** EPA
Economic Impact Analysis of
Proposed Effluent Limitations
Guidelines and Standards for
the Metal Products and
Machinery Industry (Phase 1)
Dr. Lynne G. Tudor, Economist
Economic and Statistical Analysis Branch
Engineering and Analysis Division
Office of Science and Technology
U.S. Environmental Protection Agency
Washington, DC 20460
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ACKNOWLEDGEMENTS
Credit must be given to Bill Cleary, and the whole MP&M team for their professional
manner, conscientious effort, and contributions. Thanks must also go to Mary Belefski for her
detailed technical explanations of the many processes I observed during site visits and for
teaching me about the metals industry, and to Janet Goodwin for reviewing the EIA and
helping me understand the engineering principles used in the costs and loadings models for the
MP&M industry. I also want to thank Raffael Stein for his help in "data cleaning" and
tracking the status of the questionnaires.
Credit must also be given to Abt Associates for their assistance and support in
performing the underlying analysis supporting the conclusions detailed in this report. Their
study was performed under Contracts 68-CO-0080, 68-C3-0302, and 68-C4-0060.
Additional data used in this document was provided by Radian under contract
68-C4-0024.
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TABLE OF CONTENTS
Executive Summary ES. 1
Chapter 1. Introduction and Overview
1.1 Overview and Definitions 1.1
1.2 Summary of the Proposed Regulation 1.2
1.3 Selection of the Proposed Regulation 1.3
1.4 Structure of the Economic Impact Analysis 1.8
1.5 Organization of the Economic Impact Analysis Report 1.12
Chapter 2. Data Sources 2.1
2.1 Introduction 2.1
2.2 Primary Source Data 2.1
2.3 Secondary Source Data 2.2
Chapter 3. Profile of the MP&M Phase I Industry 3.1
3.1 Introduction 3.1
3.2 Overview 3.2
3.3 Comparative Characteristics of Phase I Sectors 3.8
3.4 Sector Pass-through Capabilities 3.15
Chapter 4. Facility Impact Analysis 4.1
4.1 Introduction 4.1
4.2 Overview of the Facility Impact Analysis Methodology 4.2
4.3 Baseline Closure Analysis 4.6
4.4 Post-Compliance Closure Analysis 4.13
4.5 Analysis of Financial Stress Short of Closure 4.22
4.6 Post-Compliance Closure Analysis 4.26
4.7 Estimated Facility Economic Impacts 4.30
Chapter 5. Labor Requirements of the Proposed Regulation 5.1
5.1 Introduction 5.1
5.2 Estimating the Direct Labor Requirements of the MP&M Rule 5.2
5.3 Estimating the Indirect and Induced Labor Requirement Effects
oftheMP&MRule 5.6
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Chapter 6. Community Impact Analysis 6.1
6.1 Introduction 6.1
6.2 Assessment of Community Impacts for Estimated Sample Facility Closures .... 6.2
6.3 Assessment of State-Level Employment Impacts 6.7
6.4 Assessment of State-Level Employment Impacts Including Possible
Employment Gains 6.12
Chapter 7. Foreign Trade Impacts 7.1
7.1 Introduction 7.1
7.2 Data Sources 7.1
7.3 Methodology 7.2
7.4 Findings 7.9
Chapter 8. Assessment of Firm-Level Impacts 8.1
8.1 Introduction 8.1
8.2 Sources 8.2
8.3 Methodology 8.3
8.4 Results 8.8
Chapter 9. Impacts on New Sources 9.1
Chapter 10. Regulatory Flexibility Analysis 10.1
10.1 Introduction 10.1
10.2 Defining Small Entities 10.3
10.3 Small Business in the MP&M Industry 10.5
10.4 Impact of the Proposed Regulation on Small Business 10.9
References Ref. 1
Appendix A. Cost of Capital Methodology A.I
A. 1 Overview of Real Weighted Average, After-Tax Cost of Capital A.I
A.2 Calculating the Facility Interest Rate A.2
A.3 Calculating the Facility Cost of Equity A.2
A.4 Facility Debt and Equity Weightings A.3
A.5 Calculating the Weighted Average Cost of Capital A.4
A.6 Adjusting for Inflation A.4
Appendix B. Summary of Threshold Values for Analysis of Financial Stress Short of Closure ..B.I
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Executive Summary
Introduction
This Economic Impact Analysis (EIA) assesses the economic impact of proposed effluent
limitations guidelines and standards for the Metal Products and Machinery Industry, Phase I (MP&M
industry). The MP&M Phase I regulations apply to 7 industrial sectors that are of substantial importance
in the US economy: Hardware, Aircraft, Electronic Equipment, Stationary Industrial Equipment, Ordnance,
Aerospace, and Mobile Industrial Equipment. The proposed regulation includes limitations 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 EIA estimates the economic
effect of compliance with the proposed regulation in terms of closures among existing MP&M facilities and
associated losses in employment. In addition, the EIA analyzes additional impact categories, including:
community impacts, international trade effects, firm-level impacts, labor requirements of compliance, and
effects on new facilities. The EIA also presents a Regulatory Flexibility Analysis detailing the small
business impacts of the proposed regulation.
This Executive Summary summarizes the major elements of the EIA, including a review of: (1)
major data sources for the analysis; (2) the MP&M industry and the facilities potentially subject to
regulation; (3) regulatory options considered and selection of the proposed options; (4) methodology and
findings for the facility impact analysis; (5) findings of the other impact analyses labor requirements,
community level impacts, international trade effects, firm-level impacts, and new source impacts; and (6)
the Regulatory Flexibility Analysis (small business impacts).
Data Sources for the Economic Impact Analysis
The most important data for the economic impact analysis are the responses to the technical and
economic questionnaire distributed to 1,020 MP&M facilities under the authority of Section 308 of the
Clean Water Act (the Data Collection Portfolio or DCP). After detailed data cleaning and validation
activities, the responses for 396 facilities, representing an estimated population of 10,601 water-
discharging facilities in the MP&M industry, were used in the industry impact analysis. EPA analyzed the
economic impacts of the regulatory options on the basis of these sample facilities. The sample facility
impacts were extrapolated to the level of the MP&M industry population using facility sample weights that
are based on the sample design for the Section 308 survey.
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Data obtained from the DCP include: three years (1987-89) of income statements and balance
sheets at the facility level; the composition of revenues by customer type and MP&M business sector;
estimated value of facility assets and liabilities in liquidation; borrowing costs; ownership of the facility
business and total revenues of the owning entity (if separate from the facility); and a characterization of the
competition faced in various markets. Secondary sources supplemented these data for characterizing
background economic or financial conditions in the MP&M industry. Important secondary sources included
the Census and Annual Surveys of Manufactures, published by the Department of Commerce.
Other vital data for the economic analysis are the estimates of capital and operating costs for
complying with regulatory options. EPA developed these estimates from engineering studies of the sample
facilities. These studies took into account the characteristics of effluent discharges and existing treatment
systems at the facilities and estimated the additional pollution prevention and treatment system needs for
complying with the alternative regulatory options. The estimated capital costs and annual operating and
maintenance costs for pollution prevention and treatment systems provided the basis for assessing how an
effluent guideline would be likely to affect the financial performance and condition of MP&M facilities and
whether those facilities might be expected to incur significant economic impacts.
Overview of the MP&M Industry and the Facilities Potentially Subject to Regulation
From secondary source data (Department of Commerce), EPA estimates that approximately
90,000 establishments or facilities participated in the MP&M Phase I business sectors as of 1987. Thus,
the estimated 10,601 water-discharging facilities (from Section 308 Survey data) that would potentially be
affected by this regulation represent about 11 percent of the total facilities in the MP&M Phase I business
sectors. Of the 10,601 water-discharging facilities, EPA estimates that 8,706 facilities are indirect
dischargers (i.e., they discharge effluent to a POTW) and would thus be subject to Pretreatment Standards
for Existing Sources (PSES). The remaining 1,895 facilities are estimated to be direct dischargers (i.e.,
they discharge effluent directly to a waterway under a NPDES permit) and will thus be subject to Best
Available Technology Economically Achievable (BAT) and Best Practicable Control Technology Currently
Available (BPT) requirements.
The MP&M facilities that are expected to be subject to this regulation contribute significantly to
the U.S. economy. Table ES-1, below, summarizes important economic data for the estimated 10,601
water-discharging facilities that are potentially subject to regulation. These data show that, in 1989, the
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Table 1S-1; Suatwaty Jfctfa for *<«£for Facilities Subject to Regulation in MP&M Phase I Sectors
Estimated Revenue, Value Added and Payroll in Millions of 1989 Dollars
Sector
Hardware
Aircraft
Electronic Equipment-
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
All Phase I Sectors
Total U.S. Manufacturing
Phase I Facilities as a Percent of
Total U.S. Manufacturing
facilities
4,197
L_ 856
1,280
2,769
190
545
764
10,601
Employment
379,000
552,000
700,000
419,000
131,000
580,000
275,000
3,036,000
19,492,000
15.58%
Revenue
44,327
96,715
155,101
52,918
21,666
54,430
65,914
491,071
2,793,000
17.58%
Value Added
9,463
24,858
80,502
12,815
7,059
19,454
14,101
168,252
1,308,000
12.86%
Payroll
5,845
15,148
12,503
6,306
4,006
9,660
8,151
61,620
533,000
11.56%
Source: U.S. Environmental Protection Agency, Section 308 Survey Data, 1989, and Statistical Abstract of
the United States, 1992, Department of Commerce
10,601 facilities potentially subject to regulation employed over 3,000,000 persons or approximately 16
percent of the total U.S. manufacturing employment of 19.5 million.1 Total revenues for the 10,601
facilities are estimated at $491 billion or about 18 percent of the total shipments for U.S. manufacturing of
$2,793 billion. Value added, a more meaningful measure of the value of production activity, is estimated to
amount to about $168 billion or approximately 13 percent of the total value added of $1,308 billion for
U.S. manufacturing. The estimated payroll for the 10,601 facilities is about $62 billion or approximately
12 percent of the total of $533 billion for U.S. manufacturing in 1989.
Table ES-1 also shows economic activity data for the seven MP&M Phase I sectors. In terms of
number of facilities, the Hardware, Stationary Industrial Equipment, and Electronic Equipment sectors are
the largest sectors subject to regulation. These three sectors account for over 75 percent of the facilities
expected to be subject to regulation. However, in terms of employment and dollar measures of activity, the
Hardware sector is less dominant. A ranking on both employment and value added shows that Electronic
Equipment is the largest sector in terms of economic contribution followed by Aircraft, Aerospace,
Stationary Industrial Equipment, Mobile Industrial Equipment, Hardware, and Ordnance.
1 Although the MP&M Phase I sectors include non-manufacturing activities and employment, nearly 95 percent of
the revenue received by facilities affected by the regulation is estimated to be derived from manufacturing
activities. Thus, the comparison of employment and other economic values with totals for the U.S. manufacturing
sector provides a relevant basis for understanding the economic significance of the industries and facilities
expected to incur costs under the regulation.
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Overview of Options Considered for Proposal and Selection of the Proposed Options
In developing the regulatory proposals, EPA defined and evaluated a number of PSES regulatory
options for indirect dischargers and BAT/BPT options for direct dischargers. The following discussion
defines the options that were considered for proposal and outlines the rationale for the regulatory proposals.
PSES Options for Indirect Dischargers
EPA initially evaluated three PSES regulatory options for indirect dischargers:
Option 1: Under this option, PSES would be established on the basis of the application of lime and
settle treatment without any pollution prevention and flow controls imposed. In
implementing Option 1, Control Authorities would likely impose concentration-based
standards on facilities.
Option 2: Option 2 adds in-process flow reduction to lime and settle treatment. This option would
establish PSES such that all facilities should comply with mass-based standards based on
the proposed concentration standards and an appropriate flow that should reflect good
pollution prevention and water conservation practices. Thus, Option 2 embodies a
requirement for pollution prevention and water conservation in conjunction with lime and
settle treatment. The flow basis would be determined by the relevant Control Authority,
using site specific factors and flow guidance.
Option 3: Option 3 includes all of the Option 2 technologies plus advanced end-of-pipe treatment.
Reverse osmosis or ion exchange would remove additional suspended and dissolved solids
and yield a treated wastewater that can be recycled as process water.
EPA initially selected Option 2, In-Process Flow Reduction and Pollution Prevention and Lime
and Settle Treatment., as the preferred PSES regulatory option. Option 2 imposed relatively small economic
impacts and achieved considerably greater pollutant removals than Option 1, while costing less than Option
3. However, additional analyses of Option 2 identified three issues that weighed against its proposal as the
basis for PSES effluent guidelines:
Impact on small business. In the Regulatory Flexibility Analysis, EPA found that Option 2 would
disproportionately burden small business-owned facilities in terms of facility closures and financial
requirements. This higher burden arose from Option 2's technology requirements for pollution
prevention as well as treatment systems.
Cost effectiveness. For indirect discharging facilities with smaller discharge volumes, EPA found
that Option 2 would not be cost effective. That is, for facilities with smaller discharge volumes,
Option 2 would not achieve sufficient additional reductions in pollutant discharges beyond those
achieved by Option 1 to support its higher cost relative to Option 1.
Impact on permitting authorities. By requiring mass-based permits for all indirect discharging
facilities, Option 2 could substantially burden permitting authorities. In particular, as part of the
public participation in the regulation development process, the Association of Metropolitan
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Sewerage Agencies commented that covering small discharge facilities under mass-based
limitations would unduly burden permitting authorities.
On the basis of these findings, EPA defined and evaluated two additional PSES regulatory options
for indirect discharging facilities: Option la and Option 2a.
Option la: This option would establish a tiered PSES requirement depending on the annual
discharge volume at a given MP&M facility. For 'low" flow facilities, defined as
discharging less than 1 million gallons per year (gpy), PSES would require that they
comply with the concentration standards proposed. For 'large" flow facilities, with
discharge volumes of 1 million gpy or greater, PSES would require that mass-based
standards be imposed, based on the proposed concentration standards and an appropriate
flow volume that should reflect good pollution prevention and water conservation
practices.
Option 2a: To further reduce the regulatory burden associated with smaller facilities, EPA developed
an option based on in-process reduction and pollution prevention and lime and settle
treatment for large flow sites. This option would establish the same PSES requirements
as specified in Option 2, but would apply to only the large flow facilities with discharge
volumes of at least 1 million gpy. Facilities with discharge volumes of less than 1
million gpy would not be subject to PSES requirements, thus exempting over 75 percent of
the estimated 8,706 indirect dischargers from PSES requirements.
EPA found that both options addressed the issues described above and presented superior
alternatives to Options 1, 2, or 3, alone, for regulatory proposal. However, EPA found that Option 2a
provided a better solution than Option la for each of the issues concerning Option 2. Accordingly, EPA is
proposing Option 2a as the preferred PSES option for indirect discharging facilities.
BAT/BPT Options for Direct Dischargers
EPA evaluated three BAT/BPT regulatory options for direct discharging facilities:
Option 1: Under this option, BAT/BPT would be established on the basis of the application of lime
and settle treatment without any pollution prevention and flow controls imposed.
Option 2: Option 2 but adds in-process pollution prevention and flow to the lime and settle
treatment, which is the technology basis of Option 1.
Option 3: Option 3 includes the same treatment technology and in-process pollution prevention and
flow controls as set forth in Option 2 plus advanced end-of-pipe treatment through
reverse osmosis or ion exchange to achieve additional removals and produce a treated
wastewater that can be recycled back to the facility for reuse as process waters.
Of these options, EPA selected Option 2 as the proposed BPT/BAT regulation for direct existing
discharging facilities. Option 2 embodies best available technology for reducing effluent discharges and is
expected to impose modest economic impacts in terms of facility closures, employment losses, and financial
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requirements. EPA also found that Option 2 is cost effective. Finally, EPA concluded that Option 2 (in
combination with Option 2a for indirect dischargers) would impose a modest and manageable burden
among small business-owned, direct discharging facilities.
Analysis of Regulatory Impacts on Existing MP&M Facilities
The analyses supporting the determination of economic achievability for the proposed regulation
include a facility impact analysis, which assesses how facilities are expected to be affected financially by
the proposed regulation. Key outputs of the facility impact analysis include expected facility closures, and
associated losses in employment and economic output in those facilities. The findings from the facility
impact analysis provide the basis for the other analyses concerning economic achievability.
The evaluation of facility-level impacts includes three separate analyses:
1. Baseline Closure Analysis, which identifies facilities that are in jeopardy of financial failure
regardless of the promulgation of effluent guidelines. Facilities failing this analysis are excluded
from the post-compliance analyses.
2. Post-Compliance Closure Analysis, which identifies facilities that are likely to close instead of
implementing the pollution prevention and treatment systems needed for regulatory compliance.
The post-compliance closure analysis differs from the baseline analysis by accounting for the
capital and operating costs of these systems. Facilities failing this analysis are projected to close as
the result of regulation, a severe economic impact
3. Analysis of Financial Stress Short of Closure, which identifies facilities with limited ability to
finance the pollution prevention and treatment systems needed for effluent guidelines compliance.
Facilities failing this analysis are likely to experience financial weakness as the result of regulation,
a moderate economic impact
The Baseline and Post-Compliance Closure Analyses involve a two-part test. The first part
compares a facility's going concern value to its liquidation value. The second part assesses whether after-
tax cash flow is negative. Facilities with negative cash flow and a liquidation value that exceeds going
concern value are designated as estimated facility closures. The Analysis of Financial Stress Short of
Closure compares measures of facility profitability and debt burden to industry standards to estimate the
number of facilities that are likely to experience moderate impacts short of closure. These analyses were
performed separately for direct and indirect dischargers and also under two different cases regarding the
ability of facilities to pass compliance costs on to customers. The findings from the analysis of sample
facilities were extrapolated to the MP&M population level using facility sample weights. The findings from
the facility impact analysis are summarized below.
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Baseline Closure Analysis
Of the estimated 10,601 discharging'facilities. 13.9 percent or 1,471 facilities were assessed as
baseline closures. The 1,471 baseline closures include 1,413 indirect dischargers, or 16.2 percent of
indirect dischargers, and 58 direct dischargers, or 3.1 percent of direct dischargers.
Post-Compliance Impact Analysis
The findings from the post-compliance analyses are summarized below: for the PSES options
considered for indirect discharging facilities; for the BAT/BPT options considered for direct discharging
facilities; and in aggregate for the proposed PSES and BAT/BPT options for both discharger classes. The
following discussion is based on the conservative zero-cost-pass-through analysis, in which facilities were
assumed to recover none of their compliance costs by increasing prices to consumers. The EIA also
contains a more realistic partial-cost-pass-through analysis, which generally yields fewer impacts than the
zero-cost-pass-through analysis. However, EPA found the facility impacts of the proposed options to be
very modest under the zero-cost-pass-through case and based its selection of the proposed options on the
findings from this case.
Indirect Dischargers
For indirect discharging facilities, EPA analyzed the impacts of five possible PSES regulatory
options the initially defined Options 1, 2, and 3, and the subsequently defined Options la and 2a as
discussed above. As shown in Table ES-2, the estimated total annual after-tax costs of compliance ranged
from a low of $142 million under the proposed Option 2a to a high of $616 million under Option 3 (all
compliance cost and impact values are in 1994 dollars). Estimated facility closures follow a similar pattern,
ranging from a low of 7 facilities under Option 2a to a high of 227 under Option 3. The accompanying
employment losses range from 540 fiill-time equivalent jobs (FTEs) under Option 2a to 18,215 FTEs for
Option 3. As described above, from this analysis, EPA found that both Options 1 and 2 were economically
achievable. However, other considerations led EPA to consider Options la and 2a. As summarized in Table
ES-2, the impacts of the proposed Option 2a in terms of facility closures, employment losses, and total
compliance cost are small in relation to the other options, including Option la.
Direct Dischargers
For direct discharging facilities, EPA analyzed the impacts of three possible BAT/BPT regulatory
options: Options 1, 2, and 3. As shown in Table ES-3, the estimated total annual after-tax costs of
compliance ranged from a low $16 million for Option 1 to $64 million for Option 3. Under both Options 1
and 2, EPA estimated 18 facility closures with accompanying employment losses of 158 FTEs. Under
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Table ES-fc Estimated Impacts of Regulatory Compliance, Indirect Dischargers
(Zero-Cost-Pass-Through Case, aU dollar vames in 5000,1994)
Facilities in Analysis
Severe Impacts (closin
Number of Facilities
Percent of Class
Employment (FTEs)
Value of Shipments
Options Initially Considered for Proposal
Option 1 Option 2 Option 3
7,293
7,293
7,293
Subsequent Options
Option la Option 2a
7,293
1,792
e facilities)
161
2.20%
3,001
$369,997
151
2.07%
2,354
$235,852
227
3.11%
18,215
$2,350,346
151
2.07%
2,354
$235,852
7
0.40%
540
$133,678
Moderate Impacts (financial stress short of closure)
Number of Facilities
42
124
184
54
12
Financial Impacts on Complying Facilities
Capital Cost
$275,798
$436,293
$1,174,721
$437,209
$350,853
Total Annual Compliance Cost
Tax-adjusted"
No adjustments*
$202,115
$271,020
$213,530
$267,544
$615,530
$783,691
$208,639
$259,994
$142,467
$171,134
" "Tax-adjusted" compliance costs are an estimate of the annual cash compliance cost to industry and reflect
private costs of capital and expected tax treatment of capital outlays and annual expenses.
* Compliance costs with "No adjustments" are an estimate of the total annual cost of compliance without tax
adjustments and with capital costs annualized on the basis of a real social discount rate.
Source: U.S. Environmental Protection Agency
Option 3 closures, EPA estimated 90 facilities would close with employment losses of 7,339 FTEs. From
this analysis, EPA found that both Options 1 and 2 would be economically achievable and selected
Option 2 for proposal because, by including in-process pollution prevention, it embodies treatment
technology and performance that is superior to Option 1.
Aggregate Impacts of the Combined Regulatory Proposal for Existing Facilities: Option 2a for
Indirect Discharging Facilities and Option 2 for Direct Discharging Facilities
Aggregate impacts for both indirect and direct discharging facilities are summarized in Table ES-4
for the proposed regulatory options applicable to existing facilities: Option 2a for indirect dischargers
(PSES) and Option 2 for direct dischargers (BAT/BPT).2 Overall, 3,629 facilities passed the Baseline
Closure analysis (1,837 direct discharging facilities and 1,792 'large flow" indirect discharging facilities)
and thus are expected to be subject to regulation. Of this population, 25 facilities or 0.7 percent are
expected to close as a result of regulation. The total employment loss amounts to 698 FTEs (0.03 percent
of the total employment in facilities passing the baseline analysis and thus potentially subject to regulation)
and the associated value of lost shipments amounts to $140 million (0.03 percent of the total shipments in
The impact analysis results for Option 2a/2 are the same throughout for both the zero-cost-pass-through and
partial-cost-pass-through cases.
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Table ES-3; Estimated impacts of Regulatory Compliance* Birect Dischargers
(Zkro-Cost-Pass-Through Case, dollar values in $800, J$94)
Option 1 Option % Option 3
Facilities in Analysis
1,837
1,837
1,837
Severe Impacts (closing facilities)
Number of Facilities
Percent of Class
Employment (FTEs)
Value of Shipments
18
0.96%
158
$6,161
18
0.96%
158
$6,161
90
4.92%
7,339
$883,577
Moderate Impacts (financial stress short of closure)
Number of Facilities
6
0
0
Financial Impacts on Complying Facilities
Capital Cost I $47,363
$63,269
$127,369
Total Annual Compliance Cost
Tax-adjusted
No adjustments
$16,297
$18,181
$18,136
$19,137
$63,979
$80,523
Source: U.S. Environmental Protection Agency
facilities passing the baseline analysis and thus potentially subject to regulation). In addition to the
estimated closures, a modest 12 facilities are expected to encounter financial stress short of closure.
Summed over both indirect and direct discharging facilities, the total capital costs of compliance amount to
$414 million. Total annualized costs of compliance are estimated at $161 million, when calculated on an
after-tax basis using private costs of capital.
Other Impact Measures
EPA also analyzed the additional impact measures labor requirements, community impacts,
foreign trade impacts, firm-level impacts, and new source impacts for the proposed regulation:
Option 2a for indirect dischargers and Option 2 for direct dischargers (Option 2a/2).
Labor Requirements of Compliance
The manufacturing, installation, and operation of equipment and processes for complying with the
MP&M regulation will require labor resources. To the extent that these labor requirements translate into
employment increases in complying firms, the regulation may generate employment benefits that offset
employment losses in closing facilities. Accordingly, EPA estimated the labor requirements of compliance
taking into account both primary labor needs for manufacturing, installing and operating compliance
equipment and secondary requirements in other affected industries. From this analysis, EPA estimated an
annual direct labor requirement of 1,594 FTEs with corresponding payments to labor of $90 million
($1994). Thus, the additional labor requirements for complying with the proposed regulation may exceed
the estimated 698 job losses in closing facilities. Taking into account both primary and secondary
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Table ES-4; Estimated Aggregate Impacts of Regulatory Compliance
Proposed Regulatory Options 2a and 2 for Indirect and Direct Dischargers
(dollar values in $000, J994)
,, Option 2a Option 1 Sum for
, t Ondireet , (Direct Botfc Classes
Facilities in Analysis 1,792 1 837 3 629
Severe Impacts (closing facilities)
Number of Facilities
Percent of Class
Employment (FTEs)
Value of Shipments
7
0.39%
540
$133,678
18
0.96%
158
$6,161
25
0.69%
698
$139,839
Moderate Impacts (financial stress short of closure)
Number of Facilities
12
0
Financial Impacts in Complying Facilities
Capital Cost | $350,853
$63,269
$414,122
Total Annual Compliance Cost
Tax-adjusted
STo adjustments
$142,467
$171,134
$18,136
$19,137
$160,602
$190,270
Source: U.S. Environmental Protection Agency
employment effects, EPA estimated that the total labor requirements of the proposed Option 2a/2 would
range from 3,900 to 6,400 FTEs.
Community Impacts
The employment losses from facility closures affect not only the people that were employed by the
facility, but may also cause broader employment impacts in the communities in which the closing faculties
are located. EPA assessed community impacts by comparing community- and state-wide employment
losses to the total employment in the communities and states in which estimated facility closures are
located. The estimated employment losses include both primary employment effects among MP&M
facilities and, by applying Department of Commerce multipliers, secondary employment effects in linked
industries and in consumer-oriented retail and service industries. From this analysis, EPA found that no
affected communities or states would be expected to incur employment losses exceeding one percent of total
employment, the threshold of significant impact. Indeed, when possible labor requirements of compliance
were taken into account, all states but California, which has an estimated net employment loss of 69 FTEs,
showed net gains in employment as a result of the proposed regulation.
Foreign Trade Impacts
EPA assessed foreign trade impacts in terms of the change in net exports (i.e., exports minus
imports) by allocating revenues lost by closing facilities between domestic and foreign producers according
to a range of possible outcomes. The worst-case outcome allocated all the former exports of closing
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facilities to foreign producers, and all the former domestic sales of these closing facilities to imports from
abroad. The best-case outcome assumed that domestic facilities would retain all the domestic and export
revenues lost by closing facilities. An intermediate case allocated the closing facilities' lost revenues
between domestic and foreign facilities in proportion to measures of the historical competitiveness of
domestic facilities in international markets. EPA assigned facilities to one of these cases based on
Department of Commerce trade data for the MP&M industry and Survey data characterizing competition
in export and domestic markets. From this analysis, EPA estimates that exports will not be measurably
affected by compliance with the proposed regulation, while imports are estimated to increase by
approximately $5.3 million, or 0.01 percent of the 1991 imports of the MP&M Phase I industry
commodities. The net effect on the trade balance is therefore a decline of $5.3 million, or approximately
0.01 percent of the current trade balance in MP&M Phase I industry commodities.
Impacts on Firms Owning MP&M Facilities
Because the impacts at the level of the firm may exceed those assessed at the level of the facility,
particularly when a firm owns more than one facility that will be subject to regulation, EPA also conducted
a firm-level impact analysis for the MP&M regulation. EPA estimated financial impacts on firms based on
sampled facility impacts and on a range of the total possible share of firm revenues earned by activities
subject to the effluent guideline. Because the sample of facilities was not designed to be a random sample
of firms, EPA performed this analysis for sampled firms only and did not make national estimates of firm-
level impacts. Of those firms passing the baseline firm financial analysis, EPA found that only one firm
failed the post-compliance analysis under Option 2a/2. The single adversely affected firm is a single facility
firm and accounts for less than 0.0001 percent of revenues earned by all 255 sampled firms in the firm-
level impact analysis. From this analysis, EPA finds that firm-level impacts are not likely to be significant.
Impacts on New Sources
Because the proposed regulation includes limitations that will apply to new direct and indirect
discharging sources within the MP&M Phase I category, EPA also examined the impact of these new
source regulations to determine if they would impose an undue economic and financial burden on new
sources seeking to enter the MP&M Phase I industry.
EPA proposes to set New Source Performance Standards (NSPS), which apply to new facilities
that discharge directly to receiving waters, on the basis of the Best Achievable Technology (BAT)
limitations as specified by the proposed Option 2 for existing direct dischargers. Thus, the new source
limitations for direct dischargers are the same as those proposed for existing direct discharge facilities.
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Because new sources can include compliance equipment and related processes in plant designs before
construction and generally at lower cost than for retrofit applications, EPA believes that new sources will
be able to comply at costs that are similar to or less than those for existing sources. Accordingly, EPA
concludes that the Option 2 requirement for new source direct dischargers will be economically achievable.
In addition, EPA proposes to set Pretreatment Standards for New Sources (PSNS), which apply to
new indirect discharging facilities (i.e., that will discharge to POTWs), on the basis of the discharge
limitations in PSES Option 2, as analyzed for existing indirect discharging facilities. However, for new
indirect dischargers, the proposed PSNS limitations will apply the mass-based limitations of Option 2
regardless of the new facility's discharge volume. Thus, the new source limitations for indirect discharging
facilities will differ from the PSES limitations proposed for existing indirect discharge facilities by not
exempting low flow dischargers (i.e., with flow of less than 1,000,000 gallons per year) from regulation.
However, in its analysis of regulatory impacts on existing facilities, EPA found that the mass-based
limitations of PSES Option 2 would be economically achievable by indirect discharging facilities regardless
of discharge volume. For this reason, EPA concludes that the new source limitations applicable to new
indirect discharging facilities will also be economically achievable by new low flow indirect discharging
facilities.
Regulatory Flexibility Analysis
In accordance with the requirements of the Regulatory Flexibility Act (Public Law 96-354), EPA
performed a Regulatory Flexibility Analysis of the proposed regulation. The purpose of the Regulatory
Flexibility Act is to ensure that, while achieving statutory goals, government regulations do not impose
disproportionate impacts on small entities.
In developing the proposed regulation, EPA balanced several factors, including: the need for
additional reduction in effluent discharges from the MP&M industry; the fact that the MP&M industry is
largely comprised of small business entities; and the need to achieve additional reduction in effluent
discharges without imposing unreasonable burdens on small entities. As a result of these considerations,
EPA expressly framed the proposed regulation to reduce impacts on small entities. Specifically, EPA
settled on the proposed regulation for indirect dischargers, Option 2a, after considering and rejecting the
initial Option 2. On the basis of the facility impact analyses, EPA determined that Option 2 would be
economically achievable by indirect discharging facilities. In accordance with this finding, EPA initially
considered adopting the mass-based requirements of Option 2 for all indirect discharging facilities.
However, further analysis indicated that Option 2 would place substantial financial burdens on smaller
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facilities and, moreover, could burden permitting authorities by requiring that mass-based standards be
written for all indirect discharging facilities, regardless of size and amount of discharge reduction to be
achieved. For these reasons, EPA defined and evaluated two additional options: Option la, which applies
the Option 2 requirements to large flow facilities and the modestly less stringent Option 1 requirements to
low flow facilities; and Option 2a, which applies the requirements of Option 2 to large flow facilities while
exempting low flow indirect discharging facilities from regulation. EPA found that both of these additional
options would mitigate the burden of regulation on small businesses and permitting authorities. However,
EPA found that the latter option, Option 2a, much more substantially reduced the closure impacts and
financial burdens among MP&M facilities owned by small business and, as well, the regulatory
implementation burden on permitting authorities. After considering other factors that also favored
Option 2a namely, cost effectiveness EPA decided to propose Option 2a as the PSES option for
indirect discharging facilities.
In performing the Regulatory Flexibility Analysis, EPA found that the MP&M Phase I industry is
largely comprised of small business entities and, accordingly, the regulation is expected to apply to a
substantial number of small entities. On the basis of Small Business Administration (SBA) firm-
employment size criteria, EPA estimated that over 75 percent of the estimated 10,601 water discharging
facilities in the MP&M Phase I industries are owned by a small business. With over 75 percent of the
facilities to which the regulation is expected to apply defined as small businesses, EPA also examined the
employment size distribution of the MP&M facilities to gain provide additional insight into how smaller
facilities are likely to be affected by the proposed regulation. From the analysis of the facility employment
distribution, EPA estimated that 25 percent of water-discharging facilities have 9 or fewer employees and
that 50 percent of water-discharging facilities have 79 or fewer employees. For its analysis, EPA used both
the estimated business-size classification of the firms owning MP&M facilities and the facility
employment-size classifications to gauge the extent of impacts among small entities.
To gauge whether the proposed regulation would have a significant impact on a substantial number
of small entities, EPA considered the level of closure impacts and compliance costs expected to be imposed
on small entities.
Closure Impacts
While finding that closure impacts are concentrated among small entities, EPA also found that the
expected level of closures under the proposed Option 2a/2 is extremely low for the small entity
categorizations analyzed: 0.4 percent of small business-owned facilities; 0.9 percent of facilities with 9 or
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fewer employees; and 0.2 percent of facilities with 10 to 79 employees. In addition, closures among the
small entity categorizations were substantially higher for all the other options analyzed. Overall, EPA finds
that the rate of expected facility closures among small business entities is well within acceptable bounds.
