must complete Section 2 with information for the facility. If your corporate
               hierarchy best resembles Examples A, B, C, or D, you also need to complete Section 3 with
               information for the business entity.  If your corporate hierarchy best resembles Examples A or
               B{ you also need to complete Section 4 with information for the corporate parent.

               Financial statements are balance sheets, income statements, and accompanying notes
               prepared according to generally accepted accounting  principles (GAAP).  Respondents must
               supply financial statements according to corporate hierarchy:
                     Corporate Hierarchy
                     Example A
                     Example B
                     Example C
                     Example D
                     Example E
Complete Section(s)
      2,3,4
      2,3,4
       2,3
       2,3
Supply Financial
Statements for
Corporate Parent
Corporate Parent
Business Entity
Business Entity and Facility
                     Facility
               As appropriate, Questions 54, 86, and 92 will ask you to submit financial statements.


C0n '''I   I  '      ,  ,"	     "'    , |        '„

co«fid«nti»i  9.   If you checked D or E in  Question 7,  is  the facility:
Y««  a
NO  a          a.      Checked A, B, or C in Question 7  	Q

               b.      Publicly held	d

               c.      Privately held	Q
Page B-16
                                                   F-20

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                SECTION TWO:  FACILITY AND TEC FINANCIAL INFORMATION
            Section 2 asks questions about the finances of this facility for fiscal years 1392,1993,
            and 1994.  Please answer all questions unless directed to skip certain questions ("SKIP1}.
            Please:note any special assumptions made or calculations performed in answering a given
            question in the Comments section beginning on Page £37.  Any other comments or
            explanations should be noted in the Comments section as well.  Reference each comment
            with thie relevant question and page number.          -

            Definitions are provided on Page 8-7. Call the helpline at 1-800-945-9545 If you have any
            questions or comments concerning the questionnaire or your response to a specific
            question. The helpline operates between 9:00 AM and 5:00 PM Eastern Standard Time,
            Monday through Friday.               *      ,

            Pay dose attention to the units requested for each question. Financial questions request
            data in whole dollars.
       BACKGROUND INFORMATION

confidential   10.  List the primary and secondary 4-digit Standard Industrial Classification (SIC) codes assigned
Y«S  a         to this facility.  (See definitions beginning on Page B-7.)
No
              a.      Primary SIC code ...

              b.      Secondary SIC codes
Yes  n
NO  n
          11.  What is the first month of this facility's fiscal year? Enter 01 for January, 02 for February, 03
              for March, etc.
              First month of fiscal year
       IN-HOUSE TEC OPERATIONS

confidential   12.  Are TEC operations the only activity at this facility?  Please check a or b as appropriate.
Yes  D               '                    ••-.---
NO  n         a.      TEC operations are the only activity at this facility.	.. ..
              b.
                     Other, non-TEC activitie^ also occur at this facility.	  D
                                                F-21
                                                                                       Page B-17

-------
        Part B, Section 2: Facility and TEC Financial Information
co«fici«o««i   13. Sequentially rank the top three activities at this facility and check whether the activities
Y«« o         generate revenue.  The activity with rank #1 generates the most revenue.  If this facility
NO  o         generates no revenue, rank the three activities most performed by this facility.
Rank
#1
#2
#3
Activity



Revenue-Generating?
Yes



No



con*W«rti*i   14.  Does this facility perform TEC operations to maintain or operate other parts of your business?
Y««  p          (For example, your facility paints or repairs transportation equipment, but must first wash them
NO  b          In order to So so.)
               a.

               b.
Yes

No
n
n
coofid«oti*J   15.  Sequentially rank the reasons why this facility maintains in-house TEC operations.  Rank the
Y«  a          most important reason with 1, the second most important reason with 2, and so on.  A reason
NO  n          that is not considered at all should be ranked with a zero (0).
Rank







_ ••... . .• '. ' ' •..''.!.!. •.•'..-• '•.• ': .:,. :',;••: ".'''i . ,•;.••''• '..' .-': :; '..'... ».'•':'.• • .;; '••••'::;'
-Reason-". . •;.. f-- -. •; " • •••• ••/ • ;, •.. - • '•.. V/" •. '•".•.
We are a commercial cleaning facility (leave all other reasons unranked)
Quality
Liability
Cost
Convenience
Other (please describe)

                                                  F-22
       Page B-18

-------
        Part S, Section 2:  Facility and TEC Financial Information
 confidential   16. Indicate the cost increase that would lead you to use a commercial tank cleaning service
 Yas o         rather than performing the service for yourself on an in-house basis.  Indicate "Not Applicable"
 NO  n         if your facility does not clean the specified type of tank.  If you are a commercial tank cleaning
               service, indicate "Would Not Switch" for the tank types you clean.
Tank Type
Tank Trucks
Closed-Top Hopper
Tank Trucks
Intermodal Tank
Containers (ITCs)
Intermediate Bulk
Containers (IBCs)
and Totes
Rail Tank Cars
Closed-Top Hopper
Rail Cars
Inland Tank Barges
Closed-Top Inland
Hopper Tank Barges
Ocean/Sea Tankers
Other Containers
Percentage Cost Increase That Would
Lead To Using Commercial Tank Cleaning
Service .
Less
than
10%









—
Between
10%
to
20%









___
20%
to
30%









___
30%
to
40%









' --.-.T- -.'-.... '
40%
to
50%









	
Over
50%









^__
Would
Not
Switch









- _..__. ....
Not
Applicable









___ -'
           COMMERCIAL TEC OPERATIONS

confidential    17. What percent of transportation equipment cleanings are for clients other than yourself? (Enter
Yes  n         zero if you have no commercial clients.)
NO  n                                 ; •                          -•'.'••-•
              Percent commercial TEC cleanings  . . .		_._	%
                                                 F-23
                                                                                           Page B-19

-------
        Part B, Section 2:  Facility and TEC Financial Information
Y«> a
NO  a
           18.  How does your facility recover TEC costs from clients that you service?  Please check the
               appropriate answer.


               a.      No commercial clients serviced	  Q

              ,b.      Separate bill to client	  Q

               c.      Separate line item in total bill to client  	  D

               d.      Included in total bill to client but not broken out specifically 	,	  n

               e.      Other (please describe)	  D
Y«*  o
No  a
           19.  Sequentially rank the reasons why clients use your tEC services. Rank the most important
               reason with 1, the second most important reason with 2, and so on.  A reason that is not
               considered at all should be ranked with a zero (0).
Rank









Reason . '• • "" ..,''•'•.•• / /; .. :•..-. ;.:;'•-
No commercial clients (leave all other reasons unranked)
Cleaning services provided to client only as a part of other
services
Proximity
Price
Quality
Liability
Contract agreements between client and this facility to receive
repairs or other services at same site
Other (please describe)

co»tfW«o
-------
       Part B, Section 2:  Facility and TEC Financial Information
confidential   21. Who accepts the TEC jobs listed in Question 20 that you reject?  Check the most appropriate
Yes
No
answer.

a.     Not applicable, checked Question 20b	  Q

b.     Unknown	».	  D

c.     TEC facilities with more advanced TEC equipment	  Q

d.     TEC facilities with better wastewater treatment	  D

       TEC facilities located in regions with less stringent regulatory requirements 	  Q

       Hauler of cargo	•	  d

       .Producer of cargo	  O

       Other (please describe)	  Q
              e.

              f.

              g.

              h.
confidential   22. The table below lists factors that may affect which cleaning process this facility chooses for a
Yes  n         tank (e.g., hot water rinse, caustic, detergent, etc.).  Sequentially rank the following factors in
NO  n         order of importance in determining the cleaning process performed.  Rank the most important
              reason with 1, the second most important reason with 2, and so on.  A reason that is not
              .considered at all should be ranked with a zero (0).
Rank




••' -S^S
Reason ;-:./ -• '-V1 •. " ' .. • • ' .-'• -•••'
Previous load's contents
Next load's contents
Client policy on cleaning ,
Other (please describe)

                                                  F-25
                                                                                          Page B-21

-------
        Part B, Section 2:  Facility and TEC Financial Information
            23.  In the tabfe below, list the total number of units cleaned by the facility in 1992, 1993, and

 Y«*  a          1994.
 No  O
23.
Type of Units
Tank Trucks
Closed-Top Hopper
Tank Trucks
ITCs
IBCs and Totes
Rail Tank Cars
Closed-Top Hopper
Rail Tank Cars
Inland Tank Barges
Closed-Top Inland
Hopper Tank Barges
Ocean/Sea Tankers
Other Containers
Number of Units Cleaned ; : :
' 1992
Total


	 	 __ 	 i 	 	 ____ 	

	 . 	 	 i 	 	
	 	 i 	
	 	 i 	


,
1993
Total
_ 	 	 i .
____ i 	 	

	 j 	 	 	



._i^_ * ^^m^*m

,
1994
Total




____ _T 	 i .. _^^
	 	 t 	
i

-
,
No  b
MARKET INFORMATION


   24. Did the 1993 flooding affect the levels of TEC revenues and costs at this facility?


       a.      Yes, fluctuations in business occurred because of floods	


       b.      No, the floods created no business changes  	
cooSd«*i«i   25.  What is the distance, in miles, to the nearest commercial TEC facility offering similar services?
Y««  a
NO  p          Distance (miles)	;		
                                                  F-26
Page B-22

-------
       Part B, Section 2: Facility and TEC Financial Information
confidential   26. How sensitive are your customers to price increases for each of the following types of tank
Yes
No
cleaning?
Make two assumptions:
       (1) there would be no change in the price of cleaning other tank types, and
       (2) competitor prices remain unchanged.

Indicate 'Very sensitive" for those items where a 10 percent price increase would lead to
more than a 10 percent loss in  business for cleaning that type of tank.

Indicate "moderately sensitive" for  these items where a 10 percent price increase would
cause less than a 10 percent loss in business for cleaning that type of tank.

Indicate "not sensitive" for those  items where a 10  percent price increase would cause little, if
any, decrease in the volume of business at the facility.

Indicate "hot applicable" if the facility does not clean the specified type of tank.
Tank Type
Tank Trucks
Closed-Top Hopper Tank
Trucks
Intermodal Tank
Containers (ITCs)
Intermediate Bulk ,
Containers (IBCs) and
Totes
Rail Tank Cars
Closed-Top Hopper Rail
Cars
Inland Tank Barges
Closed-Top Inland Hopper
Tank Barges
Ocean/Sea Tankers
Other Containers
Price Sensitivity
Very
Sensitive









	 -
Moderately
Sensitive









	
Not
Sensitive









	
Not
Applicable









	 ,
No
Commercial
Clients

••







	
                                                 F-27
                                                                                          Page B-23

-------
                         V '!' '•• ill"!1!ill!I.1
              Part B, Section 2: Facility and TEC Financial Information
                    DISCOUNT RATE

                27. If you borrow money to finance capital improvements, such as wastewater treatment
      Y«« n         equipment, what interest rate would you pay on such loans?
      NO  n
                    Interest rate
      coo«d«ntkj   28. |n the event that you do not borrow money to finance capital improvements, what discount
      Y««  a         rate would you use? The discount rate is the minimum rate of return on capital required to
      NO  a         compensate debt holders and equity owners for bearing risk. If you borrow to finance capital
                    improvements, the discount rate is equivalent to the interest rate paid on those loans.
                    Discount rate
                29.  Are separate financial records maintained for TEC operations at this facility?
      Y«* n
      NO a         a.     Yes	
                    b.      No
                    (If no, TEC-specific financial questions should be answered to the best of your ability and
                    marked as "Best Estimate" where appropriate.)
                                        .   -          F-28

	:::	,  Pag© B-24

-------
Part 6, Section 2:  Facility and TEC Financial Information
BALANCE SHEET INFORMATION
   •;;.' For Questions;30;^^                                                       for this
   ;•:•;.* facilitytestbi^-pperatio                                     Provide>i992:iriformation in
    ; Question :30!0:Prwide;.:|g«93:;infonTiatic)ni in :Questibn:3.1^ andiJprovide 1994::;information in
   :  Question 32..  Current assets:include cash and other assets: that could be reasonably
   •  converted to cash, sold, or consumed^accounts receivable;; and prepaid expenses such as
     rent: Inventories include raw material^supplies, and fuel.  N^                      physical
   .; items such as property, plant and equipment, long-term investments, and intangibles.  If the
     facility was hot in operation for a particular yearv check the box for that year and leave the
   ^appropriate columns^                                this,facility and its TEC
     '':':
Confidential.
Yes O~'
No O "
30.
Balance Sheet
Information — Assets
1992 ($)
Not In Operatlon.......n
(leave columns blank)
Facility
(All Operations)
TEC
Operations
Current Assets ' -
a. Value of all current
assets excluding
inventories
b. Value of inventories
;:i 'Noncurrerit Assets
c. Land (original cost)
d. Buildings (original cost)
e. Equipment (original cost)
f. Other noncurrent assets
g. Cumulative depreciation
Total Assets
h. Total assets (sum of a
through f minus g)
$ ,
$,'•',

$ , •'',•"•'• ,
$,-.,-
$ , , ',._'•'
$,..', ,
$•,"',•

$ , . , '
$ i i ?
$ , ,
~
$ ,
$ ,
$ , . .
$ ,
•$,-',
; ' - 'i-""
$ i i i
Check box if data for TEC operations are best estimates
D
                                          F-29
                                                                                  Page B-25

-------
 Part B, Section 2: Facility and TEC Financial Information
ConttdcntkJ
Y«* D
No D
31.
Balance Sheet
Information — Assets
1993 ($)
Not in Operation 	 Q
(leave columns blank)
Facility
(All Operations)
TEC
Operations
Current Assets
a. Value of all current
assets excluding
inventories
b. Value of inventories
Noncurrent Assets
c. Land (original cost}
d. Buildings (original cost)
e. Equipment (original cost)
f. Other noncurrent assets
g. Cumulative depreciation
Total Assets
h. Total assets (sum of a
through f minus g)
$ ,
$ ,
• '• -, ' ;:,, .
$ ,
$ ,
$ ,
$ ,
$ ,

$ ,
$ , , ,
$ , ,
V:>" '•'•'"..'•• '••'.;
$ ,
$ ,
$ ,
$ ,
$ ,
•'.'•';-'"yy..'^'-\^'-':-" '••«'•••
$ ,
Check box if data for TEC operations are best estimates
                                        F-30
Page B-26

-------
TABLE C-8B
FACIUTY CLOSURE MODEL - HYPOTHETICAL INPUTS. FORECASTED CASH FLOW, AND CLOSURE SCORES
      PRESENT VALUE


   C PAST CASH FLOW ($1994):
                      Cash Flow
                      Cash Flow
                      Cash Flow
       FORECASTED CASH FLOW
                            1
                            2
                            3
                            4
                            5
                            6
                            7
                            8
                            9
                           10
                           11
                           12
                           13
                           14
                           15
                           16

      BASELINE PRESENT VALUE

1992
1993
1994
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005 ,
2006
2007
2008
2009
2010
Current $
12,500
60,000
15,000
1994
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000 '
$15,000
$15,000
$15,000
$15,000
$1994
$13.271
$61,794
$15,000
Average
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30,022
$30.022
$30,022
$30,022
$30,022
$30,022
$30.022



'
Variation
$61.794
$13,271
$61.794
$15,000
$61,794
$13,271
.$61,794
$15,000
$61,794
$15,000
$61,794
$13,271
$61,794
$15,000
$61,794
$13,271
                                      Inflate Cash Flow to 1994 dollars
                                      Consumer Price Index for transportation
                                           1992      126.5
                                           1993      130.4
                                           1994      134.3
$129,091     $258,370    $336,372
   D SUMMARY:
Cost Pass-Through

-

Regulatory Option
Baseline
Option 1
Option 2
Option 3
Option 4
Option 5
Option 6
Option?
Option 8
Option 9
Option 10
Option 11
. Option 12
10%

PVof '
Incremental
Reg. Costs
$0
• $10,000
$20,000
$29,700
$75,000
$100,000
$125,000
$150,000
-$175,000
$200,000
$300.000
$400,000
$500,000


Adj. PVof
Incremental
Reg. Costs

$9,000
$18,000
$26,730
$67,500
$90,000
$112,500
$135,000
$157,500
$180,000
$270,000
$360,000
$450,000
Salvage Value
Assessment

1994
$129.091
0
. 0
0
1
1
1
1
1
1
1
1
1
1
$110.040
Present Value
Average
$258,370
0
0
0
0
0
0
0
0
1
1
1
1
1


Variation
$336,372
0
0
0
0
0
0
0
0
0
0
1
1
1
Book:

1994
$129,091
0
• 0
0
0
1
1
1
1
1
1
1
1
1
$102,240
Present Value
Average
$258,370
0
0
0
0
0
0
, 0
0
1
1
1
1
1


Variation
$336,372
0
0
0
0
• 0
0
0
0
, 0
0
1
1
1




Closures
0
0
0
1
• 2
2
2
2
A
4
B
6
6
                                                          C-24

-------
 Price Index for transportation (CEA, 1995). The cadi flow are forecasted for 1995-2010 with the three
 methods discussed in Section C.2.

         Panel D of Table C-8B summarizes the results of the closure analysis. The first row is the pre-
 regulatory status evaluation (called "Baseline" for brevity). Each subsequent row represents a regulatory
 alternative or option. The present value of the incremental regulatory cost for each option is calculated with
 the cost annualization model (Appendix A). The after-tax value is used in the closure analysis because it
 accurately reflects the costs that the facility would incur. The present value of incremental pollution control
 cost is scaled bythecost pass-through derived from the market model (ApjKodixB) to estiniate the cost
 borne by the facility.

         The post-regulatory cash flow are calculated by subtracting the adjusted present value of incremental
 regulatory costs from the present value of projected cash flow. For example, under Option 3 in Table C-8B,
 the present value of the post-regulatory earning is $129,091 minus $26,730 equals $102,361 forthe 1994
 method of projecting cash flow. This value is lower than the salvage value as calculated by the tax
 assessment method ($110,040) but higher than the salvage value as calculated by book value ($ 102,240).

        In the example, the facility begins to experience adverse finandal impacts beguining with Option 3,
 but is not considered a closure until Option 8.
        C.&2 Sample Closure Analysis using Cash Flow

        Tables C-9A and C-9B are annotated printouts of the closure model based on cash flow using
hypothetical data. As discussed above, estimating closures on a cash flow basis is simply a special case of
the general closure model with salvage value set to zero (compare panel B in Tables C-8A and C-9A). The
forecasting method for future cash flow is identical to that in the previous example (compare panel C in
Tables C-8B and C-9B).  Finally, in panel D, the adjusted present value of compliance costs are compared
with the salvage value of zero. In other words, as long as post-compliance cash flow is greater than zero, the
facility is presumed to remain open; if post-compliance cash flow is negative, the facility is presumed to
close. In, fable C-9B, the facility experiences adverse financial impacts beginning with Option 7, but is not
considered a closure until Option 10.

              	 •  ••••	'        '   '      •  •'•       C-25   	       '  '.. '                     '

-------
TABLE C-M
FACILITY CLOSURE MODEL - HYPOTHETICAL INPUTS AND SALVAGE VALUES
    A
      CLOSURE MODEL          SwveylD*          1234 dan:                                          run d«t»:  05-Jun-98

      ALL FIGURES IN DOLLARS
      INPUT VARIABLES:

      Inflation Rate (1995-2010):                       3.6%
      (^.-Specific Discount Rate (Norn.):               13.6%
      Avg. Discount Rate (Nominal):               ,    10.4%
      Nominal Discount Rate:                        13.6%
      Real Discount Rate:                           10.0%
      Inventory Recovery Factor.                      40.0%
      Fixed AssetRecovary Factor                    20.0%
    BsALVAGEVALUE

       CURRENT ASSETS:
        1994 Ctsh:                        $0
        1994 Inventories:             '      SO

        Total:                           $0
       FTXEDASSETS:

       TaxAssMMdValue:
                                   Assessed  AowinMnt      Markat Racowabla
                                      Valu*        Rate       Vakw      Valu*
       Total:                            50       100%          JO        SO

       BookValue:

       1994 Und:                        SO
       1994 Buildings:      .               SO
       1994Equipm«it           ,         SO
       1994 Other Noncumwt Assets         SO
       Less Cum. Deprec.:                 JO

       Total:                          ,  $0
       Recoverable Valu*:                 SO
      TOTAL SALVAGE VALUE OF MILL
          Using Tax Acucsmenta:                      SO
          Using Book Value:                           SO
                                                               C-26

-------
FACILITY Ct
0SUR3 MObe. - HYKTHETWM. INPUTS, FORECASTED CASH FLOW. AND CLOSURE SCORES
      PRESEMTVALUE:


   C PAST CASH FLOW ($1394):
                      Cash Flow
                      Cash Flow
                      Cash Flow
                          1992
                          1393
                          1994
Currants
 12,500
 60.000
 15.000
  $1994
$13^71
$81,794
$15,000
MM* Cash Flow to 1994 doKani
Consumer Price Index for transportation
     1992      126.5
     1993      130.4
     1994      134.3
       FORECASTED CASH FLOW
                     •"•  •    2
                     "• I      3
                     '.'.      4
                            5
                            e
                            7
                            &
                            9
                           10
                           11
                           12
                           13
                           14'
                           15
                           16

     BASeUNG PRESENT VALUE
YMT
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1994
$15,000
$15,000
$15.000
$15.000
$15,000
$15,000
$15.000
$15.000
$15,000
$15,000
$15,000
$15.000 .
$15.000
$15,000
$15,000
$15.000
Average
$30,022
$30,022
$30.022
$30,022
$30.022
$30,022
$30,022
$30,022
$30.022
$30,022
$30,022
$30,022
,$30.022
$30,022
$30,022
$30,022
Variation
$61,794
$13571
$61,794
$15.000
$61.704
$13,271
$61,794
$15.000
$81,794
$15,000
$61.794
$13571
$81.794
$15,000
$61.794
$13571
                                            $129,091     $256.370   $336,372
  D SUMMARY:
Cost Pate-Through
• • . " ''i


Rooufakxy Option
DateBne
Option 1
Option 2
Options
Option 4
Options
Options
Option?
Options
Options
Option 10
Option 11
Option 12
flW

PVof
Incremental
Refl. Costs
$0
$10,000
$20,000
$29,700
$75.000
$100,000
$125,000
$150,000
$175.000
$200.000
$300.000
$400,000
$500.000

• 	 :• '
Adj. PVof
Incremental
Reg. Costs

$9,000
$18,000
$28,730
$67.500
$90.000
$112,500
$135.000
$157.500
$180.000
$270.000
$360,000
$450,000

Assessment

1994
$129.091
0
0
0
0
0
0
0
1






$0
Present Vttua
Avenge
$258.370
0
0
0
0
0
0,
0
0
0
0
1
1
1
SafcagaVakw


Variation
$338,372
0
0
0
0
0
0
0
0
0
0
0
1
1
Book:

1994
$129.091
0
0
0
0
0
0
0







SO
Present Value
Avenge
$258,370
0
0
0
0
0
0
0
0
0
0
1
1
1



Variatior
$336,372
o
0
0
0
0
0
0
0
o
0
0
1
1




Closures
o
0'
0
0
0
0
0
2
2
2
4
6
6
                                                           C-27

-------
C.7    BUSINESS ENTITY LEVEL ANALYSIS

        The closure analysis is performed at the business entity level for two groups of facilities: cost centers
and facilities that provided insufficient information to be analyzed at the faculty level. The closure analysis at
the business entity level is performed the same as the facility level analysis; however, the key variables used
in the analysis represent the entire business entity, not just the facility.

        The business entity closure analysis is performed on a cash flow basis.  At the business entity level
cash flow is calculated as:

                              Cash  flow = net income + depreciation

Business entity data on net income and depreciation are taken directly from the questionnaire; see Table C-10
for the list of elements. The present value of cash flow is projected over the project life using the forecasting
techniques described in Section C.2.2.  The business entity discount rate specified in the questionnaire is used
to calculate the present value of cash flow when this rate lies between 3 percent and 19 percent; if the
discount rate does not lie within this range, the industry average discount rate is used (Section A. 1).

        Many business entities own multiple facilities that perform TEC operations.  The closure model must
project impacts for the business entity based on the total compliance costs it is likely to incur in upgrading the
wastewater treatment plants of all TEC facilities that it owns, not just the faculties that received   '
questionnaires. Business entity compliance costs are estimated by scaling up faculty compliance costs using
the ratio of faculty TEC costs to business entity TEC costs. Because statistically reliable weights cannot be
developed for the parent business entities, impacts are attributed to the facilities that are owned by them. See
Section D.I for further details.                                  .

        Cost pass-through is a function of the price elasticities of supply and demand and of the facility;
specific  ratio of TEC revenues to facility revenues (Section B.3 and Section C.3). Business entities
sometimes own faculties in more than one subcategory; they also may own a mix of commercial and in-house
faculties. This information cannot be reliably determined for faculties that did not receive a questionnaire;
therefore, the EPA assumes cost pass-though is equal to zero at the business entity level in order to provide a
conservative projection of impacts.

                                               C-28

-------
                     TABLE C-10




COMPONENTS FOR CALCULATING BUSINESS ENTITY CASH FLOW
Parameter
Net Income
Depreciation
1992
1993
1994
1992
1993
1994
Location in Part B
of Questionnaire
(Question No.)
84e
84e
84e
74
78
82
Data Element
Dictionary
Field Name
B84E 92
B84E 93
B84E 94
B74 92B
B78 93B
B82 94B
                       C-29

-------
C.8  ,  REFERENCES
CEA. 1995. Council of Economic Advisors. Economic report of the president Washington, DC.
TableB-59.

Denning.  1996. Cash flow vs. salvage value: Phone call from George Denning, EPA, WAM, to Calvin
Franz, ERG. Memo to TECI Project File. October 18.

U.S. EPA. 1995.  1994 Detailed questionnaire for the transportation equipment cleaning industry. OMB No.
2040-0179. Washington, DC: U.S. Environmental Protection Agency, Office of Water.
                                          C-30

-------
                             _..,;,,  ;    APPENDIX D   ,

                             IlNkNClAL RATIO ANALYSIS
        Financial ratio analysis examines whether a company could afford the cost of upgrading all the TEC
   (   '   • . "  " ''  II HliT'l1   '    .. .  . S  "I I .  |, . ',j 	I1', ,;';..,_.  , I, >"*. •', ',  ,1,:.V"I  „•   ' .11,      ,'   ;         '
facilities that it owns.1 Particularly for companies that own more than one TEC facility, although upgrading

is economically desirable, the company may not be able to pay the total cost of upgrading all the facilities that

it owns. Many banks use financial ratio analysis to assess the credit worthiness of a potential borrower. If

the incurrcnce of regulatory costs cause a company's financial ratios to move into an unfavorable range, the

company will find it more difficult to borrow money. Under these conditions, EPA considers the company

and each facility that it owns to incur "financial distress short of closure."
        Financial ratios are calculated at the business entity' level because:
               Accounting procedures maintain complete financial statements
               statement) at the business entity or
               The survey data indicate that many companies do not keep complete
               the facility level.
: corporate level, but not necessarily at the faculty level
               Significant financial decisions, such as expansion of a facility's capacity, are typically made
               or approved at the corporate level.
                 'Wl  ' ' „"  „ '• •    ,' : " •  *, ' i !'  •! „ , ,'•„ '•,:' ' 'iV'" "  i1 '!"l ' '  ,  , ,  '•' ''•   ' "•' ' '.• 'i* •'
               The business entity (or corporate parent) is the legal entity responsible for repayment of a
               loan. The lending institution evaluates the credit worthiness of the business entity, not the
               facility.
(balance sheet and income
    ty at the faculty level.
    financial statements at
Section 3 of the detailed questionnaire collected business entity financial information (U.S. EPA, 1995a).
The questionnaire was sent to a sample, not a census, of TEC facilities.  EPA calculates national estimates
with statistical weights for each facility in the sample.  Because the sampling frame was developed on the
basis of facility attributes, it is not possible to develop statistical weights for business entity results (Denning,
1997). This, in turn, means that the number of financially distressed business entities cannot be estimated.
Tnstfffld, the impacts are passed to the facility level through the facility-level weights. For example, say a
        1 The closure model discussed in Appendix C examines whether it makes economic sense to
upgrade a given facility (e.g., the facility could absorb the additional costs and still remain profitable). It
does not examine whether the company can raise the capital to make mat investment.
                                              D-l

-------
company owns one TEC facility, which has a weight of seven, and the regulatory costs place the company in
financial distress.  The analysis woiud describe the impact as these seven facilities are owned by corporate
parents that show financial distress, not seven individual businesses snowing financial distress.2

        Section D. 1 discusses the aggregation of facility-level regulatory cost data required to perform the
ratio analysis at the business entity level.  Section D.2 presents the Altman Z"-score, a weighted average of
financial ratios used to assess financial distress.  Section D.3 presents the current ratio and the times interest
earned ratio, which EPA examined as alternatives to the Altman Z" for measures of financial distress.
D.1    AGGREGATION OF FACILITY-LEVEL REGULATORY COST DATA

       EPA estimated costs on a facility basis. EPA aggregated facility-level regulatory costs to the
business entity level in order to assess the impact of Hie total costs incurred by the entity. As mentioned
above, the TEC data represent a sample and not a census. Some business entities in the survey own TEC
facilities that were not sampled. In order to avoid underestimating the impact on these firms' financial ratios,
compliance costs must be estimated for those TEC facilities not in the sample. The 93 affected facilities that
received detailed questionnaires fall into one of three groups:

       •      Forty-four facilities (304 weighted facilities) are the only TEC facility owned by the
               company C'SF'or single facility firms).
       •      Fourteen facilities (175 weighted facilities) are owned by parent companies that own other
               TEC facilities; the facility, however, is the only facility owned by the parent company that
               received a questionnaire ("SQ" or single questionnaire firms).
       •      Thirty-five facilities (213 weighted facilities) are owned by parent companies that own other
               TEC facilities; each parent company owns more than one facility that received a
               questionnaire. The parent company, however, owns other TEC facilities that did not receive
               questionnaires ("MQ" or multiple questionnaire firms).       '
       2 This is analogous to the application of the small business entity definition to the facility level.
The definition of small entity must be determined by the revenues of the parent firm, not the facility. The
impacts are men defined in terms of small business-owned facilities. Thus, it is accurate to state, for
example, mat seven facilities are owned by small business entities, but it is inaccurate to state mat mere are
seven small business entities.
                                              D-2

-------
         For the SF group of facilities, the facility compliance costs are equal to the business entity
 compliance costs. For the SQ and MQ groups, EPA scaled the costs for the TEC facilities in the survey to
               ___                         '                 •           • ' ! *
 the costs for all TEC facilities owned by the business entity.  The factor used to scale up facility compliance
 costs is calculated from the ratio of facility TEC operating costs to business entity TEC operating costs. The
 inverse of this ratio is used as the scaling factor,3

         TEC costs were chosen to calculate the scaling factor because this ratio captures the size of facility
 TEC operations relative to parent business entity TEC operations better than other alternative measures.
 •ini'M   '  ,! n| •  ;!'"i  ,  , uiiP'i , I'i"'' "!"  /.I"!.1  '"':,;';,: • "i'. ,'i";i r i'1'1  'i'" •!'•' •.,' '"';i »':,, . "':".:!,:'"'li:'' .'  '• • "• 'm1.,1!. ,•" i  '.!!"•!'•'   I  ••    ,  <           ••   •'.•
 EPA also examined: 1) the ratio of facility TEC revenues to total business TEC revenues, 2) subcategory
 median cost,  and 3) subcategory average cost The first alternative was rejected because of two reasons: the
 large number of in-house facilities in the industry, and differences in the unknown, variable markup of price
 over cost between commercial firms. EPA rejected the second and third alternatives because of the range in
 size of TEC facilities both between firms and within firms. Also, EPA may not be able to identify the
 subcategory for each facility not in the database.4

        For the SQ group, the ratio of facility TEC costs to business entity TEC costs is calculated directly.
 If, for example, a single facility in the SQ group accounts for 20 percent of business TEC costs, then facility
 compliance costs are multiplied by five to estimate business compliance costs.
 ....•I	 	  i,  i	;i   	 '     ''	!' 'i   '•; 	>' '    ' ' ,,'   ;      ',     -'',,.    i

        For the MQ group, the cost of each facility's TEC operations is totaled over all facilities in the
 database that are owned by the same parent business and then the ratio of facility TEC costs to business TEC
 costs is calculated. For example, suppose a business entity owns several TEC facilities, two of which are in
 the database. If the sum of TEC costs for these two facilities equals one third of the business entity TEC
 costs, then the scaUng factor is equal to three. Each facility has its compliance costs multiplied by three and
 added together to estimate total compliance costs for the business entity.
        3 Total facility costs for TEC operations is question B48_94T hi the detailed questionnaire; total
business entity costs for TEC operations is question B83_94T in die detailed questionnaire.
         Some business entities in the database own both in-house and commercial facilities; facilities also
may differ greatly in size. Suppose, for example, one firm owns two TEC faculties, only one of which is
in the database.  One facility accounts for 90 percent of TEC operations and performs commercial
cleanings, while the second accounts for 10 percent of TEC operations and performs only in-house
cleanings. The selected approach provides a more accurate estimate of the costs borne by die business
entity, than does the revenue ratio scale or median/average subcategory compliance costs approach.
              .  	•     •     "  • '  •     •   '  •  • D-3         "       ""    :

-------
B.2    ALTMANZ"-SCORE


        D.2.1  Description


        EPA selected a weighted-average of financial ratios, called the Altaian Z"-score, to characterize the
baseline and post-regulation financial conditions of potentially affected firms. The Altaian Z"-score is a
multidiscriminant function, originally developed to assess bankruptcy potential (Altaian, 1993).* The Z"-
score has advantages over consideration of an individual ratio or a collection of individual financial ratios:


        •      It is a simultaneous consideration of liquidity, leverage, profitability., and asset management
               It addresses the problem on how to interpret the data when some financial ratios look "good"
               while other ratios look "bad."