Compliance Cost Impacts
EPA assessed compliance cost impacts in terms of (1) the total annual compliance costs expected
to be imposed on facilities according to business size and (2) total annual compliance cost as a percentage
of facility revenue as a measure of the relative burden of compliance costs. Both of these analyses showed
that the financial burdens on small business entities will be very modest under the proposed Option 2a/2.
Specifically, the aggregate compliance cost burden on small business entities langed from 40 percent to 90
percent less (based on small entity definition) under Option 2a/2 than under the combined Option 2 for
indirect dischargers and direct dischargers. In terms of cost as a percentage of revenue, EPA estimated that
total annual compliance costs among small business-owned would average only 0.11 percent of revenue for
the proposed Option 2a/2. Moreover, EPA found that a very small percentage of small business-owned
facilities, only 0.26 percent, are expected to incur total annual compliance costs exceeding 5 percent of
revenue under Option 2a/2.3
Small Business Impact Finding
In view of this analysis and in recognition of the Agency's efforts, as summarized above, to define
the proposed option in a way that would reduce impacts to small entities, EPA concluded that the facility
closure impacts and compliance cost burdens of the proposed option will not constitute an undue impact on
small business entities. Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 605(b), the
Administrator certified that the proposed regulation will not have a significant economic impact on a
substantial number of small entities.
In previous regulations, EPA has judged annual compliance costs that are less than five percent of facility
revenue as not likely to impose a significant financial burden on the complying entity
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Chapter 1
Introduction and Overview
1.1 Overview and Definitions
The Federal Water Pollution Control Act Amendments of 1972 established a comprehensive program
to "restore and maintain the chemical, physical, and biological integrity of the Nation's waters" (Section 101(a)).
To implement these amendments, the U.S. Environmental Protection Agency (EPA) issues effluent limitations
guidelines and standards for categories of industrial dischargers. The regulations that the EPA establishes are:
Best Practicable Control Technology Currently Available (BPT). These rules apply to
existing industrial direct dischargers, and generally cover discharge of conventional pollutants.1
Best Available Technology Economically Achievable (BAT). These rules apply to existing
industrial direct dischargers and the control of priority and non-conventional pollutant
discharges.
Best Conventional Pollutant Control Technology (BCT). BCT rules are an additional level
of control beyond BPT for conventional pollutants.
Pretreatment Standards for Existing Sources (PSES). These rules apply to existing indirect
dischargers (i.e., facilities whose discharges enter Publicly Owned Treatment Works, or
POTWs). They generally cover discharge of toxic and non-conventional pollutants that pass
through the POTW or interfere with its operation. They are analogous to the BAT controls.
New Source Performance Standards (NSPS). These rules apply to new industrial direct
dischargers and cover all pollutant categories.
Pretreatment Standards for New Sources (PSNS). These rules apply to new indirect
dischargers and generally cover discharge of toxic and non-conventional pollutants that pass
through the POTW or interfere with its operation.
This Economic Impact Analysis (EIA) assesses the economic impact of the proposed effluent limitation
guidelines and standards for the Metal Products and Machinery (MP&M) Phase I Category (40 CFR 438). This
rulemaking proposes limitations 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).
1 Conventional pollutants are defined as biochemical oxygen demand (BOD), total suspected solids (TSS), fecal
coliform, oil and grease, and pH. Other pollutants may also be regulated at the BPT level.
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The proposed MP&M regulation incorporates pollution prevention and applies to discharges from plants
or portions of plants within MP&M Phase I industries that manufacture, maintain or rebuild finished metal parts,
products or machines from any base metal. Of an estimated 10,601 water discharging facilities in the MP&M
Phase I industries, EPA estimates that a total of 3,629 facilities will be subject to the proposed regulatory options.
These facilities include 1,792 indirect discharging facilities (i.e., which discharge effluent to a publicly owned
treatment works, or POTW) that will be subject to Pretreatment Standards for Existing Sources (PSES), and
1,837 direct discharging facilities (i.e., which discharge effluent directly to a waterway under a NODES permit)
that will be subject to Best Available Technology Economically Achievable (BAT) and Best Practicable Control
Technology Currently Available (BPT) requirements. The proposed PSES regulation for indirect dischargers is
expected to exempt from regulation 5,501 facilities with smaller effluent discharge volumes.2
1.2 Summary of the Proposed Regulation
The proposed regulations include BPT, BAT and BCT, PSES, NSPS and PSNS regulations. These are
discussed below.
Best Practicable Control Technology (BPT)
EPA proposes to establish concentration-based BPT limitations that reflect the best practicable
technology performance. The technology basis for BPT is end-of-pipe treatment using chemical precipitation
and sedimentation, commonly referred to as lime and settle technology. This treatment technology is widely used
for metal-bearing wastewaters. EPA also includes, as a basis of its BPT limits, treatment for oily wastes,
consisting of emulsion breaking and oil skimming, treatment to reduce hexavalent chromium to less soluble
trivalent form, and cyanide destruction. These preliminary treatment technologies are expected to be applied
when necessary. EPA also expects that BPT technology will reflect the pollution prevention controls to conserve
water usage and thus reduce the pollutant load on the discharge. Therefore, EPA proposes that BPT-based
NPDES permits be written to control the mass of pollutant discharged.
Best Available Technology Economically Achievable (BAT) and Best Conventional Pollutant
Control Technology (BCT)
EPA proposes to establish BAT and BCT limitations equivalent to BPT limitations.
2 EPA estimates that 1,471 of the 10,601 MP&M Phase I water discharging facilities are in significant jeopardy of
financial failure independent of the regulation. These facilities were excluded from the tally of facilities that are expected
to be subject to the proposed regulation or that are expected to be exempt from the proposed regulation.
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Pretreatment Standards for Existing Sources (PSES)
EPA proposes to establish PSES equivalent to BAT limitations. However, PSES are proposed to be
incorporated into industrial user permits as mass-based standards for "large volume" facilities (facilities that
discharge 1,000,000 gallons or more annually). Facilities with an annual discharge volume less than 1,000,000
gallons are not subject to the proposed PSES regulation.
New Source Performance Standards (NSPS)
EPA proposes to establish NSPS limitations equivalent to BAT limitations.
Pretreatment Standards for New Sources (PSNS)
EPA proposes to establish PSNS limitations equivalent to BAT limitations. The PSNS limitations apply
to all new indirect discharging sources regardless of discharge volume.
1.3 Selection of the Proposed Regulatory Options
EPA originally developed three regulatory options, but then, on the basis of further analysis, developed
two more options to apply specifically to existing indirect dischargers, described in the Pretreatment Standards
for Existing Sources section below.
Best Practicable Control Technology Options and Selection
EPA considered three regulatory options on which to base BPT limitations:
Option 1: Option 1 consists of end-of-pipe treatment with chemical precipitation followed by
clarification. The metals industry has widely and effectively used this treatment,
commonly called lime and settle treatment. Option 1, as well as the other regulatory
options, requires lime and settle end-of-pipe treatment for all process wastewaters,
since all waters are assumed to have metal pollutants in treatable concentrations. All
of the options include some preliminary treatment when needed to remove certain
specific pollutants. EPA has also included the contract hauling of any wastewaters
associated with organic chemical degreasing.
Option 2: Option 2 includes the end-of-pipe lime and settle treatment indicated in Option 1.
Option 2 then adds in-process pollution prevention controls that allow for recovery,
reuse of materials and water conservation. Recovery techniques or technologies, such
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Option 3:
as centrifugation or skimming for metal working fluids, or ion exchange for surface
treatment baths, can save money for companies, since they allow materials to be used
for a longer time before being discarded, or, in some instances, recover metal or metal
treatment solutions. Using these techniques along with water conservation generates
less pollution and results in more effective treatment of the wastewater that is
generated. Many of these techniques are already widely used in the MP&M industry,
and some have been incorporated into current regulations in the industry.
Option 3 includes all of the Option 2 technologies plus advanced end-of-pipe
treatment. Advanced end-of-pipe treatment would remove significant amounts of
suspended and dissolved solids and yield a treated wastewater that can be recycled as
process water.
EPA proposes to establish concentration-based limitations based on Option 2 technology. Lime and
settle treatment is the best technology widely practiced by MP&M facilities, and flow reduction technologies have
been an integral part of the technology basis in many effluent guidelines issued in the 1980's. EPA proposes to
require permit writers to convert the concentration-based limitations into mass-based limitations based on
MP&M flow guidance from the technical Development Document.
EPA did not select Option 1 because it excludes pollution prevention and therefore does not reflect the
best technology performance. EPA did not select Option 3 because of its high costs.
Best Conventional Pollutant Control Technology Option Selection
EPA considered whether or not to establish BCT effluent guidelines for MP&M Phase I facilities that
would attain larger reductions in total suspended solids (TSS) than the proposed BPT option (Option 2). The
primary technology identified to attain this further reduction in conventional pollutant discharges was the addition
of multi-media filtration to existing BPT systems.
EPA evaluated the costs of installing a polishing multi-media filter to remove an estimated additional
45 percent of the TSS discharged after lime and settle treatment. This estimated additional removal reflects the
reduced TSS concentrations seen when MP&M facilities used filters. Depending on effluent flow volume, the
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cost per pound of TSS removed ranged from $28 to $813 per pound.3 Since these costs exceeded EPA's POTW
cost test threshold of $0.25 per pound, EPA determined that multi-media filtration did not pass the cost test for
BCT regulations development. Therefore, EPA proposes to set BCT limitations equal to BPT Option 2
limitations.
Best Available Technology Economically Achievable Options and Selection
The BAT technology level represents the best existing and economically achievable performance. To
determine this technology, EPA considers factors such as the age of process equipment and facilities, the
processes employed, process changes, the engineering aspects of applying various types of control techniques,
the costs of applying the control techniques, economic impacts associated with the regulation, non-water quality
environmental impacts such as energy requirements, air pollution and solid waste generation, and other factors
that the Administrator deems appropriate.
The proposed BAT effluent guidelines apply to five priority pollutant metals, cyanide and two
nonconventional pollutant metals. EPA considered the same three options as the BPT options. EPA rejected
Option 1 because it did not include the pollution prevention and water conservation technologies that are widely
demonstrated at MP&M sites and have been included in the BAT technology for numerous previous effluent
guidelines in the metals industries. EPA rejected Option 3 because of the high cost.
Therefore, EPA proposes BAT limitations on the basis of Option 2. As with BPT, permit writers will
implement the concentration-based limits as mass-based limits based on flow guidance and an analysis of water
conservation and pollution prevention practices in use at the MP&M facility.
Pretreatment Standards for Existing Sources Options and Selection
In developing PSES for the MP&M Phase I indirect dischargers, the Agency originally considered three
options that were based on the same same treatment system and pollution technologies as the BPT/B AT options
considered for direct dischargers.
As with BPT/BAT, EPA initially selected Option 2, In-Process Flow Reduction and Pollution Prevention
and Lime and Settle Treatment, as the preferred PSES regulatory option Option 2 imposed relatively small
economic impacts and achieved considerably greater pollutant removals than Option 1, while costing less than
3 Estimated in 1976 constant dollars for representative facilities with flow volumes of greater than 1,000,000 gallons
per year and less than 10,000 gallons per year, respectively.
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Option 3. However, additional analyses of Option 2 identified three issues that weighed against proposing
Option 2 as the basis for PSES effluent guidelines:
Impact on small business, hi the Regulatory Flexibility Analysis, EPA found that Option 2 would
disproportionately burden small business-owned facilities in terms of facility closures and financial requirements.4
This higher burden arose from Option 2's technology requirements for pollution prevention as well as treatment
systems.
Cost effectiveness. For indirect discharging facilities with smaller discharge volumes, EPA found that
Option 2 would not be cost effective.5 That is, for facilities with smaller discharge volumes, Option 2 would not
achieve sufficient additional reductions in pollutant discharges beyond those achieved by Option 1 to support its
higher cost relative to Option 1.
Impact on permitting authorities. By requiring mass-based permits for all indirect discharging
facilities, Option 2 could substantially burden the authorities that administer the permit requirements, hi
particular, as part of the public participation in the regulation development process, the Association of
Metropolitan Sewerage Agencies (AMSA) commented that the permit administration requirements of covering
small discharge facilities under mass-based limitations would unduly burden permitting authorities. EPA
estimated that over 75 percent of the estimated 6,700 indirect discharging facilities discharge less than 1 million
gallons of effluent annually. Thus, EPA acknowledged that Option 2 would require a large number of permits
to be written for these smaller discharge volume facilities and could therefore impose a substantial burden on
permitting authorities.6
To address these issues, EPA developed two additional PSES regulatory options for indirect discharging
facilities: Option la and Option 2a.
* Chapter 10 presents the definitions and methodologies associated with the regulatory flexibility analysis.
5 See Cost-Effectiveness Analysis of Proposed Effluent Limitations Guidelines and Standards for the Metal
Products and Machinery Industry (Phase I).
6 See Chapter 6 and Appendix E of Regulatory Impact Assessment of Proposed Effluent Limitations Guidelines
and standards for the Metal Products and Machinery Industry (Phase I) for a detailed discussion of the administrative
burden of the proposed regulation on permit writing and enforcement authorities.
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Option la: This option would establish a tiered PSES requirement depending on the annual
discharge volume at a given MP&M facility. For "low" flow facilities, defined as
discharging less than 1 million gallons per year (gpy), PSES would require that they
comply with the concentration standards proposed. For "large" flow facilities, with
discharge volumes of 1,000,000 gpy or greater, PSES would require that mass-based
standards be imposed, based on the proposed concentration standards and an
appropriate flow volume that should reflect good pollution prevention and water
conservation practices.
Option 2a: To further reduce the regulatory burden associated with smaller facilities, EPA
developed an option based on in-process reduction and pollution prevention and
lime and settle treatment for large flow sites. This option would establish the same
PSES requirements as specified in Option 2, but would apply to only large flow
facilities with discharge volumes of at least 1 million gpy. Facilities with discharge
volumes of less than 1 million gpy would not be subject to PSES requirements, thus
exempting over 75 percent of the estimated 8,706 indirect dischargers from PSES
requirements.
EPA found that both options addressed the issues described above and presented superior alternatives
to Options 1, 2, or 3, alone, for regulatory proposal. However, EPA found that Option 2a provided a better
solution than Option la for each of the issues concerning Option 2. Because Option 2a would cover fewer
facilities, Option 2a would further reduce the burden on permit-writing authorities. In addition, low flow facilities
would bear no costs as a result of regulation, substantially reducing financial burdens and closure impacts among
small business-owned facilities. Finally, EPA found that Option 2a would achieve substantially better cost-
effectiveness than the other regulatory options, while embodying best available technology for reducing the
industry's discharges.
Accordingly, EPA chose Option 2a as the proposed PSES option for indirect dischargers because it
presents a balanced regulatory approach for reducing MP&M Phase I effluent discharges while not imposing
undue burdens on the industry or on permit-writing authorities.
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Pretreatment Standards for New Sources and New Source Performance Standards Selection
EPA proposes to set New Source Performance Standards (NSPS), which apply to new facilities that
discharge directly to receiving waters, on the basis of the Best Achievable Technology (BAT) limitations as
specified by the proposed Option 2 for existing direct dischargers. Thus, the new source limitations for direct
dischargers are the same as those proposed for existing direct discharge facilities. Because new sources can
include compliance equipment and related processes in plant designs before construction and generally at lower
cost than for retrofit applications, EPA believes that new sources will be able to comply at costs that are similar
to or less than those for existing sources. Accordingly, EPA found that the Option 2 requirement for new source
direct dischargers will be economically achievable.
In addition, EPA proposes to set Pretreatment Standards for New Sources (PSNS), which apply to new
indirect discharging facilities (i.e., that will discharge to POTWs), on the basis of the discharge limitations in
PSES Option 2, as considered for existing indirect discharging facilities. However, for new indirect dischargers,
the proposed PSNS limitations will apply the mass-based limitations of Option 2 regardless of the new facility's
discharge volume. Thus, the new source limitations for indirect discharging facilities will differ from the PSES
limitations proposed for existing indirect discharge facilities by not exempting low flow dischargers (i.e., with
flow of less than 1,000,000 gallons per year) from regulation. However, in its analysis of regulatory impacts on
existing facilities, EPA found that the mass-based limitations of PSES Option 2 would be economically
achievable by indirect discharging facilities regardless of discharge volume. For this reason, EPA concluded that
the new source limitations applicable to new indirect discharging facilities will also be economically achievable
by new low flow indirect discharging facilities.
1.4 Structure of the Economic Impact Analysis
This EIA describes both the methodology employed to assess impacts of the proposed rules and the
results of the analyses. The overall structure of the impact analysis is summarized in Figure 1-1. The two main
inputs to the analysis are: 1) data on industry baseline financial and operating conditions, and 2) projected costs
of complying with the proposed regulations. The industry baseline financial and operating data are based
principally on the 198:9 Machinery Manufacturing and Rebuilding Data Collection Portfolio (the Survey)7
conducted under Section 308 of the Clean Water Act.
7 Machinery Manufacturing and Rebuilding is the original designation of the Metal Products and Machinery Industry.
EPA later changed the name to better describe the industry.
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A sample of 396 facilities responding to the Survey form the basis for estimating certain characteristics
of the MP&M Phase I population of 10,601 effluent discharging facilities. The Survey asked for balance sheet
and income statement information, as well as quantitative and qualitative information regarding each facility's
dependence on market sectors, types of customers and business activity. Facilities were asked to characterize the
competition they faced in various markets. The Survey also gathered data regarding facility liquidation value,
cost of capital and the facility's owning firm. A copy of the economic portion of the Survey is attached as
Appendix A to the accompanying profile document, Industry Profile for the Metal Products and Machinery
Industry (Phase I). Secondary sources supplemented the Survey in providing financial data used for the EIA and
general industrial information presented in the Phase I profiles. The most important secondary source was the
Census and Annual Surveys of Manufactures.
The second major data input to the analysis is the projected costs associated with compliance with the
regulatory options. EPA developed these estimates based on engineering analysis of the sample facilities. They
were incorporated into the economic impact analysis by adding an annualized portion of the estimated capital cost
of compliance to the estimated annual operating and monitoring costs of compliance to yield a single, total
annualized compliance cost. The annualization of capital costs accounts for the facility's use of debt as well as
equity financing, and the tax effects associated with debt financing.
EIA:
To evaluate the expected impacts of the regulatory options, six measures of impact are examined in the
Impacts on MP&M Phase I facilities;
Employment increases associated with implementation of pollution prevention and control and
treatment technologies;
Employment losses and associated community effects;
Impacts on the U.S. balance of trade;
Impacts on firms owning one or more Phase I facilities expected to incur compliance costs;
Effects on the construction of new facilities and expansion of existing facilities, and
Impacts on MP&M facilities owned by small businesses.
The EIA methodology relies foremost on a facility-level impact analysis, the results from which then
drive the other components of the EIA (See Figure 1-1). The facility-level economic model estimates baseline
and post-compliance measures of profitability, debt burden and cash flow. The Baseline Closure Analysis and
Post-Compliance Closure Analysis yield estimates of the number of closures associated with the proposed options
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by applying a two-part test. The first part compares each facility's present value of future cash flow to its
liquidation value. The second part assesses whether or not a measure of total, after-tax cash flow is negative or
not. Facilities that have negative cash flow and whose liquidation value exceeds its present value of cash flow
are designated estimated facility closures. The Analysis of Financial Stress Short of Closure compares measures
of facility profitability and debt burden to industry standards to estimate the number of facilities that are likely
to experience moderate impacts short of closure.
Figure 1-1
Economic Impact Analysis of Metal Products and Machinery (Phase I)
Industry Effluent Limitations Guidelines: Analytic Components
Metal Products and
Machinery Industry
(Phase 1) Survey for
1989
Compliance Capital
& Operating Costs .
(including sludge treatment
& disposal)
Secondary Source Economic
and Financial Data
Data Inputs
Key Analytical Components
Analytical Outputs
To the extent that faculties purchase equipment or services to comply with the regulations, the proposed
guidelines may generate employment in industries that provide the equipment or services. For instance,
equipment installation, operations, maintenance and design and monitoring services are all associated with jobs.
The labor requirements analysis uses input-output coefficients calculated by the Department of Commerce to
estimate the increase in employment induced by regulatory compliance expenditures.
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Employment losses due to projected facility closures affect not only the people that were employed by
the facility, but they may also cause broader employment impacts in the communities in which the closing
facilities are located. EPA assessed community impacts by comparing geographically defined community-wide
employment losses to the size of total employment in the communities and states in which estimated facility
closures are located. The estimated community-wide employment losses included both primary employment
effects among MP&M facilities and, by applying Department of Commerce multipliers, secondary employment
effects in linked industries and in consumer-oriented retail and service industries.
Changes in domestic MP&M activity may cause foreign trade impacts by decreasing export-related
activity and increasing Phase I imports. EPA estimated the change in net exports (i.e., exports minus imports)
by allocating revenues lost by closing facilities between domestic and foreign producers according to a range of
possible outcomes. The worst-case outcome allocated all the former exports of closing facilities to foreign
producers, and all the former domestic sales of these closing facilities to imports from abroad. The best-case
outcome assumed that domestic facilities would retain all the domestic and export revenues lost by closing
facilities. An intermediate case allocated the closing facilities' lost revenues between domestic and foreign
facilities in proportion to measures of the historical competitiveness of domestic facilities. EPA assigned
facilities to one of these outcomes according to Department of Commerce trade data for the MP&M industry and
Survey data characterizing competition in export and domestic markets.
EPA also performed a. firm-level impact analysis to determine whether the firms owning MP&M
facilities would experience significantly greater impacts than facilities. Such firms might also own an unknown
number of other facilities that were not surveyed but would also be subject to the proposed regulation. EPA
estimated impacts on firms based on sampled facility impacts and on a range of possible shares of firm revenues
earned by activities subject to the effluent guideline. For each firm that owned at least one facility in the Survey,
the firm-level impact analysis compared baseline and post-compliance pre-tax return on assets and interest
coverage ratio to industry thresholds. Firms that failed to meet either threshold were projected to experience
serious adverse impacts. Because the sample of facilities was not designed to be a random sample of firms, EPA
reached its finding for sampled firms only and did not make national estimates of firm-level impacts.
Since the proposed regulation includes limitations that will apply to new direct and indirect discharging
sources within the MP&M Phase I category, EPA also examined the impact of these regulations on new
dischargers to determine if the limitations would impose an undue economic and financial burden on new sources
seeking to enter the MP&M Phase I industry.
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Finally, EPA assessed the regulatory impact on small entities, in accordance with the requirements of
the Regulatory Flexibility Act. For this analysis, EPA defined small entities on the basis of both the estimated
business-size classification-of firms owning MP&M facilities (based on Small Business Administration firm-level
criteria) and on the employment-size class of MP&M facilities. To gauge whether the proposed regulation would
have a significant impact on a substantial number of small entities, EPA considered the level of facility impacts
and compliance costs expected to be imposed on small entities, according to these definitions.
1.5 Organization of the Economic Impact Analysis Report
The remaining parts of the Economic Impact Analysis are organized as follows. Chapter 2 describes the
data sources consulted for this EIA. Chapter 3 profiles the MP&M Phase I industry and examines the economic
and financial structure and performance of markets within the Phase I industry.
Following the background material in Chapters 2 and 3, Chapters 4 through 10 each describe the data
and methodology used to estimate one type of potential impact, and the resulting impact estimates. The analyses
presented in these chapters are based on the 369 facilities in the Survey sample. Except for the firm-level impact
analysis, results presented in these chapters are extrapolated to the estimated national population of 10,601
effluent discharging Phase I facilities by applying sample weights. Chapter 4 details the methodology used to
estimate facility impacts and presents the results. Facility impacts are the foundation on which other parts of this
EIA build. Chapter 4 estimates the magnitude of facility closures in the baseline and post-compliance business
environments, as well as the accompanying changes in employment and earnings. For complying facilities, the
facility impact analysis measures the aggregate costs of compliance and assesses financial stresses on these
facilities short of closure.
Chapter 5 presents the labor requirements analysis. Chapter 6 describes the methodology for and results
of the community impact analysis, based on the results of the facility analysis. Methods for estimating
international trade effects, and the expected effects, are described in Chapter 7. Chapter 8 assesses firm-level
financial impacts for firms owning one or more MP&M facilities that are expected to incur costs in complying
with the proposed regulation. Chapter 9 describes the expected effects of the regulation on new MP&M facilities.
Chapter 10 contains the small business impact and Regulatory Flexibility Analysis. A list of references to the
economic impact analysis follows this chapter.
Two appendixes follow this document. Appendix A, Methodology for Estimating the Cost of Capital,
describes how capital costs were imputed from primary and secondary source data to account for the variations
1.12
-------
in risk and debt structure. Appendix B, Summary of Threshold Values for Analysis of Financial Stress Short of
Closure, details the sources, methodology and results associated with calculating minimum financial performance
thresholds used in the facility impact analysis.
This EIA is one of four documents associated with the economic analyses supporting the development
of the MP&M Phase I effluent guidelines. One companion document, the Cost-Effectiveness Analysis of
Proposed Effluent Limitations Guidelines and Standards for the Metal Products and Machinery Industry
(Phase I), conducts a cost-effectiveness analysis of the various regulatory options considered. The profile
document, Industry Profile for the Metal Products and Machinery Industry (Phase I), presents a more detailed
profile of the Phase I industries than Chapter 3 contains. This profile document provides useful supplementary
information about the Phase I category to help understand the likely impacts of the proposed effluent guidelines.
The fourth document, Regulatory Impact Assessment of Proposed Effluent Limitations Guidelines and
Standards for the Metal Products and Machinery Industry (Phase I), contains the regulatory impact analysis.
1.13
-------
-------
Chapter 2
Data Sources
2.1 Introduction
This chapter describes the primary and secondary sources that provided economic and financial data used
to assess the expected economic impact of MP&M Phase I effluent guidelines.
2.2 Primary Source Data
The most important data for the analysis are primary source data obtained by a survey issued under the
authority of CWA Section 3081 (the Survey) to a stratified random sample of 1,020 facilities in the subject
industries. After data cleaning, responses from 396 facilities, representing 10,601 water-discharging facilities
in the MP&M Phase I population, were used for the economic impact analysis. This questionnaire obtained
information on the technical and financial characteristics of facilities to estimate how facilities would be affected
by an effluent guideline.
The technical data obtained by this questionnaire include information on facility operating processes that
use water, the quantities of water and pollutants discharged by the various processes, the treatment systems that
are currently in place for managing discharge of pollutants and other data. These data provided the basis for
estimating treatment system and process change costs for complying with various regulatory options for the
MP&M industries. The estimated technical costs for compliance in turn yielded estimates of the capital and
operating costs of treatment systems and any production costs or savings that would accompany installation and
operation of a treatment system. For a detailed description of the technical data obtained by the Survey and the
related engineering and cost analyses leading to estimates of technical compliance costs, see the MP&M Data
Collection Portfolio Report and Technical Development Document.
The Survey also obtained a variety of financial data from the facilities. These data include: three years
(1987-89) of income statements and balance sheets at the surveyed facility level; the composition of revenues
by kind of customer (government, export and domestic non-government) and by line of business (manufacturing,
rebuilding and repair); estimated value of facility assets and liabilities in liquidation; borrowing costs; and
ownership of the facility business and total revenues of the owning entity (if separate from the facility). Appendix
1 U.S. Environmental Protection Agency 1989 Machinery Manufacturing and Rebuilding Data Collection Portfolio, 1991.
2.1
-------
A of the accompanying profile document contains a copy of the financial section of the Survey 2. The financial
data obtained in the Survey provided the basis for assessing how facilities are likely to be affected financially by
effluent guidelines.
Complete financial data were obtained from over 750 facilities, and data from all of these observations
were used during preliminary statistical analyses. However, the number of observations that were used in the
assessment of facility-level and other economic impacts was less than the total because of sample definition
considerations.
Some additional data from Form lOKs, which publicly reporting firms file with the Securities and
Exchange Commission, provided supplementary data regarding firm financial characteristics, near-term business
prospects and the industrial classification of products sold by the firm.
Facility financial data contributed directly to the facility- and firm-level financial analyses in Chapters
4 and 8. Facility technical data regarding employment and discharge flow volumes contributed directly to the
facility, labor requirements, community and regulatory flexibility analyses. Facility data concerning competition
in sales to export and to domestic customers contributed to the foreign trade impact analysis in Chapter 7.
The Survey also collected some financial data regarding the parent firms of sampled facilities. These
data directly contributed to the firm-level and regulatory flexibility analyses.
2.3 Secondary Source Data
In addition to enabling numerous analytical tools in the economic impact analyses in this document,
secondary source data helped to characterize background economic and financial conditions in the national
economy and in the MP&M industries. For example, secondary source data were used to define capital market
conditions underlying the cost-of-capital analysis. Secondary source data also figured prominently in the analysis
of cost pass-through potential for the MP&M sectors (see Appendix B, Partial-Cost-Pass-Through
Methodology, of the accompanying profile document). Secondary sources used in the analysis include:
U.S. Department of Commerce economic census and survey data including the 1987 Census of
Manufacturers, 1988-1991 Annual Surveys of Manufacturers, Concentration Ratios in
See Industry Profile for the Metal Products and Machinery Industry (Phase I).
2.2
-------
Manufacturing, and the 1987 Enterprise Statistics: Company Summary. These sources
provided output, employment and financial time series at the 4-digit SIC group level of
aggregation used throughout the Economic Impact Analysis and in the industry profiles.
The 1982 Benchmark Input-Output Tables of the United States, published by the Bureau of
Economic Analysis in the Department of Commerce, by 6-digit industry group. This recently-
released, latest version of the input-output tables provided data necessary for estimating the cost
pass-through capability of MP&M industries.
Value of U.S. imports and exports, by 4-digit SIC group, from the Department of Commerce,
used in the profiles and in the Foreign Trade Impact Analysis.
Price index series from the Bureau of Labor Statistics, Department of Labor, by 4- and 6-digit
SIC group, which were used to estimate cost pass-through abilities and to deflate economic and
financial data.
1987 to 1992 U.S. Industrial Outlooks, published by the Department of Commerce, which
supplied information for the Chapter 3 and the accompanying profile document.
Small business thresholds, by 4-digit industry group from the Small Business Administration,
used in the Regulatory Flexibility Analysis and in the preliminary statistical analyses.
Regional income multipliers generated by the Regional Impact Modeling System (RIMS
model), developed by the Department of Commerce, and used in the Community Impact
Analysis.
Industry sources and trade publications, which contributed to the MP&M profile presented
in Chapter 3 and in the accompanying profile document.
Financial publications, including the Value Line Investment Survey, Robert Morris Associates'
Annual Statement Studies, Standard & Poor's New York- American- and NASDAQ Stock
Exchange Reports and Dun & Bradstreet' s Million Dollar Directory. These sources provided
2.3
-------
key financial ratios and firm-level and industry financial measures, including measures of
risk, debt structure, capital costs and income statement and balance sheet items.
The FY1993 Economic Report of the President provided macro-economic measures, such as
gross domestic product (GDP) and its components, employment and aggregate deflator series,
such as the GDP, and Consumer and Producer Price Indices. The Employment Cost Index
from this source also complemented price series provided by the Bureau of Labor Statistics
in estimating cost pass-through abilities.
The contributions of these sources to each component of the Economic Impact Analysis are discussed
in detail within the corresponding chapters. A specific list of references also follows at the end of this report.
2.4
-------
Chapter 3
Profile of the MP&M Phase I Industry
3.1 Introduction
The MP&M Phase I industry includes 99 4-digit SIC groups that are allocated, for this economic impact
analysis, among seven clusters of closely related SIC groups, called sectors. This chapter presents selective
profiles of the seven MP&M Phase I sectors. It emphasizes industry characteristics that relate to the ability of
producers to increase prices in order to recover any cost increases that may accompany effluent guideline
compliance. A separate document, Industry Profile for the Metal Products and Machinery Industry (Phase I),
provides more detailed analyses of these sectors, plus an overview of the entire MP&M category, a description
of the cost pass-through methodology, and an analysis of the sensitivity of the economic impact analysis to the
time period over which data were collected.
The profile in this chapter refers to data from a Section 308 survey (the Survey) as well as from
secondary sources. The Survey targeted Phase I effluent dischargers that were expected to incur compliance costs
under the proposed effluent guidelines. A stratified random sample of 396 facilities was selected and assigned
sample weights relating survey data to the entire population of 10,601 Phase I effluent discharging facilities. The
economic portion of the Survey, attached as Appendix A to the profile document, asked for facility and firm
financial information from 1987 to 1989, descriptions of the level of competition in various kinds of markets in
1989 and dependence on various types of customers in 1989, among other information.
Secondary sources provided supplementary data about Phase I industries, including both dischargers and
non-dischargers. In addition to the 10,601 dischargers represented by the Survey sample, secondary source data
also applied to approximately 80,300 non-discharging facilities. This chapter draws upon data from the Census
and Annual Surveys ofManaufactures, the U.S. Industrial Outlook, non-published trade data from the
Department of Commerce and the Economic Report of the President. As described in the cost pass-through
methodology (see Appendix B of the profile document), the cost pass-through coefficients draw upon input price
series from the Bureau of Labor Statistics and input-output coefficients from the Bureau of Economic Analysis'
1982 Benchmark Input-Output Tables of the United States. Time series data generally spanned the years 1982
through 1991, inclusive.
3.1
-------
The first section of this chapter (3.1) examines the entire MP&M Phase I industry in aggregate. The
following section (3.2) examines the differences between sectors according to financial and economic parameters
that affect the ability of firms to pass on cost increases to customers by increasing prices. The chapter then
compares the seven sectors according to these key parameters. The concluding section also summarizes the
partial-cost-pass-through methodology. All of the data presented in this profile constitute a baseline description
of the MP&M Phase I industries, exclusive of the effects of proposed effluent guidelines.
3.2 Overview
The Metal Products and Machinery (MP&M) Phase I industry encompasses a large and diverse group
of industries that principally manufacture intermediate goods used by other industries, as well as lesser amounts
of final goods such as household electronics, hi addition to manufacturing, the MP&M Phase I industry also
includes some maintenance and repairing activities. Table 3-1 lists the seven Phase I sectors and their associated
4-digit SIC industry groups. The profile gathered secondary source data by 4-digit SIC industry and then
aggregated the data according to the definitions in Table 3-1. However, rather than classifying themselves by
SIC code, Survey respondents classified themselves according to a partially subjective judgment about what
sector most closely described their activities. Therefore, primary source data from the Survey accurately
distinguishes between the seven Phase I sectors only as well as the respondents distinguished between those
sectors based on the descriptions in the Survey.1
While final consumers buy some MP&M products, the largest part of the demand for MP&M output
comes from construction and manufacturing industries, which are both pro-cyclical components of the economy.
MP&M output changes generally coincide with but also show greater amplitude than fluctuations in the general
economy. During recessionary years, customer industries can disproportionately reduce their purchases of many
new MP&M products by deferring purchases and increasing maintenance and repair activities on existing capital
goods. Thus, economic downturns tend not only to decrease MP&M revenues disproportionately but also to shift
revenues between activities. Similarly, robust economic growth has historically accompanied disproportionately
strong growth in MP&M output.
In 1989, Phase I producers accounted for $275 billion in value added, which constituted 5.7 percent of
U.S. real gross domestic product (GDP). Table 3-2 shows real and nominal value of shipments and value of
'See Appendix A of the profile document, Industry Profile for the Metal Products and Machinery Industry (Phase I),
for the economic portion of the Survey.
3.2
-------
Wusi&cr df SIC Groups
Total By Sector
Sector 1,
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Sector 2.
34
35
36
37
Sector 3,
38
39
40
41
42
Hardware
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Aircraft
1
2
3
4
Table 3»li Phase I and Phasfc II MP&M Sectors and SIC CMes
4-Digit Standard Industrial Clas*fflcatta» %pttj»
2796
3398
3412
3421
3423
3425
3429
,3433
3441
3442
3443
3444
3446
3448
3449
3451
3452
3462
3466
3469
3492
3493
3494
3495
3496
3498
3499
3541
3542
3544
3545
3546
3965
3721
3724
3728
4581
Platemaking & Related Services
Metal Heat Treating
Metal Shipping Barrels, Drums, Kegs, Pails
Cutlery
Hand & Edge Tools, Except Mach. Tools, Saws
Hand Saws and Saw Blades
Hardware NEC
Heating. Equipment Except Electric. & Warm Air Furnaces.
Fabricated Structural Metal
Metal Doors, Sash & Frames
Fabricated Plate Work (Boiler Shops)
Sheet Metal Work
Architectural and Ornamental Metal Work
Prefabricated Metal Buildings & Components
Miscellaneous Metal Work
Screw Machine Products
Bolts, Nuts, Screws, Rivets, and Washers
Iron and Steel Forgings
Crowns and Closures
Metal Stamping NEC
Fluid Power Valves & Hose Fittings
Steel Springs
Valves & Pipe Fittings, Except Brass
Wire Springs
Miscellaneous Fabricated Wire Products
Fabricated Pipe and Fabricated Pipe Fitting
Fabricated Metal Products NEC
Machine Tools, Metal Cutting Types
Machine Tools, Metal Forming Types
Special Dies & Tools, Die Sets, Jigs, Etc.
Machine Tool Access & Measuring Devices
Power Driven Hand Tools
Fasteners, Buttons, Needles, etc
Aircraft
Aircraft Engines and Engine Parts
Aircraft Parts and Auxiliary Equipment
Airports, Fields & Terminals
Electronic Eauipment
1
2
3
4
5
3661
3663
3669
3671
3675
Telephone & Telegraph Apparatus
Radio & TV Broadcasting & Communications Equipment
Communications Equipment NEC
Electron Tubes
Electronic Capacitors
3.3
-------
and Phase JJ MP&SJ. SfiCKH1* ana biC o?a«s
.Croups:
Sector 3. Electronic Equipment, continued.
43 6 3677 Electronic coils and Transformers
44 7 3678 Connectors for Electronic Applications
45 8 3679 Electronic Components NEC
46 9 3699 Electronic Mach., Equipment, & Supplies. NEC
lector 4. Stationatv Industrial Equipment
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
TO
3511
3519
3533
3534
3535
3543
3547
3548
3549
3552
3553
3554
3555
3556
3559
3561
3562
3563
3564
3565
3566
3567
3568
3569
3581
3582
3585
3586
3589
3593
3594
3596
3599
3612
3613
3621
3625
3629
Steam, Gas, Hydraulic. Turbines, Gen. Units
Internal Combustion Engines NEC
Oil Field Machinery and Equipment
Elevators and Moving Stairways
Conveyors and Conveying Equipment
Industrial Patterns
Rolling Mill Machinery and Equipment
Electric & Gas Welding & Smoldering Equipment
Metal Working Machinery NEC
Textile Machinery
Woodworking Machinery
Paper Industries Machinery
Printing Trades Machinery and Equipment
Food Products Machinery
Special Industry Machinery NEC
Pumps and Pumping Equipment
Ball and Roller Bearings
Air and Gas Compressors
Blowers and Exhaust and Ventilation Fans
Industrial Patterns
Speed Changers, High Speed Drivers & Gears
Industrial Process Furnaces and Ovens
Mechanical Power Transmission Equipment NEC
General Industrial Machinery NEC
Automatic Merchandising Machines
Commercial Laundry Equipment
Refrigeration & Air and Heating Equipment
Measuring and Dispensing Pumps
Service Industry Machines, NEC
Carburetors, Pistons, Piston Rings & Valves
Fluid Power Pumps & Motors
Scales & Balances, Except Laboratory
Machinery, Except Electrical NEC
Transformers
Switchgear and Switchboard Apparatus
Motors and Generators
Relays and Industrial Controls
Electric Industrial Apparatus NEC
Plprtrir T nmn Rnlhs and Tubes
3.4
-------
Table 34 £ MP&SJPhase I S&ehnts and SIC
Total By Sector 4»Bigit Standard Industrial Classifkatioii Groups
Sector 5, Ordnance
86 1 3482
87 2 3483
88 3 3484
89 4 3489
Small Arms Ammunition
Ammunition, Except for Small Arms
Small Arms
Ordnance and Accessories NEC
Sector 6. Space
90 1
91 2
92 3
3761 Guided Missiles and Space Vehicles
3764 Guided Missile and Space Vehicle Propulsion
3769 Other Space Vehicle and Missile Parts
Sector 7, Mobile Industrial Equipment
93 1 3523 Farm Machinery and Equipment
94 2 3524 Garden Tractors & Lawn & Garden Equipment
95 3 3531 Construction Machinery & Equipment
96 4 3532 Mining Machinery & Equipment, Except Oil Field
97 5 3536 Hoists, Industrial Cranes & Monorails
98 6 3537 Industrial Trucks, Tractors, Trailers
99 7 3795 Tanks and Tank Components
Source: Environmental Protection Agency
NEC = Not Elsewhere Classified
output from 1982 to 1991. Value of shipments is the sum of the receipts a manufacturer earns from sales of all
its outputs. Similar to revenues, value of shipments is a useful indicator of the overall size of a market or the
size of a firm in relation to its market or competitors. To measure the amount of production activity in a firm or
market, though, economists often use value added, which is the difference between the value of shipments and
the value of inputs used to make the products that it sells. This difference is the value of the production activity
that occurred in that firm or market. Over the entire period, Phase I value added nearly kept pace with GDP, in
real terms, growing 27.6 percent, compared to real GDP growth of 29.0 percent.
MP&M Phase I Real Output
$550,000
$150.000
1982 1983 198+ 1985 1986 1987 1988 1989 1990 1991
3.5
-------
.... \ \ v "-" ,- stable 3*2i MP&M Pitasfel Real ns, current
Shipments " Added
270,914.8 145,778.8
269,015.0 142,605.5
296,340.5 148,365.0
311,552.8 167,748.6
302,099.1 160,092.1
376,170.3 210,233.6
481,491.2 262,966.0
504,878.3 275,041.5
521,673.6 275,959.7
521,253.4 271,570.3
$ millions* 1989 ^tfti^fn^
Shipment* Added
314,027.4 168,958.8
305,887.8 162,180.0
330,669.0 165,873.7
343,310.6 184,849.4
331,861.7 175,768.8
406,325.6 226,950.5
501,844.6 274,066.8
504,878.3 275,041.5
426,359.1 224,871.8
414,325.2 215,515.6
'' $ millions, l£&$ constant
/V*3~^ii\
\ fjvfUX? f
3,758,400.0
3,904,800.0
4,150,700.0
4,278,200.0
4,405,100.0
4,539,900.0
4,716,400.0
4,837,600.0
4,883,700.0
4,847,600.0
Total Growth Over Period:
1982-91
92.4% 86.3%
31.9% 27.6%
29.0%
Source: Department of Commerce / Office of Management and Budget
PHASE 1 FAdLriTES:
BY TYPE OF DISCHARGER
Direct Dischargers
(17.89%)
The apparently large increase in output in
1987 partly reflects a change in SIC industry
definitions in that year. The profile document
discusses this in more detail; however, the effect of
this change is to exaggerate growth in output from
1986 to 1987 and to reduce the comparability of data
before and after the SIC redefinition. Abstracting
from this anomaly, output generally grew in the first
part of the decade, before declining in recent years.
Real value added fell by almost 22 percent between
1989 and 1991. During the same period, though,
nominal value of shipments grew by slightly over 3 percent, which is consistent with the recent experience of
manufacturing industries in general.
Out of a total population of 90,901 MP&M Phase I facilities, effluent dischargers number an estimated
10,601.2 Of the effluent dischargers, 8,705 (82 percent) are indirect dischargers, while the remaining 1,896
facilities (18 percent) are direct dischargers.
*The total Phase I population is based on the 1987 Census of Manufacturers, while the population of effluent dischargers
is based on the Survey.
3.6
-------
PHASE 1 FACILITIES:
BY SMALL BUSINESS STATUS
MP&M Phase I sectors typically have a disproportionately large number of small facilities, though output
is typically concentrated among larger facilities. Sectors vary widely in how their output is distributed among
facilities of various sizes, though, and will be examined individually later in this chapter. Using facility and firm
revenue data to impute firm-level
employment, Small Business Administration
small business thresholds were also applied to
each facility to estimate the number of
facilities that were likely to be owned by small
businesses, as defined by the Small Business
Administration. By using this methodology,
detailed in the regulatory flexibility analysis
(see Chapter 10), EPA determined that 7,976
facilities (75 percent) are small business
owned.
All Other Facilities
(24.76%)
The Survey asked effluent dischargers to indicate how much of their revenues came from each of three
major MP&M activities: manufacturing, repairing and maintenance. Manufacturing dominated, yielding 93.4
percent of all revenues earned by Phase I effluent dischargers.
SOURCES OF REVENUE:
BY MARKET TYPE
Facilities were also asked to indicate their level of dependence on each of three types of customers:
government, domestic non-government and export. Each of these customer types exerts different levels of market
power. Market power among producers is defined as the ability to influence prices. Large, concentrated
producers exert market power because they can
choose to supply or withhold enough output to
change the market price. Market power among
customers is the ability to influence prices by
buying more or less. If purchases are highly
concentrated in a few buyers, these buyers may
be able to exert downward pressure on prices by
withholding purchases. For example, the
government often exerts more market power
than individual households. When an
individual household varies the amount it buys
Exports
(24.54%;
Government
(14.81%)
Domestic
Non-Government
(60.65%)
3.7
-------
of a product, that choice typically does not influence the product's price. However, in some markets, a decrease
in government purchases may significantly affect market demand and cause a decrease in prices.3
The various customer types also affect MP&M producers in other ways. Heavy dependence on export
sales, for instance, would indicate that an industry may face relatively elastic markets. In such a market, if one
firm tries to raise prices unilaterally, a large share of its customers will be able to turn to other suppliers of the
same product at the previous price. Survey responses indicated that Phase I sectors derive almost 25 percent of
their revenues from export sales, though sector level analyses in this chapter will show wide variation in export
dependence. Industries that depend heavily on government purchases may be less pro-cyclical than others.
3.3 Comparative Characteristics of Phase I Sectors
This section compares the seven sectors that comprise the MP&M Phase I industry by examining
economic structural characteristics that influence a firm's ability to pass through cost increases by raising prices.
These structural characteristics are discussed in detail in the profile document, Industry Profile for the Metal
Products and Machinery Industry (Phase I) and Appendix B to that document, Partial-Cost-Pass-Through
Methodology. The characteristics discussed below are: the long-term growth rate, market concentration, the
strength of foreign trade competition and the risk-adjusted level of profits in each sector.
While individual economic structural characteristics differ between sectors, the overall measures of
financial condition and performance that indicate the impacts of effluent guidelines do not differ in a statistically
significant way between sectors or between other potential subcategorizations of the MP&M Phase I industry.
Appendix D, Statistical Analysis of Financial Measures for MP&M Industry Facilities of the accompanying
profile document presents the subcategory analysis.
3.3.1 Growth Rate of Output
Table 3-3 compares the sizes of the seven Phase I sectors, measured by value of shipments, value added
and employment. It also gives the average growth rates of the Phase I sectors over the period 1982 to 1991 for
each sector, measured by the average growth rate in inflation-adjusted value added between 1982 and 1991.
In certain types of markets, such as armaments, the government may also gain market power from legal and contractual
limitations on producers. This is different from the market power discussed above, which comes from concentration.
3.8
-------
/fable 3-3* 199$ fcfaas* I Output »od %mptoymea**by Seetor
Sector mMtms
1. Hardware $132,152.7
2. Aircraft $83,979.6
3. Electronic Eq. $66,745.1
4. Stationary Ind. Eq. $147,309.1
5. Ordnance $7,341.6
6. Space $29,497.7
7. Mobile Ind. Eq. $37,852.5
Gross Domestic Product (GDP)
ValueAdded, Ratetrflfceal S
wittiom Value Added
$70,827.5
$44,889.4
$37,961.3
$79,984.3
$5,117.7
$19,142.6
$17,118.7
$4,837,600.0
-0.57%
2.01%
-0.20%
-2.18%
-1.04%
-0.26%
-1.98%
2.87%
HtplftymcHt^
thousands
1,329.1
602.4
584.5
1,288.8
77.0
221.0
236.9
Source: Department of Commerce
Real Output Growth By Sector, 1982-91
Declining industries may have very different options from growing industries, in the face of similar
market stresses. While aggregate real output for the entire MP&M category increased over the relevant period,
the median rate of growth, calculated
individually for each sector,4 was less than
zero, at -0.6 percent per year. Against this
standard, Table 3-3 shows that the
Hardware, Aircraft and Electronic
Equipment sectors experienced average
annual growth rates above the MP&M
median. The Aircraft sector showed the
only positive average growth rate, at just
over 2 percent per year.
-Bt
Sectorl Scctor2 Sector} Sector4 Sectors Sectors Sector? GDP
To different degrees, three important factors explain Phase I growth and the wide variation in these
growth rates: 1) the level of business activity overall or in closely related markets, 2) government spending,
regulation and standard-setting, and 3) technological advances.
The Hardware sector, for instance, consists mostly of small facilities whose performance depends closely
upon the demand for their products from construction and manufacturing industries. Cost-cutting in those
industries has contributed to an overall decline in real output from the Hardware sector over the period of the
analysis. At the same time, economic recession abroad has also reduced demand, although favorable exchange
rates have mitigated this effect recently. Two major governmental initiatives have significant implications for
""Medians are measured across all 15 MP&M Phase I and II sectors.
3.9
-------
REAL OUTPUT, 1989
By MP&M Phase I Sector
the Hardware sector. Industry observers
expect the North American Free Trade
Agreement (NAFTA) to give a strong boost to
the sector.5 hi Europe, though, the prospect of
heightened European Community (EC) trade
barriers after unification has caused some
manufacturers to relocate from the U.S. to
within the EC. Structurally, the Hardware
sector faces oligopsonistic markets in some
areas, such as specialty fasteners. The valve
and pipe fitting manufacturers, for another example, sell to highly concentrated oil and gas producers. In 1989,
the Hardware sector reported $132 billion in shipments and employment of 1.33 million full-time equivalent
production and non-production employees.
Scdtrl Seat* 2 Seder} SoUc4 Sector! Sector* Secfcr7
Value of Shipment: E23 Value Added
Employment, 1989
By MP&M Phase I Sector
1,400
The Aircraft sector has proven the most
resistant to the recession of 1990 - 1991, among
Phase I sectors. It is a highly concentrated
group of industries that faces relatively little
import penetration and ranks third in value of
shipments among the Phase I sectors, with $84
billion in shipments and employment of 602
thousand employees.
Regulatory policy and technological
advances will shape much of the future of the
Electronic Equipment sector, particular in the areas of high-technology communications equipment in which the
U.S. has a strong presence. Inroads by foreign manufacturers have been offset by emerging markets, deregulation
and the growth in the total size of the electronic equipment market. The Electronic Equipment sector ranks
fourth in output and employment, among MP&M Phase I sectors.
Sector! Sector! Sector? Sector4 Sectors Sectors Sector?
iU.S. Industrial Outlook
3.10
-------
3.3.2 Measures of Market Concentration
MP&M firms compete in relatively concentrated markets, compared to manufacturing industries in
general. Concentration of production among a small group of producers gives those producers increased market
power and therefore an enhanced ability to increase prices in response to input cost increases. Once the market
price has been set, smaller producers may be able to share in the price increase.
Concentration in MP&M Sectors
Specialization and Concentration Ratios
100
Horizontal concentration is a
measure of the proportion of production within
an industry that comes from a small group of
firms. The eight-firm concentration ratio
used in this analysis (CRg) is the percentage of
shipments of an industry s products that comes
from the eight largest firms in that industry. In
spite of numerous small firms and
establishments, the eight largest firms in each
4-digit industry in each MP&M sector
produce, on average, between 32.6 percent and
80.0 percent of their industry's value of shipments (see Table 3-4). The Aerospace, Ordnance and Aircraft
sectors sectors 6, 5 and 2, respectively exhibit the highest concentration ratios, but even the least
concentrated sector, Hardware, has a sizable CR8 of 32.6 percent, compared to an aggregate of 12.0 percent for
all manufacturing industries.
Table 3~4i C»B^ntratKaiiB MP&M Setters :. ,:
7 CeHeea*fa^wtt&ati&» SpeeiaJizaifetti i
Sector , 8-firnt fCJRft> Jfetife ^1
1. Hardware
.2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
1. Mobile Ind. Eq.
MP&M Median
Manufacturing
32.6%
77.3%
52.2%
45.5%
81.2%
89.0%
55.9%
57.7%
12.0%
91.0%
89.0%
51.0%
84.0%
88.0%
76.0%
75.0%
77.3%
NA
Source: Department of Commerce
3.11
-------
Three Phase I sectors have CRg values less than the MP&M median of 55.7 percent across all fifteen
sectors. These are the Hardware, Electronic Equipment and Mobile Industrial Equipment sectors.
If, instead of producing a higher percentage of the output from a particular industry, the largest firms
expand their production into other industries, especially related industries that sell to or buy from their own, then
the industry is said to be vertically concentrated. In lieu of a more direct measure of vertical concentration,
the current analysis uses the specialization ratio, which is the percentage of the average firm's revenues that is
derived from shipments of products classified within the firm's own industry classification. A lower
specialization ratio indicates that firms in the industry tend to produce a wider range of products and are more
likely to be vertically concentrated. Industries with very high specialization ratios cannot be vertically
concentrated, because, by definition, most of their production falls into a narrow range of products within the
industry.
Table 3-4 shows that the Electronic Equipment, Space and Mobile Industrial Equipment sectors have
lower specialization ratios than the MP&M median value of 113 percent and are therefore more likely to be
vertically concentrated.
The Mobile Industrial Equipment sector serves many small customers, such as homeowners, farmers and
construction firms. These customers face significant foreign trade pressure from Europe, Canada and Japan, and
their level of activity is sensitive to weather fluctuations. The agricultural equipment industry, which is a
component of this sector, also suffers from overcapacity.
The Ordnance and Space sectors exhibit the highest horizontal concentration among Phase I sectors, but
they are also somewhat highly specialized and therefore they do not stand out as candidates for high vertical
integration. These two sectors are also the most highly dependent on sales to the government; each sector earns
more than half of its revenues from the government.
3.3.3 Foreign Competition
To the extent that foreign competitors do not incur the same compliance costs as domestic producers,
dependence on foreign markets can reduce an industry's ability to increase prices in response to cost increases.
Industries that compete heavily against imports in the United States or foreign producers in export markets have
to price their products competitively with products from foreign producers that may not have incurred compliance
costs.
3.12
-------
Table 3-5 presents measures of foreign competition in import and export markets. The import
penetration ratio is the ratio of imports to the sum of domestic shipments and imports. Against an MP&M
median value of 11.7 percent, only two sectors, Ordnance and Space, experience low import competition.
Taffefe 3-5$ Foreign Compefitroo, percent \
-"' IJaajwwrt
Seeior ' JteueiiSi
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile Ind. Eq.
MP&M Median
A 11 Manufacturing
slum
10.6
11.0
18.0
13.2
7.0 .
0.0
13.7
73.2
77.7
Ixport
. .Sb»r«
8.9
41.4
18.3
21.7
36.3
0.1
31.5
18.3
9.5
Source: Department of Commerce
The Aerospace sector has negligible imports and exports; it is relatively isolated from foreign markets.
While foreign markets affect the other sectors significantly, none exhibit both relatively high import penetration
and relatively high dependence on export markets. Only Sector 3, Electronic Equipment, faces more import
penetration, at 18 percent, than the national average of 11.7 percent,6 while it depends on export customers for
about 18.3 percent of its shipments,
compared to a national manufacturing
average of 9.5 percent. Only Sectors 2
Aircraft and 5 Ordnance have higher
export dependence than the national
average, and both of these face low
import penetration. The foregoing
notwithstanding, the Electronic
Equipment, Aircraft and Ordnance
sectors are relatively sensitive to foreign
Foreign Competition By MP&M Sector
Import Penetration and Export Share
Sector 1 Sector2 Sector3 Sector4 Sectors Sector6 Sector?
I Import Penetration S3 Export Share of Shipments
competition. Only Sector 6, Aerospace,
is substantially independent of foreign
competition. Foreign competition
National average across all manufacturing industries.
3.13
-------
significantly affects the other MP&M sectors. For instance, changes in the foreign trade environment will figure
prominently in determining the future of the Stationary Industrial Equipment sector. The key to growth in the
well-developed foreign trade in stationary industrial equipment is the adoption of international standards under
the ISO 9000 initiative7 and NAFTA.
3.3.4 Barriers to Entry
The presence of positive economic profits is one of the surest indicators of imperfect competition and
market power on the part of producers. Positive profits can exist only in the presence of both entry and exit
barriers. Entry barriers are fixed costs that a new firm must incur before it produces any goods. Exit barriers
are fixed costs that a firm cannot recover in liquidation.8 These barriers not only allow firms to raise prices with
diminished fear of new entrants underpricing them, but they are also evidence, in and of themselves, of the
exercise of market power, as firms erect entry and exit barriers to protect and enhance market power.
The usefulness of economic profit as an indicator of market power is matched, unfortunately, by the
difficulty in measuring it However, the cost pass-through analysis requires only an accurate rank ordering of the
economic profitability of the seven sectors, which is a much easier task than identifying precise point values for
each sector. It is useful to note, at this point, that all profits can be completely described by two parameters: the
rate of return and the magnitude of risk.
The pre-tax return on assets (PTRA) is a good measure of the rate of return. It is well-defined,
commonly used and calculated from data reported in the Survey. Furthermore, the PTRA is commonly used by
firms to gauge their own profitability. This implies that if firms were to exercise market power, they would seek
to influence PTRA. This is another reason that PTRA would be a good indicator of market power.
Profits, though compensate investors not only for the use of their capital, but also for the riskiness of
their use. Therefore, one firm might have a higher PTRA than another not because it is more economically
profitable, but because it is riskier. To compensate for differences in riskiness, EPA gathered or estimated beta-
coefficients (ps) for each facility from published sources by assigning the p associated with its parent firm. The
ISO 9000 is an international standardization initiative that seeks to increase the compatibility and uniformity of products
among nations.
'Entry barriers cannot exist without exit barriers, in the neoclassical theory of firm behavior. In the absence of exit barriers,
the cost of entry is fully negated by the liquidation value of the firm. Therefore, subject to liquidity constraints, the firm
would be able to afford any magnitude of entry cost, and such costs would not be an entry barrier.
3.14
-------
firm p is a standard measure of risk defined as the covariance of the firm's profitability with respect to the market.
Table 3-6 presents risk-adjusted PTRA values for each Phase I sector; all PTRA values in the profile are risk-
adjusted. The median of 22.0 percent is a median across Phase I sectors only, because the Survey did not target
Phase II facilities.
JFinaaciaJ Performance by Phase ISeefer
1. Hardware 6%
2. Aircraft 15%
3. Electronic Eq. 22%
4. Stationary Ind. Eq. 22%
5. Ordnance 31%
6. Space 22%
7. Mobile Ind. Eq. 29%
0.90
0.98
0.33
0.71
0.73
0.51
0.42
Phase I Median
22%
0.71
Source: Environmental Protection Agency Data Collection Portfolio
In addition to having the two lowest returns on assets, Sectors 1 Hardware and 2 Aircraft also have the
two highest long-term debt burdens, when measured as the ratio of debt to long-term assets. Their debt-to-asset
ratios are 0.90 and 0.98, respectively. However, it should be noted that the Survey responses with regard to
balance sheet items were subject to wide, though manageable, ranges of variation and error. With this caveat
about the statistical significance of measured differences in these values in mind, Sectors 4 Stationary Industrial
Equipment and 5 Ordnance also have moderately high debt-to-asset ratios. Sector 3 Electronic Equipment has
the lowest debt-to-asset ratio of the Phase I sectors, at 0.33.
3.4 Sector Cost Pass-Through Capabilities
Appendix B in the accompanying profile document9 details the methodology by which cost pass-through
coefficients were assigned to each sector. This section summarizes the methodology and findings of the cost
pass-through analysis.
Cost pass-through coefficients were assigned in a two-part process. The first part examined the six
"structural" determinants of cost pass-through ability previously discussed in this chapter. These six
determinants measured market concentration, foreign competition, overall growth and entry barriers. The second
Industry Profile for the Metal Products and Machinery Industry (Phase I), Appendix B: Partial-Cost-Pass-Through
Methodology
3.15
-------
part assessed the historical ability that each sector demonstrated to pass on input cost increases as output price
increases. Each part of the process yielded a point score, which, when summed, determined the range of cost
pass-through coefficients assigned to each corresponding sector. Finally, the assigned range of cost pass-through
coefficients was adjusted for each sector to account for the percentage of the domestic industry expected to incur
compliance costs from effluent guidelines.
Table 3-7 summarizes the results from the first part of the cost pass-through analysis. Each of the six
structural measures is given a value of "High," "Neutral" or "Low," depending on whether the measure is above,
equal to or below the MP&M median, respectively, for each sector. The medians are calculated on all 15 MP&M
sectors, including the 8 Phase II sectors.
, fa&te;O*Sa^
Cotw-entiratwn
' Sfttttjlr " ,' ^'ftatfoT
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Aerospace
7. Mobile Ind. Eq.
Low
Low
Low
Low
High
Neutral
Low
SjjmaJBaiwB Soiport .Isport
Jtat|<> J*enebra£wrt tJenjentJenc^ Srwrth Frafit
Low
Low
High
Neutral
Low
High
High
High
High
Low
Neutral
High
High
Low
High
Low
Neutral
Low
Low
High
Low
Neutral
High
High
Low
Low
High
Low
Low
Low
Neutral
Neutral
High
Neutral
High
Source: Abt Associates Inc.
Table 3-8 presents the results from the second part of the cost pass-through analysis. While the
structural measures in Table 3-7 indicate what range of cost pass-through ability each sector ought to have, based
on theory, Table 3-8 indicates what range of cost pass-through ability each sector has actually experienced
historically. The estimated historical elasticities are the percentage change in output price per percentage change
in input prices, estimated over the period 1982 to 1991 by linear regression. Higher values correspond to higher
average abilities to pass-through cost increases. The range of estimated elasticities is divided into three equal
parts. In Table 3-8 each sector is categorized as "High" if its estimated historical elasticity falls into the top third
of the range, "Neutral" if it falls into the middle third, and "Low" if it falls into the lower third of the range of
estimated historical elasticities.
3.16
-------
T&tlde 3-& J^ibaat^^toi^»i"M8stMiy ^afoes ah-3 Assigned Maatfeiiiy Sc«re
for MP&M Phase I and Phase II Sectors
S*eta*
Estimated
Historical
B^k
Historical
llasjklty
Phase I Sectors
1.
2.
3.
4.
5.
6.
7.
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
0.889
0.924
0.899
0.909
0.907
0.773
0.901
14
4
12
9
10
15
11
Low
High
Low
Neutral
Neutral
Low
Low
Phase II Sectors
8.
9.
10.
11.
12.
13.
14.
15.
Source:
Instruments
Precious and Non precious Metals
Shipbuilding
Household Equipment
Railroad
Motor Vehicle
Bus and Truck
Office Machine
Abt Associates Inc.
0.923
0.938
0.970
0.921
0.911
0.898
0.930
0.920
5
2
1
6
8
13
3
7
High
High
High
Neutral
Neutral
Low
High
Neutral
The results of the structural and historical analyses are combined using a numerical algorithm detailed
in Appendix B of the profile document The algorithm assigns to each sector an elasticity value that gives the
expected percent change in output price associated with a one percent change in input costs. Using financial data
from the Survey, these elasticities are expressed as the cost pass-through coefficients shown in Table 3-9, which
are then multiplied by the share of output in each sector that is expected to be subject to effluent guidelines. This
takes into account the fact that if a sector has few dischargers, then discharging facilities would have more
difficulty changing prices in the face of competition from many facilities that are not affected by the effluent
guidelines.
3.17
-------
1. Hardware
2. Aircraft
3. Electronic Equipment
4. Stationary Industrial Equipment
5. Ordnance
6. Aerospace
7. Mobile Industrial Equipment
0.321
0.964
0.958
0.366
0.956
0.962
0.886
Source: Abt Associates Inc.
The estimated cost pass-through coefficients translate the compliance costs estimated by the engineering
analysis into dollar values of the impact of proposed effluent guidelines on each facility analyzed under the
assumption that facilities will be able to increase prices. For example, if the engineering analysis indicates that
a particular facility subject to a particular effluent guideline will incur annual costs of $1,000 to meet those
guidelines, the cost pass-through coefficient multiplied by $ 1,000 will be the estimated increase in annual revenue
from price increases. The difference between the annualized costs incurred and the revenue from price increases
is the actual cost burden to the facility.
3.18
-------
Chapter 4
Facility Impact Analysis
4.1 Introduction
The facility-level economic impact analysis assesses how MP&M Phase I effluent guidelines would affect
facilities and how facilities would most likely respond. The facility-level analysis provides the basis for
estimating the number of facility closures and associated production and employment losses that may result from
an effluent guideline for the MP&M industry.
The facility-level economic analysis draws largely from sample facility data obtained from the Survey.
Facility-level data were also used in the engineering analysis to assess the costs or savings that would likely
accompany facility compliance with different effluent guideline compliance options. Although these analyses
are based on facility specific-data, the facilities that were analyzed represent only a small sample of the
population of facilities likely to be covered by an MP&M guideline. Accordingly, these facilities are considered
as model, representative facilities in the context of the overall industry impact analysis.1 To develop analytic
results that are meaningful for the overall economic impact analysis, the results from the facility analyses are
extrapolated to the MP&M population based on sampling weights applied to each observation in the sample.
Based on these analyses, EPA expects that the proposed MP&M Phase I effluent guidelines are
economically achievable and will not subject affected facilities to unmanageable or unreasonable financial or
economic burdens.
The major sections of this chapter explain the methodology behind each component of the facility impact
analyses and present the results. The first section presents an overview of the facility impact analysis
*EPA examined the Metal Finishing industry, which overlaps the MP&M Phase I industry, for its Sustainable Industry
Project (SIP) and found four major categories of facilities with very different propensities to close in the face of declines in
financial performance and very different environmental strategies. In particular, the SIP defined a particularly problematic
group of facilities ("tier 3") that accounted for a disproportionately large quantity of pollutant discharges and could not afford
to invest in pollution prevention and control technologies but were deterred from closing, in spite of low or non-existent
profits, by the threat of post-closure liabilities. The facility impact methodology described in his chapter includes the effect
of such liabilities on closure decisions by using data from the Survey regarding such liabilities to compare with facility going-
concern values in modeling the closure decision. Facility heterogeneity in pollutant discharges is incorporated by the cost-
effectiveness analysis, presented in an accompanying report.
4.1
-------
methodology. The following sections then examine in detail the methodologies for each of the component
analyses that comprise the facility impact analysis: the Baseline Closure Analysis, the Post-Compliance Closure
Analysis and Host Analysis of Financial Stress Short of Closure. The chapter concludes by presenting national
estimates of the facility-level impacts of various effluent guidelines alternatives.
4.2 Overview of the Facility Impact Analysis Methodology
The facility level analysis estimates financial impacts of proposed MP&M effluent guidelines on
facilities. Since this analysis involves a series of component analyses (see Table 4-1), this section identifies those
components and explains how they relate to one another.
; -; 7^44'&imt^rfVteJ
^P^f**4^0*? * V'' ^rtptiott
1 . Baseline Closure Identifies facilities that are
in jeopardy of financial
failure regardless of the
promulgation of effluent
guidelines
2. Post-Compliance Identifies facilities that are
Closure likely to close instead of
implementing the pollution
prevention and treatment
systems needed for effluent
guidelines compliance
3. Financial Stress Short Identifies facilities with
of Closure limited ability to finance the
pollution prevention and
treatment systems needed
for effluent guidelines
compliance
Source: Environmental Protection Agency
»t^^^^M^ 'Af*, , <.<;'>"
Negative Finding
Facilities failing both
tests are considered a
baseline closure and
excluded from
subsequent analyses
Facilities failing both
tests are projected to
close as the result of
regulation, a severe
economic impact.
Facilities failing
either test are likely
to experience
financial weakness as
the result of
regulation, a
moderate economic
impact.
Three Financial Analyses
The following three sections address three groups of financial tests. Each group of tests predicts a
particular facility decision.