        •      There are defined threshold or cut-off values for classifying firms in good, indeterminate,
               and poor financial health. "Rules of thumb" are available for some financial ratios, such as
               current ratio and times interest earned, but these frequently vary with the industry   (U.S.
               EPA,1995b).

        •      The Altaian Z"-score is a well accepted standard technique of financial analysis (see Brealy
               and Meyers, 1996, and Brigham and Gapenski, 1997).         -     v

        Altaian (1993) developed several variations on the multidiscriminanl function. EPA selected the Z"-
score because it was developed to evaluate public and private nonmanufacturing firms. Altaian (1993) notes
that "this particular model is also useful within an industry where the type of financing of assets differs
greatly among firms and important adjustments, like lease capitalization, are not made." That is, the Z"-score
model is the most appropriate model for the  TEC industry.


        The model is:                                                                 '
        5 EPA uses the Altaian Z"-score as an indication of financial distress, but not necessarily
bankruptcy. A Z"-score below the "bankruptcy likely* is a warning sign, not a determination of immediate
bankruptcy. There is a time lag between a warning (i.e., low Z"-score) and actual bankruptcy.  A
company has me opportunity to change its behavior during mis warning period to avoid me projected
bankruptcy. The Chrysler Corporation is an example; Altaian, 1993 cites other examples.  If a business
entity's Z"-scpre falls below the 'bankruptcy likely" cutoff as a result of me rule, EPA considered the
option to have caused financial distress. The company will likely have to change the way it does business
to respond to the regulation.

                                              D-4                  ,

-------
        ZT - 6.56X! + 3.26X2 + 6.72X3 + 1-

where the pre-compliance components are:

        2?'     —      overall index
        X]      =      working capital/total assets
        X2      =      retained earnings/total assets
        X3      =      earnings before interest and taxes (EBIT)/total assets
        X4      =      book value of equity/book value of total liabilities

For this analysis, retained earnings are taken from the financial statements submitted along with the
questionnaire. Working capital is equal to current assets less current liabilities.  Book value of total liabilities
is equal to total liabilities less owner equity.  Where retained earnings are not identified in these statements,
owner equity is used as a proxy.

        Taken individually, each of the ratios given above (Xt through XJ is higher for firms in good
                	                           _            '                 !               i
financial condition and lower for firms in poor financial condition. Consequently, the greater a firm's
bankruptcy potential, the lower its discriminant score.  An Altaian Z"-score below 1.1 indicates that
bankruptcy is likely; a score above 2.6 indicates that bankruptcy is unlikely.  Z"-scores between 1.1 and 2.6
are indeterminate. Pre-regulatory scores are calculated from survey data. Table D-l summarizes the
questionnaire data used in the AltmanZ" analysis.

        EPA estimates financial distress short of closure based on changes in the Altaian's Z"-score as a
result of pollution control costs.  Capital costs are those developed by the engineering staff for use in the cost
actualization model. The anrmalired pollution control costs for each option were calculated from the
engineering estimates of capital and operating and maintenance costs in the cost annualization model (see
Appendix A). The estimates of post-compliance scores are calculated as follows:

        27'      —      overall index
        X|      =      working capital/(total assets + capital costs)
        Xj      -      retained earnings/(total assets + capital costs)
        Xj      -      (EBIT - pre-tax annuali/ed compliance costs)/(total assets + capital costs)

  	          '"                  :  •  	:  D-5   "  •	

-------
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63

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Data Elemen
Dictionary
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Data Element
Dictionary
Field Name
Location in
Questionnaire
(Question No.)






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B32A94F





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                                                D-6

-------
         Xx     =      bode value of equity/(book value of total liabilities + capital costs)

 The approach, therefore, assumes that the firm would incur debt in some form for the capital cost; an
 alternative approach assumes that the equipment could be purchased out of working capital The first
 approach, is more likely.
        D.2.2   Evaluation of Altaian Z" Results

        EPA calculates the pre-regulatory condition of the industry in order to evaluate the post-regulatory
 impacts on an incremental basis. Given the number of and wide range in industries, company types, and
                      *                                                 i
 company sizes represented in the TEC database, it would be unusual not to have any business entities with
 Z"-scores below the "bankruptcy likely" cutoff  Table D-2 summarizes the number of unweighted business
 entities in each of the "bankruptcy likely," "indeterminate," and "bankruptcy likely" categories before the
 incurrence ofregulatory costs.  While this does not mean that EPA necessarily expects the firms in the last
 category to go bankrupt, it does mean that the pre-existing financial condition of the business does not make
 it possible for EPA to separate impacts of the regulation from the pre-existing condition.

        Post-regulatory financial stress, therefore., is evaluated and reported on an incremental basis (Section
 5.4.2). Facilities are described as incurring financial stress short of closure when their parent firm has a pre-
 re|uiatoryAltmanZ"-score greater than 1.1 (the upper bound of the bankruptcy likely range) and a post-
 regulatory score less than 1.1. The financial distress is "short of closure" because facilities estimated to be
 incremental closures in the closure model are removed from the analysis. A facility cannot be both an
 incremental closure and incur incremental financial distress. The results of the closure model take precedence
 because a company is more likely to close a facility than jeopardize the financial health of the entire business
with the facility's upgrade. Facilities that are estimated to remain open are then examined for financial
distress using financial ratio analysis.
                                               D-7

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                  TABUJD-2
  PRE-REGULATORY ALTMAN Z" SCORES
Category
Unweighted
   Business
    Entities
Bankruptcy Unlikely

Indeterminate

Bankruptcy Likely
        37

        16

        18
For 3 unweighted business entities analysis was not
  conducted because insufficient data were provided.
                        D-8

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 11,1":;!]:' ir , r,  „ :
 D.3    CTJRRENT RATIO AND TIMES INTEREST EARNED RATIO

        EPA also examined the current and times interest earned (TIE) ratios as alternative measures to the
 Altaian 2T ratio to characterize the baseline and post-regulation financial conditions of potentially affected
 firms. Both the current ratio and TIE ratio are standard financial ratios, two among many, used by lending
 institutions and firms to judge the credit-worthiness of a firm (Breary and Myers, 1996).

        The current ratio is a liquidity ratio; that is, it is one measure of how much cash and other liquid
 assets a firm has on hand to repay debt Current assets may be a better measure of a firm's ability to repay
 cash. In the baseline, the current ratio is calculated as:
                                                 current assets
                                 current ratio =
                                                current liabilities
The post-regulatory current ratio is calculated as:
                current ratio  -  curren^ assets - pre-tax annualized compliance costs
 '•,	     M     /;•;;   '   •    •    • '    ,'' ,' "  i:1' 'Current liabilities
        The TIE ratio is a leverage ratio. It examines if a firm has sufficient income to meet interest payment
obligations on outstanding debt; regular interest payments must be made in order for a firm to avoid default
In the baseline, TEE is:
                                TIE ratio - EBIT  + depreciation
                                              interest payments
where EBIT is earnings before interest and taxes. Post-regulatory TIE is:
              TIE ratio  = EBrT + depreciation - pre-tax ann^aiigmd compliance costs
                                              interest payments
Table D-3 summarizes the detailed questionnaire data used in the current and TIE ratios.
                                              D-9

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                                            D-10

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         Unlike the Altaian Z" ratio, there are not well-defined thresholds far the current and TIE ratios with
  \vhichtojudgethefinancialhealthofafirm. Financial analysts tend to vvatch the trend in ratios overtime,
  Mini!' -J;  • : i,i. L	„-:„,'  ;	ijii •1»,;li  , ,;,  v, ;;,,vi;, IT  !, (• '  I'. ',.,	|i.?  .i'.,t ••.,'>•• ,. '(r.:.'••;	; ,,,;•';  «',	   '|  ,.'.••
  especially in relation to industry trends (Breafy and Myers, 1996). However, it is clear that a firm cannot
  remain financially healthy in the long run if its current liabilities exceed current assets. Thus, if in the
  baseline a business entity has a current ratio exceeding one, and compliance costs cause the ratio to fall below
  one, then that business entity is projected to incur incremental financial distress. Similarly, if a firm's TIE
  ratio falls below one, then its interest payments exceed its current earnings. There is no clear standard for
  how much current earnings should exceed interest payments for financial health; the threshold for times
  iiif!, , !,  ,;,.  	';i' '  I'm  ,„ .'•. '. :•' • "Til 	 IIP " \ *'„•'',,' t'~ ' ,•!«  ',•'.• \, '.•"!. •• J !• i", : ',.'': '• f1 •• ,'»:•;   .'!.•.                ,
  interest earned is set at three. If a business entity has a baseline TIE ratio exceeding three, and compliance
  costs cause the ratio to fall below three, then that business entity is projected to incur incremental financial
  distress.  Table D-4 presents the number of unweighted business entities with baseline current and TIE ratios
  above and below the "financially healthy" thresholds.

        In general, similar magnitudes of impacts are observed under the three financial ratios examined
  (Section 5.4.2). Because the Altman Z" score examines a weighted average of four different ratios, because it
  has well-defined thresholds for determining financial health of a business entity, and because it answers the
  question of what to do when some ratios look "good" and some ratios look "bad," the Altman Z" results were
  emphasized ui determining financial ratio impacts. The current ratio and TIE ratio provide corroborating
  evidence for the Altman Z" results.
 D.4    REFERENCES

 Altman. 1993. Edward Altman. Corporate financial distress and bankruptcy. New York: John Wiley
 aid Sons.
 Breaty and Meyers. 1996.  Breaty, Richard A. and Stewart C. Myers.  Principles of corporate finance
 (5th ed). New York: The McGraw-Hill Companies, Inc.
 BpghaniandGapenski. 1997. Brigham, Eugene F. and Louis C.Gapenski. Financial management: theory
, and practice (8th ed.J. Fort Worth: The Dryden Press.
 Denning. 1997. Business entity weights: Phone call from George Denning> EPA, WAM, to Calvin Franz,
'Epr. Memo to TEC|Prpject File. April 22.
                                               D-ll

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                       TABLED-4
  PKE-KEGtJLATORY CURRENT AND TIE RATIOS
                                              Unweighted
                                                 Business
 Category         	                    Entities

 Current ratio greater than 1.0                           39
                   *
 Current ratio less than 1.0                              31
TIE ratio greater than 3.0                              39

TIE ratio less than 3.0                                 17
For 4 unweighted business entities current ratio analysis was not conducted
  because insufficient data were provided.
For 7 unweighted business entities TIE ratio analysis was not conducted
  because insufficient data were provided.
For 11 unweighted business entities interest payments were zero.
                          D-12

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U.S. EPA. 1995a.  1994 detailed questionnaire far the transportation equipment cleaning industry. OMB
Number 2040-0179. Washington, DC: U.S. Environmental Protection Agency, Office of Water.

U.S. EPA. 1995b.  Interim economic guidance for water quah'ty standards: workbook. EPA-823-B-95-002.
Washington, DC: U.S. Environmental Protection Agency, Office of Water.
                                           D-13

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D-14

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                                             APPENDIX E
                                       SECONDARY IMPACTS
              The impacts to national and regional output and employment in non-TEC industries caused by the
      regulation of the TEC industry are called secondary impacts. The secondary impact analysis assesses those
      impacts. Compliance costs decrease the output of the TEC industry, which may cause a loss in TEC
      employment1 The decrease in TEC output decreases the demand for products in the industries that supply
      inputs to the TEC industry. As a result, these industries may suffer reduced output and employment as well;
      however, the need to manufacture, install, operate and maintain the pollution control equipment may generate
      increased economic activity in other industries. Ibis increase in economic activity resulting from compliance
      with the regulation can result in output and employment gains that offset the losses caused by the regulation.

              The analysis in this section provides a range of estimated secondary impacts caused by the TEC
      regulation. Section E. 1 describes the input-output (IO) methodology used to estimate secondary impacts and
      the application of this methodology to the TEC industry. Section E.2 presents the procedure used to estimate
        jjfiiiiilli, ,i    :,'i, ""'i    fiiiiii!! ' .I," '••  '•'.(',' .. '."" ! ...':,.: '.' . I;11'-"1 •:• • " r"\ '•.•:, '•  i •',',,,'.'. 	«,'	   ' ,i    i
      offsetting gams from purchasing wastewater treatment systems.  Section E.3 analyzes regional impacts
      caused by the TEC regulation.
      E.1    METHODOLOGYFORESTIMATINGNATIONALEMPLOYMENT AND OUTPUT
             IMPACTS
             National output and employment impact estimates are generated through the use of output and
      employment multipliers derived from the National Input-Output (IO) tables compiled by the Bureau of
      Economic Analysis (BEA [U.S. Department of Commerce, 1997]). IO multipliers estimate the total impact
      on the national economy of a change in the quantity purchased of a single industry's output Impacts include
      the change in the industry's purchased output (direct effects), the impact on the industry's suppliers (indirect
         1 This loss in employment may be comprised of actual job losses or may be reflected in a decrease in the
      number of hours worked by several employees even though all employees retain their jobs. For this reason
      employment impacts are measured as "full-time equivalents" (FIE), where one FTE equals 2,080 labor hours
      or one person-year of employment
        ::.. •        .    ':,   '  "      , •  :       ,  . 1Srl
i it i;,:, i; i,',. ii!'	•	i	•, /,.,'Vv. .iLk'tVim.!;]:; >: ,ja,!,r,«i,,! ;«'•	k;i, iuiiuLt.'i,;:,,;1' is/jiatsiii;;,; *•:;	",„*	,&;	i: £	a.im'fr^.'i'.'.- li!	.,.!.

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 effects), and the impacts caused by the change in expenditures by employees of all impacted industries due to
 their changed income (induced effects). Multipliers vary between industries because of differences in their
 upstream effects (how significant the industry is as a user of other industries' production as inputs) and
 downstream effects (how significant the industry is as a supplier of inputs into other industries).2

        For example, a decrease in tank cleanings by the TEC industry caused by the regulation will decrease
 the demand for tank cleaning solvents.  This may cause the suppliers of tank cleaning solvents to decrease
 their production of solvents, .impacting those industries that supply them with the inputs required to
 manufacture the solvents. In addition, the employees of each industry will experience a decrease in income;
 this will affect their purchases of other products as well. The final demand multiplier estimates the total
 dollar value of output lost due to the decreased demand for other products caused by the decreased supply of
 tank cleaning services.
        E.I.I   Input-Output Multiplier Methodology

        To use the final demand output multiplier, the loss in industry output caused by the decrease in
supply must be estimated. This lost output is expressed in terms of decreased industry revenues (i.e., the
dollar value of lost output). Figure E-l illustrates the change in industry revenues caused by the regulation.
The rectangle bounded by P*Q* represents total pre-compliance industry revenues while the rectangle
bounded by P2^ represents post-compliance industry revenues attributable to tank cleaning services; the
   2Note mat an implicit simplifying assumption of IO analysis is that the production of goods requires the use
of inputs in fixed proportions. The tnagmfrifte of change in each link of impacts is determined by these fixed
coefficients. In reality, however, each link in the chain of impacts represents the supply and demand for a product
or service. The decrease in output causes a decrease in the demand for each input  This change in demand for
inputs may change the price of the input Because profit-maximizing firms have incentive to vary the use of
inputs to minimize the costs of production in response to changes in input prices, the coefficients in the IO tables
are not, in reality, constant Adjustments in the use of inputs tend to mitigate the impacts of the decreased
demand; therefore, impacts estimated using IO multipliers can be considered conservative estimates in the sense
that they tend to overestimate impacts. In an industry like the TEC industry, which neither uses a significant
share of another  industry's product nor provides a significant cost share in the output of user industries, these
mitigating effects are likely to be slight
                           .•'    •    '     '     E-2

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Price
                                                                 SI


                                                                 } per unit compliance costs

                                                                 S
                                  Ql     Q*
Tanks Cleaned
                                       Figure E-l

                             Lost Output and Transfer Payments
                            for Calculation of Secondary Impacts
                                            E-3

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 difference between the two rectangles represents the value of output lost due to the regulation.3 Next,
 estimated output loss in the regulated industry is multiplied by the final demand output multiplier for the
 industry to calculate the decrease in total national output caused by the regulation:
                             -.••'"'           •      "             .            .
                output loss  x  final demand output multiplier  =  total.national output loss

 This includes the lost output in the regulated industry as well as indirect and induced losses in industries that
 provide inputs to the industry and final consumption goods.