Section 4.3, the Baseline Closure Analysis, identifies facilities that would likely choose to terminate
operations in the pre-compliance environment. These are facilities that are having or will likely have serious'
4.2
-------
financial difficulties regardless of the promulgation of effluent guidelines. Attributing these financial difficulties
to the guidelines rather than to these pre-existing financial problems would over-estimate the burden of those
guidelines. Accordingly, facilities that failed the Baseline Closure Analysis were excluded from subsequent
analyses that measure the impact of meeting effluent guidelines.
The Baseline Closure Analysis subjects facilities to two financial tests, which are detailed in Section 4.3.
One examines current cash flow. The second compares the benefits of closing and liquidating the facility to the
value of expected future earnings from operating the facility. Facilities that failed both tests were projected
baseline closures.
Next, the Post-Compliance Closure Analysis (Section 4.4) determines if facilities that would likely
choose to remain open in the baseline in the absence of effluent guidelines would likely choose to terminate
operations in the face of those guidelines. The Post-Compliance Closure Analysis subjects facilities to the same
two tests as in the baseline case, except that the revenues and costs now reflect changes due to compliance with
effluent guidelines. Facilities that fail both tests are projected post-compliance closures.
Additionally, some facilities might choose not to close, post-compliance, but might nevertheless
experience intermediate levels of financial stress. Therefore, the Analysis of Financial Stress Short of Closure
described in Section 4.5 identifies those facilities whose profitability is low or whose interests costs are relatively
high, when compared to industry norms.
Two Cost Pass-Through Assumptions
The Post-Compliance Closure Analysis and Analysis of Financial Stress Short of Closure were
performed under assumptions of both zero-cost-pass-through and partial-cost-pass-through of compliance costs
to customers. The zero-cost-pass-through case presents an extremely conservative assessment of regulatory
impacts in that facilities are assumed to pass none of the costs of compliance through to customers. That is, both
quantities and prices and therefore revenues for each facility's production were assumed to remain constant
after compliance even though costs increased after compliance. Because it is likely that companies would be
able to recover some of the compliance costs by increasing prices, the no-cost-pass-through case represents a
conservative, worst case result of compliance.
For a more realistic assessment of impacts, EPA also analyzed the impact of regulatory options under
an assumption of partial-cost-pass-through. For the partial-cost-pass-through analysis, EPA estimated the ability
4.3
-------
of each firm to recover compliance costs from customers. The assessment of cost pass-through potential was
based on an econometric analysis of historical pricing and cost trends in the MP&M industries coupled with an
analysis of market structure factors that provide additional insight into the likely ability of firms to pass on higher
costs to customers. Market structure factors considered in the analysis included: market power based on
horizontal and vertical integration; extent of competition from foreign suppliers (both in domestic and export
markets); barriers to competition as indicated by supra-normal, risk-adjusted profitability; and the long term
growth trend in the industry. The analysis of pass-through potential yielded pass-through measures indicating
the fraction of compliance costs that firms subject to regulation are expected to recover from customers through
increased revenues. The partial-cost-pass-through analysis yielded modestly lower impacts in terms of expected
facility closures and losses in employment and production.
Facility Discharge Status
Whether facilities discharge effluent streams to a publicly owned treatment works (POTW) (i.e., indirect
dischargers) or directly to a waterway (i.e., direct dischargers) is relevant to the structure of the economic impact
analysis because these facilities and their effluent streams are regulated under different authorities of the CWA.
Indirect dischargers are subject to Pretreatment Standards for Existing Sources (PSES) while direct dischargers
are subject to Best Available Technology Economically Achievable (BAT) and Best Practicable Control
Technology Currently Available (BPT) requirements. For this regulation, different sets of regulatory options
were considered for indirect and direct dischargers. The four PSES regulatory options were considered for
indirect dischargers, and three BAT/BPT options were considered for direct dischargers. EPA performed the
facility impact analyses separately for these two classes of facilities and the regulatory options that were
considered for them.
Since the analytical methodology for estimating impacts on indirect dischargers is the same as for
estimating impacts on direct dischargers, the following three sections will explain the methodologies without
distinguishing between discharger types. Each section will describe one of the three financial analysis: the
Baseline Closure Analysis, the Post-Compliance Closure Analysis and the Analysis of Financial Stress Short of
Closure.
The discussions of the Post-Compliance Closure Analysis and the Analysis of Financial Stress Short of
Closure will each have separate discussions of the two alternative cost pass-through assumptions. Section 4.4,
for instance, will first present the methodology for estimating post-compliance closures under a zero-cost-pass-
through assumption, and then separately under a partial-cost-pass-through assumption. The Analysis of Financial
4.4
-------
Stress Short of Closure will be divided similarly.
Finally, Section 4.7 presents the analytical findings, separately for direct and indirect dischargers. Within
each discharge category, this last section presents results under each cost pass-through assumption and for each
regulatory option.
Figure 4-1
NO
- BASELINE CLOSURE
4.3 Baseline Closure Analysis
In Figure 4-1, the solid lines designate the part of the facility impact analysis described in this section.
The purpose of the Baseline Closure Analysis is to identify facilities that are in jeopardy of financial failure
independent of the compliance costs that may be
imposed by pollution prevention and control under
an MP&M effluent guideline. Because these
facilities were financially weak before
promulgation of effluent guidelines, attributing
closures or financial stress among these facilities
to the guidelines would overestimate the financial
impact of the guideline. Accordingly, facilities
that failed this analysis were excluded from the
subsequent analyses that measure the impact of
Bwdfau Closure Autyds
Does the facility
peas the After-
Tax Cash Flow
Test?
AtiS
Doenhe&cilfty
pass the Ijqui-
dttioaVahie/
Going- Concern
Value Tett?
compliance costs on financial performance and
condition. This analysis involved two financial
tests:
Poat-CompUl&a
jDoesthe&dUty
'Tax Cash Flow
[Test?
AfiaiyiijofFiY«
Closu*
'Does the ftdlin*!
[below industry
[norms?
: Closure Autyni
) DoesBw&ality
t pg£g the Ltaui-
--->.; dationVahie/
AND > Going- Concern
1 Vibe-Fat?
... ...... ......J
LIES
mei»I Stress Short of
Ipoesthefccilhy.
";* 'ratio fcll below
OR ikvkBtlyluSRW?
1
NO
YES
POST-COMPLIANCE
'CLOSURE
FACILITY SUBJECT
TO FINANCIAL
* STRESS SHORT OF
CLOSURE
1. After-Tax Cash Flow Test: Is average after-tax cash flow negative? That is, is the sample
facility losing money on a cash basis?
2. Liquidation Value/Going-Concern Value Comparison Test: Does the baseline
liquidation value of facility assets exceed the going-concern value of the facility?2 That
is, is the facility worth more liquidated than the facility's future earnings are worth today?
Based on a discounted value analysis of the facility's total cash flow, after-tax, available for capital.
4.5
-------
The After-Tax Cash Flow Test examines whether a facility has lost money on a cash basis during the
three years covered by the Survey. If the facility, on average, incurred a cash loss, then the facility's management
is presumed to be under pressure to change operations or business practices to eliminate future losses. One
possible change is to terminate operations at the facility. The second test examines whether that option might
be financially advantageous to the facility's ownership.
The Liquidation Value/Going-Concern Value Comparison Test examines whether the liquidation value
of facility assets exceeds the going concern value of the facility based on a discounted value analysis of the
facility's after-tax cash flow. This test determines whether the facility is worth more in liquidation or in its current
operation (i.e. as a going concern). If the liquidation value exceeded the going-concern value, then the facility
is presumed to see a reward for terminating the facility's business and liquidating its assets.
If a facility failed both tests, then it was judged to be at risk of financial failure independent of
compliance costs, and it was removed from the subsequent financial impact analysis. The requirement that the
facility fail both tests means that a facility must be under pressure to consider termination of business that is,
after-tax cash flow is negative and must also see a reward for doing so that is, liquidation value is estimated
to exceed going-concern value based on a discounted cash flow analysis. The analytic steps and interpretation
for both tests are discussed below.
After-Tax Cash Flow Test
The After-Tax Cash Flow Test involves calculating, for each sample facility, the average after-tax cash
flow (AATCF) over the years for which income statement data were obtained in the Survey. The calculations
are as follows:
1. Express all income statement values for a sample facility in 1989 constant dollars, based
on the Consumer Price Index for urban consumers (CPI-U). The Financial Accounting
Standards Board recommends that public-reporting firms use the CPI-U to prepare
supplemental reports that disclose the effects of changing prices on financial performance
and condition3. The Survey requested financial data for the three years 1987-1989, and
most facih'ties reported values for each of these years. However, a few facilities were not
See Statement of Financial Accounting Standards No. 89, Financial Reporting and Changing Prices, December 1986,
Financial Accounting Standards Board, Stamford, Connecticut.
4.6
-------
in operation in one or more of the earlier years or accounting procedures for those years
differed from those in later years. As a result, a few facilities did not report values for all
three years or may have reported values for one or more later years, 1990 or 1991. Data
for any of the years reported is deflated4 to 1989.
2. Compute after-tax cash flow in 1989 dollars for each year of data. After-Tax Cash Flow
(ATCF) was computed as follows:
ATCF =
or,
ATCF =
where:
E
D
REV =
TC
I
T =
E + D
[REV - (TC +1 + D + T)] + D = REV - TC -1 - T
Earnings or after-tax income;
Depreciation;
Revenue;
Total Costs, including Operating Costs and Fixed Costs
Interest
All Income Taxes.
3. Compute Average After-Tax Cash Flow (AATCF) over the number of years of data
that are available for a facility. The average value of ATCF was computed as a simple
arithmetic average. For example, if a facility reported data for 1987, 1988 and 1989,
the three values for ATCF indexed to 1989 were arithmetically averaged to yield
AATCF at 1989.
If the facility, on average, incurred a cash loss over the number of years of reported data (i.e., AATCF
< 0), then the facility's management and ownership is presumed to be under pressure to change operations or
business practices to eliminate future losses. One possible change is to terminate operations at the facility.
Whether it may be financially advantageous to the facility's ownership to terminate facility operations is the
subject of the next financial test.
TDeflation is the term for expressing nominal values in constant dollar equivalent values, regardless of whether the deflator
is less than or greater than 1. In most cases, deflators for years earlier than 1989 are greater than 1.
4.7
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Liquidation Value/Going-Concern Value Comparison Test
The second part of the test compares two facility-level values calculated from Survey data: (1) a
liquidation value and (2) the discounted value of total cash flow, after-tax, available for capital. The financial
issue underlying these calculations and comparison is whether the facility is worth more in liquidation or in its
current operation (i.e., as a going concern).
Calculation of Liquidation Value
Question 6 of the economic Survey requested data needed to calculate liquidation value. Specifically,
assuming a three-year liquidation process, facilities were asked to estimate market values for the following asset
categories: buildings and land, other fixed assets, inventories, and other working capital (net of inventories). The
Survey also asked for estimates of two types of liquidation costs. These liabilities include closure costs costs
that occur because of closure and that are incurred during closure and post-closure costs costs that occur
because of closure but that are incurred after closure. Thus, the concept of liquidation value requested in the
Survey is that of the gross market value of facility assets less extraordinary liabilities that occur because of
liquidation. Three adjustments were required to use the liquidation value in the economic impact analysis, as
follows:
1. Deflate liquidation value estimates to 1989. To put the comparison of liquidation value
and cash flow-based values on a consistent, constant dollar basis, the liquidation value
estimates were deflated from 1991, the time at which Survey data were requested, to 1989
using CPI-U.
2. Adjust for tax losses or gains on liquidation of facility assets. Because the liquidation
value of the facility is compared with a going-concern value based on after-tax cash flow,
the calculated liquidation value is netted for the tax cost (or benefit) resulting from capital
gains (or losses). This adjustment was made by first subtracting the book values of assets
as reported in the facility's 1989 balance sheet from the facility's reported asset liquidation
values (in 1989 dollars), which yields a net gain (or loss, if negative) on the liquidation of
facility assets. The extraordinary liability items accompanying liquidation were also
subtracted from this value to yield a net gain (or loss) for tax purposes at facility
liquidation. This value was multiplied by 0.34, the federal corporate income tax rate after
$335,000 of income, to give a net tax liability (or benefit, if the value was negative) upon
4.8
-------
liquidation. This value was subtracted from the liquidation value calculated in step 1 to
give an after-tax liquidation value.
3. Adjust for a three-year distribution of receipts in liquidation. In providing estimates of
liquidation value, facilities were asked to assume a three-year liquidation period to
anticipate the usual lag of several years between promulgation of a rule and the deadline
for full compliance. To adjust for the passage of time in liquidation, it was assumed that
the net receipts from sale of facility assets would accrue in three equal installments
uniformly spread over the three-year liquidation period. The first payment was assumed
to occur at the middle of the first year, the second at the middle of the second year, and the
third at the middle of the third year.5 These values were discounted to the beginning of the
liquidation period using the facility's estimated weighted average, after-tax cost of capital
(see Appendix A of this report, titled Calculation of Real, Weighted Average, After-Tax
Cost of Capital). The resulting value is used as the after-tax liquidation value in both the
Baseline Closure Analysis and later in the Post-Compliance Closure Analysis.
Calculation of Going-Concern Value
The after-tax liquidation value was compared with the estimated value of the facility as a going
concern to determine whether facility owners could be expected to benefit financially by terminating
production and liquidating facility assets. To make the going-concern value and liquidation value
comparable, they are both calculated in similar ways: both are calculated on an after-tax, total capital basis,
in which going-concern liabilities are not subtracted from the liquidation value. The measure of cash flow
discounted in this analysis is after-tax and includes payments available to total capital that is, debt and
equity. Correspondingly, the discounting factor the Weighted Average Cost of Capital also reflects
the after-tax cost of all capital.
The income statement portion of each facility's Survey contains data for calculating total after-tax
cash flow. Total After-Tax Cash Flow Available for All Capital (TATCF) is defined as follows:
TATCF = REV-(TC + T) = ATCF
(1)
Other receipt schedules are possible. However, this multi-year schedule recognizes the fact that, historically, effluent
guideline are implemented so that facilities come into compliance over a period of years.
4.9
-------
or
TATCF = (1- T) X (REV - TC) + T X (I + D)
(2)
where:
REV = Revenue;
TC = Total Costs, including Operating Costs and Fixed Costs
T = All Income Taxes (T = TX [REV - TC -1 - D]);
ATCF = After-Tax Cash Flow (as defined above)
I = Interest;
T = Corporate Income Tax Rate; and
D = Depreciation.
In expression (1), TATCF differs from ATCF only by the amount of interest payments: ATCF is after-
tax cash flow available to equity, while TATCF is after-tax cash flow available to all capital. Interest expense
is not adjusted for taxes when it is added back to the ATCF expression because the cash flow available for all
capital includes the total amount of interest payments without any adjustment for taxes. When the equation is
solved as in expression (2), the benefit of the tax shield for both depreciation and interest is explicitly apparent.6
Computation of TATCF involves comparable steps to those outlined above for ATCF, namely:
1. Deflate income statement values to 1989.
2. Compute TATCF in 1989 dollars for each year of data.
3. Compute average total after-tax cash flow (AT ATCF) over the number of years of data
which are available for a facility.
The going-concern value for the facility was calculated by discounting TATCF over a fifteen-year period
using the facility's estimated real (i.e., excluding the effects of inflation), weighted average, after-tax cost of
capital (RWACC). Fifteen years was used as the length of the discounting period because compliance-related
For a theoretical exposition of this method of cash flow analysis and valuation, see Haley, Charles W. and Schall,
Lawrence D., The Theory of Financial Decisions, McGraw-Hill, 1979, pp. 208-217, 323-332, and 344-352.
4.10
-------
investments are expected to have a useful life of at least 15 years. At the same time, extending the discounting
period beyond 15 years would have had little effect on the estimated going-concern values as discounting
progressively reduces the contribution of out-year values to the calculated present value. The cost of capital is
the expected total payment required by providers of the firm's capital for financing the firm's assets and is
calculated from a combination of Survey data, firm-level data obtained from public financial statements, and
financial and economic data obtained from federal government publications and other secondary sources (see
Appendix A, titled Calculation of Real, Weighted Average, After-Tax Cost of Capital).
The going-concern value of the facility is calculated as follows:
TATCF
t=o (1 + RWACC )l
where:
PV(TATCF) = The Present Value of After-Tax Cash Flows Available for All
Capital, or the estimated value of the facility as a going concern; and
N = The number of years of cash flows analyzed.
RWACC = Real Weighted Average Cost of Capital
Comparing Liquidation and Going-Concern Values
To complete the second test of baseline facility viability, the estimated after-tax liquidation value for the
facility was compared with the going-concern value. If the liquidation value exceeded the going-concern value,
then facility ownership is presumed to see a reward for terminating the facility's business and liquidating its
assets.
Combining the Tests to Determine Baseline Closures
If a facility failed both tests, then it was presumably in jeopardy of financial failure independent of the
promulgation of MP&M effluent guidelines and was excluded from further consideration. Failure of the after-tax
cash flow tests means that the facility is incurring a cash loss and is thus under financial pressure to alter its
business to prevent future losses. Failure of the liquidation value/going-concern value test means that facility
ownership would benefit financially by terminating operations and liquidating facility assets. The combination
4.11
-------
of these two circumstances leads to the expectation that facility management and ownership may decide to cease
business at the facility independent of the application of an MP&M guideline.
4.4 Post-Compliance Closure Analysis
The previous Baseline Closure Analysis evaluates each facility's financial and operating condition prior
to incurring costs for meeting effluent proposed guidelines and identifies those facilities that are projected to close
even in the absence of such guidelines. The post-compliance financial viability analysis, described in this section,
identifies facilities that are likely to terminate MP&M operations and liquidate assets after effluent guideline
promulgation rather than invest hi compliance with the regulation. In Figure 2, solid lines denote the Post-
Compliance Closure Analysis, while broken lines denote the other parts of the facility impact analysis. Facilities
that pass the baseline test but fail the post-compliance test are projected closures due to the effluent guidelines.
Figure 4-2
BittlUeCkmireAulyili
i
|Doc»theCicili!y
.>. BASELINE CLOSURE
Aul?ii»oIPliuciilStn«Skortof
Cknra
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oaecy
Interest coverage
i -"> 'raHo &U below
OX
YES
POST-COMPLIANCE
CLOSURE
FACILITY SUBJECT
TO FINANCIAL
STRESS SHORT OF
CLOSURE
The Post-Compliance Closure Analysis is
identical to the Baseline Closure Analysis, except
that the after-tax cash flow amounts used in the After-
Tax Cash Flow test and the Liquidation-Value/Going-
Concern Comparison Test are adjusted to reflect the
annual cash outlays for financing and operating the
pollution prevention and treatment systems needed to
comply with an MP&M guideline.
The adjustments to cash flow reflect the
annualized costs of purchasing and financing
equipment to comply with the alternative regulatory options and include allowances for the cost of debt and equity
financing. In addition, the cash flow adjustments reflect the annual costs incurred by facilities for operating and
maintaining the pollution prevention and treatment systems needed for compliance. The capital cost and
operating and maintenance costs that underlie these cash flow adjustments were estimated by EPA on the basis
of engineering studies at sample MP&M facilities.
As in the Baseline Closure Analysis, the post-compliance analysis requires two tests:
1. As the result of the financial effects of compliance, would after-tax cash flow to equity
become negative?
4.12
-------
2. As the result of the financial effects of compliance, would the baseline liquidation value
of facility assets exceed the discounted value of the facility's total cash flow, after-tax,
available for capital? That is, will the facility be worth more in liquidation than as a going
concern?
Again, the facility must fail both tests to be judged as likely to terminate MP&M operations rather than
undertake the investments needed for pollution prevention and control. The logic underlying the two tests is the
same as that outlined above. Failure of the cash flow test means the facility would lose money on its operations
after compliance and thus be under pressure to consider termination of business. Failure of the liquidation/going-
concern value analysis means that management would perceive a financial benefit from terminating operations
instead of undertaking compliance-related investments. Taken together, these analyses are meant to simulate the
compliance decision-making process of a facility's management.
Both of the post-compliance tests were considered under two assumptions. The first, and extremely
conservative assumption, is that the facility could pass none of the cost increases resulting from compliance
activities onto its customers. While firms are historically able to pass on at least some cost increases to
customers, this zero-cost-pass-through assumption is well-defined, easy to measure precisely and
methodologically robust.
If a facility did not fail the analysis under this zero-cost-pass-through assumption, then the facility was
presumed to not be a candidate for closure as the result of an MP&M guideline. If the facility failed the analysis
under the zero-cost-pass-through assumption, then the analysis was performed under the second, more realistic
assumption that the facility could be expected to pass on some of its compliance costs to customers. If the facility
failed this less stringent, partial-cost-pass-through assumptions, then the facility was judged as a candidate for
closure as the result of an MP&M guideline (see Appendix B, Analysis of Cost Pass-Through Potential for
MP&M Industry Sectors, of the companion document, Industry Profile for the MP&M Industry (Phase I), for
a detailed explanation of the concepts and methodology underlying the partial cost pass-through analysis case).
This chapter presents results under both the partial-cost-pass-through and zero-cost-pass-through
scenarios. However, to present worst-case results, analyses in the following chapters, which address other types
of impacts, are based on the extremely conservative zero-cost-pass-through assumption.
4.13
-------
After-Tax Cash Flow Test
Post-compliance cash flow was calculated using the same basic formulation as for pre-compliance cash
flow but with the addition of costs resulting from compliance. Specifically, the relevant formulation for pre-
compliance cash flow is as follows:
ATCF = REV-crc + i + T)
withT = TX(REV-TC-I-D)
and, therefore,
ATCF = (1-T)X(REV-TC-I) + (TXD)
where:
REV = Revenue;
TC = Total Costs, including Operating Costs and Fixed Costs
I = Interest;
T = All Income Taxes;
T = Corporate Income Tax Rate; and
D = Depreciation.
Adding the post-compliance adjustments, the post-compliance formulation is as follows:
(1- T) X [(REV + AREV) - (TC + JQ- (I + AI)]- E. - K + [ T X (D
ATCF,C=
where:
ATCFpc=
AC
P
Post-compliance cash flow (in the calculation, the average of cash
flow values, AATCF, is used as the basis for adjustment);
Operating (and Monitoring) Costs of Compliance
Annual principal payment on the debt used to finance compliance
capital outlays;
Annual allowance for cost of equity capital used to finance compliance
capital outlays;
A signifies the change in the value for a variable due to compliance;
All other variables are defined as before.
4.14
-------
The changes in the expression, relative to the pre-compliance case, are indicated by underlined,
bold-faced italics.
In this formulation, the change in revenue (AREV) is zero except in the partial-cost-pass-through
analysis. As noted above, the analysis was first conducted for each facility using the zero-cost-pass-through
assumption. That is, both quantities and prices and therefore revenues for each facility's production were
assumed to remain constant after compliance even though costs were increased on the basis of the estimated
equipment and operating costs for effluent guidelines compliance. Because it is likely that companies would
both attempt and be able to recover some of the compliance costs by increasing prices, the zero-cost-pass-through
case represents a conservative, worst case result of compliance. It was necessary to relax this assumption only
if a facility failed the zero-cost-pass-through analysis. In this case, the facility was analyzed under a less stringent
partial-cost-pass-through assumption. The partial-cost-pass-through analysis is based on an econometric analysis
of historical pricing and cost trends in the MP&M industries coupled with an analysis of market structure factors
that provide additional insight into the likely ability of firms to pass on higher costs to customers. This analysis,
which is documented in Appendix B, Analysis of Cost Pass-Through Potential for MP&MIndustry Sectors in
the companion document, Industry Profile for the MP&M Industry (Phase I), provided estimates of the fraction
of compliance costs that firms subject to regulation are expected to recover from customers through increased
revenues. Specifically, a cost pass-through coefficient, a, was developed for each facility in the analysis. When
multiplied by the annual compliance cost, the cost pass-through coefficient provides an estimate of the expected
change in facility revenues associated with the increased costs resulting from effluent guideline compliance costs.
The partial-cost-pass-through analysis does not decompose the change in revenues into separately estimated
changes in prices and output quantities.
The Operating Cost of Compliance (AC) is the change in costs estimated to result from operating and
monitoring pollution controls adopted to comply with effluent guidelines.
The change in interest expense (Al) and the principal payment for debt used to finance compliance
capital outlays (P) were calculated as follows:
1. Calculate the amount of the pollution control investment to be financed by debt. The
investment due to the effluent guidelines that is, equipment and, if relevant, land and
buildings was assumed to be financed by debt and equity in the same proportions as
each facility's overall proportion of debt to equity. This proportion is the same as the debt
4.15
-------
and equity weightings in the computation of the weighted average cost of capital (see
Appendix A). The debt fraction of total capitalization was multiplied by the total
compliance investment (TCI) outlay (capital costs of compliance, as estimated by the
engineering analyses) to calculate the debt required for the compliance investment.
2. Calculate the annual interest expense resulting from the TCI-related financing. The facility
was assumed to finance the TCI debt at a rate equal to the interest rate developed for the
weighted average cost of capital analysis. To calculate an annual interest payment, this
rate was multiplied by the debt component of the TCI financing.
3. Calculate the annual principal payment resulting from the TCI-related financing. The
facility was assumed to finance the TCI debt over a 15-year period with fixed annual
principal payments equal to l/15th of the initial debt amount. The assumption of a fixed
annual principal payment means that the sum of the principal payment and interest would
decline successively with each principal payment (because of the decline of the outstanding
principal balance on which interest is paid). Accordingly, the post-compliance cash flow
equation is a first-year calculation when the sum of principal and interest on compliance-
related financing are at their peak and thus provides a conservative treatment of the cash
flow burdens resulting from the compliance-related debt financing.7
The preceding calculations of payments to principal and interest payments are expenditures associated
with pollution control investments financed by borrowing money (financing by using debt). A business may also
choose to finance some of its investments with its own money (equity financing). While the business does not
pay interest on its own equity, there is still an economic cost associated with equity financing.
By using equity to finance part of an investment, a business forgoes income it could have earned by using
the equity in some other way, such as by investing it in other activities. This foregone earning is the cost of
equity. To recognize this cost in the financial decision analysis, an allowance for the recovery and cost of equity
capital is included in the after-tax cash flow analysis.
The equity allowance is calculated as follows:
7This methodology conforms with conventional business practices.
4.16
-------
1. Calculate the amount of the compliance investment to be financed by equity. The
proportion of debt to equity associated with each facility was previously used to estimate
the amount of debt that the facility would choose to use to finance its pollution control
investments. The remaining amount of TCI, not financed by debt, is the amount financed
by equity.
2. Calculate the level annual payment required to recover the equity capital and the associated
cost of equity over a 15-year period. A 15-year time horizon, the same period for
depreciating the TCI and for financing the compliance capital debt, is used as the period
over which the equity capital and its equity cost are to be recovered. The equity capital is
charged at the nominal cost of equity developed for the weighted average cost of capital
analysis (see appendix). The annual charge is based on the standard level payment
amortization formula, as summarized below. Note that no adjustment for taxes appears
in the calculation for, or use of, the allowance for cost of equity capital; all payments to
equity are made from after-tax cash flow.
_ eqxTI
eq
TI
e
N
Annual allowance for cost of equity capital
Equity fraction of compliance investment;
Treatment investment
Nominal cost of equity capital;
Number of years of capital recovery (15 in current analysis)
4.17
-------
The change in depreciation (AD) was calculated as the straight-line depreciation of TCI outlays over a
15-year recovery period.8 For this analysis, all capital outlays except for land are assumed to be depreciable for
tax purposes.
The changes in variable values were used to compute an AATCF^ (average ATCF^) using the arithmetic
average of pre-compliance, constant dollar after-tax cash flows for each facility. The after-tax cash flow test is
as before. If AATCFpc was found negative, the facility was assumed to seek to avoid the cash losses that will
prospectively accompany compliance. If, at the same time, it is financially advantageous for the facility to
terminate its operations (i.e., liquidation value exceeds going-concern value) then the facility was assumed to do
so. Note that this latter condition could be met without recalculating the liquidation value/going-concern value
analysis on a post-compliance basis if liquidation value exceeded going-concern value in the baseline analysis.
Liquidation Value/Going-Concern Value Comparison Test
This test was also based on the same formulations as outlined for the Baseline Closure Analysis with the
difference that the incremental effects of compliance were included in the analysis. The After-Tax Liquidation
Value, as discussed in the Baseline Analysis, was calculated independently of compliance considerations and is
thus the same value used for the post-compliance analysis. Therefore, the following discussion describes only
the incremental changes in the calculation of going-concern value for the facility.
As discussed previously, the going-concern value for the facility was calculated by a discounting analysis
based on Total After-Tax Cash Flow Available for All Capital (TATCF). The formulation of TATCF on a pre-
compliance basis was as follows:
TATCF= (1- T) X (REV - TC) + T X (I + D)
where:
^t would have been possible to calculate depreciation using the Modified Accelerated Cost Recovery System (MACRS)
schedules specified in the current U.S. Tax Code. The MACRS schedules provide an accelerated write-off of capital outlays
in which the fraction of a depreciable outlay that may be charged against taxes in early years generally exceeds the fraction
chargeable in later years. In addition, the recovery periods under the MACRS schedules are generally less than the class
lives and expected useful lives of the depreciable property. Thus, the MACRS schedule would generally provide a greater
present value of the write-off of depreciable property against taxes than indicated by the straight-line method. However, the
15-year straight-line method used here was considerably simpler to implement for the single-year formulation and moreover
it provides a more conservative treatment of the tax benefit provided by depreciation. It is highly doubtful that the difference
in depreciation accounting would have made any difference in the findings from this analysis.
4.18
-------
T = Corporate Income Tax Rate;
REV = Revenue;
TC = Total Costs, including Operating Costs and Fixed Costs
I = Interest
D = Depreciation.
In adjusting this expression for the post-compliance analysis of total after-tax cash flow, two kinds of
cash flow were accounted for:
1. At the time the facility implements the pollution controls required to comply with an
MP&M guideline, the facility makes an outlay in the amount of the treatment investment
(TCI, Total Compliance Investment). For the discounting analysis, this outlay is assumed
to occur at time zero.
2. After installing the pollution controls, the facility's operating cash flows change because
the facility operating expenses change and, in the case of the partial cost pass-through
analysis, facility revenues may also change. In addition, to the extent that the facility's
financing of the treatment investment involves debt, the facility will incur additional
interest expense. Finally, because of the acquisition of new, probably depreciable assets,
the facility may have a change in the amount of depreciation. Note that because the going-
concern value analysis is based on after-tax cash flow available for total capital that
is equity and debt capital, interest expense is not part of the cash outlays that would be
subtracted from revenues in arriving at the residual of cash flows available for payments
to capital. Similarly, because depreciation is a non-cash item, depreciation would also not
be subtracted from cash revenues in calculating residual cash flow. Finally, since interest
expenses and depreciation are tax deductible, cash flow is increased by the sum of interest
expenses and deprecation multiplied by T, the corporate tax rate.
Accounting for these adjustments, the post-compliance total cash flow expression takes on two values
as follows:
At time t = 0,
4.19
-------
TATCF,C = - TI + (1- T) X [(REV + AREV) - (TC + ATC)]
and for all other periods, t = 1 ... N,
TATCF,C = (1- T) X [(REV + AREV) - (TC + ATC)]
+ T X [(I + AI) + (D + AD)]
where:
TATCFp,. = Post-compliance values for TATCF;
TI = Treatment Investment;
A signifies the change in a variable's value resulting from compliance with MP&M
effluent guidelines. All other variables are defined as in the baseline analysis.
All variable values were calculated in the same way as outlined above in the discussion regarding analysis
of post-compliance after-tax cash flow. TATCF^, exclusive of the compliance capital outlay, was calculated by
first computing the adjusted TATCF values for each year for which facility data are available. These yearly post-
compliance TATCF values were then averaged to generate the TATCFfC value used in the discounted cash flow
valuation of the facility as a going concern. Except in a partial cost pass-through analysis, AREV, the change
in facility revenues, post-compliance, would be zero.
The discounting procedure is as discussed previously with the specific formulation as follows:
PV (TATCF
TATCF
t-o (1 +RWACC )'
where:
PV(TATCFpc)=The present value of after-tax cash flows available for capital, or the
estimated value of the facility as a going concern;
N
The number of years for which cash flows are analyzed, minus one;
TATCF^ is a constant value for all periods except t = 0, when the value is reduced by the
amount of the compliance capital outlay, TI, as discussed above.
4.20
-------
As for the baseline feasibility analysis, the liquidation value and going- concern values were compared.
If the liquidation value exceeds the going-concern value, then the facility presumably gains financially by
terminating operations instead of undertaking the facility improvement program required for compliance. As with
the After-Tax Cash Flow test, the analysis was first conducted under the zero-cost-pass-through assumption.
If a facility's liquidation value exceeded its going-concern value under this worst case assumption, then the
analysis for that facility was performed under the less stringent, partial-cost-pass-through assumption. Only if
the facility failed this less stringent test would it be deemed to have failed the Liquidation Value/Going-Concern
Value Comparison Test and be a possible candidate for closure as a result of effluent guideline compliance costs.
Combining the Tests
If a facility fails both the After-Tax Cash Flow and Liquidation Value/Going-Concern Value Comparison
tests, then the facility was judged to be a candidate for closure and liquidation of assets as the result of the costs
of an MP&M guideline. The facility's ownership is financially better off by avoiding future losses in operating
cash flow and taking the financial gain expected in liquidation. A facility need only fail one test incrementally
as the result of MP&M compliance to be judged a candidate for closure if the facility had already failed the
other test in the baseline analysis. This is likely to occur when the facility has a liquidation value that exceeds
going-concern value in the baseline analysis but still has positive cash flow. If, as the result of compliance, after-
tax cash flow was expected to become negative, the facility would meet the second condition for failure.