        This does not account for all regulatory impacts.  Compliance costs are passed through to customer
 industries in the form of increased prices; this price change increases the customer industries' costs of
 operation (a decrease in suppfy), which will reduce the quantify of output they provide and generate
 secondary impacts for their suppliers as well.  On Figure E-l the cost passed through is represented by the
 increase in equilibrium price from P* to P1 multiplied by the number of tanks cleaned at that price, Q1.
 Multiplying the value of output represented by (Pl-P*) x Q1 by the final demand multiplier for the customer ,
 industries accounts for secondary impacts generated by the compliance costs that are avoided by the regulated
 industry by passing them through to their customers.                     '

        EPA uses the final demand employment multiplier and the direct effect employment multiplier to
 estimate national employment impacts. The final demand employment multiplier uses data on the labor input
 required per dollar of output in each industry to estimate the direct, indirect, and induced changes in national
 employment (measured in FTEs) caused by the initial change in the regulated industry's output:
                                                                           '    l
          output loss  x  final demand employment multiplier =.  total national employment loss

 This final demand employment multiplier essentially estimates the total number of employees in all industries
required to produce $1 million of the regulated industry's output
   3 Although the post regulatory price paid by the customer equals P1, the facility only receives price P2 for the
tank cleaning service itself; the difference between P1 and P2 represents the payment for the incremental
wastewater treatment component of tank cleaning services. The revenues represented by the area (P1- P*) x Q1
(ie., area a) reflect losses due to the decrease in the number of tanks cleaned caused by the regulation. The area
(P* - P2) x Q1 (i.e,, area b) represents revenues lost due to the decrease in the post-regulatory price received by
facilities on the remaining number of tank cleanings.

   ..•                     '                      E-4

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        The final demand employment multiplier is estimated for each industry by the Bureau of Economic
 Analysis (BEA) from its IO tables. This multiplier's effects are based on the direct change in industry
 output, which is calculated in the same manner as described above. Because this multiplier is based on 1992
 data, the estimated dollar value of lost output must be deflated to 1992 dollars before calculating, otherwise
 employment losses will be overestimated due to inflation.4

        EPA also makes use of the direct employment multiplier in estimating impacts. Typically, regulated
 industry unemployment is estimated directly from incremental facility closures; however, there are no
 incremental facility closures projected under the proposed options for the TEC industry. The post-
 compliance decrease in tank cleanings projected by the TEC market model infers employment impacts. The
 direct effect employment multiplier can be used to estiniate the urtemployment impacts in the regulated
 industry.
        TTy» Icgy to cstinirfng gmplnymgnt impacts fa thg regulated industry from the direct effect
enjoyment multiplier is the relationship between that multiplier and the final demand employment
multiplier. The final demand employment multiplier described above estimates total national employment
impacts based on the change in output in the regulated industry. The direct effect employment multiplier also
estimates total national employment impacts; this estimate is based on the change in employment in the
regulated industry:

      industry employment loss x direct effect employment multiplier =  national employment loss

Because both multipliers are derived from the same underlying relationships in the production process, the
national impacts estimated from changes in employment should be consistent •with national impacts estimated
from changes in output  EPA can directly estimate output losses in the regulated industry and use the final
demand employment multiplier to estimate national employment impacts. National employment impacts can
then be divided by the direct effect employment multiplier to estimate the loss in industry employment:
   4 The final demand employment multiplier estimates the total number of employees required to produce $ 1
million, of the primary industry's output in 1992; inflation between 1992 and 1994 means that the nominal value
of that output would be greater in 1994 than in 1992 even though the same physical quantity of output had been
produced. Estimating employment impacts based on 1994 value of output would overestimate employment
impacts because it would overestimate the value of output lost

                                             E-5

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      national employment loss  -=-  direct effect employment multiplier  =  industry employment loss

This estimate is valid because all three multipliers are derived from the same underlying relationships
estimated in the IO tables.
       E.1.2   Application of Input-Output Methodology to the TEC industry

       Kl.2.1 Issues in Applying IO Multipliers to the TEC Industry

       Although the application of IO multipliers to estimate impacts is straightforward in theory, practical
application of these multipliers to the TEC industry is difficult for two reasons. First, BEA does not provide
IO multipliers for the TEC industry. The value of the multiplier would be a weighted average of other
multipliers that seem to most closely fit the facilities involved. This weighted average would be comprised of
the multipliers for such activities as truck trailer manufacturing, ship building and repair, railroads and related
services, motor freight transportation, water transportation, and automotive repair shops and services.5 Each
of these categories describes the primary activity of some segment of the facilities that comprise the TEC
industry.
                                   f '     ' .'
       Rather than attempting to calculate a weighted average of the IO multiplier that most closely matches
each individual faculty's primary activity, EPA applied the 10 multipliers for, transportation services
according to the transportation mode of the subcategory (e.g., facilities in the Barge Chemical and Petroleum
subcategory are assigned the IO multiplier for water transportation services, IO category 65.04). Each of the
activities performed by faculties that provide TEC services (such as the building or repair of tank containers,
terminal operations by shippers and carriers, or TEC services alone) are performed solely for the purpose of
providing freight transportation services. All these activities are inputs into the transportation service
   5 SIC code 7699 is the code reported by commercialTEC facilities.  This SIC code is contained in IO industry
73.0101: Miscellaneous Repair Shops. Other services contained in this industry code include welding, armature
rewinding, musical instrument repair, beer pump coil cleaning and repair, rebabbitting, cesspool cleaning,
taxidermists, window shade repair, farriers, and mattress renovating. This partial list illustrates why EPA did not
use the IO multiplier for SIC code 7699 to estimate secondary impacts; mis list also illustrates why EPA did not
attempt to use published data for primary information on the TEC industry.

              .''                  '              E-6

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  industry. Any regulatory impact to the TEC industry affects the national economy through its impact on
  transportation services.

          Second, lost industry output is difficult to estimate because a significant proportion of tank cleanings
  occur with no market transaction (i.e., in-house cleanings). Estimating the decrease in in-house tank
  cleanings and attributing a dollar value to them requires making a number of implicit and explicit
  assumptions. EPA chose to value in-house cleanings at the preregulatory market equilibrium price for
  commercial cleanings.
  '";''      " •" •' •   '';$]  ;     • "   .'  ;:'  :  ;  '• ' '•  ••''''••' ',.'''  .•• '   ;,   •, '  ' 'i   '  ')              ' ;

         Under perfect competition, the price of a good or service is equal to the marginal cost of supplying it.
  The cost of using a resource in production reflects the foregone opportunity to use it for an alternative
 ' !;p";'!!! '' i'''  'I,'' •' • i1:"'1, "•'  i! 'if;,11!' ' ' ii'l"' '  : " :„'" •i,"|illl,"" "'  'l!'" ?°  ''!" '':' ''","  'ii!'",'1' •!' •'''' • •• '•- •'.' '""''' "' ''"' :!"'1"'"1 i' ••' 'l' '•  •' r-,1.1'!"''' '•, ''     '   •       '.'          ''  "
  purpose. Thus, the equilibrium price under perfect competition reflects the value society places on that good
  or service. If, for example, the price of a good is less than the cost of providing it, then society values that
  good less than the other goods that could be made with the same resources.  Conversely, if the price is greater
: '"' 'I ''J!'! !" '! !,!'  'li, : : ,|!!|' • '; '" ,,; ",,  "HI !'"»!,!•  !• ,'  ir' ../i » , r ! i!'	 'i'i,"i  i '," •' ' ",  ''i:'"', ' . !,"," V',"1' :",.'"•'' "'!,'', '' ., '.i'1' •• ii!''!"'™!i "'!''",'' '!l"|i	   • i                 •
  titan marginal cost, society values the good more than the resources used in producing it; society would
  benefit from having more of the good produced.

         EPA assumes that the value of tank cleaning to society is reflected in the price of providing that
 service. In-house facilities may provide tank cleaning services at a cost greater than market price.  This
 implies that some individuals are willing to pay a price premium for tank cleaning services over and above the
 value society places on those services.6 For the purpose of estimating the impact to society, the relevant value
 is the one society places on the good.  It is irrelevant for this purpose that some in-house consumers of tank
 cleaning services are willing to^pay more than the market price just as it is equally irrelevant that many
 purchasers of commercial tank cleaning services are willing to pay more than the market price for those
 services.

        An additional complexity in accounting for the value of in-house tank cleanings concerns evaluating
 the reaction of in-house faculties to regulatory compliance costs.  The market model evaluated the
 outsourcing decision faced by in-house facilities; no in-house facilities were projected to outsource their tank
    6 This premium may reflect the additional value an individual places on attributes of the service such as
 convenience or guarantee of quality.
  "::      '  ' :      '" '•      "  '          ,           E-7

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cleanings in die subcategories affected by the proposed regulation. Although none of these faculties chose to
close the TEC line in their facility, they still face incentive to reduce compliance costs by reducing the number
of tank cleanings performed whenever possible. EPA assumes that users of in-house tank cleaning faculties
behave in essentially a similar manner as users of commercial facilities.  The price elasticity of demand for
commercial services, which in a sense quantifies the key variables that determine the consumption of tank
cleaning services, applies equally to in-house customers as commercial customers.

        Although calculating the value of lost output is more complex for the TEC industry than for more
               /                 •                                    '                .
typical (i.e., better defined, small in-house production) industries, estimating costs passed through to
customer industries is less complex for the TEC industry. Typically industries have many customers for their
product The final demand multiplier for the passed-through costs should, in theory, be a weighted average of
the final demand multipliers for the customer industries; the weights for the average can be derived from the
IO direct requirements table. One customer exists for TEC services: transportation services.  Consequently,
passed-through costs for the TEC industry will be multiplied by the same industry multipliers that are used,
for lack of a better alternative, for the direct loss in TEC output
       KL2.2 Application of IO Multipliers to the TEC industry

       Due to the uncertainties in applying IO multipliers to the TEC industry, EPA provides a range of
secondary impact estimates. Because of the in-house provision of TEC services, EPA cannot directly
estimate the total value of lost output from the market model; however, the value of lost output can be
indirectly estimated by using price elasticities of supply and demand. EPA uses the price elasticities of
demand for each subcategory specified in the market model; the range of impact estimates will be generated
by varying the price elasticity of supply.

       The value of lost output is estimated by using the price elasticities of supply and demand to estimate
the increase in tank cleaning price caused by the proposed regulation.7 Given this figure, the decrease in
tanks cleaned can be derived from the definition of the price elasticity of demand. Combining these two
  7 The price increase estimated by the market model cannot be used for this purpose because it only includes
commercial tank cleanings and commercial facility compliance costs.

     '•  '      k        .                         E-8       •  .  •      '       •              •   '   '

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 figures with the compliance costs per tank cleaned, the value of lost output can be calculated (Figure E-l).
 The percentage change in price caused by a given percentage change in supply is estimated as (Franz, 1996):
                                          dP
 where:
  /V      .''.'•. ;: ......   .'  .'   . '•     : . ' . f "'!' '  \ '••-•'•  ,          •;',   '  !
   '"     '   , '     ,':";":       dP                                 '
                          ^— - = percentage change in equilibrium price
  :'ifi   •     „     , •Jl,!1!  •      •;.  ,'  ..... ."?, . i    :   . ,  ••"?  , '  . , ' '.' ' ' i .    . •:'   •  ,     I
                            e = price elasticity of supply
  i * !"] '"    "          "ij1    "   ,  „  I' "•  ..... ' i    _  '!'•,, '' '  "'',',•"'   "   ' "     •   • ',!'' '     !
                            T|  = price elasticity of demand
                            A = pie-tax annually^  compliance cost per unit
      :   '    "     ..... ' "i       • '  " .....  : i  i ,  •' ' . • ....... •'••••.' •••. ••• •'. •  i ..... .-•••. '    <••„ •   i
                            P = preregulatory equilibrium price
 The percentage change in supply is equal to total amqmliygd comph'ance costs divided by total subcategory
 revenues, including those imputed to in-house cleanings.8 After the percentage change in equilibrium price is
 calculated, the percentage change in quantity demanded can be calculated by rearranging the definition of
 price elasticity' of demand:

              percentage change in quantity demanded = i\ * percentage change in price
        The range of secondary impacts is calculated using extreme values of the price elasticity of supply.
If the price elasticity of supply is equal to zero, then the supply curve is vertical (Figure E-2).  The regulatory
costs shift the supply curve upward, but there is no change in either equilibrium price or equilibrium number
of tank cleanings performed (ie., post regulatory price, P1, is equal to the preregulatory price P*, and post
regulatory tank cleanings, Q1, are equal to preregulatory tank cleanings Q*); however, suppliers, after paying
for wastewater treatment, receive onfy P2 per tank cleaned to provide the same services for which they used to
   "This is precisely how the supply shift is estimated in the market model The only difference is that in the
secondary impact analysis total revenues include in-house cleanings valued at the equilibrium market price and
total compliance costs include costs for all facilities, not just commercial facilities (Appendix B).
                                                E-9

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   Price
P* = P1
     P2
S = S1
                                                } per tmit compliance costs
                                                                                 Tanks Cleaned
                                           Figure E-2

                                Lost Output and Transfer Payments
                                for Calculation of Secondary Impacts
                                  Perfectly Inelastic Supply Curve
                                             E-10

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 receive price P*. The decrease in industry revenues is, therefore, equal to total pre-tax animaliTgd compliance
 costs.                      ....        .                               _

         Figure E-3 illustrates the opposite extreme, where the price elasticity of supply equals °°, which
 corresponds to a horizontal supply curve. In this case the imposition of regulatory costs results in the largest
 possible percentage decrease in tank cleanings. The value of lost output is equal to the decrease in the
 number of tank cleanings performed (Q* - Q1) valued at the original equilibrium price P*. In all likelihood,
 the true long run price elasticity of supply for TEC services is more similar to the perfectly elastic case than
 the perfectly inelastic case. In general, economic theory infers that long run price elasticities of supply will
 exceed one.  If inputs into the production process are not very specialized and readily available, and if labor
 docs not require a high degree of expensive specialized training relative to other jobs, then the long run price
 elasticity of supply can be expected to be much greater than one.

         Estimating a range of secondary impacts based on the extreme values of a perfectly inelastic and a
 perfectly elastic supply curve provides a lower and upper bound for total impacts. The true price elasticity of
  liliHi1"1,1 ii'  ,. ""• „	., ,   I. nikMi. • , ;• ,  	i',	I'i',, ,' 'ii '• ,n, '« I , J	iinliii	ii.i!,i'i< '  :.• .	i",.1 ,' •: I . I 	 i,1,.:. '.T'iftiiTji,  . , i |,  •  '  • ,    r •   „       •'-.,,
 supptylies between these two extreme values and impacts should lie within the estimated range.  Beyond
 cvaluatingthe range of estimated impacts, asignificant differeiM» exists in who bears the burden of the
 regulation under the two scenarios. If supply is perfectly inelastic, all direct impacts are incurred by the TEC
 industry alone, and all secondary impacts are caused by the decrease in value of TEC output, illustrated by the
 difference .between !;a|ea (P* x Q*) and (P2 x Q1) in Figure E-2. If supply is perfectly elastic, only part of the
 impacts are borne directly by the TEC industry (the difierence between area (P* x Q*) and (P2 x Q1) in Figure
 E-3) and indirectly by its  suppliers. The remaining impacts fall directly on TEC customers and indirectly on
 the customers' suppliers; this is illustrated by area  (P1 - P*) x Q1 in Figure E-3.9

        Table E-1 presents the values of all key variables used in estimating secondary impact losses. The
 precompliaace equilibrium price, quantity of commercial cleanings, and quantity of in-house cleanings are
  ••"nil i * i11   '!• ,i«,' •, • ."• i   .1111!1'11 '! .  >i "".:,' •" in ,!  . "i/i'i" '.i1',' '»" .  	,', Jii .i.'1"1 i1". ''•! '.";i|i •.;:•	•.	.'"'|i'. n'1 :'"'." •'  TI! .!•:	"•' i  • \.
 estimated by the market model. IO multipliers are for IO industry codes 65.01 (railroads and related
 services), 65.03 (motor freight transportation and warehousing), and 65.04 (water transportation).
   9 This can be observed in the estimate of TEC employment losses. TEC employment losses are calculated
from the loss in TEC output  Thus, while the national impacts are greater under the assumption of perfectly
clastic supply, the loss in TEC employment is smaller because most of the regulatory costs and impacts are
passed through to the customer industries.
                                               E-ll

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   Price
     PI
P* = P2
                                  Qi
_ SI


} per unit compliance costs

-  S
                                                                         D
            Tanks Cleaned
                                            Figure E-3

                                Lost Output and Transfer Payments
                                for Calculation of Secondary Impacts
                                   Perfectly Elastic Supply Curve
                                             E-12

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IK iiiiiii i 1 1 ...... m ; ...... a"
            ! '" ssi |; ('- ....... "'i ......... :*: F .• 'i^ " •"; ...... s "" t:> ':• •;« ' ••:* "T*1 i*.'1.", !;"' " ;i '"'.•• ' ..... •"•'•'$• ' • f. ^;: " • 'i Sir: v ; 1 "
                                        TABLE E-l

            PARAMETERS FOR NEGATIVE SECONDARY IMPACT
                                                                                ESTIMATES

Parameter
Preregulatory equilibrium price
Commercial cleanings
In-house cleanings
Price elasticity of demand
IO industry code for multipliers
Final demand output multiplier
Final demand employment multiplier
Dkect effect employment multiplier
Subcategory
Truck Chemical
$279.39
769,668
555,126
-0.195
65.03
2.997
39.2979
2.6519
Rail Chemical
$781.07
32,915
25,558
-0.10
65.01
2.7859
27.0791
4.2135
Barge Chemical
$6,447.75
12,078
1,874
-0.07
65.04
3.0285
29.697
4.5543
Sources: Price, price elasticity of demand, and cleanings: TEC industry market model;
   ''
              IO industry:
              65.03: Motor freight transportation and warehousing
              65.01: Railroads and related services
              65.04: Water transportation
                                           E-13

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       ESTIMATION OF OUTPUT AND EMPLOYMENT GAINS

       E.2.1  Negative and Positive Impacts on Output and Employment

       Negative impacts to output and employment caused by the regulation, however, may be offset by
positive impacts to industries and individuals that provide wastewater treatment services. In Figure E-1 the
cost of wastewater treatment per tank cleaned is equal to the difference between P1 and P2.10  While
compliance costs represent a loss in revenues to providers and customers of TEC services, they also represent
income to the providers of wastewater treatment services. Compliance costs, from society's viewpoint are
not a net loss, but a transfer of income from one industry to others. Thus, compliance costs represent an
increase in the demand for wastewater treatment systems, the construction services to install the system,
chemicals and parts to operate and maintain the treatment system, and labor services to run the system. The
increase in demand for each of these components  causes increased demand in those industries that supply
them with inputs; therefore, compliance costs cause positive secondary impacts that are also estimated
through IO output and employment multipliers.

       In general, the gains in output and employment are estimated in the same manner as the losses: The
increase in. demand for an industry's output is multiplied by the industry specific final demand output
multiplier to estimate the total increase in national output from direct, indirect, and induced effects caused by
the original change in demand. Similarly, the final tfemand employment and direct requirements employment
multipliers can be used to estimate impacts on national and industry employment respectively.
       E.2.2   Estimation Procedure for Output and Employment Gains in the TEC Industry

       Application of 10 multiplier methodology to estimate output and employment gains due to regulation
of the TEC industry is much more straightforward than the application to estimate losses.  Total annualized
compliance costs represent the gain in output to suppliers of wastewater treatment systems to which the final
demand output and employment multipliers are applied. The primary modification required is that different
components of compliance costs represent an increase in demand to different industries, which have different
   10 Total compliance costs are equal to (P1 - P2) x Q1, see Figure E-l.

                      '                       E-14

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 multipliers. Accordingly, annualized compliance costs must be disaggregated before IO multipliers can be
 applied.
        First, capital costs can be divided into costs of the treatment system and costs for installin

 treatment system. The multipliers specified for construction (i.e., installation) are significantly different from

 those for the industries that manufacture the equipment itself; therefore, in estimating gains from the

 regulation, EPA distinguishes capital costs from installation costs. Second, both capital equipment and

 installation are onetime expenditures. EPA uses annualized capital and installation costs in order to compare

 the gains from the anmiali/ed equivalent of a onetime expenditure with the lost output estimated to occur

 annually for the sixteen year project lifetime.11


        Operating and maintenance costs can be divided into the labor needed to operate and maintain the

 equipment, the cost of materials such as chemicals and filters used in the system, energy requirements to run

 the system, monitoring of wastewater to ensure compliance, and disposal of the wastes removed by the

 treatment system.  Chemical, energy, monitoring, and waste disposal costs require no special treatment

 beyond identifying the most appropriate multipliers to use. These costs are incurred annually so the gains

 from these expenditures are dkectly comparable to the losses.12
 'Ill,,'1 I . i ' '  .  .1   ,''.'i,   ' "Ml]J , "  "  , ,     ' in, •     ii ' '    ' " '!' '!„     ':  ,, i "     •"' 'i,   :  " ! ' ',    i

        The increase in TEC labor hours caused by the need to operate and maintain tfu? wastewater

 treatment system cannot be handled in the same manner as most direct employment increases in IO analysis.13
   11 EPA used a weighted average of IO industries 40.06 (fabricated plate work—70 percent), 42.08 (pipes,
valves, and pipe fittings—20 percent), and 49.01(pumps and compressors—10 percent) to  estimate the
multipliers fix- the wastewater treatment equipment the multipliers for IO industry 11.0000 (construction—new
and maintenance and repair) were used for installation. Cantor and DeClaire, 1997a,  1997b, and 1997c provide
the breakdown of capital costs into equipment and installation.
  ,,h!l!l'. '  	!' 'i 	 •  ,: 	  HI !	11 ,11   ,i ' • , ,, «•;, ,i; i ,,, , ""  .,,!|;;v	" | ,j,|j ,	|r,," , /, , ,: ,„,),';  , ,;;  «; , •  , ,i  i, „,, .,, , ,,';;'," ',,,,,  'i ,'•    |
   12 IO multipliers for industry 27.0406 (chemical and chemical preparation, not elsewhere classified) were used
for opetatlogmaterials, and multipliers for industry 68.01 (electric services) were used for energy expenditures.
Monitoring costs incurred for the testing of effluent  samples use the multipliers for industry 73.0105
(management and consulting services, testing and research labs) and waste disposal costs are accounted for under
industry 68.0302  (sankary services). Cantor and DeClaire, 1997a, 1997b, and 1997c provide the breakdown of
operating and maintenance costs into these components.

   13 While this increase in labor hours is described for convenience as FTE labor gains that offset the job losses
caused by the negative impacts, in all likelihood these new operating and maintenance tasks will be assigned to
                                                                                      (continued...)

  :    .        .  ' .,;;,    .   ....  ,   .    .     E-IS

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In general, when an industry increases its demand for labor hours, it is done to increase production.  The
increased production causes secondary impacts that increase national employment by a multiple of the
original increase in employment

       The increased labor required by the TEC industry to operate and maintain the wastewater treatment
system, however, does not increase its productive capacity.  Additional labor is required to enable the industry
to provide approximately the same quantity of services it provided prior to the regulation. Because this labor
is not associated with increased production, it does not generate further employment or output through
indirect effects. While the additional labor required by the TEC industry is counted as a gain in employment
caused by the regulation to offset negative impacts, it has no multiplier effect to generate additional
employment in other industries.14  Similarly, the wages paid for these labor services represent a direct
increase in purchases of consumer goods, but because the increased employment does not cause indirect gains
in employment, no indirect increases in the 
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                The following compliance costs multiplied by the appropriate industry final demand output
                multipliers to determine total direct, indirect, and induced gains attributable to the
                regulation:

                —      anmialiaed capital costs, disaggregated into capital and installation components.

                —      annual operating and maintenance costs attributable to monitoring, waste disposal,
                        materials and energy use.

                Plus annual expenditure on operating and maintenance labor services are added to the
                estimated increase in total national output (i.e., the multiplier is set equal to one).
 Total secondary employment gains from tits regulation are measured as the sum of:
                The following compliance costs multiplied by the appropriate industry final employment
                multipliers to determine total direct, indirect, and induced gains attributable to the
                regulation:

                —     annnalJTed capital costs, disaggregated into capital and installation components.

                —     annual operating and maintenance costs attributable to monitoring, waste disposal,
                       materials and energy use.

                Plus annual expenditure on operating and maintenance labor services converted to FTE
                employment  (i.e., the multiplier is set equal to one).
All multipliers used to estimate secondary impact gains are listed in Table E-2.
E3
        Because ithe TEC industry detailed questionnaire was sent to a sample of TEC facilities stratified by

type of tank cleaned and certain financial characteristics, EPA cannot determine the geographical distribution

of TEC facilities with any degree of statistical confidence. In addition, the closure model projects no facility

closures under the preferred options,16 and market model projections of impacts provide no means of
   16 la previous EAs, projected facility closures with known addresses have been used to estimate regional and
community impacts.

                                               E-17

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                                      TABLE E-2

           PARAMETERS FOR POSITIVE SECONDARY IMPACT ESTIMATES
Annualized Cost Component
Capital equipment
Installation
Annual monitoring
Annual energy
Annual materials
Annual labor
Annual waste disposal
IO Industry Code
for Multipliers
40.06 (70%)
42.08 (20%)
49.01 (10%)
11.0000
73.0105
68.0100
27.0406
N.A.'
68.0302
- Final Demand
Output Multiplier
3.0152
3.1957
3.4139
2.237
2.9083
l.OO1
3.3582
Final Demand
Employment
Multiplier
31.3721
38.6754
44.1564
15.7616
23.7101
19.50382
35.4602
1 Assumed to be equal to one.
^1 million in 1992 labor expenses divided by 1992 labor cost per hour ($24.65) to estimate labor hours,
     divided by 2,080 hours to estimate FTE per year.
Sources: RIMS H multipliers: DOC, 1996.

IO industry:  11.0000: New construction, maintenance and repair
            27.0406: Chemicals and chemical preparations not elsewhere classified
            40:0600: Fabricated plate work (toiler shops)
            42.0800: Pipes, valves, and pipe fittings
            49.0100: Pumps and compressors
            68.0100: Electric services (utilities)
            68.0302: Sanitary services, steam supply, and irrigation systems
            73.0105: Management and consulting services, testing and research labs
                                         E-18

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 ascertaining how these aggregate impacts are distributed across facilities. Because of these reasons, it is
 impossible for EPA to accurately project impacts to say particular geographical region.
E.4    REFERENCES
Cantor and DeClaire. 1997a. Version Srldraft capital and annual cost detail estimates for the TEC industry
truck/chemical indirect discharge subcategory. Memorandum from Melissa Cantor and Michelle DeClaire,
Eastern Research Group, lac. (Chantilly) to Cal Franz, Eastern Research Group, Inc. (Lexington).
October 13.

Cantor and DeClaire. 1997b. Version 5 draft capital and annual cost detail estimates for PSES for the
rail/chemical subcategory. Memorandum from Melissa Cantor and Michelle DeClaire, Eastern Research
Group, Inc. (Chantilry) to Cal Franz, Eastern Research Group, Inc. (Lexington). October 14.

Cantor and DeClaire. 1997c. Version 5.1 draft capital and annual cost detail estimates for BPT/BAT/BCT
for the TECI barge/chemical subcategory. Memorandum from Melissa Cantor and Michelle DeClaire,
Eastern Research Group, Inc. (Chantilly) to Cal Franz, Eastern Research Group, Inc. (Lexington).
October 15.

Franz. 1996. Method for calculating the percentage increase in price due to pollution control requirements
for pulp and paper. Memo from Calvin Franz, ERG, to Matt Clark, EPA March 21.

U.S. Department of Commerce.  1997. Regional multipliers: A user handbook for the regional input-output
modeling system (RIMS D).  Washington, DC: U.S. Government Printing Office. March.
                                             E-19

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E-20

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                                   APPENDIX F
                                     OMB No. 2040-0179
                                         Expires 3/31/98
                             ATTACH FACILITY ADDRESS
                                    LABEL HERE
              U.S. ENVIRONMENTAL PROTECTION AQENCY
                1994 DETAILED QUESTIONNAIRE FOR THE
         TRANSPORTATION EQUIPMENT CLEANING INDUSTRY
               '.I! •'
             PART B - FINANCIAL AND ECONOMIC INFORMATION
                                   APRIL 1995
The public reporting burden- for this information collection is estimated to be 65 to 339 hours per
response, depending upon the size of the facility. The reporting burden includes time for reviewing
instructions, gathering data, and completing and reviewing the questionnaire. Please return the question-
naire to EPA within 60  calendar days of receipt.  Late filing or failure to comply with these instructions
may result in criminal fines, civil penalties, and other sanctions as provided by law. If you have any ques-
tions regarding the burden estimate or any other aspect of this data collection, including suggestions for
reducing the burden, please send them to:
Chief, Information Policy Branch
U.S. Environmental Protection Agency
401 M Street, S.W. (Mail Code 2136)
Washington, DC 20460
and
Office of Management and Budget,
Paperwork Reduction Project (2040-0146)
Washington, DC 20503
                                      F-l
                                                                Printed on Recycled Paper

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F-2

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                      U.S. ENVIRONMENTAL PROTECTION AGENCY
                       1994 DETAILED QUESTIONNAIRE FOR THE
                   TRANSPORTATION EQUIPMENT CLEANING INDUSTRY

                   PART B: FINANCIAL AND ECONOMIC INFORMATION

                                 TABLE OF CONTENTS
                                                                                Page
GENEfWl INSTRUCTIONS			  B-1

             Introduction	....	  B-1
             Authority			 . '.	B-1
             Overview of the Questionnaire	B-1
             Respondents to the Questionnaire	.	B-2
             Helpline		B-3
             Return of the Questionnaire	,	B-3
             Provisions Regarding Data Confidentiality	B-4

PART B SPECIFIC INSTRUCTIONS  				B-5

DEFINITION OF KEYTERMS . .	........ J.......................	  B-7

CHECKLIST AND CERTIFICATION	B-11
             Checklist		B-11
             Questionnaire Certification	B-11
             Special Cases	B-12

Section 1      FACILITY IDENTIFICATION	.	V.	B-13
             Information Contact and Facility Identification  	B-13
             Corporate Hierarchy  	B-15

Section 2     FACILITY AND TEC FINANCIAL INFORMATION .. . . .		B-17
             Background Information  	B-17
             In-house TEC Operations	 B-17
             Commercial TEC Operations	B-19
             Markft Information	I	B-22
             Discount Rate			B-24
             Balance Sheet Information	 B-25
             TEC Revenue Information	B-29
             TEC fcost Information	 B-30
             Facility income Statement Information	B-33
             Assessed Value	B-35
             Employment	B-35
             Facility Financial Statements	B-36
             Section 2 Comments	B-37

Section 3      BUSINESS ENTITY FINANCIAL INFORMATION		B-39
             Business  Entity General Information  	•	B-39
             Discount Rate	 B-42
             Balance Sheet Information .	 B-43
             TEC Revenue Information		B-45
                                       F-3

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                        TABLE OF CONTENTS (continued)

                                                                              Page
                                             &
            TEC Cost Information	;. . .'	B-46
            Financial Statement Information	,	 .  B-49
            Employment				B-50
            Business Entity Rnancial Statement	B-50
            Section 3 Comments  . . . . •	  B-51

Section 4     CORPORATE PARENT RNANCIAL INFORMATION .	B-53
            Corporate Parent General Information	^ .........  B-53
            Corporate Parent Financial Statements  	.......:......	B-54
            Section 4 Comments	4 . .'	  B-55
                                     F-4

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Part B: Financial and Economic Information—General Instructions
                   U.S. ENVIRONMENTAL PROTECTION AGENCY
                    1994 DETAILED QUESTIONNAIRE FOR THE
              TRANSPORTAT ION  EQUIPMENT CLEANING INDUSTRY
                              GENERAL INSTRUCTIONS
INTRODUCTION
The U.S. Environmental Protection Agency (EPA) is developing effluent limitations guidelines and
standards for the Transportation Equipment Cleaning (TEC) Industry which consists of facilities that
perform interior cleaning of tank trucks, closed-top hopper tank trucks, intermodal tank containers,
Intermediate bulk containerst>(IBCs and totes), rail tank cars, closed-top hopper rail tank cars, inland
tank barges, closed-top inland hopper barges, ocean/sea tankers, and other similar tanks (excluding
drums)  This questionnaire requests detailed information concerning operation of tank interior
cleaning facilities.  Your facility has been selected to receive this detailed questionnaire based on a
stratified statistical random sampling of facilities identified as performing transportation equipment
cleaning operations in a screener questionnaire administered in early 1994.