4.5 Analysis of Financial Stress Short of Closure
The third financial impact test, the Financial Stress Analysis, identifies facilities might have difficulty
financing the investments associated with an MP&M guideline. Figure 4-3 places this portion of the facility
impact analysis in context by denoting it with solid lines. This analysis was undertaken only for those facilities
that remain open. Facilities that fail the Moderate Impacts Analysis may experience a financial impact that is
less severe than closure as the result of efforts to comply with an MP&M guideline. However, they may incur
significant financial stress from undertaking compliance-related investments and/or incurring the operating cost
burdens of compliance. Financing assistance might be required from the parent firm or through an equity infusion
or other financial restructuring. These facilities or firms are projected to become among the poorer, but still
viable, financial performers in an industry. Although they are not projected to fail or otherwise terminate
operations directly due to the MP&M effluent guidelines, the deterioration in their financial performance could
leave them more vulnerable to other factors in their business environment.
4.21
-------
Figure 4-3
[DoatbcSaWy
I Sa Cut Flow
iTert
NO
>-BASELINE CLOSURE
The Financial Stress Analysis examines whether the facility can afford the investments associated with
effluent guideline compliance. It is based on two measures of financial performance: pre-tax return on assets
(PTRA) and the interest coverage ratio (ICR). These
rank among the more important criteria that creditors
and equity investors review to determine whether and
under what terms to provide financing to a firm. The
PTRA and ICR also provide insight into the ability of
firms to generate funds for compliance investments
from internally generated equity that is, from after-
tax cash flow, hi this analysis, the two measures are
evaluated against industry norms obtained from
secondary sources. These measures were defined as
lUttUie Ckwve Auty&
rDOE*ib«&dUly
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POST-COMPLIANCE
"CLOSURE
irss
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FACILITY SUBJECT
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follows:
Pre-Tax Return on Assets (PTRA) (net operating income divided by total assets): a
measure of the profit performance of a firm's capital assets, independent of the effects of
tax and financial structure. PTRA is perhaps the single most comprehensive measure of
a firm's economic and financial performance (for credit analysis in particular). Interest
payments are made from pre-tax income. PTRA provides information about the quality
of management, the competitive position of a firm within its industry, and the economic
condition of the industry in which the firm competes. If a firm cannot sustain a
competitive PTRA on a post-compliance basis, it will probably have difficulty financing
the treatment investment, whether financing is to be obtained as debt or equity, or, more
likely, a blend of the two.
PTRA = COI/TA
with
COI = REV - TC
and, therefore
PTRA = (REV-TQ/TA
where:
4.22
-------
PTRA = Pre-tax return on assets;
COI = Cash income from operations;
REV = Revenue;
TC = Total Costs
TA = Total assets.
Interest Coverage Ratio (ICR) [pre-tax andpre-interest income (cash operating income)
divided by interest expense]: a measure of a firm's ability to service its contractual
financial obligations on the basis of current, ongoing financial performance. If a firm's
operating cash-flow does not comfortably exceed its contractual payment obligations, then
investors and creditors will be concerned that any decline in sales or increase in costs may:
(1) sharply reduce or eliminate returns to the equity owners of the firm, and/or (2) prevent
the firm from meeting its contractual payment obligations. In the first case, earnings might
fall or become negative, with a consequent reduction or elimination of dividends and/or
reinvested earnings. The market value of the firm's equity could also fall, causing a capital
loss to investors. In sum, the greater the ICR, the greater will be the firm's ability to meet
interest payments and, generally speaking, the greater the firm's credit-carrying ability.
ICR also provides a measure of the amount of cash flow available for equity after interest
payments.
ICR = COI /1
with
COI = REV-TC
and, therefore
ICR = (REV - TC) /1
where:
ICR = Interest coverage ratio;
COI = Cash income from operations;
I = Interest expense.
4.23
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When these measures are calculated taking account the cash effects of compliance with MP&M effluent
guidelines, they indicate a facility's ability to obtain the financing. Facilities whose values for these measures fall
below accepted industry norms may have difficulty in obtaining financing from external providers of capital.
In addition, low PTRA and low ICR indicate a decreased ability to generate cash internally (after meeting current
obligations) for equity financing.
Adjusting for the effects of MP&M compliance costs, the two measures are as follows:
pc
*AR)-(TC +ATQ]
(TA +TI)
and
ICR
pc
[(REV + AR)-(OC + AFC)]
(I + AI)
where:
TI
Pre-tax return on assets, post-compliance;
Interest coverage ratio, post-compliance;
Treatment investment (assuming all of the front-end outlay would be
capitalized and reported as an addition to assets on the balance sheet);
A signifies the change in the value for a variable due to compliance.
All other variables are defined as before.
The incremental values for revenues, expenses, and interest were calculated in the same way as described
for the previous analyses of the Facility Financial Decision. As before, the incremental revenue effect (AR) was
assumed to be zero for the more conservative zero-cost-pass-through analysis. If a facility met the tests under
this assumption, then analysis was not required under the partial cost pass-through case. However, if a facility
failed one or both of the tests in the zero-cost-pass-through case, then the measures were recalculated under the
less stringent partial-cost-pass-through assumption.
4.24
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To determine whether a facility's values for PTRA and ICR were so low as to indicate difficulty in
financing treatment equipment outlays, the values were compared with industry norms derived from data reported
in Robert Morris Associates Annual Statement Summaries (RMA).9 Specifically, facility PTRA and ICR values
were compared with the lowest quartile (i.e., 25th percentile) value for the respective financial measures as
calculated from RMA data for the relevant industries. The RMA-based threshold values shown in Table 4-2 were
calculated from data over the period 1985-1992 (see Appendix B, Summary of Threshold Values for Evaluating
Facility Financing Feasibility). Facilities with a post-compliance PTRA or ICR less than the 25th percentile
value were judged likely to experience difficulty in financing treatment system investments. Because both
measures are judged to be critically important to financial success and ability to attract capital, failure with regard
to either measure alone was deemed adequate for the impact determination.
TaMe4-2* Tkr«sfaoklsf&r Financial Stress Short of Closure
Sector Fre-TaxBet«r««B.Jit»»ctiS Itatfr^tCweragfi^aife
1.
2.
3.
4.
5.
6.
7.
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Space
Mobile Industrial Equipment
2.82%
2.86%
1.51%
3.09%
2.86%
2.86%
1.86%
2.10
2.11
1.89
2.15
2.11
2.11
1.76
Source: Environmental Protection Agency
4.6 Aggregating and Extrapolating Facility-Level Results to the Population of Facilities Expected To
Be Subject to Regulation
The financial analyses discussed in the preceding sections are based on the sample of MP&M industry
facilities on which financial and technical data were obtained through the Survey. Using results from these
analyses to assess the aggregate impacts of effluent guideline for the MP&M Phase I industry group requires
extrapolating these sample facility results to the industry population. The extrapolation is done with sample
weights that were developed on the basis of the sample design.
The Surveys were sent to a stratified random sample of facilities in the industry groups that will be
subject to the MP&M effluent guideline. The sample was designed to cover all industry groups subject to
9RMA provides financial statistics based on bank credit reports from public-reporting and non-public-reporting firms
in a variety of industries.
4.25
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regulation while taking account of the expected variance in facility characteristics within the separate industry
groups or sampling strata. To gain a relatively similar level of statistical precision in the descriptive information
obtained about each of the separate 4-digit SIC industry groups10, the sample design specified a varying number
of observations over the sampling strata. In general, the higher the expected variance within a sampling stratum,
the greater the number of observations needed to achieve a similar level of statistical precision across sampling
strata of unequal variances.
Because of these sample design considerations, the sampling weights that are used to extrapolate results
from the facility to the industry population vary among the industry groups that were the basis for the sampling
strata. In essence, the sampling weight indicates the number of facilities in the underlying population that a
sample facility represents. Therefore, to extrapolate and aggregate the facility-level results to the level of the
MP&M industry groups required treating each facility as a model unit that represents the number of facility units
in the 4-digit industry group indicated by its sampling weight (Appendix , Sample Design and Resulting
Facility Sample Weights explains the sample design and resulting sampling weights used for the aggregate
impact analysis).
Sample weights were used to extrapolate and aggregate facility-level results to the level of the seven
Phase I MP&M sectors and to the MP&M Phase I industry group in aggregate. In addition, the weighted results
were used to aggregate and analyze results according to other facility characteristics. For example, for the small
business impact analysis, facilities and their associated impact findings were sorted according to facility size
criteria to permit analysis of whether small businesses would be expected to incur a disproportionate share of the
impact burden resulting from the MP&M effluent guideline.
Key analytic results that were extrapolated and aggregated to the MP&M Phase I sector and total industry
group level include:
Fraction and aggregate number of facilities that were identified as failing the Baseline
Closure Analysis. These facilities were assessed as being in such poor financial condition
before compliance with the MP&M guideline as to be in significant jeopardy of closure
independent of effluent guidelines.
^Vhile the sample was designed around 4-digit SIC industries, this analysis aggregates the results to the seven MP&M
Phase I sectors for reasons described in the statistical appendix.
4.26
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Fraction and aggregate number of facilities that were identified as failing the Post-
Compliance Facility Financial Viability Analysis. These facilities were assessed as being
likely to close or otherwise terminate MP&M operations instead of comply with the costs
of the MP&M guideline.
Fraction and aggregate number of facilities that were identified as failing the Financial
Stress Analysis. These facilities were assessed as being likely to encounter significant
financial difficulties short of closure in their efforts to finance the treatment system costs
of the MP&M guideline.
In addition, for each of these categories of analytic findings, the facility weights and other relevant data
from the Surveys were used to project:
Total revenues or value of shipments affected. That is, what are the gross values of
shipments or revenues, and fractions within the MP&M industry sector and total industry
group, that fell in the different impact categories? In particular, the value of shipments
associated with the failures of the Post-Compliance Closure Analysis is the estimated total
loss in domestic shipments resulting from compliance with the MP&M guideline. This
makes the extremely conservative assumption that other facilities would not increase
production.
Total employment affected. The estimated numbers of employees affected is based on the
employment intensity of production (i.e., number of employees and labor-hours per dollar
of revenue) in the model facilities falling in the different impact categories.
Total annualized cost of compliance. The annual cost of compliance experienced by
MP&M facilities is measured by the impact of capital and operating compliance costs on
an annualized, after-tax measure of cash flow that reflects private costs of capital and the
expected tax treatment of capital outlays and annual expenses.
Total capital and operating cost burden to the economy from effluent guideline compliance.
Total capital cost and operating costs for compliance were aggregated to the MP&M total
industry and sector levels^or those facilities that are expected to achieve compliance and
4.27
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remain in business that is, the segment of the industry that fails neither the Baseline
Closure Analysis nor the Post-Compliance Closure Analysis. The total estimated capital
costs were annualized over a 15-year recovery period at the real private opportunity cost
of capital of seven percent as specified by the Office of Management and Budget. The
sum of the total annual operating costs and the annualized capital costs represents the total
annual cost burden to the economy of the MP&M guideline.
These results were extrapolated and aggregated to the MP&M total industry and sector levels for both
the zero-cost-pass-through and. partial-cost-pass-through economic impact assumptions.
The zero-cost-pass-through analysis assumes that facilities and firms affected by the MP&M guideline
must absorb all of the increased capital and operating costs resulting from effluent guideline compliance with no
change in product prices. In addition, no attempt was made in the analysis to redistribute any of the lost
production to the facilities that remain in operation in the industry. Accordingly, the zero-cost-pass-through
analysis provides a highly restrictive, worst-case estimate of the possible economic impact of the MP&M effluent
guideline. This is a methodology that yields robust numerical results that are protective of the regulated industry.
The less restrictive partial-cost-pass-through analysis provides a more realistic assessment of how
producers and consumers may be expected to respond to the promulgation of MP&M effluent guidelines.
Producers are expected to attempt recovery of compliance costs by increasing the prices they charge consumers.
As the result of such price increases, the affected industry will move to a new supply and demand equilibrium
in which unit prices are likely to be higher and the total quantity of production lower relative to the equilibrium
conditions without implementation of the effluent guideline.1' In contrast to the relatively pessimistic zero-cost-
pass-through case, file partial-cost-pass-through case probably represents a more realistic approximation of
the longer-term market equilibrium solution that would result in the MP&M subject industries. This conclusion
This discussion speaks of the market adjustment process as though all changes occur against a static backdrop for other
supply and demand considerations. In fact, other market conditions are constantly changing and the pre-regulation
equilibrium is itself a dynamic event with each industry's output and prices in an essentially perpetual state of equilibrium-
seeking adjustment. Accordingly, the changes in prices and quantities resulting from regulation should be thought of as
the changes relative to the future path of equilibriums that would otherwise have prevailed in the marketplaces for the goods
and services of the MP&M industries. In this light, the observation that an industry may produce less of a given good or
service does not mean necessarily that the industry will produce absolutely less than it did before regulation. Rather, with
continued growth in the domestic and international economies, the affected industries are more likely to continue growth but,
perhaps at a lower rate, during the period of regulatory adjustment.
4.28
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is based in large part on the way in which the cost pass-through elasticities were estimated that is, the elasticity
values that are the basis of the partial-cost-pass-through coefficients were estimated from relatively long-term
cost and price series for the subject industries.
In this analysis, the market adjustment to the costs of regulation is analyzed by using partial-cost-pass-
through coefficients that indicate the fraction of compliance costs that affected producers are expected to recover
from customers through higher prices. The analysis for each sample facility assumes that the pre-compliance
quantity of production remains unchanged and that prices increase by the amount indicated by the estimated
partial-cost-pass-through coefficients. Accordingly, the change in revenue for each sample facility is
proportional to the indicated change in price. However, in the aggregate analysis that is based on extrapolation
of sample results to the total MP&M population and various sub-aggregations, the total quantity of production
in the affected industries is allowed to vary. Specifically, the estimated closure of facilities and the associated
losses in shipments, employment, and value of production activity provide an estimate of the impact of
compliance costs on the aggregate production equilibrium for the affected industries. To summarize, the new
industry equilibrium of production quantities and pricing is assumed to be accomplished by the joint effects of
(1) the changes in pricing as estimated from the partial-cost-pass-through analysis, (2) the exit of facilities from
the industry because of adverse financial results, and (3) the associated loss in production, as estimated from the
results of the Post-Compliance Closure Analysis. Note that production quantities at those facilities remaining
in the industry are assumed to not change neither from the effect of "own" consumer response to their
increased prices nor from the possible reallocation of some demand that previously was served by those facilities
that are assumed to exit the industry.
4.7 Estimated Facility Economic Impacts
The findings from the facility impact analysis are summarized below.
Baseline Closure Analysis
The estimated baseline closures for both indirect and direct discharge facilities are summarized in
Table 4-3. Of the estimated 10,601 discharging facilities, 13.9 percent or 1,471 facilities were assessed as
baseline closures from the financial analyses outlined above. The 1,471 baseline closures include 1,413 indirect
dischargers, or 16.2 percent of indirect dischargers, and 5 8 direct dischargers, or. 3.1 percent of direct dischargers.
4.29
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-&zWn4<3i 3«pi»ap^6fBa»«l%d[C*>*ti(«sA»g5?si«
"*''^ ", ' ' "L v:Jto&*^'7J ,-,,,.. -PjN**
* - ' IP totol Dischargers "" 'ijisdmraers
Facilities in Analysis
(dischargers only)
Baseline Failures
(percent failing in class)
Facilities in Analysis
(percent in class)
10,601
100.0%
1,471
13.9%
9,130
86.1%
8,706
82.1%
1,413
16.2%
7,293
83.8%
1,895
17.9%
58
3.1%
1,837
96.9%
Source: Environmental Protection Agency
Post-Compliance Closure Analysis
Findings from the Post-Compliance Impact Analyses are summarized below. Findings are presented first
for the PSES options considered for indirect discharging facilities, and then for the BAT/BPT options considered
for direct discharging facilities. A third section presents aggregate findings for the proposed PSES and BAT/BPT
options for both discharger classes. The expected impacts of compliance in terms of estimated total capital cost
and total annual costs are also summarized. In addition, the numbers of facilities expected to incur financial stress
short of closure (moderate impacts) are also presented.
The analyses of Post-Compliance Closure and Financial Stress Short of Closure were performed under
assumptions of both zero-cost-pass-through and partial-cost-pass-through of compliance costs to customers.
That is, both quantities and prices for each facility's production were assumed to remain constant after
compliance, even though costs increased on the basis of estimated equipment and operating requirements for
effluent guideline compliance. Because companies would likely recover some of the compliance costs by
increasing prices, the zero-cost-pass-through case represents an extremely conservative, worst case assessment
of the effect of proposed regulations.
4.7.1 Indirect Dischargers
For indirect discharging facilities, EPA analyzed the impacts of five possible PSES regulatory options
Options 1, 2, 3, 1A and 2A. The estimated facility-level impacts associated with each regulatory option are
discussed below and presented in Table 4-4.
4.30
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Table 4-4, Estimated Imparts «f Regulatory Compliance, Indirect iWscharger*
(dollar values in $WO, 19«5>>
Facilities in Analysis
Options Originally Considered for proposal
Option 1
7,293
Option 2
7,293
Option 3
7,293
Subsequent Options
Option 1A
7,293
Option 1A*
1,792
Zero-Cost-Pass-Through Analysis
Severe Impacts (closing facilities)
Tumber of Facilities
'ercent of Class
imployment (FTEs)
Value of Shipments
161
2.20%
3,001
$316,939
151
2.07%
2,354
$202,031
227
3.11%
18,215
$2,013,307
151
2.07%
2,354
'$202,031
7
0.39%
540
$114,509
Moderate Impacts (financial stress short of closure)
dumber of Facilities
42
124
184
54
12
Financial Impacts in Complying Facilities
Capital Cost
$235,374
$372,345
$1,002,541
$373,127
$299,428
Total Annual Compliance Cost
fax-adjusted^
*To adiustments
$172,491
$231 296
$182,232
$228,330
$525,311
$668,824
$178,059
$221,887
$121,585
$146,050
Partial-Cost-Pass-Through Analysis
Severe Impacts (closing facilities)
dumber of Facilities
'ercent of Class
imployment (FTEs)
Value of Shipments
91
1.25%
1,714
$279 162
52
0.72%
892
$151,711
160
2.20%
7,710
$735,140
82
1.12%
1,068
$164,254
7
0.39%
540
$114,509
Moderate Impacts (financial stress short of closure)
Number of Facilities
0
41
66
Financial Impacts in Complying Facilities
Capital Cost
$238,132
$375,372
$1,020,259
12
12
$375,885
$299,428
Total Annual Compliance Cost
Tax-adjusted1
N^o adiustments
$173,798
$232 913
$183,721
$230,184
$537,334
$684,583
$179,366
$223,503
$121,585
$146,050
* EPA estimates that Option 2a will exempt 5,50 1 indirect discharging facilities from regulation.
t "Tax-adjusted" compliance costs are an estimate of the annual cash compliance cost to industry and reflect private
costs of capital and expected tax treatment of capital outlays and annual expenses.
% Compliance costs with "No adjustments" are an estimate of the total annual cost of compliance without tax
adjustments and with capital costs annualized on the basis of a real social discount rate.
Source* Environmental Protection Agency
4.31
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Impacts of Option 1. Indirect Dischargers
Zero-Cost-Pass-Through Analysis
Of the 7,293 indirect discharging facilities subject to regulation, EPA estimates that 161 facilities or 2.2
percent could be expected to close as the result of regulation. The employment and shipments losses associated
with these facility closures are estimated at 3,001 full-time equivalent (FTE) positions and $317 million,
respectively (all amounts in 1989 dollars). The estimates of possible facility closures and associated losses in
employment and shipments are highly conservative because of the assumption of zero-cost-pass-through and
because the analysis does not account for the likelihood that non-closing facilities will absorb some of the lost
production and employment from closing facilities. As a result of compliance, an additional 42 facilities are
expected to incur financial stress short of closure, a moderate impact. EPA estimates that MP&M Phase I
industries will incur capital costs of $235 million for complying with Option 1. The total annualized cost of
compliance without tax adjustments and with capital costs annualized on the basis of a real social discount rate
amounts to $231 million. The estimated total annualized, after-tax cash cost to industry, which reflects private
costs of capital and expected tax treatment of capital outlays and annual expenses, amounts to $172 million.
Partial-Cost-Pass-Through Analysis
The more realistic, partial-cost-pass-through analysis shows fewer impacts. Among indirect dischargers,
91 facilities or 1.3 percent are expected to close as a result of regulation and no facilities are expected to incur
moderate economic impacts. Employment and shipments losses associated with closing facilities are estimated
at 1,714 FTEs and $279 million respectively. Because additional facilities are expected to come into compliance
under the partial-cost-pass-through analysis, costs of compliance are estimated to be modestly higher. Total
capital costs of compliance are estimated at $238 million and total annualized compliance costs are estimated at
$174 million, tax-adjusted, and $233 million, without adjustments.
Impacts of Option 2. Indirect Dischargers
Zero-Cost-Pass-Through Analysis
Under Option 2, EPA estimates that 151 facilities or 2.1 percent could be expected to close as the result
of regulation. The employment and shipments losses associated with these facility closures are conservatively
estimated at 2,354 FTEs and $202 million, respectively. An additional 124 facilities are expected to incur
financial stress short of closure because of regulation. EPA estimates that MP&M Phase I industries will incur
capital costs of $372 million for complying with Option 2. The total annualized cost of compliance without tax
adjustments and with capital costs annualized on the basis of a real social discount rate amounts to $228 million.
4.32
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The estimated total annualized, after-tax cash cost to industry, which reflects private costs of capital and expected
tax treatment of capital outlays and annual expenses, amounts to $182 million.
Partial-Cost-Pass-Through Analysis
Under the more realistic, partial-cost-pass-through analysis, 52 facilities or less than 1 percent of indirect
dischargers passing the baseline analysis are expected to close as a result of regulation and another 41 facilities
are expected to incur moderate economic impacts. Employment and shipments losses associated with closing
facilities are estimated at 892 FTEs and $ 152 million respectively. Total capital costs of compliance are estimated
at $375 million and total annualized compliance costs are estimated at $184 million, tax-adjusted, and $230
million, without adjustments.
Impacts of Option 3. Indirect Dischargers
Zero-Cost-Pass-Through Analysis
Impacts under Option 3 are estimated to be markedly higher than those for the other options. Under
Option 3, EPA estimates that 227 facilities or 3.1 percent could be expected to close as the result of regulation.
The employment and shipments losses associated with these facility closures are conservatively estimated at
18,215 FTEs and $2,013 million, respectively. Also, an additional 184 facilities are expected to incur financial
stress short of closure because of regulation, again considerably higher than for the other options considered.
Compliance costs are also considerably higher for Option 3. EPA estimates that MP&M Phase I industries will
incur capital costs of $1,003 million for complying with Option 3. The total annualized cost of compliance
without tax adjustments and with capital costs annualized on the basis of a 7% social discount rate amounts to
$669 million. The estimated total annualized, after-tax cash cost to industry, which reflects private costs of
capital and expected tax treatment of capital outlays and annual expenses, amounts to $525 million.
Partial-Cost-Pass-Through Analysis
Although impacts are moderated under the partial-cost-pass-through analysis (in relation to the zero-cost-
pass-through analysis), they still remain considerably higher than the impacts estimated for the other options.
Among indirect dischargers, 160 facilities or 2.2 percent of facilities passing the baseline analysis are expected
to close as a result of regulation and another 66 facilities are expected to incur moderate economic impacts.
Employment and shipments losses associated with closing facilities are estimated at 7,710 FTEs and $735 million
respectively. Total capital costs of compliance are estimated at $1,020 million and total annualized compliance
costs are estimated at $537 million, tax-adjusted, and $694 million, without adjustments.
4.33
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Impacts of Option 1A. Indirect Dischargers
Zero-Cost-Pass-Through Analysis
Under Option 1 A, EPA estimates that 151 facilities or 2.1 percent could be expected to close as the result
of regulation. This equals the number of facilities expected to close under Option 2. The employment and
shipments losses associated with these facility closures are conservatively estimated at 2,354 FTEs and $202
million, respectively. An additional 54 facilities are expected to incur financial stress short of closure because of
regulation, a moderate economic impact This is less than half the number of facilities incurring moderate impacts
as under Option 2. EPA estimates that MP&M Phase I industries will incur capital costs of $373 million for
complying with Option 1A. The total annualized cost of compliance without tax adjustments and with capital
costs annualized on the basis of a real social discount rate amounts to $222 million. The estimated total
annualized, after-tax cash cost to industry, which reflects private costs of capital and expected tax treatment of
capital outlays and annual expenses, amounts to $178 million.
Partial-Cost-Pass-Through Analysis
The more realistic, partial-cost-pass-through analysis again shows fewer impacts than under Option 2.
Among indirect dischargers, 82 facilities or 1.1 percent are expected to close as a result of regulation and another
12 facilities are expected to incur moderate economic impacts. Employment and shipments losses associated with
closing facilities are estimated at 1,068 FTEs and $164 million respectively. Total capital costs of compliance
are estimated at $376 million and total annualized compliance costs are estimated at $ 179 million, tax-adjusted,
and $224 million, without adjustments.
Impacts of Option 2A. Indirect Dischargers
Impacts under Option 2A, the proposed option, are generally lower than any of the other options
considered. Capital costs under this option, though, constitute a larger share of compliance costs than under the
other options considered.
Zero-Cost-Pass-Through Analysis
Among the five PSES options that EPA analyzed, the proposed Option 2a, which applies the limitations
of Option 2 to large flow facilities and exempts low flow facilities from regulation, achieves the lowest impacts
in terms of facility closures, employment losses, and financial burdens. Under Option 2a, EPA estimates that
a minimal number of facilities 7 would be expected to close as the result of regulation. These 7 facilities
represent 0.1 percent of the 7,293 indirect discharge facilities found to pass the baseline closure analysis and 0.4
percent of the 1,792 indirect discharge facilities that both have a discharge volume of at least 1,000,000 gallons
4.34
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per year and pass the baseline closure analysis. The employment and shipments losses associated with these
facility closures are conservatively estimated at 540 FTEs (0.03 percent of total) and $ 134 million (0.03 percent
of total), respectively. An additional 12 facilities are expected to incur financial stress short of closure because
of regulation, a moderate economic impact EPA estimates that MP&M Phase I industries will incur capital costs
of $299 million for complying with Option 2A. The total annualized cost of compliance without tax adjustments
and with capital costs annualized on the basis of a real social discount rate amounts to $146 million. The
estimated total annualized, after-tax cash cost to industry, which reflects private costs of capital and expected tax
treatment of capital outlays and annual expenses, amounts to $122 million.
Partial-Cost-Pass-Through Analysis
The more realistic, partial-cost-pass-through analysis yields the same results as the zero-cost-pass-
through analysis, in terms of compliance costs, facility closures and other facility impacts. The estimated impacts
of Option 2a under the partial-cost-pass-through case are the same as the already modest values estimated for
the zero-cost-pass-through case. The estimated closure and financial impact values remain the lowest among the
five PSES options analyzed for indirect discharging facilities.
4.7.2 Direct Dischargers
For direct discharging facilities, EPA analyzed the impacts of three possible BAT/BPT regulatory
options Options 1, 2, and 3 as previously described in Section 4. Of these options, EPA is proposing
Option 2 because, as discussed in Chapter 1, it represents the performance achievable with the best available
technology and, in view of its comparatively modest economic impacts, is economically achievable. The estimated
facility-level impacts associated with each of the regulatory options are discussed below and presented in Table
4-5. For direct dischargers, EPA estimated the same number of facility closures under both the zero-cost-pass-
through and partial-cost-pass-through analyses. Thus, results for these two cases are not presented separately.
However, the cost pass-through assumptions do affect the number of facilities estimated to incur moderate
financial impacts short of closure. These results are presented in separate rows in Table 4-5.
4.35
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Table 4-5: Estimated Impacts of Regulatory Compliance, Direct Dischargers
(dollar values in SwO, 1989} ,
Facilities in Analysis
Gptfan 1
1,837
option 2
1,837
Severe Impacts (closing facilities)
Option 3
.1,837
Zero-Cost-Pass-Through Analysis and Partial-Cost-Pass-Through Analysis (same results)
Number of Facilities
Percent of Class
Employment (FTEs)
Value of Shipments
18
0.96% .
158
$5,277
18
0.96%
158
$5,277
90
4.92%
7,339
$756,873
Moderate Impacts (financial stress short of closure)
Zero-Cost-Pass-Through Analysis
Number of Facilities
6
0
0
Partial-Cost-Pass-Through Analysis
Number of Facilities
0
0
0
Financial Impacts in Complying Facilities
Zero-Cost-Pass-Through Analysis and Partial-Cost-Pass-Through Analysis (same results)
Capital Cost
$40,421
$53,995
$108,700
Total Annual Compliance Cost
Tax-adjusted*
Mo adjustments*
$13,908
$15,516
$15,477
$16,332
$54,602
$68,720
* "Tax-adjusted" compliance costs are an estimate of the annual cash compliance cost to
industry and reflect private costs of capital and expected tax treatment of capital outlays and
mnual expenses.
J Compliance costs with "No adjustments" are an estimate of the total annual cqst of
compliance without tax adjustments and with capital costs annualized on the basis of a real
social discount rate.
Source: Environmental Protection Agency
Impacts of Option 1, Direct Dischargers
Of the 1,837 direct discharging facilities subject to regulation, EPA estimates that 18 facilities or 1.0
percent could be expected to close as the result of regulation. The employment and shipments losses associated
with these facility closures are estimated at 158 FTEs and $5 million, respectively. The estimates of possible
facility closures and associated losses in employment and shipments are conservative because the analysis does
not account for the likelihood that non-closing facilities will absorb some of the lost production and employment
from closing facilities. An additional 6 facilities are expected to incur financial stress short of closure because
of regulation, a moderate economic impact EPA estimates that MP&M Phase I industries will incur capital costs
of $40 million for complying with Option 1. The total annualized cost of compliance without tax adjustments and
with capital costs annualized on the basis of a real social discount rate amounts to $ 16 million. The estimated
4.36
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total annualized, after-tax cash cost to industry, which reflects private costs of capital and expected tax treatment
of capital outlays and annual expenses, amounts to $14 million.
Impacts of Option 2, Direct Dischargers
Under Option 2, EPA estimated the same magnitude of facility closures and associated impacts as for
Option 1; however, moderate facility impacts are slightly lower and compliance costs incurred by industry are
slightly higher. Closing facilities are estimated at 18 facilities or 1.0 percent of direct dischargers passing the
baseline analysis. Associated employment and shipments losses are again estimated at 158 FTEs and $5 million,
respectively. No facilities were assessed as likely to incur financial stress short of closure. EPA estimates that
MP&M Phase I industries will incur capital costs of $54 million for complying with Option 2. The total
annualized cost of compliance without tax adjustments and with capital costs annualized on the basis of a real
social discount rate amounts to $ 16 million. The estimated total annualized, after-tax cash cost to industry, which
reflects private costs of capital and expected tax treatment of capital outlays and annual expenses, amounts to
$15 million.
Impacts of Option 3, Direct Dischargers
In a similar way as for indirect dischargers, impacts under Option 3 for direct dischargers are estimated
to be markedly higher than those for Options 1 and 2. Under Option 3, EPA estimates that 90 facilities or 4.9
percent could be expected to close as the result of regulation. The employment and shipments losses associated
with these facility closures are conservatively estimated at 7,339 FTEs and $757 million, respectively. However,
no facilities are expected to incur financial stress short of closure either under the zero-cost-pass-through
assumption or under the more realistic partial-cost-pass-through assumption. Compliance costs are also
considerably higher for Option 3 than for Options 1 and 2. EPA estimates that MP&M Phase I industries will
incur capital costs of $109 million for complying with Option 3. The total annualized cost of compliance without
tax adjustments and with capital costs annualized on the basis of a real social discount rate amounts to $69
million. The estimated total annualized, after-tax cash cost to industry, which reflects private costs of capital and
expected tax treatment of capital outlays and annual expenses, amounts to $55 million.
Aggregate Impacts for the Proposed Options
Table 4-6 summarizes aggregate impacts for both indirect and direct discharging facilities for the
proposed regulatory options applicable to existing facilities: Option 2A for indirect dischargers (PSES) and
Option 2 for direct dischargers (BAT/BPT). Overall, 3,629 facilities passed the Baseline Closure analysis (1,837
direct discharging facilities and 1,792 "large flow" indirect discharging facilities) and thus are expected to be
4.37
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subject to regulation. Of this population, 25 facilities or 0.7 percent are expected to close as a result of regulation
in both the zero-cost-pass-through and partial-cost-pass-through analyses. The total associated employment
impact amounts to 698 FTEs (0.03 percent of the total employment in facilities passing the baseline analysis and
thus potentially subject to regulation) and the associated value of lost shipments amounts to $140 million (0.03
percent of the total shipments in facilities passing the baseline analysis and thus potentially subject to regulation).
An additional 12 facilities are expected to encounter financial stress short of closure as a result of regulation.
Summed over both indirect and direct discharging facilities, the total capital costs of compliance amount to $353
million. Total annualized costs of compliance are estimated at $162 million, without tax adjustments and with
capital costs annualized on the basis of a real social discount rate, and at $137 million, when calculated on an
after-tax basis using private costs of capital. These results are identical in both the zero-cost-pass-through and
partial-cost-pass-through analyses.
Table 4-6? Estimated Aggregate Impacts of JRegulatory Compliance
Proposed Regulatory Options 2a and 2 for Indirect and Direct Dischargers
(dollar values in $000, l£8$)
, ,£'',, *{,.' ,,,,,,^-^f.
+ -' ~<&8g»%^~ ' ' - - / '^ <
Option 2a (Indirect Option 2 (Direct Sum for Both
Dischargers) Dischargers) Classes of Facilities
Facilities in Analysis
1,792
1,837
3,629
Zero-Cost-Pass-Through and Partial-Cost-Pass-Through Analyses (same results)
Severe Impacts (closing facilities)
Number of Facilities
Percent of Class
Employment (FTEs)
Value of Shipments
7
0.39%
540
$1 14,509
18
0.96%
158
$5,277
25
0.69%
698
$119,786
Moderate Impacts (financial stress short of closure)
Number of Facilities
12
0
12
Financial Impacts in Complying Facilities
Capital Cost
$299,428
$53,995
$353,424
Total Annual Compliance Cost
Tax-adjusted"
No adjustments*
$121,585
$146,050
$15,477
$16,332
$137,063
$162,382
* "Tax-adjusted" compliance costs are an estimate of the annual cash compliance cost to industry and reflect private costs
pf capital and expected tax treatment of capital outlays and annual expenses.