This  detailed questionnaire is divided into two sections:  Part A: Technical Information, and Part B:
Financial and Economic'Information. The data collected in "Part A: Technical  Information" of this
questionnaire will be used to characterize the operations and wastewater generation, treatment, and
discharges of tank interior cleaning facilities; to evaluate the performance of the wastewater treatment
technologies currently in use at tank interior cleaning facilities; and to develop  potential wastewater
discharge regulations for the TEC industry. The data collected in  "Part B:  Financial and Economic
Information" of this questionnaire will be used to characterize the economics of the transportation
equipment cleaning industry and to evaluate the possible economic impacts of wastewater regulations.


AUTHORITY

This  questionnaire is conducted under the authority of Section 308 of the Clean Water Act (the Federal
Water Pollution Control Act as amended, 33 U.S.C. Section 1318), Section 114 of the Clean Air Act (as
amended, 42 U.S.C. Section 7414), and Section 3007 of the Resource Conservation and Recovery Act
(42 U.S.C. Section 6927). All facilities that receive this questionnaire must respond.  PLEASE
RETURN THE QUESTIONNAIRE TO EPA WITHIN 60 CALENDAR DAYS OF RECEIVING IT. Late
filing or failure to comply with these instructions may result in criminal fines, civil penalties, and
other sanctions as provided by law.


OVERVIEW OF THE QUESTIONNAIRE

As stated above, this questionnaire is divided into two parts:  Part A: Technical Information and Part B:
Financial and Economic Information. Different types of information are requested in Part A and Part B;
therefore, these two sections may be completed by separate individuals. However, EPA recommends
that all perspnnel who assist in completing the questionnaire be provided with  a full copy of the
questionnaire, that each individual read the entire questionnaire before answering, and that Part A and
Part  B respondents coordinate their efforts as needed. Both sections must be completed and the blue
Certification Forms for both Part A and Part B must be completed, signed, and returned to EPA with
the questionnaire.  The Certification Form located in Section 6 in Part A and on page B-11 in Part B
must be completed by the individual or individuals (no more than two—i.e., one for Part A and one for
Part  B) responsible for supervising the completion of the questionnaire.  The same official may certify
for both Parts A and B. Please note that verifying the accuracy of the information provided in each

                                        p_5                                       Page B-1

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 Part 3: Financial and Economic information—General Instructions


                         GENERAL INSTRUCTIONS (continued)

 OVERVIEW OF THE QUESTIONNAIRE (continued)

 part of the questionnaire and signing the Questionnaire Certification is the responsibility of a single
 individual who signs that Part's Certification Form.

 EPA has prepared this questionnaire for use by a variety of transportation equipment cleaning
 facilities..  Therefore, not all of the questions may apply to this facility. Uniess instructed otherwise, you
 are expected to make an effort to complete every questionnaire item. You are not required, however,
 to perform nonroutine tests or measurements solely for the purpose of responding to this
 questionnaire.  If exact data are not available but can be estimated, please provide estimates.  Note on
 the Comments  page at the end of each section any question for which your answer is an estimate,
 and provide the method(s) used to make the estimation.

 Type or clearly  write all responses in dark ink.  Report items as whole numbers, except when
 instructed otherwise. Use the Cpmment Section to elaborate on your responses or to provide further
 information. Reference each comment with the corresponding question number.  Some tables may
 require multiple responses; please photocopy the tables as needed before writing on them.


 RESPONDENTS TO QUESTIONNAIRE

 All recipients of the questionnaire must complete the questionnaire, even if TEC operations are not a
 primary line of business  (e.g., your facility's primary line of business is manufacturing or transportation
 equipment repair or maintenance).                                  '      :.	

 Special Cases

 Completion of this questionnaire is required of the facility that has ultimate responsibility for disposal
 and/or discharge of wastewater generated from TEC operations conducted by the facility. Additional
 guidance is provided below for two special cases of TEC facility operations:

       •       Mobile TEC facilities;  and

       •       Facilities that  use contract or other non-facility personnel to perform TEC operations.

 Mobile TEC facilities perform TEC operations at the client or customer site.  Non-mobile TEC facilities
 require the client or customer to bring the tank to be cleaned to the TEC facility site. The majority of
 TEC facilities are non-mobile TEC facilities. All non-mobile TEC, facilities which receive this
 questionnaire are required to  coordinate and obtain all information necessary to complete this
 questionnaire.

 1) IF YOU OPERATE A MOBILE TEC FACILITY, and wastewater generated from TEC operations is
 handled using any of the following methods, you are required to coordinate and obtain all information
 necessary to complete this  questionnaire:  (1) collection and discharge or disposal of wastewater is
arranged for, provided  by, or paid for by the mobile TEC facility; (2) the permit under which the
mobile TEC facility wastewater is disposed and/or discharged is in the mobile TEC facility's name; or
 (3) the  mobile TEC facility bills the customer or client for whom TEC operations were performed for
wastewater discharge and/or disposal.
PageB-2                                 F-6

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Part B: Financial and Economic Information—General Instructions	


                        GENERAL INSTRUCTIONS (continued)

Special Cases (continued)

2) IF YOUR FACILITY USES CONTRACT OR OTHER NON-FACILITY PERSONNEL TO PERFORM TEC
OPERATIONS, OR YOUR FACILITY CONTRACTS A MOBILE FACILITY TO PERFORM TEC
OPERATIONS, but disposal and/or discharge of the wastewater generated from TEC operations is
arranged for, provided by, or paid directly by your facility, or the permit under which your facility's TEC
waltewater is disposed and/or discharged is in your facility's name, you are required to coordinate
and obtain all information necessary to complete this questionnaire.

3) IF YOU SUPPLY CONTRACT PERSONNEL TO PERFORM TEC OPERATIONS FOR ANOTHER
FACILITY, and wastewater generated from TEC operations is handled using any of the following
methods, you are required to coordinate and obtain all information necessary to complete this
questionnaire: (1) collection and discharge or disposal of wastewater is arranged for, provided by, or
paid for by the contract facility;  (2) the permit under which the TEC facility wastewater is disposed
aria/or discharged is in the contract facility's name; or (3) the contract facility bills the customer or
client for whom TEC operations were performed for wastewater discharge and/or disposal.

Note that additional guidance for mobile TEC facilities and contract TEC operations is provided on
pa|e B-12  If you are still unclear as to your responsibility in completing this detailed questionnaire,
contact the Technical Information Help-line at 1-800-275-1308.


HELPLINE

Toll-free helplines are available to respond to questions you may have on any section of this
questionnaire. The helpline toll-free numbers are:

       Part A: Technical Information                1-800-275-1308 operated by Radian Corp.
       Part B: Financial and Economic Information   1-800-945-9545 operated by ERG, Inc.

The helplines operate Monday through Friday between 9:00 AM and 5:00 PM Eastern Standard Time.

NOTE: Part A Helpline is only available untilJune 30, 1995.


RETURN OF THE QUESTIONNAIRE

Your response must be postmarked no" later than 60 calendar days after receipt of this questionnaire.
After completing the entire questionnaire (Parts A and B) and signing both blue Certification Forms,
use the enclosed label and mail the package to:

       Mr.  David Hoadley
       Document Control Officer
       U.S. Environmental Protection Agency
       Transportation Equipment Cleaning Questionnaire
       Room E913C(4303)
       401 M Street, SW
       Washington^ DC 20460

Please retain a copy of the completed questionnaire, including attachments.  EPA will review the
information  submitted and may request your cooperation in  answering follow-up questions, if
necessary, to complete analyses.


  ''' .  '          "'I            ",'   , '. "        ''""' '  ''"; '":"'V"  ''	:"  ''"  '       '        PageB-3

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 Part B; Financial and Economic Information—General Instructions	


                         GENERAL INSTRUCTIONS (continued)

 PROVISIONS REGARDING DATA CONFIDENTIALITY

 Regulations governing the confidentiality of business information are contained in 40 CFR Part 2,
 Subpart B.  You may assert a business confidentiality claim covering  part or all of the information you
 submit, other than effluent data or air emissions data, as described in  40 CFR 2.2.03(b):

        "(b) Method and time of asserting business confidentiality claim. A business which is
        submitting information to EPA may assert a business confidentiality claim covering the
        information by placing on (or attaching to) the information, at  the time ft is submitted to EPA, a
        cover sheet,  stamped or typed legend, or other suitable .form  of not;- 3 employing.language
        such as 'trade secret,' 'proprietary,' or 'company confidential.'  Allegedly confidential portions
        of otherwise  non-confidential documents should be clearly identified by the business and may
        be submitted separately to facilitate identification and handling by EPA.  If the business desires
        confidential treatment only until a certain date or until the occurrence  of a certain event, the
        notice should so state."

 If no business confidentiality claim accompanies the information when it is received by EPA, EPA
 may make the information available to the public without further notice.

 You may claim confidentiality by checking the appropriate box next to each question number for which
 responses contain confidential business information (CBI).  Effluent data are not eligible for
 confidential treatment, pursuant to Section 308(b) of the Clean Water  Act. Any response where "yes*
 is not checked will be considered non-confidential.

 Information covered by a claim of confidentiality will be disclosed by EPA only to the extent,  and by
 means of the procedures set forth in 40 CFR Part 2, Subpart B.  In general, submitted information
 protected by a business confidentiality claim may be disclosed to other employees, officers,  or
 authorized representatives of the United States concerned with carrying out the Clean Water Act or
 Clean Air Act.

 The information submitted will be made available to EPA contractors for carrying out work required by
 their contracts with EPA. All EPA contracts provide that contractor employees shall use the
 information only for the purpose  of carrying out the work required by their contract and shall refrain
 from disclosing any CBI to anyone other than EPA without the prior written approval of each  affected
 business or of the EPA legal office.  The contractors and subcontractors that will be providing support
 to EPA during the development of these regulations include: Radian Corporation, Herndon, VA; ABB
 Environmental Services, Arlington, VA; ViGYAN Inc., Falls Church, VA;  Information Systems Solutions
 International Inc., Vienna, VA; Viar and Co., Alexandria, VA; Eastern Research Group, Inc. (ERG),
 Lexington, MA; Science Applications International Corporation, McLean, VA; Highland Data Services,
 Bliiegrass, VA; Software Technology Group, Fairfax, VA; Tetra Tech Inc., Fairfax, VA; and Versar Inc.,
 Springfield, VA

Any comments you may/wish to make on this issue must be submitted in writing at the time  of
 submitting your response. Please direct any questions regarding CBI  in Part A of the questionnaire to
the Technical Information Helpline, operated by Radian Corp., EPA's technical contractor, at  1-800-
275-1308. Please direct any questions  regarding CBI in Part B of the questionnaire to the Financial
and Economic Information Helpline, operated by Eastern Research Group, Inc. (ERG), EPA's
economic contractor,  at 1-800-945-9545.
PageB-4                                 F"8

-------
Part B: Financial and Economic Information—Part B Specific Instructions	


                           PART B SPECIFIC INSTRUCTIONS


1.     Read all definitions. Read all definitions beginning on Page B-7 carefully before completing
       Part B of the questionnaire. The individual who responds to each section must be familiar with
       the pertinent economic and financial aspects of the facility's transportation equipment cleaning
       and related activities.
             	          	     ,' .  )     ,   .     	   :  .   •
2.     Mark responses for each question.  Fill in the appropriate response(s) legibly for each
       question. Complete all questions that require written responses by printing or typing in the
       spaces provided.  If the space allowed for the answer to any question is inadequate for your
       complete response, please continue the response in the Comments area at the end of each
       section of the questionnaire, referencing the appropriate question number.  If additional
       attachments are used to clarify a response, please make certain that the code number for this
       questionnaire, which appears at the top of each page, is also placed at the top right hand
       comer of each page of the attachments.

3.     Pay close attention to the units in  each question. All financial questions ask you to report
       answers in whole dollars.

4,     Answer i|J items  unless instructed otherwise. The purpose of this questionnaire is to gather
       all available economic and financial information pertinent to transportation equipment cleaning
       operations. If a question is not applicable, indicate so by writing NA. If, after conscientious
       attempts to obtain requested information, an item remains unknown and cannot be estimated,
       write UNKand explain in the Comments area at the end of the appropriate  section why such
       InfpfTnatioQ is unknown.  If an item seems ambiguous, please call the Part B Helpline,
       operated by Eastern Research Group, Inc. (ERG), EPA's economic contractor, at 1-800-945-
       9545 for clarification.  State all assumptions made in answering questions in the Comments
       section, and reference all explanations and assumptions to the appropriate questions. If actual
       data are not available to answer a question, please estimate and indicate that you  have done
    ' t  so in the Comments Section.
 „"! ',i   '  ",,'.,    ' -r"! :   n   '   i '  '"' :,„   -     "» ,-,,:,>,'   ' , '     ,   , j,,     [        •,
5.     Enter zero  (0) where appropriate.  Leave entry blank only if instructed to do so (e.g., if the
       answer is zero, enter a zero (0)).

6.     indicate information that should be treated as confidential.  Please follow the instructions
       given in the "Provisions Regarding Data Confidentiality" section on Page B-3.  If information for
       a given question is considered confidential business information, indicate this by checking the
       box next to each question as desired. Any response where "yes" is not checked will be
       considered non-confidential.

7.     Retain a copy of the completed  questionnaire. EPA will review the information submitted
       and may request,  if necessary, your cooperation in answering follow-up clarification questions
       to complete the data collection effort.  Please retain a copy of the completed questionnaire,
       including attachments, in case EPA must contact you to verify your responses.  Also, please
       maintain a record  of sources used to complete the financial section.
                                                                                    Page B-5

-------
 Part B, Section 2: Facility and TEC Financial Information
Confidential
Y«s D
No n .
32.
Balance Sheet
Information — Assets
1994 (S)
Not in Operation 	 n
(leave columns blank)
Facility
(All Operations)
TEC
Operations
:VCurrent Assets ••'.'•'.' op.;;,.
a. Value of all current
assets excluding
inventories
b. Value of inventories
Noncurrent Assets
c. Land (original cost)
d. Buildings (original cost)
e. Equipment (original cost)
f. Other noncurrent assets
g. Cumulative depreciation
Total Assets
h. Total assets (sum of a
through f minus g)
$ , , ' ,
$ , , '••• , ,
i ' • • . ', . • •.
$ , ,
$ ,
$ , ,
$ ',
$ , , ,

* i i i
$,... ,• • •
$ , ,
-'. ' -?l't": ;.-v:.'::> •^.-oV; !:.^M
$ ,
$ ,
$ , ,
$ ,
'$• ,
, ' '
$-,'"•' ,
Check box if data for TEC operations are best estimates
                                        F-31
                                                                               Page B-27

-------
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accrued expenses and taxes, and the
current portion of long-term debt?
03
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                                        F-32

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Question 35 Question 36
- Confidential Confidential
Y«S a Y« . a
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: were the net sales/revenues from
operations at this facility? If no
ne from TEC operations, enter zero
Do not include revenues from sale
sidual materials (see Question 36).
«o o . Z
f£ co"-S

1 1 1 1 1 1 1 1 1 1
1 1 1 1 II M II
1 1 i ! 1 1 1 1 1 1




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t were the revenues generated from
ale of residual materials (i.e., heels)
cted during TEC operations?
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                                                 F-33

-------
 Part B, Section 2: Facility and TEC Financial Information
    TEC COST INFORMATION
           Questions 37 through 48 requesfinformation oVl992,1993, and 1994 costs for this facility's
           total operations and for its TEC operations.  If the facility was not in operation in a'particular
           year, check the box for that year and leave the appropriate columns blank.  Report amounts
           in whole dollars.                                            :       ' ,:
Queeilon3? Que«ilon38 Guaet!on39 Question 40
Confidential Confidential Confidential Confidential
Ye« O Ye* D Yes Q Yes Q
No CJ No D No D NoQ
Cost Information
37. Operating
#
1992 ($)
Not in Operation 	 Q
(leave columns blank)
Facility
(All Operations)
TEC Operations
and Maintenance (O&M) Costs
a. Payroll
b. AH Other O&M Costs
c. Total O&M Costs (sum
of a and b)
38. Sales, General, and Administrative
Costs
39. Depreciation and Amortization
40. Total Costs and Expenses (sum of
Question 37c through Question 39) •
$_, 	 , 	 , 	
$ ,
$ , -
$ ,
$ ,
$ ,
$_, 	 ._, 	 , 	
$ ,
$ ,
$ ,
$ ,
$ ,
Check box if data for TEC operations are best estimates	[~|
                                           F-34
   Page B-30

-------
Part B, Section 2:  Facility and TEC Financial information
Question 41 Question 42 Question 43 Question 44
Confidential Confidential Confidential Confidential
Yes D Yes D Yes D Yes Q
No Q No O No D No D
Cost Information
41. Operating

1993 ($)
Not In Operation 	 Q
(leave columns blank)
Facility
(All Operations)
TEC Operations
and Maintenance (O&M) Costs
a. Payroll
b. All Other O&M Costs
c. Total O&M Costs (sum
of a and b)
42, Sales, General, and Administrative
Costs ,
43. Depreciation and Amortization
44. Total Costs and Expenses (sum of
Question 41 c through Question 43)
$ ,
$ ,
$ , , ,
$_, 	 ;__, 	 :_, 	 	
$ , ,
$ , ,
$ ,
$ , -,'","
$ , , , '
$_,_ 	 , 	 , 	 	
$ ,
$ , , , '
Check box if data for TEC operations are best estimates	D
                                           F-35
                                                                                  Page B-31.

-------
 Part B, Section 2:  Facility and TEC Financial Information
Qu»»tl
-------
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Confidential
Yes D
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                                                  F-37-

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Comments section beginning on
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this is not equivalent to the difference
between a and the sum of b through d,
please explain why in the Comments
section beginning on Page B-37.

                                                                 CD
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                                                                  (S
                                                                 CL
F-38

-------
        Part B, Section 2:  Facility and TEC Financial Information
        ASSESSED VALUE


 confidential   51. What was the property tax assessment or appraised value for land, buildings, and equipment
 Yes  n         at this facility?                              *
                                                                    '
 No
Assessed Value
a. Land
b. Buildings
c. Equipment and Machinery
d. Total Value (sum of items
a through c)
1993
$ ' -,
.'$,.,
$ • ,
$ , ,
1994
$''•-,
$ ,
$
$ ,
confidential   52. On what percentage of market value is the tax assessment or appraised value based?

NO  n         Percentage of market value	                             %


       EMPLOYMENT

confidential   53. Please list the average number of employees (full- and part-time) and the total number of labor
Yes  D        . hours worked at this facility in each of the following labor categories for fiscal year
No  n         1994. To  estimate the total labor hours include overtime, vacation, and paid holidays, but do
              not include overtime as time-and-a half. Estimates to the nearest 1,000 hours are acceptable.
Employment Type
a. Total facility employment
(part-time and full-time)
(all operations)
b. Employment engaged in
TEC operations (part-
time and full-time)
Average
Number of Employees
»
i
Total
Number of Employee Hours


                                                  F-39
                                                                                        Page B-35

-------
Part B, Section 2: Facility and TEC Financial Information
   p
   D
FACILITY FINANCIAL STATEMENTS

   54. |f you checked hierarchy type D or E for Question 7 (Page B-15), include copies of this
      facility's end-of-year financial statements for 1992,1993, and 1994 with your completed
      questionnaire.  These may be accountant reports, annual reports, and/or 10-K forms, and
      MUST include both an income statement and balance sheets for this facility. These
      statements heed not be audited, but should conform to generally accepted accounting
      principles (GAAP). In all cases, INCLUDE THE NOTES TO THE FINANCIAL STATEMENTS.

      In the table below, please indicate with a check the type of statement included.
1992
•




1993
•




1994
•




.•„'.. j
Financial Statement
Accountant Report
Annual Report
10-K Form
Other (please describe)

•
            IF YOU CHECKED A, B, C, OR D IN QUESTION 7 (Page B-15), PLEASE PROCEED TO
            SECTIONS.  , .  .		-

            IF YOU CHECKED E IN QUESTION 7 (Page B-15), YOU HAVE COMPLETED PART B OF
            THE QUESTIONNAIRE. DO NOT PROCEED TO SECTION 3.  MAKE SURE YOU HAVE
            COMPLETED AND SIGNED THE CERTIFICATION FORM (Page B-11) AND RETURN THIS
            QUESTIONNAIRE AND ALL ADDITIONAL INFORMATION TO EPA.
     Page B-36
                                            F-40

-------
Part B, Section 2: Facility and TEC Financial Information
                                  SECTION 2 COMMENTS
'
Question
Number
I

















f
Confidential
D Yes
n NO
D Yes
n NO
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes .
n NO
D Yes
D No
D Yes
D No
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
> ',",•'-
•"' f % ! ''-'" ^
; Comment





:



^
,'

' ' " ' ' ' . ' '
- •




                                           F-41
Page B-37

-------
Part B, Section 2:  Facility and TEC Financial Information
Question
Number


















Confidential
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
Q Yes
n NO
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
n NO
D Yes
D No
D Yes
D No
D Yes
D No
V , V, ** , , -t '
> •/ < *(<
' Comment (continued)







»










      Page B-38
                                                 F-42

-------
                SECTION THREE:  BUSINESS ENTITY FINANCIAL INFORMATION
            The purpose of Section 3 |s. to collect financial information about ih'e business entity that
            owns this facility,  (Refer lo the Corporate Hierarchy Chart or» Page Br15,}' -          ,;
            s             f                             *-.,;;           ''         _,""•£
            Answer the questions at sequence, and do not leave any blank entiles unless instructed "-''\'
            otherwise. Pay close aitention to the specific instructions accompanying each question,  "*"
            and be sure that your answers are given in the appropriate unfts.  Definitions are provided
            beginning on Page 8-7. Use the Comments section on Page B-51 to record any
            assumptions or explanations needed to understand your answer.  Reference each
            comment with the appropriate question and page number,
                                                                          ;•'
            Call the helpline at i-800-945-9545 if you have any questions or comments. The helpline
            operates between 9:00 AM and 5:00 PM (Eastern Standard Time),  Monday through Friday,
       BUSINESS ENTITY GENERAL INFORMATION

confidential   55.  What is the name and mailing address of the business entity that owns this facility?

NO  n         a.      Name of business entity .	;	;	'.	

              b.      Mailing address or P.O. box	;	

              c.      City   _	_	__	:     State	_  Zip  _
confidential   56.  List the primary and secondary 4-digit Standard Industrial Classification (SIC) codes assigned
Y«S  n         to the business entity.  (See definitions beginning on Page B-7.)
NO  n
              a.     Primary SIC code	.....;	;........
             b.
Secondary SIC codes
                                                F-43
                                                                                     Page B-39

-------
        Part B, Section 3:  Business Entity Financial Information
 con««n«!«i   57. Check the organization type that best describes the business entity. The corporate hierarchy
 Y« p         chart on Page B-15 shows business entities on the second row.

               a.      Corporation (C Corporation)	'	   Q

               b.      Subchapter S corporation	   Q

               c.      Limited partnership		   n

               d.      General partnership	;	   n

               e.      Sole proprietor	   Q

               f.      Other (please describe)	   n







conftdtntu   58.  Is the business entity privately or publicly held?
Yte" D
No  Q          a.      Private	 . .. ...	 .   Q

               b.      Public	   D


con&)*ntk!   59.  If this business entity owned more than one facility that conducted TEC operations (counting
Y«*  D          this facility as one) in fiscal year 1994, provide the name and address of all other facilities
No  a          owned by the business entity conducting TEC operations in the table on the following page.

               a.      This is the only facility owned by the business
                      entity that conducts TEC operations	   D

               b.      This business entity owns more than one facility
                      thai ponducts TEC operations	   D
                                                 F-44
       Page B-40

-------
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                          F-45

-------
                                                                                                             ,r 'i1.;1; ""	," ;" ..'in;'1!*;:1!! I
    Part B, Section 3:  Business Entity Financial Information
      confid«nu«J   61.  In what year did the business entity purchase, construct, or otherwise gain control of this
      Y«*  a          facility?
      NO  p

                     Year    ... ...... ... ____ . ____ ... ____ '.'.' ...... ......... ....... .      19 _
                62. What is the first month of the business entity's fiscal year?  Enter 01 for January, 02 for
      Y««  Q         February, 03 for March, etc.
      No  a
                    First month of fiscal year  ............... . ........... . ............
      •:   M      ?!;.  :"   ,-. •  , .    • ...... £1!   ,. .'    .  .. •  •; ''  I ' . •.  ,.„••*• '•„,  ';v ,, ;,  ••. , ,  ;, :;"  .  ]•  .  •   •.  .,'  '

      confWwtw   63. Ust the top three revenue-generating activities for the business entity in rank order. The
      Y««  a         activity with rank-#1 generates the most revenue.
      No  o
                    a.      Rank #1 Activity - ',
                    b.      Rank #2 Activity

                    c.      Rank #3 Activity
             DISCOUNT RATE
                64. If the business entity borrows money to finance capital improvements, such as wastewater
      Y« p         treatment equipment, what interest rate would it pay on such loans?
lit:.;' "Mo  /cj '    '	"   "  '  '	
                    Interest rate
               >».!     -         ' l-.'Ji
                65. In the event the business entity does not borrow money to finance capital improvements, what
      Y« p         discount rate would it use?  The discount rate is the minimum rate of return on capital required
      NO  p         to compensate debt holders and equity owners for bearing risk.  If the business entity borrows
                    to finance capital improvements, the discount rate is equivalent to the interest rate paid on
                    those loans.


                    Discount rate			-	%.
            PageB-42

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expenses and taxes, and the
current portion of long-term
debt?

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F-48

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il Confidential Confidential Confidential
Yes D Yes O Yw Q
No D No D No D
i =
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What were the net sales/revenues from TEC
operations at this business entity? If no
income from TEC operations, enter zero (0).


so '
(0

1 1 i 1 1 II II
1 1 1 1 MM I
II II M 1 1 1




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II 1 II 1 1 II
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i-TEC revenues. What were revenues from
>ther sources? Include interest earnings.
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i value should equal the sum of Question
md Question 70.
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                                                                    F-49

-------
    Part B, Section 3:  Business Entity Financial Information
    TEC COST INFORMATION
         Questions 72 through 83 request information on 1992,1993, and 1994 costs for the business
         entity's total operations and for its TEC operations. If the business entity was not in operation
         in a particular year, check the box for that year and leave the appropriate columns blank.
         Report amounts In whole dollars.                       "          •
          1-11 "   '           «  -          ^           =               -
QUMtt!on72 Question 73 Question 74 Question 75
C
-------
    Part B, Section 3: Business Entity Financial Information
Question 76 Question 77 Question 78 Question 79
Confidential - Confidential . Confidential Confidential
Yes O Yes D Yes O Yes Q
NO o NO n NO n NO n
Cost information
1993 ($)
Not In Operation — n
(leave columns blank)
Business Entity
(All Operations)
TEC Operations
76. Operating and Maintenance (O&M) Costs

a. Payroll
b. All Other O&M Costs
c. Total O&M Costs (sum of a and
b> ,
77. Sales, General, and Administrative Costs
78. Depreciation and Amortization
79. Total Costs and Expenses (sum of
Question 76c through Question 78)
$ ' , ,-.'"-,•
$ ,
$ ' , , ,
$ , ,
$ ,
*_,___,___,___
$ ,
$ , ,
$_.
$ ,
$ , ,-',•••
.$_, 	 . •', ' ,
Check box if data for TEC operations are best estimates
                                            F-51
                                                                                   Page B-47

-------
    Part B, Section 3: Business Entity Financial Information
Qu*«tion80 Qu»«tlon81 Question 82 Question 83
Confktaitiri Confidential Confidential Confidential
Y«* D Y«» D Yes D Yes D
No O No D No D No D
Cost Information
1994 ($)
Not in Operation.... D
(leave columns blank)
Business Entity
(All Operations)
TEC Operations
80. Operating and Maintenance (O&M) Costs

a. Payroll
b. All Other O&M Costs
c. Total O&M Costs (sum of a and
b)
81. Sales, General, and Administrative Costs
82. Depreciation and Amortization
83. Total Costs and Expenses (sum of
Question 80c through Question 82)
$ ,
$ ,
$ ,
$ , • ,
$ ,
$ ,
$ ',
$ ,
$ ,
$ ,
$ ,
$. ,
Check box if data for TEC operations are best estimates	Q
                                            F-52
   Page B-48

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84.
Financial Statement Item





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a. Earnings before interest and taxes
What were earnings before interes
and taxes? This should equal
Question 71 minus Question 75,
Question 79, or Question 83.































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b. Interest expenses. What were

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Comments section on Page B-.51

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                                                          F-53

-------
       Part B, Section 3: Business Entity Financial Information
Y*« D
No O
   EMPLOYMENT

      85. Please list the average number of employees (full- and part-time) and the total number of labor
          hours worked at this business entity in each of the following labor categories for fiscal
          year 1994. To estimate the total labor hours include overtime, vacation, and paid holidays,
          but do not include overtime as time-and-a half. Estimates to the nearest 1,000 hours are
          acceptable.
Employment Type
a. Total business entity
employment (part-time
and full-time)
b. Employment engaged in
TEC operations (part-
time and full-time)
Average
Number of Employees


Total
Number of Employee Hours
i » .
* f _„_
p
       BUSINESS ENTITY FINANCIAL STATEMENTS
       ., si I"*.,, •' ,  ; • ....... •.  'i/ij • ••"; ,>.; ''.'.v. 5* •:;"£  „;  •:•;• , '•••':.".'.•,''";••'}' > '"  :: ::{>':• '•."• $'•  '.j.
          86. If you checked hierarchy type C or type D for Question 7 (Page B-15), include copies
             of this business entity's end-of-year financial statements for 1992, 1993, and 1994 with your
             completed questionnaire.  These may be accountant reports, annual reports, and/or 10-K
             forms, and MUST include  both an income statement and balance sheets for the business
             entity. These statements need not be audited but should conform to generally accepted
             accounting principles (GAAP). In all cases, INCLUDE THE NOTES TO THE FINANCIAL
             STATEMENTS.
1992
•




1993
•




1994
•





Financial Statement
Accountant Report
Annual Report
10-K Form
Other (please describe)


             IF YOU CHECKED A OR B IN QUESTION 7 (Page B-15), PROCEED TO SECTION 4.
             IF YOU CHECKED C OR D IN QUESTION 7 (Page B-15), YOU HAVE COMPLETED PART B
             OF THE QUESTIONNAIRE.  MAKE SURE YOU HAVE COMPLETED AND SIGNED THE
             CERTIFICATION FORM (Page B-11) AND RETURN THIS QUESTIONNAIRE AND ALL
             ADDITIONAL INFORMATION TO EPA.
       Page B-50
                                              F-54

-------
Part B, Section 3: Business Entity Financial Information
                             SECTION 3 COMMENTS
Question
Number










.•



•



Confidential
D Yes
D No
O Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
n NO
D Yes
D No
D Yes
D No
D Yes
n NO
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
n NO
D Yes
Q No
D Yes
D No
1 ll
*
Comment

, . • ' ,







.








                                     F-55
                                                                         Page B-51

-------
Part B, Section 3: Business Entity Financial Information
Question
Number



















Confidential
D Yes
n NO
D Yes
D No
D Yes
n NO
D Yes
D No
D Yes
n NO
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
D No
AV [
,. « / 0 4 ,
Comment (continued)



















                                           F-56
Page B-52
                                                              ..LI*

-------
                SECTION 4:  CORPORATE PARENT FINANCIAL INFORMATION
           The purpose of Section 4 is to coiled; financial information about the corporate parent that
           owns the business entfty identified In Section 3. (Refer to the Corporate Hierarchy Chart, OR
           .Page8-15,)       '                        -"      ,'",'','       ,      ~,,

           Answer the questions m sequence, and do not leave any blank entries unless instructed
           otherwise. Pay ctose attention to the specific instructions accompanying each question,
           and be sure that your answers are given in the appropriate units.  Definitions begirt on
           Page B-7, Use the Comments section on Page 6-55 to record any assumptions or    "
           explanations needed to understand your answer; Reference each comment with the
           appropriate questionand page number*                       '-  ' -    '   '

           Call the helpline at 1-800-345-9545 if you have any questions or comments.  The helpline
           operates between 9:OO AM and 5:00 PM {Eastern Standard Time), Monday through Friday,
       CORPORATE PARENT GENERAL INFORMATION

confidential   87. What is the name and mailing address of the corporate parent?
Yes  a                .                    '            :
NO  n        a.     Name of parent company:	
              b.     Mailing address or P.O. box:

              c.     City  	:	'.—	
                                               State.
Zip
confidential   88. Please list the primary and secondary 4-digit Standard Industrial Classification (SIC) codes
Yes  a        assigned to the corporate parent. (See definitions beginning on Page B-7.)
NO
             Primary SIC Code ..