' Compliance costs with "No adjustments" are an estimate of die total annual cost of compliance without tax adjustments
and with capital costs annualized on the basis of a real social discount rate.
Source: Environmental Protection Agency
4.38
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Chapter 5
Labor Requirements of the Proposed Regulation
5.1 Introduction
Firms will need to install and operate wastewater treatment systems to comply with an effluent
limitations guideline for the Metal Products and Machinery (MP&M) Industry, Phase I. The manufacture,
installation, and operation of these systems will require use of labor resources. To the extent that these
labor needs translate into employment increases in affected firms, the MP&M rule has the potential to
generate employment benefits. If realized, these employment benefits may partially offset the employment
losses that are expected to occur among facilities adversely affected by the rule. The employment effects
that would occur in the manufacture, installation, and operation of treatment systems are termed the
"direct" employment benefits of the rule. The employment effects associated with the operation of the
treatment systems will occur in the MP&M facilities that install treatment systems for compliance with the
MP&M regulation. The employment effects associated with manufacture and installation of the treatment
systems will occur in firms that supply the treatment system components to the MP&M facilities or provide
installation services. Because these employment effects are directly attributable to the MP&M rule, they
are conceptually parallel to the employment losses that were estimated for the facilities that are expected to
incur significant impacts as a result of the MP&M rule.
In addition to direct employment benefits, the MP&M rule may generate other employment benefits
through two mechanisms. First, employment effects may occur in the industries that are linked to the
industries that manufacture and install wastewater treatment systems; these effects are termed "indirect"
employment benefits. For example, a firm that manufactures the pumps, piping and other hardware that
comprise a treatment system will purchase intermediate goods and services from other firms and sectors of
the economy. Thus, increased economic activity in the firm that manufactures the treatment system
components has the potential to increase activity and employment in these linked firms and sectors. Second,
the increased payments to labor in the directly and indirectly affected industries will lead to increased
purchases from consumer-oriented service and retail businesses, which in turn lead to additional labor
demand and employment benefits in those businesses. These effects are termed "induced" employment
benefits.
5.1
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In view of these possible employment benefits, EPA estimated the labor requirements associated
with compliance with the proposed MP&M regulation, as represented by Option 2a for indirect dischargers
and Option 2 for direct dischargers (Option 2a/2). The following discussion summarizes the findings from
this effort. Labor requirements and thus the possible employment benefits were estimated in two
steps. EPA first estimated the direct employment effects associated with the manufacture, installation, and
operation of the MP&M wastewater treatment systems. These effects are discussed in Section 5.1. Second,
EPA considered the additional employment effects that might occur through the indirect and induced effect
mechanisms outlined above; these effects are discussed in Section 5.2.
On the basis of these analyses, EPA found that the MP&M regulation may yield direct employment
requirements of 1,594 full-time equivalent positions on a 15-year annualized basis. When the indirect and
induced employment effects are included, this value increases to 3,900 to 6,400 full-time equivalent
positions.
5.2 Estimating the Direct Labor Requirements of the MP&M Rule
As discussed above, an effluent guideline for the MP&M industry will create demand for labor
services for manufacturing, installing, and operating wastewater treatment systems. EPA analyzed each of
these components of direct labor requirements separately. The sum of the estimated requirements for the
three labor categories represents the estimated total direct labor requirement, and thus the potential direct
employment benefit, from compliance with the MP&M effluent guideline.
Direct Labor Requirements for Manufacturing Wastewater Treatment Systems
EPA estimated the direct labor requirements for manufacturing wastewater treatment systems
based on the cost of the treatment system equipment and labor's expected contribution to the equipment's
value in its manufacture. Labor's contribution was estimated in dollars and was converted to a full-time
employment equivalent based on a yearly labor cost. Each component of the calculation is discussed below.
Cost of Treatment System Equipment
The cost of treatment system equipment was estimated as part of the facility-level impact analysis
for the regulatory options. Treatment system equipment requirements and associated costs were estimated
for each facility in the Survey that was assessed as incurring costs. For the labor requirements analysis,
compliance costs and their associated labor requirements were considered only for those facilities that were
assessed as likely to comply with the rule and continue MP&M production activities. The labor
5.2
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requirement effects of compliance were not estimated for facilities assessed as closures in either the
baseline or post-compliance analysis. These compliance costs were weighted according to the number of
facilities each sample facility represents in the underlying MP&M industry population and summed to give
an aggregate treatment system equipment cost for the MP&M industry. The total estimated capital
equipment cost in 1989 dollars for complying with Option 2a/2 is $263.7 million.1 This value is less than
the total capital cost of regulatory compliance reported in Chapter 4; the difference is the estimated
allowance for installation of the treatment system equipment.
Labor's Expected Contribution to the Equipment's Value
Input-output tables assembled by the Bureau of Economic Analysis in the Department of
Commerce provide information on the composition of inputs used to produce the outputs of industries in
the U.S. economy.2 The inputs tallied in the input-output tables include the purchase of intermediate goods,
materials and services from other industries as well as the use of labor by the subject industry. In
particular, the direct requirements matrix identifies the value of each input, including labor, that is
required to produce a one dollar value of output for a subject industry. From discussions with MP&M
project engineers, the "Heating, Plumbing, and Fabricated Structural Metal Products Industry" (Bureau of
Economic Analysis industry classification 40) was identified as the industry with output that most nearly
matches the kinds of equipment needed for compliance with the MP&M effluent guideline. From the direct
requirements matrix, the labor input, titled compensation of employees, accounts for $0.31016 of each
dollar of output value from the Heating, Plumbing, and Fabricated Structural Metal Products Industry.
Multiplying labor's share of output value (32.02 percent) times the value of equipment purchases for
complying with the MP&M rule ($263.7 million) yields labor's contribution to manufacturing the treatment
system equipment, measured in terms of gross compensation, $81.8 million (see Table 5-1).
1 The $320.4 million is the one-time outlay for purchasing the capital equipment estimated to be needed for
compliance with the MP&M regulation and is not the annual cost of the capital equipment. In the economic impact
analysis, the capital outlay is annualized over a 15-year period and the resulting value, which is part of the total
annual cost of compliance, is much less than the $320.4 million value.
2 See The 1982 Benchmark Input-Output Accounts of the United States, U.S. Department of Commerce, Bureau of
Economic Analysis, December 1991 and "Benchmark Input-Output Accounts for the U.S. Economy, 1982," in
Survey of Current Business, July 1991, U.S. Department of Commerce, Bureau of Economic Analysis. The 1982
tables are the most current information on the inter-industry input-output structure of the U.S. economy.
5.3
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Table 5-fc Analysis of Possible BmpJoyittent Generatfoii Effeef s ojNfie
Proposed Regulatory Option 2a/2 for ffie W&M ladusfay
mimii..i{i^idollto3m
Labor Cost
Total Share of
Weighted Production
Expenditures Value1
Labor Cost Component
one-time annual
basis - basis*
Direct Labor
Requirements^
, one-time annual
basis basis
Direct Labor Effects From Treatment System Equipment:
Manufacturing $263,693 31.02% $81,787
Installation
Operation
$87,898 42.23% $37,122
$8,980
$4,076
$63,467
1,704 187
773 85
1,322
Total Direct Labor Effects
$76,522
1,594
Notes:
1 Source: U.S. Department of Commerce, The 1982 Benchmark Input-Output Accounts of the United States,
December 1991.
2 Annualized over 15 years at the social discount rate of 7 percent.
3 Number of jobs calculated on the. basis of an average hourly labor cost of $24.00 and 2,000 hours per
labor-year.
Source: U.S. Environmental Protection Agency
In the economic impact analysis of the MP&M rule, the manufacture of treatment system
equipment is considered a one-time event that occurs at the beginning of industry's compliance activities.
Accordingly, the labor requirements for manufacturing treatment system equipment should be viewed as a
one-time requirement. Elsewhere in the MP&M economic impact analysis, the labor effects associated with
facility impacts are presented on an annual basis, with the expectation that these job effects would persist
over the period of analysis. Accordingly, to assess consistently the possible labor requirement effects from
manufacturing treatment system equipment, it was necessary to annualize the one-time labor effect.
Consistent with the annualization procedures elsewhere in the economic impact analysis, the one-time labor
compensation value was annualized over a fifteen-year period at the social discount rate of 7 percent. The
resulting annual value of gross labor compensation in manufacturing treatment system equipment is $9.0
million.
Conversion to Full-Time Employment Equivalent Basis
To convert the gross payment to labor to a full-time employment equivalent basis, the payment to
labor was divided by an estimated yearly labor cost. The yearly labor cost is based on the same labor cost,
$24.00 per hour, used in the engineering cost analysis to estimate the cost of operating treatment system
equipment. The $24.00 per hour rate is a comprehensive labor cost including an allowance for fringe
benefits (e.g., holidays, vacation, and various insurances) and payroll taxes, and was calculated in 1989
dollars. Assuming a 2,000 hour work-year, the gross annual labor cost per full-time employment position is
5.4
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$48,000. On a one-time, one-year basis (i.e., not annualized), the outlay for manufacturing treatment
system equipment is estimated to require 1,704 person-years of full-time employment. On a 15-year
annualized basis, the $9.0 million of gross labor cost for manufacturing treatment system equipment is
estimated to require 187 full-time employment positions.
Direct Labor Requirements for Installing Treatment System Equipment
EPA estimated the direct labor requirements for installing treatment system equipment in a parallel
manner to that used for analyzing the labor requirements for manufacturing treatment system equipment.
Each component of the calculation is discussed below.
Cost of Installing Treatment System Equipment
The cost of installing treatment system equipment was estimated as part of the engineering analysis
for estimating the purchase cost of treatment system equipment and is expected to average about 25 percent
of the total capital outlay for regulatory compliance. On this basis, the cost of installing treatment system
equipment was estimated at $87.9 million.
Labor's Expected Contribution to the Equipment's Value
The Bureau of Economic Analysis industry group that EPA used as the basis for estimating labor's
share of cost in installing treatment system equipment is the 'Repair and Maintenance Construction
Industry" (Bureau of Economic Analysis industry classification 12). In this industry group, gross payments
to labor account for $0.42233 of each dollar of output value, as recorded in the direct requirements matrix
for the national input-output tables. Multiplying labor's share of value (42.23 percent) by the estimated
total installation cost ($87.9 million) yields a gross labor cost for treatment system equipment installation
of $37.1 million. Like the purchase cost of treatment system equipment, the installation cost is a one-time
outlay and, accordingly, an annualized value was calculated using the 15-year amortization period and the
7 percent social discount rate. The resulting annual value for the labor cost of installing treatment system
equipment is $4.1 million.
Conversion to Full-Time Employment Equivalent Basis
Conversion to a full-time employment equivalent basis is based on the same yearly labor cost,
$48,000, as used in estimating the labor requirements for the manufacturing of treatment system
equipment. On a one-time, one-year basis, EPA estimates that 773 person-years of full-time employment
would be required for installing the equipment needed to comply with the proposed Option 2a/2 MP&M
5.5
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effluent guideline. Annualized over 15 years, the corresponding labor requirement for installing treatment
system equipment is 85 full-time equivalent positions.
Direct Labor Requirements for Operating Treatment Systems
MP&M project engineers estimated the annual labor hours required to operate wastewater
treatment systems as part of the estimation of the annual operating and maintenance costs for each MP&M
regulatory option. On a full-time equivalent basis, the estimated annual labor requirement for operating
treatment systems is 1,322 person-years. This value is assumed to recur annually over the period of
analysis. The corresponding total annual estimated payments to labor is $63.5 million (1989 dollars).
Total Direct Labor Requirements for Complying with the MP&M Effluent Guideline
Summing the three components yields the total direct labor requirements for complying with the
proposed MP&M effluent guideline as represented by Option 2a/2. On a full-time equivalent basis, the
estimated total annual labor requirement for complying with Option 2a/2 is 1,594 person-years. The
corresponding total annual estimated payments to labor is $76.5 million (1989 dollars). To the extent that
these labor requirements manifest as net new labor needs in the U.S. economy, the 1,594 full-time
employment equivalents have the potential to offset employment losses that may otherwise occur because of
the rule. Specifically, on the basis of the facility impact analysis presented in Chapter 4, EPA estimated
that total employment losses in facilities expected to close as a result of regulation would amount to 698
FTE positions. From the analysis presented in this chapter, the estimated direct labor demands resulting
from the manufacturing, installation and operation of treatment system equipment in complying facilities
may exceed the employment losses associated with estimated facility closures. As a result, the combined net
employment effect of the regulation may be positive.
5.3 Estimating the Indirect and Induced Labor Requirement Effects of the MP&M Rule
In addition to its direct labor effects, the MP&M effluent guideline may also generate labor
requirements through the indirect and induced effect mechanisms described in the introduction to this
chapter. The indirect and induced effects associated with an economic activity are analyzed by use of
multipliers. Multiplier estimates generally vary with the industry in which the direct economic activities are
expected to occur and with the economic characteristics of the location of the direct activities.
A range of multipliers was used in this analysis to illustrate the possible aggregate employment
effects of a MP&M effluent guideline. A recent EPA study used multipliers ranging from 3.5 to 3.9 to
5.6
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calculate the possible indirect and induced employment effects of direct activity investments in general
water treatment and pollution control.3 A study of "clean water investments" commissioned by the National
Utility Contractors Association (NUCA) documented total employment effect multipliers ranging from 2.8
to 4.O.4 Using the high and low values for these multipliers, the indicated aggregate employment effects
associated with the direct labor requirement of 1,888 full-time positions would range from 5,285 to 7,550.
A more conservative assessment of these possible employment effects would recognize that the
three categories of labor requirements analyzed above are likely to have different indirect labor demand
effects. In particular, the direct labor demands for manufacturing and installing treatment system equipment
result from additional economic activity in those industries. Accordingly, it is reasonable to expect that the
additional economic activity in manufacturing and installing equipment will translate into increased activity
in the industries that are linked to the direct effect industries and, hence, lead to additional labor demand in
those industries through the indirect effect mechanism. In contrast, the increased labor demand in the
MP&M industry for operating treatment systems does not result from increased economic activity in that
industry. As a result, increased labor demand in the MP&M industry resulting from the MP&M effluent
guideline may not translate into increased labor requirements in the industries that are linked to the MP&M
industry. In this case, the appropriate employment multiplier for the equipment-operations component of
direct labor requirements would exclude the indirect effect mechanism and include only the induced effect
mechanism. Multipliers cited in the NUCA study referenced above suggest that a multiplier based only on
the induced effect mechanism might fall in the range of 2.4 to 2.9. Using this lower multiplier range for the
equipment-operations component of direct labor requirements and the higher, 2.8 to 4.0 range for the
manufacturing and installation components, the estimated aggregate employment effects of the MP&M
effluent guideline would range from 4,662 to 5,837 full-time equivalent positions.
3 U.S. Environmental Protection Agency, Office of Water (February 1993). Job Creation Fact Sheet, internal
document.
4 Apogee Research, Inc., A Report on Clean Water Investment and Job Creation, prepared for National Utility
Contractors Association, March 1992.
5.7
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Chapter 6
Community Impact Analysis
6.1 Introduction
This chapter examines community level employment impacts that may result from proposed
effluent limitations guidelines and standards for the Metal Products and Machinery (MP&M) Industry.
Community impacts are assessed by estimating the expected change in employment in communities with
MP&M facilities that are affected by regulation. Possible community employment effects include the lost
employment in facilities that are expected to close because of regulation, and related employment losses in
other businesses in the affected community. These employment losses are considered significant if they are
expected to exceed one percent of the pre-regulation level of employment in the affected communities. For
such comparisons, a community is defined as the area in which employees may reasonably commute to
work typically a Metropolitan Statistical Area (MSA), or county if the affected community is not
contained within a MSA.
In addition to these expected employment losses, as discussed in the preceding chapter, EPA
anticipates that employment may increase as a result of facilities' expenditures for purchase and operation
of treatment systems for regulatory compliance. On a national and state level, such employment gains, if
they occur, may partially offset the employment losses that are expected to result from facility closures.
However, these gains will mitigate community employment losses only if they occur in the same
communities in which facility closures occur.
To understand the significance of community employment impacts from the proposed regulatory
option (Option 2a for Indirect Dischargers and Option 2 for Direct Dischargers), EPA performed two
analyses of expected community employment impacts. First, EPA examined the community employment
impacts based on the known location of the sample facility closures estimated to result from regulation.
Because the location of these sample facilities is known, it is possible to compare the expected employment
loss from closure, including losses in related businesses, with the pre-regulation employment in the affected
community, defined as either the MSA or the county in which the sample facility closure is located. This
analysis directly tests the significance of employment losses in the communities in which the estimated
closing sample facilities are located. However, this analysis does not address the impact of closures in the
underlying facility population that are represented by the sample facility closures. That is, each of the 396
6.1
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sample facilities on which this impact analysis was based represents an additional set of facilities in the
underlying population of 10,601 water-discharging MP&M facilities. Thus, each sample facility closure
represents additional facility closures whose location is not known. Thus, in the second analysis, EPA
examined the significance of expected facility closures taking into account the employment losses from the
closing facilities in the underlying facility population that are represented by the sample facility closures.
Because the locations of these non-sample closing facilities are not known, it is not possible to measure the
significance of the associated employment losses in specific communities. However, it is possible to
allocate the estimated employment losses among states and assess the significance of these losses at the
state level. In addition, at the state level, it is also possible to consider the effect of employment gains that
may occur as a result of compliance-related outlays.
Both of these analyses indicated that employment impacts at the community level are likely to be
comparatively minor. At the level of both MSAs and states, EPA expects that employment losses
including losses in closing facilities and in related businesses will be well less than one percent of pre-
regulation employment levels. When possible employment gains are included, the already slight community
employment impacts are further diminished.
The remainder of this chapter is organized as follows. Section 6.1 presents the methodology and
findings for the analysis of community employment impacts for estimated sample facility closures. Section
6.2 reviews the methodology and findings from the analysis of employment impacts at the state level; this
analysis takes into account the non-sample, represented facilities. Section 6.3 adds the effect of possible
employment gains to the estimated employment losses by state.
6.2 Assessment of Community Impacts for Estimated Sample Facility Closures
To assess the significance of facility closures and associated employment losses in specific
communities, EPA compared the employment loss from estimated sample facility closures, including losses
in related businesses, to the pre-regulation level of employment in the communities in which the sample
facilities are located. As described in the introduction, this analysis considers only the employment impacts
associated with estimated sample facility closures and does not account for the employment effects of
closures in the underlying population of facilities that are represented by the estimated sample facility
closures. The employment losses in represented facilities are not considered in this analysis because the
location of these facilities in terms of a specific MSA or county is not known. The methodology and results
for this assessment are discussed below.
6.2
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Methodology
The analysis of community employment impacts involves estimating the total employment loss in
an affected community and comparing that loss with the pre-regulation level of employment in the
community. For this analysis, the relevant community is the MSA or county (if the facility is not located
within a MSA) in which the estimated closing facility is located. These jurisdictions are assumed to
represent the labor market area within which residents could reasonably commute to work.
In estimating the employment impact in an affected community, EPA accounts for both the primary
and secondary impacts of facility closures. Primary impacts consist of the employment losses that are
expected to occur as a direct result of the regulation, namely the loss of full employment in the estimated
closing facility. Secondary economic impacts and associated employment losses occur in other businesses
than those directly affected by regulation and result from two mechanisms. First, reductions in output at
closing facilities influence activity and employment levels in linked industries (indirect effects). Second, the
losses in employment and employee earnings in both the directly and indirectly affected businesses result in
reduced personal consumption expenditures, which may further affect employment levels in the community
(induced effects). If the total employment loss, including primary and secondary impact, is expected to
exceed one percent of the pre-regulation level of employment in the community, then EPA considers the
employment loss to be a significant economic impact.
Estimating Primary Employment Impacts
The primary employment impact of an MP&M regulation is the employment loss in estimated
closing facilities that is, in those facilities estimated to incur Severe Impacts as the result of regulation.
For this analysis, all employment at a sample facility as reported in the §308 Survey response is assumed
to be lost. Employment at sample facilities was calculated on the basis of Full-Time Equivalent positions
(FTEs), which assume a 2,000 hour work year. No employment loss is assumed for facilities estimated to
incur Moderate Impacts (Financial Stress Short of Closure).
Estimating Secondary and Total Employment Impacts
Secondary employment impacts are estimated based on multipliers that relate a change in
employment in a directly affected industry to aggregate employment change including the employment
affects in: (1) linked industries (indirect effects) and (2) consumer businesses whose employment is affected
by changes in the earnings and expenditures of the employees in the directly and indirectly affected
industries (induced effects). For this analysis, EPA calculated state-specific, composite MP&M
6.3
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employment multipliers that are based on the estimated relationship of employment in MP&M industry
sectors to total state employment, and the composition of employment within a state among the seven
MP&M Phase I sectors.
These state-specific composite employment multipliers were calculated from Regional Input-
Output Modeling System (RIMS) multipliers developed by the Bureau of Economic Analysis (BEA) within
the Department of Commerce. BEA publishes state-level employment multipliers by BEA industry
classifications, which are conceptually similar to but structurally different from SIC code classifications.
For this analysis, EPA used the state-level employment multipliers for the 2-digit BEA industries that
'best" match the seven MP&M industry sectors, as summarized in Table 6-1. The 'best" BEA sector
match was determined as the BEA sector containing the greatest share of MP&M sector revenues, based on
Census of Manufacturers (COM) data from the Department of Commerce.
Phase I MP&M Sector
Table 64i Phase I MP&M Sector and $EA Sectors
Used To Construct State-Level Employment Multipliers
1: Hardware
2: Aircraft
3: Electronic Equipment
4: Stationary Industrial Equipment
5: Ordnance
6: Aerospace
7: Mobile Industrial Equipment
Sector Match
Source: U.S. Environmental Protection Agency
18: Fabricated Metal Products
22: Transportation Equipment, except Motor Vehicles
20: Electric and Electronic Equipment
19: Machinery, except Electrical
18: Fabricated Metal Products
22: Transportation Equipment, except Motor Vehicles
19: Machinery, except Electrical
The BEA state- and sector-specific multipliers were weighted on the basis of MP&M employment
by sector for each state to construct each state's composite multiplier. MP&M employment data by sector
were calculated by aggregating employment data by the 4-digit SIC code sectors that define each of the
seven MP&M Phase I sectors. Each state's composite multiplier was calculated as follows:
H
Empu
xMi.j
where:
Mi
Composite Employment Multiplier for the /th state
Employment for the /th State,/th MP&M sector
Employment for the /th State over all Phase I MP&M sectors
6.4
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My = BEA Employment Multiplier for the /th state for the BEA sector matching the /th
MP&M sector
The composite multipliers, listed in Table 6-2, were used in the community impact analyses for
both the sample facility closure analysis, which was performed for the specific communities in which the
estimated sample facility closures are located, and the state-level analysis, which accounts for closures in
the non-sample, represented facilities. Each multiplier indicates the expected change in total state
employment resulting from a change in MP&M industry employment, taking into account the structure of
inter-industry linkages in the state and the composition of MP&M employment in the state.
Tafole 6-2; ComoesSfc; KtnDloymeotMKltiolterslw State
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Composite
Multiplier
2.5155
1.4943
2.6651
2.2802
2.7202
2.8000
2.3424
1.9012
1.2715
2.1904
2.3517
1.8275
2.1952
3.0812
3.0417
2.7162
2.3542
2.7583
2.0767
2.0442
2.3199
2.5502
2.7169
2.7329
2.2981
2.5785
State
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Composite
Multiplier
1.6122
2.3709
1.6439
2.5176
2.4625
2.1481
2.1233
2.5079
2.2031
3.0269
2.3088
2.4743
2.8821
1.9809
2.2823
2.0144
2.6036
2.7606
2.6434
2.1326
2.2651
2.3778
2.1381
2.6641
1.7647
Source: U.S. Department of Commerce and Environmental Protection Agency
The expected total employment loss that is, considering both primary and secondary
employment impacts in a community was calculated by multiplying the employment loss in the
estimated sample facility closure by the composite multiplier for the particular state. Note that the use of a
6.5
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state-level multiplier for a MSA- or county-level analysis is likely to overstate the employment impact in
the MSA or county. The state-level multipliers register the expected effect throughout a state resulting from
changes in activity levels in the subject industry within the state. To the extent that some of these effects
occur in locations beyond the MSA or county in which the primary impacts occur, the state-level multiplier
will exaggerate the employment impacts in the MSA or county.
Assessing the Significance of the Estimated Total Employment Loss
To assess whether the community employment loss from an estimated sample facility closure is
significant, EPA compared the estimated total employment loss with the pre-regulation employment in the
community, based on 1990 Census data. For facilities that are located in an MSA, the pre-regulation
employment is the 1990 employment for the MSA. For facilities not located within a MSA, the pre-
regulation employment is the 1990 employment for the county in which the facility is located. If the total
employment loss exceeded one percent of the pre-regulation level of employment, the community
employment impact was deemed significant.
Findings
The facility closure analysis of the proposed regulatory option Option 2a for indirect
dischargers and Option 2 for direct dischargers indicated that 3 sample facilities would be expected to
close as a result of regulation. Two of the three sample facilities are located in California: one in Merced
county, and one in the Los Angeles-Long Beach MSA. The third facility is located in Virginia, in the
Norfolk-Virginia Beach-Newport News MSA. The total of employment losses in these sample facilities
amounts to 168 FTEs, or an average of 56 FTEs per closing sample facility (see Table 6-3). The facility
employment losses in each MSA or county were multiplied by the relevant state multiplier to estimate the
total employment losses, including primary and secondary effects. The total losses by MSA ranged from 20
to 264 FTEs (see Table 6-3). Table 6-3 also lists the pre-regulation employment for the relevant
communities. Comparison of the estimated total employment loss with these pre-regulation employment
values indicated that none of the estimated sample facility closures would be expected to have a significant
effect on total community employment. The largest of the percentage impacts is estimated for Merced
County, California and amounts to 0.26 percent. The estimated impact in the Los Angeles-Long Beach
MSA amounts to only 0.01 percent, while the impact in the Norfolk-Virginia Beach-Newport News MSA
rounds to zero when calculated to the nearest hundredth of a percent.
6.6
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6.3 Assessment of State-Level Employment Impacts
To capture the effect of employment losses in the non-sample facilities that are represented by the
estimated sample facility closures, EPA performed an analysis in which the employment loss in these non-
sample facilities was distributed among states in proportion to pre-regulation levels of MP&M industry
employment. Because the community locations of these non-sample, represented facilities is not known, it
is not possible to analyze the impact of these employment losses in specific communities as defined by
MSAs or counties. However, the analysis at the state level provides additional insight into the likely
employment impacts at a local level. As part of this analysis, EPA also distributed the possible employment
gains (estimated in the preceding chapter) among states and calculated a net potential employment impact
by state taking into account the expected effect of both facility closures and labor demands from
compliance-related outlays. The methodology and findings from this analysis are discussed below.
Table 6-3; Community Employment Impacts in Estimated Sample Closing Facilities ;
MSA or County
Los Angeles-Long Beach
Merced County
Norfolk-Virginia Beach-
Newport News
Total Pre-
Regulation
Emplloyment
4,173,000
64,617
594,463
Facilities
Affected
Number
1
1
1
Empl.
{FTEs)
97
62
9
MP&M
State
Multiplier
2.72
2.72
2.27
Total Employment
Loss in MSA
FTEs
264
169
20
as % of I*re-
Regnlation
Employment
0.01%
0.26%
0.00%
Source: U.S. Environmental Protection Agency
Methodology
The methodology for this part of the community impact analysis builds from the previous analysis
by using the same state-specific, composite employment multipliers for estimating total employment
impacts at the state level. In addition, this analysis begins with the same allocation of primary employment
impacts among states for the estimated sample facility closures as reported in the previous section. The
steps in the analysis are summarized below.
Calculate Primary Employment Impacts from Estimated Non-Sample Facility Closures
This analysis differs from the preceding analysis by accounting for employment impacts in non-
sample facility closures. Therefore, the first step was to identify the employment impacts in non-sample
facility closures that were to be distributed among states. As discussed in Chapter 4, on a sample-weighted
basis, the proposed regulation Option 2a, Indirect Dischargers and Option 2, Direct Dischargers is
expected to cause a total of 698 primary employment losses in 25 facility closures. The estimated 3 sample
6.7
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facility closures account for 168 of these primary employment losses. Accordingly, the primary impacts in
estimated non-sample facility closures amount to 22 facility closures and 530 FTE losses (see Table 6-4).
Table 6-4: Summary of Prttnary Employment Impacts in Estimated Fasility Closure
(Proposed Option: Option 2a, Indirect Dischargers and Option 2, Direct Dischargers)
Sample- Weighted Closures (from Chapter 4)
Estimated Sample Closures
Residual Impacts in Non-Sample, Represented Facilities
Number Facilities
25
3
22
Number Employees
698.
168
530
Source: U.S. Environmental Protection Agency
Distribute Impacts in Estimated Non-Sample Facility Closures among States
The primary employment impacts in non-sample facilities were distributed among states in
proportion to each state's estimated MP&M Phase I sector employment as calculated from Department of
Commerce employment data. The employment distribution percentages are summarized in Table 6-5.
Calculate Total Primary Employment Loss by State
The total primary employment loss in each state was the sum of the primary employment loss in
estimated sample facility closures by state (as described in the preceding section) and the primary
employment loss in the estimated non-sample, represented facility closures as distributed among states
based on the distribution of MP&M employment by state. Table 6-6 summarizes the estimated primary
employment loss by state in estimated sample and non-sample facility closures and as the sum over both
groups of estimated facility closures. These estimated values range from a low of zero (when rounded to the
nearest integer) to a high of 228 for California. Only California is estimated to have a total primary
employment loss in closing facilities that may exceed 50 FTEs.
Calculate Expected Aggregate Employment Loss by State
As in the preceding analysis, the expected aggregate employment loss by state was calculated by
multiplying each state's composite employment impact multiplier by the state's estimated total primary
employment impact. The composite employment impact multipliers used for this calculation are the same
as those used in the preceding analysis and summarized in Table 6-2.
Compare Expected Aggregate Economic Loss by State with Pre-Regulation Employment
To evaluate the significance of the estimated total employment loss by state, EPA compared the
employment loss values with estimated total civilian employment for each state, as reported by the
6.8
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Department of Commerce for 1991. Table 6-7 summarizes the calculation of expected aggregate
employment loss by state and the comparison of the estimated loss values with total state employment.
TaMetf-5: UistribitfiOB of MP&M3
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
MP&M
Employment
Percentage
1.3%
0.2%
1.0%
1.1%
13.1%
0.9%
2.8%
0.1%
0.0%
3.1%
1.8%
0.2%
0.1%
7.1%
3.2%
1.1%
1.0%
1.2%
0.6%
0.3%
1.0%
3.3%
5.2%
2.2%
0.8%
2.0%
base I Sector %m$lwmmt fey State
State
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
MP&M
Employment
Percentage
0.0%
0.5%
0.1%
0.6%
3.3%
0.2%
5.7%
2.3%
0.1%
7.2%
1.2%
0.8%
5.9%
0.4%
1.4%
0.1%
2.2%
6.1%
0.4%
0.2%
1.4%
1.1%
0.3%
3.7%
0.0%
Source: U.S. Department of Commerce and Environmental Protection Agency
Findings
Table 6-7 summarizes the findings from the analysis of estimated total employment loss by state
expected to result from the proposed regulatory option. As shown in the table, the estimated aggregate loss
by state averaged 36 FTEs and ranged from a low of zero to a high of 621; 33 states (including the District
of Columbia) had a total estimated loss of less than 25 FTEs. In only 9 states is the the total employment
loss estimated to exceed 50 FTEs. The maximum estimated employment loss in any state as a percentage
total state employment amounts to only one-half of one-hundredth of one percent of total state employment.
In eight states, the indicated loss as a percent of total state employment amounts to two one-thousandths of
6.9
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a percent. For most states (30), the estimated loss as a percent of total state employment amounts to one
one-thousandth of a percent. Finally, for the remaining 12 states, the estimated loss rounds to zero when
calculated to the nearest thousandth of a percent. Thus, on the basis of the findings from this and the
preceding analysis, EPA expects that the proposed regulation for the MP&M industry will not cause
significant employment impacts at the state level.
6.4 Assessment of State-Level Employment Impacts Including Possible Employment Gains
As a final part of the analysis of community level employment impacts, EPA considered the effect
of total state-level employment impacts including the effect of possible employment gains as analyzed in the
preceding chapter. Possible labor gains, as estimated in Chapter 5, were distributed by state, and state-level
employment multipliers were applied to these gains to estimate the total potential state-level employment
gain. These values were subtracted from the total employment loss values calculated in the preceding
section to calculate a net employment loss by state, which takes account of possible gains from compliance-
related activities.
For this analysis, EPA first distributed the estimated additional labor demand from manufacture,
installation, and operation of compliance equipment according to the distribution of MP&M employment
by state. These values represent the possible primary impact labor gains that may offset the employment
losses from estimated facility closures.
In recognition that these employment gains, if realized, would also generate employment gains in
linked industries, EPA again applied state-level employment multipliers to these gains to estimate a total
possible employment gain by state. In using the BEA state-level employment multipliers to calculate total
possible employment gains, EPA further recognized that the industry definitions on which the multipliers
would be based should differ depending on whether the primary labor effect occurred from the manufacture
and installation of the compliance equipment or from its operation. Specifically, the primary employment
gains stemming from operation of compliance equipment would occur in the MP&M industry and the
employment multiplier effect should reflect the composite multiplier applicable to the MP&M industry as a
whole within a state. However, employment gains stemming from manufacture and installation of
compliance equipment would involve different industries and the multiplier effects should be based on the
state-level multipliers applicable to those specific industries. For estimating the total employment effect
stemming from manufacture of compliance equipment, EPA used the state-level multipliers for BEA
industry sector 18, Fabricated Metal Products (which is also one of the sectors used to calculate composite
6.12
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MP&M industry multipliers). For installation of compliance equipment, EPA used the state-level
multipliers for BEA industry sector 7, Repair and Maintenance Construction.
Accordingly, to calculate a total potential employment gain from compliance-related activities,
EPA multiplied and summed the labor requirement values for the different activity categories as follows:
Comnonent of Primary Employment Gain
Manufacture of Compliance Equipment
Installation of Compliance Equipment
Operation of Compliance Equipment
Industry on Which Multiplier Is Based
Fabricated Metal Products Manufacturing
Repair and Maintenance Construction
Composite MP&M Industry in a state
The resulting estimates of total potential employment gain by state are summarized in Table 6-8.
These values range from a low of zero for the District of Columbia, which has a very low estimated
employment in MP&M industry activity, to a high of 552 for California, the state with the largest estimated
MP&M industry employment. The average possible gain by state amounted to 81 FTEs. These values were
subtracted from the estimated total loss values calculated in the preceding section to yield an estimated net
employment loss from the regulatory option. As shown in Table 6-8, for all states but California, which has
an estimated net employment loss of 69 FTEs, the estimated potential gain exceeds the estimated loss from
facility closures. Thus, the potential employment gains associated with compliance activities, if realized,
could substantially offset the local employment losses expected to result from facility closures.
These potential offsets to the employment losses from estimated facility closures further strengthen
EPA's conclusion that the proposed MP&M industry regulation should not have a significant employment
impact on affected communities.
6.13
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Chapter 7
Foreign Trade Impacts
7.1 Introduction
To the extent that effluent guidelines change the total production costs of domestic producers in the
MP&M industries without similarly affecting production costs for foreign producers, they are likely to affect the
balance of trade for the goods and services produced by the MP&M Phase I industries. If cost changes cause
facility closures, domestic and foreign facilities would compete to replace, in whole or in part, the sales associated
with the closing facility. The possible consequence of reduced exports and higher imports would be detrimental
to the U.S. trade balance both in aggregate and for the MP&M industry products in particular. The purpose of
the foreign trade analysis is to gauge the likely extent of trade impacts that could result from the MP&M effluent
guideline.
This analysis examines the effects of Option 2A under the zero-cost-pass-through assumption, which
is the most conservative assumption in that it leads to the largest number of estimated closures'. Even under this
assumption, the MP&M Phase I industry is estimated to experience approximately 0.01 percent change in its
trade balance for affected industries. Therefore, EPA finds that the proposed effluent guidelines will not
significantly reduce the trade balance of the United States or of the MP&M Phase I industry.
The following sections describe the data sources, methodology and findings associated with the foreign
trade analysis.
7.2 Data Sources
The foreign trade impact analysis begins with the revenue losses associated with facility closures
projected to follow the proposed regulation as discussed in Chapter 4. These estimated revenue losses are based
on the zero-cost-pass-through analysis case. The zero-cost-pass-through was selected because it yields the largest
estimated losses in revenues and is therefore the most conservative assumption. The revenue losses are allocated
between domestic and foreign producers based on data from the Survey and secondary sources characterizing the
state of U.S. competition with foreign producers.
However, it is not conservative with respect to the projected responses from facilities that do not close. These
facilities are allowed to compete for sales associated with closing facilities. This relaxes the assumption, implicit in the
facility impact analysis, of no change in facility-level output., but it retains the assumption of no price increase.
7.1
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This analysis uses responses from Question 5 of the Survey2, which asked respondents to identify their
"major source of competition" in each of three markets:
1. Local / Regional
2. National
3. International
Respondents were asked to select one and only one of the following possible responses for each of the
above categories:
1. Domestic producers of the same or similar products
2. Foreign producers of the same or similar products
3. No competition in this market
4. Do not operate in this market
Question 2 asked for the percentage of revenues earned from exports from each responding facility, and
therefore the percentage of revenues earned from domestic sales.
Secondary sources supplemented Survey data. Import and export data for MP&M Phase I sectors were
taken from Department of Commerce publications for the year 1991, the most recent year available at the time
of this economic impact analysis, and therefore the best predictor of foreign competitiveness at the time of
effluent guideline promulgation. The trade data were aggregated at the 4-digit SIC level and included both
dischargers and non-dischargers.
7.3 Methodology
In conventional economic theory, the effect of an increase in domestic production costs on the foreign
trade balance depends on several complex considerations: the likely pricing behavior of domestic producers in
response to the cost increase; the price elasticity of demand in both domestic and export markets; the likely
pricing and supply response of foreign producers; and the likely change in currency exchange rates. In practice,
these analytic factors are very difficult to estimate with any useful accuracy. For a more practical analytic
approach, this chapter assesses the likely international trade effects of the proposed regulation, Option 2 A/2, by
allocating the revenue losses in closing facilities between domestic and foreign producers based on an assessment
of the character of international competition faced by the facility and its MP&M sector. Each closing facility's
' The §308 Survey is attached as Appendix A to the companion Profile document.
7.2
-------
revenue loss is assigned to one of three trade impact scenarios that span the range of likely trade effects that
would occur because of the facility closure.
7.3.A Defining the Trade Impact Scenarios
When a facility closes, other domestic producers and foreign producers of the same goods and services
produced by the closing facility will compete to replace the facility's former export and domestic sales. The
outcome of this competition between domestic and foreign producers will determine the impact of a facility
closure on the MP&M industry trade balance.
In the competition for the facility's former export markets, domestic exports will fall and that component
of the trade balance will deteriorate unless domestic producers are competitive enough to increase their exports
to equal the amount previously exported by the closing facility. If domestic producers so dominate a world
market that all of a closing facility's exports are retained by other domestic producers, then the nation will
experience no loss of exports due to that facility's closure. Alternatively, if foreign producers are successful in
winning some or all of the foreign markets previously served by the closing facility, then domestic exports will
fall because of the facility closure and the trade balance will deteriorate accordingly.
Similarly, the closing facility's domestic sales are also subject to competition between domestic and
foreign producers. Whether imports will increase depends on the success of foreign producers in competing away
some or all of the domestic market share previously served by the closing facility. For example, if U.S. firms fare
poorly against foreign producers, all of the closing facility's previous domestic sales might be replaced by
imports. In that case, imports would increase by an amount equal to the closing facility's domestic sales and the
trade balance for MP&M products would deteriorate by a like amount. Alternatively, if U.S. producers retain all
of the former domestic sales of a closing facility, then imports will not increase and the import component of the
trade balance will be unaffected by the prospective facility closure.
The combination of the results from the competition for the former domestic and export sales of closing
facilities yields the change in the net trade balance for the MP&M industry. The amount by which the net trade
balance declines is determined as the increase in imports plus the decrease in exports.
7.3
-------
The foreign trade impact analysis identifies three scenarios that span the likely range of foreign trade
impacts of post-compliance closures3, hi the analysis, each closing facility is assigned to one of the three impact
scenarios based on the assessment of the character of international competition faced by the facility (from
Question 5 on the Survey) and its MP&M sector (from secondary census data). Each scenario describes a possible
outcome of the competition between domestic and foreign producers to replace the production loss in facilities
estimated to close as a result of the MP&M regulation:
1. Worst case. In the worst case scenario, all production for domestic consumption and for export
by domestic facilities projected to close post-compliance is captured by foreign sources. Exports
are assumed to decrease by the amount previously exported by closing facilities. In addition,
imports are assumed to increase to replace the entire non-export portion of these facilities'
production. Therefore, the net trade balance deteriorates by the total amount of production lost
due to the post-compliance closures.
2. Best case. In the best case scenario, all production for domestic consumption and for export by
facilities projected to close is replaced in full by production and exports from other domestic
facilities. Both exports and imports remain unchanged because foreign producers do not replace
any of the domestic production lost by facility closures. The net trade balance remains constant.
3. Proportional case, In the proportional case, the production of facilities projected to close is
replaced both by remaining domestic facilities and by foreign imports in the same proportions
as the baseline ratio of imports and exports to the total domestic market. As explained further
below, this scenario attempts to reflect the approximate historical competitiveness of MP&M
industry sectors in competing with foreign producers in domestic and foreign markets. As an
example, hi this scenario, if imports account for half of the domestic market of an MP&M
sector's products, then a closing facility's production for domestic sales would be replaced half
by imports and half by other domestic producers.
It is possible, but highly unlikely, for the trade balance to deteriorate or improve by more than the total value of
production lost by closing facilities. Even keeping prices constant, under the zero-cost-pass-through assumption,
changes in output can affect relative prices between countries by influencing currency exchange rates. Currently, the
impact of exchange rates on the MP&M trade balance cannot be modeled with useful accuracy and is not included in this
analysis.
7.4
-------
In the analysis, each sample facility that is projected to close and its associated revenue is assigned
to one of the three scenarios, depending on the facility's own characterization of foreign competition in the Survey
and on secondary source data on foreign trade at the sector level.
7.3.B Assigning the Production from Closed Facilities to One of the Three Scenarios
Each facility projected to close was assigned to a foreign trade impact scenario in two steps. The first
step assigns a point value to the facility's self-assessment of foreign competition as indicated in its responses to
the Survey. The second step assigns point values to the facility based on MP&M sector-specific secondary source
information compiled in the preceding industry profile (Chapter 3). The sum of these scores indicates the trade
impact scenario to which the facility is assigned for the trade impact analysis.
The first step examines the sample facility's own assessment of its competition against imports and
exports, as indicated by its response to the Survey question (Question 5) that asked the facility to identify its
"major source of competition" in each of three markets. The respondent facility's export market is the
"international market" as referenced in the Survey. If the sample facility indicated that it has no competition in
the export market, it is assigned an export competition point value of+1. Alternatively, if it indicated that foreign
producers are its main source of competition, then it is assigned a point value of -1. The other possible responses
were that the facility competes primarily against other domestic producers or that the facility does not operate
in the export market. Either of these responses corresponds to 0 points.
The facility's domestic market includes both local and national markets, as referenced in the Survey. If
the facility indicated that its primary source of competition in either of these domestic markets comes from
foreign producers, the facility is assigned a point value of-1 in the area of import competition. If, however, it
indicated that it has no competition in either of these markets, it is assigned a point value of+1. The exception
is that, if a facility indicated strong foreign competition in one domestic market and no competition in the other,
it was given a score of 0. Responses indicating that the facility does not operate in domestic markets or that it
competes primarily against domestic producers in those markets correspond to 0 points.
The analysis then sums each facility's import and export competitiveness scores. The possible score
values from the facility's self assessment of foreign competition range from +2, corresponding to no significant
foreign competition, to -2, indicating significant foreign competition.
7.5
-------
The second step of the analysis uses measures of foreign competition developed for the MP&M industry
sector profiles and in the analysis of facility cost-pass-through potential. To measure the degree of import
competition, each sector was given a score of-1, +1, or 0, depending on whether its import penetration ratio was,
respectively, higher than, lower than, or equal to the median import penetration ratio among the MP&M sectors.
Sectors with high import penetration ratios exhibit relatively less success in competing against foreign
competition. Export competition was scored in the opposite way: each sector was assigned a score of+1, -1 or
0, depending on whether exports as a share of domestic production were, respectively, higher than, lower than,
or equal to the median export share among the MP&M sectors. A high export share indicates relative success in
competing against foreign producers. The foreign trade analysis uses the sum of the import and export scores as
an indicator of the performance of each MP&M sector in competing with foreign producers for domestic and
export markets. These possible score values range from +2, indicating strong competitive performance against
foreign producers in domestic and export markets, to -2, indicating weak competitive performance against foreign
producers in domestic and export markets. Each sample facility closure takes on the point score of the sector to
which it belongs.
Adding the score based on respondents' self-assessments of the character of competition from foreign
producers to the score based on overall international market considerations for the sector yields a combined
international trade impact score for each projected sample facility closure ranging from -4 to +4. On the basis
of that score, each sample facility closure and its sample-weighted production was assigned to one of the three
foreign trade impact scenarios according to Table 7-1 below:
TabteT-lt Assignment of facilities to Trade Impact Scenarios
$&r$
-4 to -2
-Ito-H
+2 to +4
Assigned Scenario " """" " ,^-,^"^' ^-""- ^
Worst Case: Total replacement of lost output by foreign production.
Proportional Case: Proportional replacement of lost output by foreign production.
Best Case: Zero replacement of lost output by foreign production.
Source: Environmental Protection Agency
7.3.C Calculating Changes in Imports and Exports
Once each sample facility closure was assigned to a trade impact scenario, it is then possible to allocate
the sales that had been earned by projected closures between foreign and domestic producers in export and import
markets.
7.6
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First, the pre-compliance sales from failing facilities were divided between domestic and export sales
using their facility-specific Survey responses indicating the share of revenues earned from exports. Exports are
the product of each facility's export revenue share and its total revenues. Domestic sales include the remainder.
Depending on the foreign trade impact case to which each estimated facility closure was assigned, the disposition
of export and domestic sales was calculated as follows.
Best Case Scenario
For sample facility closures assigned to the best case scenario, all of their domestic sales are estimated
to be replaced by other domestic producers, while all of their export sales are also replaced by domestic
producers. Because the production and sales of the failing facility have been replaced by other domestic facilities,
neither exports, imports nor the trade balance change.
AX = 0 = change in exports
AM = 0 = change in imports
AX-AM 0 change in trade balance
Worst Case Scenario
In the worst case scenario, all former exports from closing facilities are assumed to be captured by
foreign producers, as are all former domestic sales. Therefore, exports fall by the full amount of the closing
facility's baseline exports and imports increase by the full amount of the facility's baseline domestic sales. The
U.S. trade balance declines by the amount of revenue the closing facility earned under baseline conditions.
where
AX
AM
AX-AM
R
SHAREX
RxSHAREx
Rx(l-SHAREx)
R
Facility average total revenue over period of analysis
Share of facility revenue from export sales
Proportional Case Scenario
The estimation of trade impacts for closures assigned to the proportional case is based on the
international trade performance of the MP&M sector from which the facility receives the most revenue.
Specifically, the assignment of the closing facility's domestic and export sales between domestic and foreign
producer is based on the current allocation of export and domestic sales between foreign and domestic producers
for the MP&M sector. In the proportional case, domestic producers are assumed to compete as well on the margin
7.7
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for retaining export and domestic markets as the relevant MP&M sector competes on average in export and
domestic markets.
Foreign producers are assumed to capture the same share of the facility's former domestic sales as the
share of total domestic sales in the relevant MP&M sector that is held, in aggregate, by foreign producers. Said
another way, foreign producers will be approximately as competitive on the margin in capturing the former
domestic sales of closing facilities as they have been historically in gaining a share of U.S. markets in the relevant
sector. If J denotes the share of domestic sales for the relevant MP&M sector from all sources accounted for by
foreign producers, then J can be calculated as follows:
J = M/(VS-X+M)
where:
J = Foreign producers' (import) share of domestic sales (1991, by
sector)
M = total U.S. imports (1991, by sector)
VS = total U.S. value of 'shipments (1991, by sector)
X = total U.S. exports (1991, by sector)
The denominator in the above expression measures the value of domestic sales from all sources. The U.S.
value of shipments less exports (VS - X) is the value of domestic sales from domestic producers; imports (M)
are the value of domestic sales from foreign sources; and domestic sales from domestic producers plus imports
(VS - X +M) is total domestic sales from both domestic and foreign producers.
The allocation of a facility's former export sales between domestic and foreign producers is based on the
historical success of domestic producers in achieving export sales in relation to total domestic sales for the
relevant MP&M sector. That is, domestic producers are assumed to retain the same share of the closing facility's
former export sales as the average share of exports to total domestic sales.4 In other words, domestic producers
are assumed to be approximately as competitive at the margin in retaining closing facilities' export markets as
While the ideal ratio to use is the ratio of U.S. exports to worldwide trade in the relevant industry sector, export figures
from other countries are not available with useful accuracy in the detail needed for this analysis. The measure used in this
analysis is a suitable substitute that exhibits some desired characteristics. If U.S. producers are not able to compete at all
with foreign producers in export markets, then the marginal competitiveness and, accordingly the calculated ratio, should
be 0. As U.S. competitive strength in foreign markets increases, the ratio should increase correspondingly. If U. S. producers
completely dominate world trade markets, then the marginal competitiveness and the calculated ratio should be 1. The ratio
used in this analysis does exhibit these characteristics.
7.8
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they are on average in achieving export sales out of the total domestic market. The ratio of exports to domestic
sales, K, is calculated as follows:
K = X / (VS - X +M)
where
K = Ratio of exports to total domestic sales (1991, by sector)
Applying these ratios to the revenues from facilities projected to close, the changes in export and imports
for facilities assigned to the proportional case were calculated as follows:
AX
AM
AX + AM
where
AX
AM
AX + AM
[RxSHAREx]xK
[Rx(l-SHAREx)]xJ
[R x SHAREX] x K + [R x (1 - SHAREX)] x J
Decline in exports (portion of former export sales captured by
foreign producers)
Increase in imports (portion of former domestic sales captured by
foreign producers)
Deterioration in net trade balance associated with an projected
facility closure assigned to the proportional impact case
Combining Results over Facilities from the Three Trade Impact Scenarios
The changes in exports and imports accruing from the projected sample facility closures were calculated
using the method for the foreign trade impact case to which each estimated sample facility closure was assigned.
The facility-specific changes in exports and imports were then multiplied by the facility sample weights and
summed to yield an estimate of the aggregate impact on imports, exports and the trade balance resulting from
promulgation of the proposed MP&M effluent guidelines.
7.4 Findings
Table 7-2 shows the number of effluent discharging MP&M Phase I facilities that are estimated to belong to each
of the foreign trade impact scenarios.
7.9
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Table ?-3jfra&MpaetS^
S<*tt8)ffo " - ^'o^"" ^
Worst Case: Total replacement of lost output by foreign production.
Proportional Case: Proportional replacement of lost output by foreign production.
Best Case: Zero replacement of lost output by foreign production.
All Facilities
N4,
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Chapter 8
Assessment of Firm-Level Impacts
8.1 Introduction
While Chapter 4 assessed the facility-level impacts of an MP&M effluent guideline, this chapter
estimates the impacts on firms, because firm-level impacts may exceed those assessed at the facility level,
particularly when a firm owns more than one facility that will be subject to regulation..
Firms differ from facilities in that firms are business entities or companies, which may operate at several
physical locations. Facilities are individual establishments defined by their physical location, whether or not they
constitute an independent business entity on their own. Some facilities in the Survey sample are single-facility
firms. In these cases, the firm-level impact depends only on the facility-level impact. In other cases, though,
sampled facilities are owned by multi-facility firms, so that the impact on the owning firm depends not only on
that facility, but also on the impacts on and characteristics of other facilities owned by the same firm.
This chapter does not examine the ability of firms to transfer capital, labor and technology between
facilities. This is a conservative omission, since such transfers would reduce the economic impact of effluent
guidelines. This chapter applies all of the financial impacts on facilities to their parent firms, by summing facility
impacts within each firm. Also, while this chapter examines all 396 sample facilities, with no allowance for
closures, facilities in fact have the option of closing rather than incurring impacts associated with effluent
guideline compliance. Some facilities (56, on an unweighted basis) were projected to close even under baseline,
pre-compliance conditions. Either kind of closures can ameliorate any impacts found in this firm-level analysis.1
EPA assessed firm-level impacts on the basis of changes in measures of profitability and interest
coverage, as calculated from firm financial statements. These measures are the same as those used in the Analysis
of Financial Stress Short of Closure. When applied to firms, these measures indicate the firm's ability to attract
1 Excluding closing facilities can diminish firm-level impacts in three ways. First, it may exclude facilities associated with
post-compliance firm failures. Second, a choice to close must be no more costly than compliance, to a rational firm.
Otherwise, it would not choose to close. Therefore, the impact of closures on firms can be no greater than the compliance
costs experienced by firms in this analysis, so allowing closures can have only a neutral or ameliorating effect on firm-level
impacts. Finally, excluding closing facilities would decrease the MP&M Phase I share of production for multi-facility firms,
as will be explained in the methodology section, thus decreasing the significance of facility compliance costs.
8.1
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and service debt associated with new capital needed for expansion in the normal course of business or for
pollution control investments associated with effluent guideline compliance.
EPA conducted the firm-level impact analysis under the zero-cost-pass-through scenario. Since the
Survey sample was not designed as a random sample of firms, but was instead toward estimating national
characteristics of facilities, the Survey data used in this analysis is not sample weighted. The findings apply only
to firms that own sample facilities and do not represent national estimates of firm-level impacts.
The principal difficulty in conducting the firm-level analysis is that the Survey did not request
information from respondents about other facilities owned by the respondent's firm. Although the Survey yielded
measures of firm as opposed to facility revenues, the revenue is not divided between revenue from water-
discharging, MP&M Phase I activities and revenue from other activities, and there is no indication of how many
other facilities the firms owns nor how many of these are water-discharging MP&M Phase I facilities. Therefore,
the analysis of firm-level impacts requires additional assumptions about the relationship between the sample
facilities and their owning firms.
EPA finds that the proposed effluent guideline will not be accompanied by unreasonable economic
burdens on firms engaged in MP&M Phase I activity. From the sample, EPA identified 263 single- and multi-
facility firms for which data were available for the firm-level analysis. Only six out of 263 firms analyzed are
projected to pass the baseline financial tests and fail these tests post-compliance. Three of the six firms are
associated with facilities that have already been identified as facilities failing the Analysis of Financial Stress
Short of Closure. Revenues from the six facilities that fail the firm-level impact analysis amount to less than
0.002 percent of all revenues earned by sampled firms active in water-discharging, MP&M Phase I activities.
The following sections describe the sources and methodology used in the firm-level analysis. The chapter
concludes by presenting the analytical findings.
8.2 Sources
This analysis requires data about facilities, firms, and the relationship between facilities and firms. In
order to assess the significance of firm-level financial impacts, the analysis also requires data about the industries
in which MP&M firms compete.
8.2
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The Survey described in Chapter 3 provides the facility data used to estimate facility-level impacts. The
Survey also indicates whether the responding facility is part of a single- or multi-facility firm. If the latter, the
survey then asks for identifying data for the owning firm. The analysis uses Survey data regarding firm revenues
only when secondary source financial reports are not available. When both secondary source and Survey data
were available, this analysis used secondary source data, because these were calculated from public filings in a
manner that was most likely to be consistent with similar calculations for other facilities.
If the respondent failed to provide an accurate name for its parent firm, Dun & Bradstreet's Million
Dollar Directory was consulted to determine that information. Given the name of the owning firm, EPA was
able to retrieve income statement and balance sheet information about publicly reporting firms from Mood's
Industrial Manual and from Standard & Poor's American, New York and NASDAQ Stock Exchange Reports.
Thresholds to determine the significance of firm-level impacts are the same as those used in the Analysis of
Financial Stress Short of Closure. They are based on industry statistics from Robert Morris Associates' Annual
Statement Studies and are presented in Appendix B.
8.3 Methodology
The impact of effluent guidelines on firms is assessed by measuring affected firms' pre- and post-
compliance returns on assets (ROA) and interest coverage ratios (ICR), defined in detail in the facility impact
analysis chapter2. In the case of firms consisting of only the responding facility, the impact on each firm's ROA
and ICR is identical to the unweighted facility impact.
It is more difficult, however, to estimate multi-facility firm impacts from facility data, given that the
Survey was not directed toward firms and does not address the firm's share of revenues subject to MP&M effluent
guidelines. While the Survey did ask facilities that were part of multi-facility firms to indicate firm revenues as
well as facility revenues, it is possible that the firm might own other facilities that are also subject to MP&M
effluent guidelines but were not sampled. If all of a firm's revenues come from MP&M Phase I production, the
impact of effluent guidelines on that firm will clearly be greater than the impact on a firm that participates
minimally in MP&M Phase I production, all other things being equal. Similarly, a firm whose production is
heavily concentrated in foreign facilities would also experience smaller impacts than firms primarily producing
in the U.S. and therefore subject to the MP&M effluent guideline.
2 See the Analysis of Financial Stress Short of Closure in Chapter 4.
8.3
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This analysis estimates impacts based on a range of possible relationships between facilities in the
sample and the firms that own them. Facility balance sheet and income statement changes are extrapolated to
changes in the owning firm's balance sheet and income statement to yield post-compliance measures of firm-level
ROA and ICR These values are compared to the thresholds presented in Chapter 4. Firms that exceed both the
ROA and ICR thresholds before compliance but fall below either threshold after compliance are deemed to
experience significant adverse impacts from the effluent guidelines.
This is a conservative analysis because, in practice, firms may reduce any adverse impacts estimated in
this firm-level analysis in several ways. First, contrary to the zero-cost-pass-through assumption used, firms are
likely to pass some costs of pollution control to customers through higher prices. Second, firms may shift
resources and activities among their facilities to meet effluent guidelines in less costly ways than indicated by
facility analyses alone. The current analysis does not examine such infra-firm transfers.
8.3.A Identifying Firm Financial Data
The Survey asked facilities to name the firms that own. them and to indicate whether these firms were
single- or multi-facility firms. Facilities that were subsidiaries of a common parent firm were grouped together.
This effort yielded a list of 355 unique firm names from the 396 sample facilities, including both publicly
reporting and non-publicly reporting firms. Of these, 185 are single-facility firms and 170 are multi-facility
firms.
The balance sheet and income statement data for publicly reporting multi-facility firms were gathered
from Moody's Industrial Manual and from Standard & Poor's American, New York and NASDAQ Stock
Exchange Reports. These data, together with the Survey data for single-facility firms, provided the necessary
information to calculate baseline ROA and ICR values for all single-facility firms and for publicly reporting
multi-facility firms (see Table 8-1). Firm financial data were not available for 94 non-public multi-facility firms.,
nor for 6 of the 76 publicly reporting multi-facility firms.3 The analysis for the 70 publicly reporting firms for
which data was available is offered as the best estimate of impacts on non-publicly reporting multi-facility firms.
Overall, the firm-level analysis is applied to 255 firms that own 290 of the 396 facilities sampled by the Survey.
These 255 firms include all 185 single-facility firms and the 70 multi-facility firms for which data were available.
' Historical data were unavailable for six firms because of changes in firm ownership.
8.4
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Ifafcfe Ms &Hir«es of Kra* financial &a*a
Single-Facility Firms
Multi-Facility Firms
I*ft&BsJy leprartiiig I tera*
§308 Survey
(8 firms)
Standard & Poor's/Moody's
(70 firms, data available
6 firms, data unavailable)
Nw^PaibMy Ssjwrtaig firms
§308 Survey
(177 firms)
Data Not Available
(94)
Where identification of parent firms was absent or unclear, Dun & Bradstreet's Million Dollar Directory
provided supplementary information.
8.3.B Calculating Baseline Firm Financial Conditions
To provide a baseline against which the financial condition of firms after compliance with effluent
guidelines can be compared, the analysis begins with the calculation of baseline firm financial performance, as
measured by returns on assets (ROA) and interest coverage ratios (ICR). ROA, a measure of profitability,
indicates a firm's viability as an ongoing enterprise and its ability to attract new capital. ICR indicates a firm's
likely ability to support the cost of financing new capital expenditures, such as business expansion or pollution
control investments. As in Chapter 4, these measures are defined as:
ROA = [REV - (TC - TAX - INT)] / TA
ICR = [REV - (TC - TAX - INT)] / INT
where:
REV = Revenue;
TC = Total Costs;
TAX = Tax Expense;
INT = Interest Expense;
TA = Total Assets
Return on Assets
Interest Coverage Ratio
Baseline ROA and ICR values were calculated for all firms for which data was available.4 If either ROA
or ICR fell below the thresholds given in Table 8-2, then the corresponding firm was considered to be a baseline
failure. Baseline failures were excluded from further analysis in that firm impacts attributed to MP&M effluent
4 The firm financial analysis includes compliance costs for facilities projected to close because of poor financial
performance or condition. Therefore, the post-compliance firm financial analysis likely represents a conservative upper
bound on firm impacts, since not all facilities would actually choose to incur pollution control costs. For some facilities,
closure might be a financially superior option.
8.5
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guidelines are measured as incremental failures with respect to the baseline firm financial tests. Failure of the
firm financial analysis is not a projection of firm closure, but rather a projection that the firm is likely to face
difficulties financing or attracting capital investments, including any effluent guideline related investments.
Tal>te8-2: Firm FinanciaHmpnct Thresholds
Return on Assets
Interest Coverage Ratio
2.86%
2.11
Source: Environmental Protection Agency
The thresholds are calculated as 1989 shipments-weighted averages of 25th percentile ROA and ICR
values across MP&M Phase I industries.
8.3.C Calculating Post-Compliance Firm Financial Conditions
The income statements and balance sheets of firms that survive the baseline firm financial tests are then
changed to reflect pollution control activities and outlays or savings accompanying Option 1A effluent guidelines,
as determined by EPA engineering analysis. For single-facility firms, these are the same total annualized changes
in after-tax cash flows as those used in the facility impact analysis in Chapter 4, under the zero-cost-pass-through
assumption.
For multi-facility firms, the compliance costs for each sampled facility within each firm are summed.
The sum of sampled facility compliance costs is then multiplied by a factor that accounts for the estimated share
of the firm's MP&M Phase I production that was not included in the sample. For example, if a multi-facility firm
is represented by two sample facilities, then extrapolating from the two facilities' compliance costs to the firm's
compliance costs depends on how much of the unsampled portion of the firm's production would be subject to
the effluent guidelines. If no other production at the firm is an MP&M Phase I activity, then the summed sample
facility costs are the same as the firm's compliance costs. If the entire firm is comprised of MP&M Phase I
facilities, though, then the firm's compliance costs should be a multiple of the sum of the firm's sampled facility
compliance costs. In this case, the multiplication factor is the ratio of firm to facility revenues. Extrapolating
facility-level compliance costs or savings in this way applies the same relationship between costs and revenues
observed in the sampled facilities to the entire firm5.
5 This assumption excludes economies or dis-economies of scale for the individual firm being analyzed. However, the
sample of firms used in this analysis includes firms represented by a wide range of facilities, whose compliance costs reflect
varying relationships, such as relative scale, between the sampled facility and its firm. Therefore, the aggregate results
8.6
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This analysis tests the entire range of possible assumptions about the proportion of firm production
subject to effluent guidelines. While the maximum MP&M Phase I share of firm production is 100 percent, the
minimum possible proportion is the proportion of the sampled facilities' revenue to their parent firm's revenue.
To illustrate, if a firm is represented in the Survey by facilities whose revenues sum to one-third of the firm's
revenues, then the proportion of the firm's revenues from MP&M activities can be no less than one-third.
However, that proportion could be as high as one if all the firm's unsampled facilities are also subject to the
MP&M Phase I effluent guidelines. Thus, for each multi-facility firm, two firm-level impact cases were analyzed:
Minimum proportion Within each firm, only revenues associated with sampled MP&M
Phase I facilities are subject to the regulation.
Maximum proportion Within each firm, all revenues are subject to the regulation.
The post-compliance firm ROA and ICR are therefore calculated as follows:
ROA
ICR
where:
REV
TC
TAX
INT
TA
[REV - (TC - TAX - INT +TCCaJ] / [TA 4-TIfoJ Return on Assets
[REV - (TC - TAX - INT + TCCfoJ] / [INT + AINT ^Interest Coverage Ratio
AINTfira=
Revenue;
Total Costs;
Tax Expense;
Interest Expense;
Total Assets;
Total Annualized Compliance Cost for the firm including an annualized share of the
capital investment (TI, below).
Total effluent guideline-related pollution control investment by the firm
Change in interest paid by the firm due to pollution control investment
and,
TCC =
L ^^actes
Sum of total annualized costs of compliance for each sampled facility
within the firm
presented in this chapter do reflect the diversity of facility characteristics within firms.
8.7
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Ti
to
1/K X TI&cUities
Sum of pollution control investments for each sampled facility within the firm
Sum of changes in interest expense paid by each sampled facility within the firm
Range of values from 1 to REV^ / REVfacilities
While, in this analysis, k, the share of firm revenue subject to regulation, is allowed to vary over the full
range from 1 to REVfirra / REVfaoiIities, its actual value would depend on the proportion of the firm's revenue that
is not subject to MP&M Phase I effluent guidelines, whether because the revenue is not associated with a water-
discharging, MP&M Phase I facility or because the production that generates the revenue does not take place in
the United States. While some information about the location of sales is available, information regarding location
of production is not consistently available, so the possibility of foreign-based production, for at least some of the
revenue, is included as one of the possible sources of variation in k.
Because the firm-level analysis uses the zero-cost-pass-through scenario, firm revenues do not change,
post-compliance. This is an extremely conservative assumption. Allowing firms to benefit from partial pass-
through of compliance costs would reduce the firm-level impacts.
The post-compliance values of ROA and ICR for each firm that passes the baseline analysis are
compared to the same thresholds as in the baseline case (see Table 8-2). If a firm fails to meet either threshold,
it is deemed an incremental failure.
8.4 Results
The firm-level analysis identifies, from Survey facilities, 185 single-facility firms and 170 multi-facility
firms. Of the latter, 76 were publicly reporting firms in 1989. Financial data were gathered for all of the single-
facility firms and for 70 of the 76 publicly reporting, multi-facility firms6.
Of the 255 firms analyzed, 73 firms, or slightly less than 29 percent, failed one or both of the firm
financial tests pre-compliance and are therefore classified as financially weak in the baseline case, independent
of the MP&M regulation. Of these, 39 baseline failures are associated with facilities projected to close under the
facility-level baseline closure test. The firm-level impact analysis seeks indications that a firm would have
6 Historical data were unavailable for six firms because of changes in firm ownership.
8.8
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significant difficulty in attracting or financing capital. This is a less severe impact than closure. Therefore, the
fact that some but not all of the baseline failures in the firm-level impact analysis are also associated with baseline
facility closures is not unexpected. The 29 percent failure rate is also consistent with the use, in this analysis, of
the lowest quartile values of each financial measure as thresholds. Even in the select group of loan applicants
in the Robert Morris Associates database, 25 percent of firms do not meet both thresholds.