             Secondary SIC Code
confidential   89. In what year did the corporate parent purchase or otherwise gain control of the business entity
Yes  n        described in Section 3?
NO
Year
                                                                                     19
                                               F-57
                                                                                     Page B-53

-------
    Part B, Section 4: Corporate Parent Financial Information
YM  D
NO  a
       90.  Check the organization type that best describes the corporate parent. The corporate
           hierarchy chart on Page B-15 shows corporate parent entities on the top row (level one).
      .....
           a.      Corporation (C Corporation)	  D

           b.      Subchapter S corporation	  Q

           c.      Limited partnership	  Q

           d.      General partnership	  d

           e.      Sole proprietor	  n

           f.      Other (please describe)	• • • • •	  D
      	,;     . '   , i    ' '|i«l '    ' ,     ,: „	i „   ,	 'I ,    ' ' ''   ' ,'    • /  ; ,v'i|    1         /             •
      'i111: '       n»	   '" 	•" '   '  .'  -  " •'   'f   '  ."   '' - '""' '  •	    ' ' '    	    ' I          i     . '.




      	' '      i      	Til     »        "     '"     ""ln '       '  i          ''  '  I



       91.  Is the corporate parent privately or publicly held?
D     """.	..'..  '	I ,    '.'.'  '.''.".'           '.    •             ,',    '..
a          a.      Private	  D

           b.      Public  •	i • • >	^	  D
NO
   p
   a
   CORPORATE PARENT FINANCIAL STATEMENTS
     Wl1,,,, •' !'•  '•!. ' ' ; ' n. • ,; , ,   • i1 in   •    •   i :,! ,i » "» : ,,l!" ",.'.,.„ , ' :'" .  ii ..... :"' !„ i  • '.;.',  • ,  : • ,   , ,   ""i ",   I

      92. Include copies of the corporate parent's end-of-year financial statements for 1992, 1993, and
          1994 with your completed questionnaire. These may be accountant reports, annual reports,
          and/or 10-K forms, and MUST include both an income statement and balance sheets for the
          corporate parent. These statements need not be audited  but should conform to generally
          accepted accounting principles (GAAP). In all cases, INCLUDE THE NOTES TO THE
          FINANCIAL STATEMENTS.
                1992
                 •
                            1993
                             •
                                     1994
                                      •
Financial Statement
                                         Accountant Report
                                         Annual Report
                                         10-K Form
                                         Other (please describe)
   Page B-54
                                              F-58.

-------
Part B, Section 4: Corporate Parent Financial Information
                            SECTION 4 COMMENTS
Question
Number


„














f f
Confidential
D Yes
D No
D Yes
D No
D Yes
D No
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
D Yes
n NO
•* * f ' s "" f '' f * f * y f
s f u % "• V"" * "" t
Comment / „ - ,-_
•
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, , .
                                      F-59
                                                                         Page B-55

-------
F-60

-------
 r
                                  U.S. Environmental Protection Agency
                                   Tank and Container fnterfor Cleaning
                                          Screener Questionnaire
                                                 APPENDIX G
                                                                                  EPA
                                                                Form Approved   ,    .   ,  ,
 I                                             '                  OMB No. 2040-0166
 |	                                          .  •           	j  Expires 11/30/96

Use No. 2 pencil only. Do not write on, stamp, or mark pages 1-3 of this form except to fill in the appropriate oval(s) for each question. Read
the General Instructions, Optical Scanner Instructions, and the Definition of Terms before completing this questionnaire form. Please see the
burden statement on page 2 of the cover letter. If you have any questions, call the helpline number at 1-800-275r1308.
                                       SECTION  1. GENERAL INFORMATION
   1. Is the information printed on the mailing label
     correct?
      "Yes
     C No (Provide corrected address information on Page 4)
  2. Identify the person most knowledgeable of
     questionnaire responses on Page 4.
  3. Is the facility and the business entity that owns
     this facility one and the same?
     OYes
     •-_.  No (Provide information on Page 4)
4. How many facilities operated by
  the business entity listed in
  question 3 conduct TEC
  operations? TEC operations
  include cleaning the interior of'
  tank trucks, intermodal tank
  containers, intermediate bulk
  containers, rail tank cars, tank
  barges, and/or tankers.
 _ ^

•x x x
   x a:
   35
®;
*"(!^ •"SP1 f~*s"'
•-SL-' SL/ :ff--
X '.3D X'
'."£ 3D K
  5. Does your facility perform any transportation
    equipment cleaning (TEC) operations? TEC operations
    include the following activities: cleaning the interior of
    tank trucks, intermodal tank containers, intermediate
    bulk containers (IBC's), rail tank cars, tank barges,
    and/or tankers.
     3 Yes
     - No                   '        •

    IF YOU ANSWERED "NO", STOP HERE. COMPLETE
    THE CERTIFICATION FORM. RETURN THIS
    QUESTIONNAIRE FORM AND THE SIGNED
    CERTIFICATION FORM.
  *U.S. GOVERNMENT PRINTING OFFICE: 1993-515-218
                     6. Does your facility generate transportation equipment cleaning
                       process wastewater? Refer to the Definition of Terms section.
                       CYes            •                        .
                       CNo                    ;

                       IF NO TEC PROCESS WASTEWATER IS GENERATED
                       AT THIS FACILITY, STOP HERE. COMPLETE THE
                       CERTIFICATION FORM. RETURN THE CERTIFICATION
                       FORM AND THIS QUESTIONNAIRE FORM.

                       If transportation equipment cleaning process
                       wastewater is generated at your facility, to where is it
                       discharged and/or disposed? Indicate all that are
                       applicable. Provide the information associated with
                       each on Page 4.
                       O POTW (Specify name on Page 4)
                       O CTW (Specify name on Page 4)
                       y FOTW (Specify name on Page 4)
                       O Other facility (Specify on Page 4)
                       — United States Surface Waters. (Specify NPDES permit number below)
                                                                     NPDES Permit Number
.I' z 'S c.  B." Q; o;  
-------
                                       111	1'TUB1! i'!i.''M""""ll!,l
NOTE: FOR ALL NUMERICAL. QUESTIONS IN SECTIONS 2, 3, AND 4, IF INFORMATION IS NOT READILY AVAILABLE, PLEASE PROVIDE AN
      APPROXIMATE FIGURE OR BEST ESTIMATE.
                            SECTION 2. TRANSPORTATION EQUIPMENT CLEANING OPERATIONS
   7.  For calendar year 1992, please approximate the number of
      cleanings performed for each type of unit cleaned at this
      facility. If possible, approximate based on readily-available
      Information at your facility.
        Tank Truck
               Q.  o,
               €  1.
 0.
 "€  i.  t
'R  I.  t SL sc
X  '€  C C C
3?'X  £ r £
XX  £ C C
3D'£  C ,€ C

X  "£  t € €
         r C
      Rail Tank Car
        ' S.
CCT.J: £ r

      c c
      £ X £
XX X T '£
XXX
   £ £
•XT ID
          f  C
          »• x
          c  JT
                    Intermodal
                  Tank Container
                   o.  o/ o  o,  o
                   T.  i, C t:  I
                   f.  al C £  ?.
                   3. 'C .£ 3'  C
                  X
                             £
                       ID I .£•  I
                          f C  C
                   Tank Barge
                          ti  6*  0 •  0
                          T 'T  f X
                         •"£• 3D
                          I  £
                          "£  £
      C X
      £ E
   & 'C '€
£  £  £ £•
€  'C; C JC
                          e
                                   Intermediate
                                  Bulk Container
              C. •&.  oJ .£
              C .T  £ X T
              f 2"  2~"  2~* 2*
              c f  .6 x ]

              rs'S  -£••-£ :i
                                              X
                                   ,C LC .£•• .T- X
                                   •y T- i: §? w..
    Tanker
                                       .'"& '£
                                   X X X X
                                   ® fi: X' -x
'^* "4s 4^ '"4"
  • V2./ '5^ ^.5^
  '• & .© ®
                                              ®
                                       ' C-
  8. Please estimate what percent of the units cleaned by your
     facility in calendar year 1992 were used to transport the
     following commodities. If possible, approximate based on
     readily-available information at your facility.
     A s None
     D * 26%-50%
                 B = Less than 5%
                 E = 51%-75%
                                      C = 5%-25%
                                      F = 76%-100%
Food Grade Products. Beverages, Animal
and Vegetable Oil, etc. ................................. X JC c: K 1} £

Petroleum and Coal Products (ex. coal;
gasoline; naphtha; lube, crude, and
fuel oil). ...... . ....... . .......................................... £ C- e C, .£ E

Latex. Rubber, Resins, Plastics,
Pfastteizere, etc ............................................. £ D g; g

Soaps and Detergents ................................... "S £ £ E

Hazardous Waste (as defined in 40 CFR
par! 261) ....... ............................ „ ................... 5. ,£ E-.g
Chemteals Not Usted in Above Categories .. T E .© • £

Other (Please specify on page 4) ................. £• ,$} ^ &

Other (Pfease specify on page 4) ................. K & •'£ '£.
                                                      c • r

                                                      £  E


                                                      E  £

                                                      £ '£

                                                      E -E

                                                     -C  E
                                                               9.  What types of cleaning operations does your facility
                                                                  perform? Indicate all that apply.
                                £ Water Wash
                                C. Presolve
                                c; Caustic Wash
                                                                                           D" Detergent Wash
                                                                                           C Others (Please
                                                                                             specify on page 4)
                           10. For calendar year 1992, please estimate your facility's total
                               average daily process and non-process wastewater
                               discharge, in gallons per day. If possible, approximate based
                               on readily-available .information at your facility.
                                                                                               Gallons
                                                                                               Per Da1
                                                              0" .O/ 0, OJ. Oj'.Q.  0,' ,0,
                                                              i? .f t1 £ .1  X  t; T
                                                              2: ?, a: 2, 'c  2,  ?;>2:
                                                              3? 3. JC 3".  C  .C  C C
                                                              . • •!-• r^ -f  -r%  y  y~, y-
                                                              A- t C 4.  4.  4,  4. C'
                                                              £• ;J£ £> 'A- £• •• £  £; v£
                                                              e? .C C C  £'  £  E X
                                                              £ £ £ £ £  .£  £•£
                                                              "s;- •"«: i: c  8~  ,c  £• x
                                                              9" C' € "si?  sT  s!
                                                                           SECTION 3. WASTEWATER TREATMENT
                           11. What type(s) of wastewater treatment technology(ies) or
                              disposal method(s) does your facility employ to manage
                              wastewater from transportation equipment cleaning
                              operations? Indicate ail that apply.

                              '^ No Treatment
                               _ Biological Treatment
                               JT Carbon Adsorption
                             - ._. Chemical Oxidation or Reduction
                              •-'_ Chlorination
                              CJ Clarification
                             .  _ Coagulation
                              C? Deep Well Injection
                              ;__. Dissolved Air Flotation
                               — Equalization
                               1. Evaporation Ponds
                              '-_- Filtration
                              :_• Gravity Separation
                             .  .3 Grit Chambers
                             -  ~2 Hydrolysis
                             • '  _ Ion Exchange/Resin Adsorption
                               _ Non-aerated Lagoons/Ponds/Basins
                               = Oil/Water Separator
                               . pH Adjustment
                               r Racks/Screens
                               -. Recycle/Reuse
                             • ; _ Reverse Osmosis
                               _ Sedimentation/Settling Ponds
                              ._ Solvent Extraction
                              C Steam/Air Stripping
                              • _ Others (Please specify on page 4)
                                                                                  Please continue on
                                                                                          pages
                                                           G-2

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                                            SECTION 4. ECONOMIC INFORMATION
 -\1. PVeasc indicate which of the following represent your
     facility's operational structure. Indicate all that apply. For
     definitions of the following, refer to the Definition of Terms
     section.
     O Carrier
     O Shipper
     O Independent
     O Builder/Leaser
     If you indicated more than one type of facility operation
     above, please estimate what percentage of your business
     operations are dedicated to these activities.
      Carrier
     GpXX
       ©X
       ®®l
Shipper


X







••&
-,-L
•E'
GC
S
®
X
i:

.£•
X
X
X
•X
'X
X
X
                     Indepen-
                       dent
                        CD
                     CD 'X --3
                        'X .1
                        •X £•
                        .'?;• x
                        xx
                        •.§-> '-^*

                        ® X
 Builder/
 Leaser
   ®®
XXX

   ® X
   CE-J)
   ® ®
   X X

   ®-x
13. On average, for fiscal year 1992, please estimate the number
    of people that were employed at this facility on a full-time
    basis. Of these, how many were involved in TEC-related
    activities at your facility?
                   Total
                 Full-time
|i-> (d fn! ( < f
fs)
'col lo>!
(o>
fro'1
                        TEC
                      Full-time
                                  ' •,£• X X
                                X'-XXX
                                   x- x- x
                                XX XX
                                •x-xxx-
                                    x x -;
                                © -x x ex
                                 X X X X;
14.  For fiscal year 1992, please estimate your facility's total
    annual revenues, in dollars. If possible, approximate based
    on readily-available information at your facility.
                      Dollars
cs>! £ -'C'cs: • 03 .•£.
CD X X X X X X X X

      X'X X"®"®®
      -5} !X' -X 'X1 *^X C^' '"y
® ® X 'X X X ® X X
® ® X ® ® ® ® ® X
CD 'X X X 'X X- © © X
       D ® ® ® ® ® ®
® ® X -X- X X- ® ® X
                                                      15. For fiscal year 1992, please estimate your facility's total
                                                          annual revenues from transportation equipment cleaning
                                                          operations, in dollars. If possible, approximate based on
                                                          readily-available information.
Dollars


®-x
CD CD
•X
®
CD
®
X
®
Cl>
(&
•X
X
X
X
X
'£•

•x*'X
XX
nx
XX
XX
X X
XX
X®
,9./ ' St/

.JO
X
X
x
'X
£;
X
X
•x

(ST.X-
X X
•X £
'IP 5*1
~L a-
.&: e
X ,£
"E 'D
£ -5;

CD
X
x-
X
X
"g~-
-X
x-
'91

-.5)
X
.?.•
-^
c.
T;
7"
D
9",
                                                                 16. Darken in the ovals to indicate which questionnaire
                                                                     responses are confidential business information. Response
                                                                     to question(s):
                                                                                       7".
                                                                     Facility name, address, contact person and discharge rates
                                                                     can not be claimed confidential. Therefore, responses to
                                                                     Questions 1,2, 6, and 10 can not be considered confidential.
                                                                                 Please continue on
                                                                                         page 4
                                                             •3-
                                                           G-3

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If your response to Question 1 was "No", please provide:
Facility Name
Facility Street Address
KO. Box
City
                                                  State
Zip Code
For Question 2, Identify the person most knowledgeable of questionnaire responses:
Name
Title
Telephone Number
Best Time To Contact
If your response to Question 3 was "No", please provide:
Business Entity Name
Street Addrass/P.O. Box
City
                                                  State
   Zip Code
tf your response to Question 6 was "POTW", "CTW", "FOTW", or "Other Facility", please provide:
POTWName:	    '	
CTW Name:	
FOTW Name:
Other Facility Name:_
M your response to Question 8 included "Other", please specify the commodity or commodity group.
(1)
12)

H your response to Question 9 Included "Others", please specify the type of cleaning operation(s) performed.
(1) ' <3)
(¥l
141
It your response to Question 11 included "Others", please indicate the other wastewater treatment or disposal methods employed.
(1) (3)
(2)
<4> 	

Please provide any comments regarding your responses to the screener questionnaire. Please cross-reference your comments by question.
»,!

:~





, 	 . PLEASE DO NOT WRITE IN THIS AREA O fS H ft
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                                                       G-4

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