Of the total of 182 firms that pass the baseline firm financial test, only one failed either test under Option
2A, even under the extremely conservative zero-cost-pass-through assumption (see Table 8-3). This was a
single-facility firm that accounted for less than 0.0001 percent of revenues earned by all 25 5 sampled firms in
the firm-level impact analysis. These results are independent of the assumptions about the share of firm revenue
derived from water-discharging MP&M activities. That is, the tests were applied first assuming that among
multi-facility firms, no unsampled facilities would be subject to effluent guidelines, and then assuming that all
of each firm's unsampled facilities would be subject to those guidelines. The results were identical in each case.
-Tahte-S^i flr»-^wp»cl''AttalysIsKes«lts
Number of Firms in Analysis
Baseline Failures
Incremental Post-Compliance Failures
255
73
1
Source: Environmental Protection Agency
8.9
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Chapter 9
Impacts on New Sources
The proposed regulation includes limitations that will apply to new direct and indirect discharging
sources within the MP&M Phase I category. In this chapter, EPA examines the impact of these regulations for
new dischargers to determine if they would impose an undue economic and financial burden on new sources
seeking to enter the MP&M Phase I industry.
EPA proposes to set New Source Performance Standards (NSPS), which apply to new facilities that
discharge directly to receiving waters, on the basis of the Best Achievable Technology (BAT) limitations as
specified by the proposed Option 2 for existing direct dischargers. Thus, the new source limitations for direct
dischargers are the same as those proposed for existing direct discharge facilities.
In addition, EPA proposes to set Pretreatment Standards for New Sources (PSNS), which apply to new
indirect discharging facilities (i.e., that will discharge to POTWs), on the basis of the discharge limitations in
PSES Option 2, as analyzed for existing indirect discharging facilities. Thus, the new source limitations for
indirect discharging facilities will differ from the PSES limitations proposed for existing indirect discharge
facilities. Specifically, the proposed PSES option for existing indirect discharge facilities, Option 2a, applies no
limitations on low flow indirect discharge facilities (i.e., facilities discharging less than 1,000,000 gallons per
year) while applying the mass-based limitations of Option 2 to large flow indirect discharge facilities (i.e.,
facilities discharging at least 1,000,000 gallons per year). However, the proposed PSNS limitations will apply
the mass-based limitations of Option 2 regardless of the new facility's discharge volume.
In general, EPA estimates that, when new and existing sources face the same discharge limitations, new
sources will be able to comply with those limitations at the same or lower costs than those incurred by existing
sources. Engineering analysis indicates that the cost of installing pollution control systems during new
construction is generally less than the cost of retrofitting existing facilities. Thus, a finding that discharge
limitations are economically achievable by existing facilities will also mean that those same discharge limitations
will be economically achievable to new facilities.
In its analysis of regulatory impacts on existing facilities, EPA found that the mass-based limitations of
PSES Option 2 would be economically achievable by indirect discharging facilities regardless of discharge
9.1
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volume. For this reason, EPA concludes that the new source limitations applicable to new indirect discharging
facilities will be economically achievable for these new sources.
EPA notes that one of the important reasons for not applying limitations to the lower flow class of
existing indirect dischargers (less than 1,000,000 gallons per year) is to reduce the administrative burden to
permit writers that would result from writing mass-based permits for the large number of existing low flow
indirect dischargers. EPA estimates that approximately 63 percent of the existing facilities to which the regulation
will apply are indirect dischargers with a flow less than one million gallons per year. However, applying the mass-
based concentration requirements of Option 2 to new facilities will not impose as large an administrative burden,
as new facilities enter gradually over time.
In addition to determining economic achievability, EPA also examined whether the proposed PSNS rule
would create barriers to entry and diminish the competitiveness of MP&M markets. Under Option 2a/2, potential
entrants would see substantially the same production costs of complying with effluent guidelines as existing
facilities that are considering expansion of production by adding capacity, hi the short run, however, existing
low-flow, indirect dischargers may benefit from a cost advantage over potential entrants, to the extent that these
existing facilities can increase production by raising their utilization of current capacity, which would not trigger
the imposition of effluent limitations.
9.2
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Chapter 10
Regulatory Flexibility Analysis
10.1 Introduction
This chapter examines the expected effects of the proposed effluent limitations guidelines and
standards for the Metal Products and Machinery (MP&M) Industry on small entities pursuant to the
Regulatory Flexibility Act. The Regulatory Flexibility Act (Public Law 96-354) calls for the Agency to
prepare a Regulatory Flexibility Analysis (RFA) for regulations that are expected to have a significant
impact on a substantial number of small entities. The purpose of the Act is to ensure that, while achieving
statutory goals, government regulations do not impose disproportionate impacts on small entities.
The Regulatory Flexibility Act also calls for record-keeping and reporting requirements to be
indicated, as well as any federal rules that duplicate, overlap, or conflict with the proposed rule. The
proposed regulation imposes no reporting and record-keeping requirements. In addition, no known Federal
rules duplicate, overlap, or conflict with the proposed rule.
As discussed in this chapter, EPA finds that the proposed regulation will not impose significant
impacts on a substantial number of small entities. In developing the proposed regulation, EPA sought from
the outset to define a regulation that would not unreasonably burden small entities. In particular, EPA
considered a number of regulatory alternatives for indirect and direct dischargers, each of which was
assessed to have varying degrees of impact on small entities. In selecting the proposed regulation from
among these alternatives, EPA balanced several factors, including: the need for additional reduction in
effluent discharges from the MP&M industry; the fact (as discussed below) that the MP&M industry is
largely comprised of small business entities; and the need to achieve additional reduction in effluent
discharges without imposing unreasonable burdens on small entities. As a result of these considerations,
EPA expressly framed the proposed regulation to reduce impacts on small entities.
Specifically, as discussed in Chapter 1, EPA settled on the proposed regulation for indirect
dischargers, Option 2a, after considering and rejecting the initial Option 2. On the basis of the facility
impact analyses presented in Chapter 4, EPA determined that Option 2 would be economically achievable
by indirect discharging facilities. In accordance with this finding, EPA initially considered adopting the
more stringent, mass-based requirement of Option 2 for all indirect discharging facilities. However, further
10.1
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analysis indicated that Option 2 would place additional financial burdens on smaller facilities (beyond the
level imposed by Option 1) and, moreover, would substantially burden permitting authorities by requiring
that mass-based standards be written for all indirect discharging facilities, regardless of size and amount of
discharge reduction to be achieved. For these reasons, EPA defined and evaluated two additional options
for regulating indirect discharging facilities:
1. Option la, which applies the more stringent, mass-based requirement of Option 2 to 'large" flow
facilities (annual discharge volume of at least 1,000,000 gallons per year), and the modestly less
stringent, concentration-based requirement of Option 1 for 'low" flow indirect dischargers (annual
discharge volume of less than 1,000,000 gallons per year); and
2. Option 2a, which applies the requirements of Option 2 to large flow facilities while exempting low
flow indirect discharging facilities from regulation.
EPA found that both of these additional options would mitigate the burden of regulation on small
businesses and permitting authorities. However, EPA found that the latter option, Option 2a, much more
substantially reduced the closure impacts and financial burdens among MP&M facilities owned by small
business and, as well, the regulatory implementation burden on permitting authorities. After considering
other factors that also favored Option 2a namely, cost effectiveness EPA decided to propose
Option 2a as the PSES option for indirect discharging facilities.
For this Regulatory Flexibility Analysis, EPA performed a number of analyses aimed at
understanding the role of small entities in the MP&M industry and the impacts expected to be imposed on
small entities by the proposed regulation. These analyses showed that the MP&M industry is largely
comprised of small business entities as defined on the basis of Small Business Administration criteria and
other measures of business size. As such, the regulation is expected to apply to a substantial number of
small entities. EPA also analyzed the expected level of impacts and compliance costs imposed on small
business entities under the proposed and alternative regulatory options. From these analyses, EPA found
that the proposed regulation will impose significant economic impacts (i.e., facility closures) more
frequently among small business entities than among MP&M facilities generally. In addition, these
analyses indicated that the compliance cost burden (as measured by total annual compliance costs as a
percent of facility revenue) is expected to be greater among small business entities than among MP&M
facilities generally. However, for both of these measures of small business impact frequency of facility
closures and compliance cost burden EPA found that the absolute levels of impacts were so slight as to
10.2
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not constitute a significant economic impact on small entities. Moreover, the impact levels under the
proposed regulation are much lower than those that would be expected under any of the other options that
EPA considered for proposal.
In view of this analysis and in recognition of the Agency's efforts to define the proposed option in a
way that would reduce impacts to small entities, EPA concluded that the facility closure impacts and
compliance cost burdens of the proposed option will not constitute an undue impact on small business
entities. Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 605(b), the Agency certifies
that the proposed regulation will not have a significant economic impact on a substantial number of small
entities.
The following sections of this chapter describe the Regulatory Flexibility Analysis undertaken for
the MP&M regulation. Section 10.2 discusses the definitions of small entities used in this analysis. Section
10.3 then examines the role of small business entities in the MP&M industry. Section 10.4 presents the
analyses of the impact of the proposed and alternative regulatory options on small business entities,
including analyses of facility closure impacts and compliance costs by business size criteria.
10.2 Defining Small Entities
For this analysis, EPA used two approaches to define small business entities and to characterize
regulatory impacts on them. The first approach used Small Business Administration (SBA) business size
criteria that are compared with the estimated employment of Has firms that own MP&M facilities while the
second approach was based on the employment size distribution of facilities expected to be subject to
regulation.
The first approach for defining and characterizing small business entities used SBA business size
criteria to identify facilities that are owned by a small business firm, as defined by SBA. By being based on
a measure of firm size (as opposed to facility size), this approach follows EPA's traditional framework for
assessing regulatory impacts. This approach recognizes that firm size measures will generally provide more
meaningful insight than facility size measures into the ability of businesses to manage financing needs and
absorb compliance costs. For this approach, EPA developed a composite'firm employment size criterion for
each Phase I MP&M sector. Each sector's employment size criterion was calculated as the weighted
average of the small business employment criteria for each 4-digit SIC code in the sector, weighted by the
10.3
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three-year average (1987-1989) of shipments for the SIC code as obtained from Department of Commerce
data. The resulting employment size criteria are summarized in Table 10-1.
Table 18-4: Composite lira* Implement . Sfoe Criteria for SwaB
Businesses, Based on Small Business Administration Criteria
MP&M Phase 1 Sector
1. Hardware
2. Aircraft
3 . Electronic Equipment
4. Stationary Industrial Equipment
5. Ordnance
6. Aerospace
7. Mobile Industrial Equipment
|v * - Employment
, " Criterion
503
1,284
721
637
i;i22
1,000
636
Source: Small Business Administration and Environmental Protection
Agency
To determine whether a sample facility was owned by a small business firm, EPA compared the
firm-level employment for the facility to the composite employment size criterion for the MP&M business
sector from which the facility received the greatest revenue. For those facilities that reported being single
facility businesses in their §308 survey responses, EPA used the facility's reported employment as firm-
level employment. For facilities that reported being part of a multiple facility firm, it was necessary to
estimated firm-level employment because the §308 questionnaire did not ask respondents the number of
firm-level employees. For these facilities, EPA estimated firm-level employment by multiplying the reported
number of facility employees per dollar of facility revenue times reported firm-level revenue. That is, the
employment intensity of revenue for the firm was assumed to be the same as that for the facility as reported
in the facility's §308 questionnaire response. A facility was characterized as being owned by a small
business if its estimated firm-level employment was less than the composite employment size criterion for
the applicable MP&M business sector. As discussed in more detail in the next section, this approach to
defining small business entities showed that the MP&M industry is heavily dominated by small businesses.
Over 75 percent of the estimated population of water-discharging facilities were found to be owned by a
small business.
With over 75 percent of the facilities expected to be subject to regulation defined as small
businesses, EPA developed additional size classification criteria to permit a more detailed understanding of
how regulatory impacts would be distributed among facilities of differing sizes. This second approach to
classifying entity size differs from the first approach in that it is based on the employment size distribution
of facilities instead of firms. The analyses with respect to facility size are intended to provide additional
10.4
-------
insight into how smaller facilities are likely to be affected by the proposed regulation. Specifically, EPA
used the first quartile and median values of sample-weighted facility employment reported in §308 Survey
responses, as additional bases for characterizing impacts among smaller entities in the MP&M industry.
From the analysis of the facility employment distribution, EPA estimated that 25 percent of water-
discharging facilities have 9 or fewer employees and that 50 percent of water-discharging facilities have 79
or fewer employees. Accordingly, these quartile ranges of facility employment size 9 or fewer employees
(first quartile), and 10 to 79 employees (second quartile) were used as additional facility classifications
for understanding the impact of the proposed regulation on small business entities defined, in this case,
as facilities instead of firms. While the first and second quartile ranges of facility employment size may not
be interpreted as absolute definitions ofsmallness in the MP&M industry, they necessarily define ranges of
facility size (based on facility employment) that are small in relation to the general set of water-discharging
facilities in the industry.
10.3 Small Business in the MP&M Industry
To understand the potential breadth of impacts among small business entities, EPA examined the
participation and role of small business entities in the MP&M industry. This examination was based on
both Department of Commerce economic data for establishments operating in MP&M Phase I SIC codes
and data from the §308 Survey of MP&M facilities expected to be subject to regulation.
Small Business Participation Based on Department of Commerce Data
By a number of measures, small businesses contribute substantially to economic activity in the
MP&M industry. Table 10-2 summarizes the participation and contribution by establishments of varying
employment size in terms of number of establishments (or facilities), employment, shipments, and value
added. For each economic activity measure (e.g., shipments), the table lists the total value over all MP&M
Phase I sectors and also by each MP&M sector individually. To aid in understanding the role of small
businesses in the industry group, the table also lists the percentage of the economic activity measure
contributed by establishments in 7 employment size classes ranging from fewer than 10 employees to 500
or more employees. These data were developed from Department of Commerce, Annual Survey of
Manufacturers data for 1989 and apply to all establishments in the MP&M Phase I industry group,
regardless of water use and water discharge status and, accordingly, include facilities that would not be
affected by the proposed MP&M regulation (e.g., non-water users or non-dischargers). Sector-level values
10.5
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were calculated by summing data reported at the 4-digit SIC code level according to the composition of
MP&M sectors by 4-digit SIC code groups. All dollar values are in millions of 1989 dollars.
Table 10-2: Contribution of Small Establishments to Economic Activ^taMJP&M Phase I Sectors
Number of Establishments, Employees, Shipments and Value Added, 1989
Includes Water Users attd Non-Water Userst Dischargers and Non~Dischargers
Totals by Sector and Percentage Distribution by Employment Size doss ofEstablishment
Data Category and Sector
Number of Establishments
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
Total, Phase I Sectors
Number of Employees
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
Total, Phase I Sectors
Shipments (5000,000)
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
Total, Phase I Sectors
Value Added (§000,000)
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
Total, Phase I Sectors
Total
Values
40,396
1,621
6,741
37,848
376
141
3,773
90,896
1,329,100
602,400
584,500
1,288,800
77,000
221,000
236,900
4,339,700
132,153
83,980
66,745
147,309
7,342
29,498
37,853
504,879
70,828
44,889
37,691
79,984
5,118
19,143
17,119
274,772
Establishment Size Classes, Number of Employees
1-9
45.2%
33.9%
38.8%
56.5%
46.8%
13.5%
44.8%
49.2%
5.8%
0.3%
1.5%
6.3%
0.8%
1.1%
3.0%
4.1%
4.5%
0.2%
1.0%
3.8%
0.6%
0.5%
1.9%
2.6%
4.8%
0.2%
1.0%
4.5%
0.5%
0.4%
2.0%
2.8%
10-19
20.2%
14.3%
14.1%
17.6%
10.9%
9.2%
18.6%
18.4%
8.8%
0.5%
2.2%
7.4%
0.5%
0.0%
4.4%
5.5%
7.2%
0.3%
1.5%
4.9%
0.4%
0.0%
2.8%
3.7%
7.8%
0.4%
1.6%
5.6%
0.4%
0.0%
3.1%
4.0%
20-49
19.8%
18.4%
18.6%
14.1%
10.4%
17.0%
17.6%
17.2%
19.3%
1.6%
6.6%
13.2%
1.4%
0.3%
9.4%
11.4%
17.7%
0.9%
4.5%
10.5%
1.0%
0.3%
6.4%
8.8%
18.0%
1.1%
4.6%
11.4%
0.9%
0.3%
6.7%
9.0%
50-99
8.3%
9.9%
11.3%
5.6%
4.8%
9.2%
7.8%
7.4%
18.1%
1.9%
9.0%
11.9%
1.5%
0.4%
9.4%
11.1%
18.4%
1.3%
6.1%
10.7%
1.2%
0.2%
6.6%
9.4%
18.1%
1.6%
6.3%
11.1%
0.9%
0.2%
6.7%
9.3%
100-249
4.7%
9.9%
10.3%
3.9%
9.0%
10.6%
6.9%
5.0%
22.6%
4.3%
17.9%
19.3%
14.7%
0.9%
17.6%
16.9%
24.4%
3.1%
14.2%
19.8%
17.1%
0.6%
14.1%
15.7%
23.3%
3.6%
14.8%
19.3%
15.5%
0.6%
13.8%
15.3%
250-499
1.3%
5.9%
3.8%
1.4%
6.4%
6.4%
2.5%
1.7%
15.2%
5.6%
15.6%
16.5%
11.7%
1.5%
15.9%
13.6%
17.0%
4.1%
15.0%
17.6%
9.2%
1.4%
16.2%
13.5%
16.8%
5.0%
14.2%
17.3%
8.6%
1.3%
14.5%
13.2%
500*
0.4%
7.8%
3.1%
0.9%
11.7%
34.0%
1.9%
1.1%
10.2%
85.8%
47.1%
25.4%
69.5%
95.8%
40.3%
37.5%
10.8%
90.0%
57.7%
32.7%
70.6%
96.9%
52.0%
46.2%
11.2%
88.0%
57.5%
30.8%
73.1%
97.1%
53.2%
46.3%
Source: Department of Commerce and Environmental Protection Agency
10.6
-------
Although the role of smaller establishments varies by sector, these data show that smaller
establishments for example, those with fewer than 100 employees generally play an important role in
MP&M economic activity according to the four measures summarized:
Number of Establishments (or facilities). In terms of number of establishments, smaller
establishments heavily dominate all sectors. Over 90 percent of establishments in the total group
have fewer than 100 employees. Within specific sectors, the Aircraft, Ordnance, and Aerospace
sectors have the least domination by smaller establishments; however, even these values are
substantial at 76.4 percent, 72.9 percent, and 48.9 percent, respectively.
Number of Employees. Because of the larger number of employees and value of economic activity
in larger establishments, the distributions of total employment and economic value measures
necessarily favor the larger employment establishments in comparison to the distributions for
number of establishments. Still, in terms of number of employees, smaller establishments play a
substantial role, with 32.0 percent of total group employment in facilities of fewer than 100
employees. Only the Aircraft, Ordnance, and Aerospace sectors have small percentages of total
employment in establishments of fewer than 100 employees, at 4.3 percent, 4.1 percent, and 1.9
percent, respectively.
Shipments. The distribution of shipments by employment size of establishment shows a lesser, but
still substantial, contribution by smaller establishments than exhibited for number of employees.
Overall, 24.5 percent of total MP&M shipments derive from establishments with fewer than 100
employees. Again, the Aircraft, Ordnance, and Aerospace sectors are the only sectors with single-
digit contributions from establishments with fewer than 100 employees at 2.8 percent, 3.2 percent,
1.1 percent, respectively.
Value Added. The distribution of value added by employment size of establishment follows a
similar pattern to that for shipments, with 25.2 percent of total MP&M value added contributed by
facilities with fewer than 100 employees. The values for the three sectors that are less dependent on
smaller employment establishments are: Aircraft, 3.4 percent; Ordnance, 2.8 percent; and
Aerospace, 1.0 percent.
Although some sectors are relatively less dominated by smaller establishments in terms of number
of employees and the value of economic activity namely, the Aircraft, Ordnance, and Aerospace
10.7
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sectors the data in Table 10-2 show that the MP&M industry is largely comprised of smaller
establishments and that smaller establishments make substantial economic contributions in every sector.
Because the data in Table 10-2 reflect all facilities in the MP&M Phase I industry whether or not they
discharge waste water, the numbers of facilities in the table overstate the number of facilities to which the
regulation will apply. Nevertheless, because the aggregate industry is so heavily dominated by small
facilities, the data suggest that an effluent guideline for the MP&M industry will likely affect a large
number of smaller establishments, based on the number of employees per establishment.
Small Business Participation Based on §308 Survey Data
In addition to looking at the participation and role of small businesses in the MP&M industry
based on Department of Commerce establishment-level data, EPA also analyzed the participation of small
business entities in the industry based on §308 Survey data. Analysis of these data indicated that the water
discharging segment of the MP&M industry is largely comprised of facilities that are owned by a small
business firm or that have small facility-level employment. As such, these data confirm that the MP&M
regulation will necessarily apply to a large number of small business entities. Table 10-3 summarizes
business size information for the population of water-discharging facilities expected to be subject to
regulation, using the two approaches to classifying small businesses as defined above. The set of
establishments, on which these data are calculated differs from that in the preceding discussion by including
only water discharging facilities. On the basis of the §308 Survey data, EPA estimates that over 75 percent
of discharging facilities are owned by a small business according to SBA business size criteria. Within the
two discharger subclasses indirect and direct dischargers the estimated small business ownership
varies modestly with a higher percentage of direct dischargers (83.6 percent) estimated to be owned by
small businesses than that for indirect dischargers (73.4 percent).
On the basis of reported facility employment, EPA estimates that about one-quarter of facilities
have nine or fewer employees and the next quartile of facilities have between 10 and 79 employees. With
50 percent of facilities having 79 of fewer employees, the MP&M industry is clearly dominated by small
facilities. The facility employment data also show that indirect discharge facilities have somewhat higher
facility employment than direct discharging facilities: 19.5 percent of indirect dischargers have 9 or fewer
employees in comparison to 51.0 percent for direct dischargers. In addition, 28.0 percent of indirect
dischargers employ 10 to 79 employees in comparison to 9.9 percent for direct dischargers.
10.8
-------
Table 10- 3: MP&M Water-Bisenargtng lacltfties fey Business Sfee
Giased on §308 Survey response data)
Facility Classifications;
Total Discharging Facilities
By SBA Firm-Size Criteria
Small Business-Owned
(as percent of total)
Other (not Small Business)
(as percent of total)
By Facility Employment Class
1-9 Employees
(as percent of total)
10 - 79 Employees
(as percent of total)
80 or more Employees
(as percent of total)
Discharge Class
All
10,601
7,974
75.2%
2,627
24.8%
2,666
25.1%
2,629
24.8%
5,306
50.0%
Indirect
8,706
6,390
73.4%
2,316
26.6%
1,700
19.5%
2,441
28.0%
4,565
52.4%
Direct
1,895
1,584
83.6%
311
16.4%
966
51.0%
188
9.9%
741
39.1%
Source: Environmental Protection Agency
From both the Department of Commerce and §308 Survey data, the MP&M industry is
substantially dominated by small businesses entities. Moreover, small businesses play an important role in
the overall economic activity of the MP&M industry group.
10.4 Impact of the Proposed Regulation on Small Business
EPA performed a number of analyses to gauge the impact of the proposed and alternative
regulatory options on small business entities. These analyses showed that small business entities as
classified on the basis of both EPA's usual firm-level analysis (using SBA firm-level employment criteria),
and the facility employment analysis (using the first and second quartiles of facility employment) are
more likely than MP&M facilities generally to incur significant economic impacts in terms of facility
closures under the proposed regulation. In addition, the compliance cost burden (as measured by total
annual compliance costs as a percent of facility revenue) was found to be greater among small business
entities than among MP&M facilities generally. However, for both of these measures of small business
impact frequency of facility closures and compliance cost burden EPA found that the absolute levels
of impacts were so slight as to not constitute a significant economic impact on small entities. The following
sections discuss these analyses of the regulatory impact on small business entities.
Facility Closure Impacts by Business Size
As discussed in Chapter 4, EPA performed a facility impact analysis to identify facilities that were
expected to close as the result of an MP&M effluent guideline. This analysis was performed in two steps.
10.9
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Hie first analysis, the baseline closure analysis, identified facilities that are in jeopardy of financial failure
independent of an MP&M effluent guideline. The baseline closures were excluded from the second
analysis, the post-compliance closure analysis. Table 10-4 summarizes the facilities by business size that
remained in the impact analysis after excluding these closures. Overall, the distribution of facilities in the
impact analysis by business size is largely the same as that for all discharging facilities. Notably, the
percentage of facilities that is estimated to be owned by a small business is the same 75.2 percent
both before and after excluding baseline closures. Said another way, the frequency of baseline closures is
the same for both small business-owned facilities and other facilities. Modest differences are noted,
however, in the distributions based on facility employment. In particular, the smallest employee-size class
of indirect dischargers (9 or fewer employees) declines from 19.5 percent of indirect discharging facilities
before excluding baseline closures to 14.6 percent of facilities passing the baseline analysis. Thus, the
smallest employment class of indirect discharging facilities was somewhat more likely than other facilities
to close in the baseline closure analysis. At the outset, then, this class of facilities indirect discharging
facilities with 9 or fewer employees would appear to be in financially weaker condition overall than
other water-discharging facilities in the impact analysis. It should be noted that decisions to close small
facilities (whether in the baseline or post-compliance) may not mean a full loss to the MP&M industry of
the employment and production in those facilities. la particular, the production and employment in smaller
facilities that are part of a multi-facility firm may be consolidated at larger facilities.
,... Table tO-4; Facilities in Impact Analysis fry Business Sfee
Facility Classifications
Total Facilities Passing Baseline Analysis
By SBA Firm-Size Criteria
Small Business-Owned
(as percent of total)
Other (not Small Business)
(as percent of total)
By Facility Employment Class
1-9 Employees
(as percent of total)
10 - 79 Employees
(as percent of total)
80 or more Employees
(as percent of total)
Discharge Class
Ail
9,130
6,869
75.2%
2,261
24.8%
2,029
22.2%
2,401
26.3%
4,700
51.5%
Indirect
7,293
5,315
72.9%
1,979
27.1%
1,063
14.6%
2,242
30.7%
3,988
54.7%
Direct
1,837
1,555
84.6%
282
15.4%
966
52.6%
159
8.7%
712
38.8%
Source: Environmental Protection Agency
In the post-compliance closure analysis, EPA found that small business facilities whether
defined on the basis of SBA firm-size criteria or the first and second facility employment quartiles were
10.10
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more likely to close than MP&M facilities generally. These findings mean: (1) that facilities owned by
small business firms are more likely to close, and (2) that smaller facilities, whether or not owned by a
small business firm, are more likely to close. As noted above, in the face of compliance costs, multiple
facility firms may close their smaller facilities and consolidate production within larger facilities. EPA
found these disparate effects for both indirect and direct dischargers, and in all the regulatory options that
were considered for proposal.
Indirect Dischargers
Table 10-5 summarizes facility closure impacts by business size for indirect dischargers. The first
three columns Option 1, Option 2, and Option 3 report results for the three options that EPA initially
defined and evaluated for indirect discharging facilities. The latter two columns reflect the additional
options that were subsequently developed for indirect dischargers: Option la and Option 2a. As shown in
the table, all estimated facility closures for Options 1, 2, la/2, and 2a/2 occur among small business-owned
facilities, as defined on the basis of SBA criteria. Only under Option 3 are closures estimated to occur
among facilities not owned by small businesses. The analysis according to facility employment size class
gives similar results with estimated facility closures concentrated in the two smaller employment size
classes.
Table 10-5 1 Facility Closure Impacts by Business Size, Indirect Biscbargers
Facility Classifications
Total Estimated Facility Closures
(as percent of facilities in impact analysis)
Closures By SBA Firm-Size Criteria
Small Business-Owned
(as percent of class1)
Other (not Small Business-Owned)
(as percent of class)
Closures By Facility Employment Class
1-9 Employees
(as percent of class)
10 - 79 Employees
(as percent of class)
80 or more Employees
(as percent of class)
Regulatory Option
Initial Options
Option 1
161
2.2%
161
3.0%
0
0.0%
65
6.1%
95
4.3%
0
0.0%
Option 1
151
2.1%
151
2.8%
0
0.0%
65
6.1%
84
3.7%
2
0.1%
Option 3
227
3.1%
203
3.8%
24
1.2%
65
6.1%
105
4.7%
56
1.4%
Subsequent Options
Option la
151
2.1%
151
2.8%
0
0.0%
65
6.1%
84
3.7%
2
0.1%
Option 2a
7
0.1%
7
0.1%
0
0.0%
0
0.0%
5
0.2%
2
0.1%
* 'Class" refers to the indicated sub-group of facilities (e.g., Small Business-Owned Facilities) and 'percent
of class" means the percentage of that group expected to incur facility closure impacts.
Source: Environmental Protection Agency
10.11
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Although closure impacts are concentrated among small entities, the expected level of closures
under the proposed option is extemely low for the small entity categorizations analyzed: 0.1 percent of
small business-owned facilities; 0.0 percent of facilities with 9 or fewer employees; and 0.2 percent of
facilities with 10 to 79 employees. Notably, closures among the small entity categorizations are
substantially higher for all the other options analyzed. To illustrate, for small business-owned facilities, the
closure rate ranges from 2.8 percent to 3.8 percent for the other four options presented in the table. Overall,
EPA finds that the rate of expected facility closures among small business entities is well within acceptable
bounds.
Direct Dischargers
As shown in Table 10-6, the overall pattern of facility closures for direct discharging facilities is
similar to that for indirect dischargers. Again, all closures are estimated to occur among small business-
owned facilities for Options 1 and 2, and only under Option 3 do closures occur among other facilities.
However, at 1.1 percent, the predicted level of closures among small business-owned facilities under
Options 1 and 2 remains relatively low. Also, the predicted level of closures among small business-owned
facilities is higher at 2.9 percent under the more stringent Option 3 than under Option 2, the proposed
option for direct dischargers, at 1.1 percent.
Table 10-tft Facility Closure Impacts by Business S&e, Uirect Dischargers
Facility Classifications
Total Estimated Facility Closures
(as percent of direct dischargers in analysis)
Closures By SB A Firm-Size Criteria
Small Business-Owned
(as percent of class)
Other (not Small Business-Owned)
(as percent of class)
Closures By Facility Employment Class
1-9 Employees
(as percent of class)
10 - 79 Employees
(as percent of class)
80 or more Employees
(as percent of class)
Regulatory Option
Option 1
18
1.0%
18
1.1%
0
0.0%
18
1.8%
0
0.0%
0
0.0%
Option 2
18
1.0%
18
1.1%
0
0.0%
18
1.8%
0
0.0%
0
0.0%
Option 3
90
4.9%
45
2.9%
46
16.1%
18
1.8%
27
17.1%
46
6.4%
Source: Environmental Protection Agency
With regard to the distribution of impacts by facility employment class, all closures are estimated
to occur among the smallest employment size class of facilities (9 or fewer employees) under Options 1
and 2. Again, the percentage of closures among these facilities is quite low at 1.8 percent. Under the more
10.12
-------
stringent Option 3, the predicted level of closures among the smallest employment size class of facilities is
the same; however, estimated closures in the next higher employment size class (10 to 79 employees) are
much more substantial at 17.1 percent.
All Dischargers
Table 10-7 summarizes closures for indirect and direct dischargers, combined. The first three
columns Option 1, Option 2, and Option 3 combine the results for indirect and direct dischargers for
each of those options. The latter two columns reflect the additional options that were developed for indirect
dischargers Option la and Option 2a combined with Option 2 for direct dischargers. Specifically, the
rightmost column, which is labeled Option 2a/2, combines results for Option 2a for indirect dischargers
and Option 2 for direct dischargers and thus represents Hie proposed regulatory option. The next column to
the left, which is labeled Option la/2, combines results for Option la for indirect dischargers and Option 2
for direct dischargers and represents the other option that EPA defined as an alternative to the initially
selected Option 2 for indirect and direct dischargers.
Table 10-7? Facility Closure Impacts fey Business Size* All Dischargers
Facility Classifications
Total Estimated Facility Closures
(as percent of facilities in impact analysis)
Closures By SBA Firm-Size Criteria
Small Business-Owned
(as percent of class1)
Other (not Small Business-Owned)
(as percent of class)
Closures By Facility Employment Class
1-9 Employees
(as percent of class)
10 - 79 Employees
(as percent of class)
80 or more Employees
(as percent of class)
Bef>»fctar?0i>tte
Initial Options
Option 1
178
2.0%
178
2.6%
0
0.0%
83
4.1%
95
4.0%
0
0.0%
Option 2
169
1.8%
169
2.5%
0
0.0%
83
4.1%
84
3.5%
2
0.1%
Option 3
317
3.5%
248
3.6%
69
3.1%
83
4.1%
132
5.5%
102
2.2%
Subsequent Options
Option la/2
169
1.8%
169
2.5%
0
0.0%
83
4.1%
84
3.5%
2
0.1%
Option 2a/2
25
0.3%
25
0.4%
0
0.0%
18
0.9%
5
0.2%
2
0.1%
Source: Environmental Protection Agency
The results presented in this table confirm the observations made for the separate discharger
classes. In particular, although closure impacts are concentrated among smaller facilities, the expected level
of closures under the proposed option is very low for the small entity categorizations analyzed: 0.4 percent
of small business-owned facilities; 0.9 percent of facilities with 9 or fewer employees; and 0.2 percent of
10.13
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facilities with 10 to 79 employees. Moreover, closures among the small entity categorizations increase
substantially under the alternative Option la/2 as well as the other regulatory options analyzed.
Compliance Cost Impacts by Business Size
In addition to examining the distribution of expected closures among facilities by business size,
EPA also considered the compliance costs likely to be incurred by facilities in complying with the proposed
regulation. EPA assessed compliance costs and their impact on small business entities in two ways:
1. EPA considered the total annual compliance costs expected to be imposed on facilities
according to business size for the proposed and alternative regulatory options. This
analysis shows how the absolute cost of compliance would be expected to vary by
regulatory option for the different business size classifications of facilities.
2. EPA analyzed total annual compliance cost as a percentage of facility revenue as a
measure of the relative burden of compliance costs. This analysis examines whether
compliance costs are likely to constitute a significant burden on facilities by comparing
expected compliance costs to pre-compliance revenue.
These analyses considered the distribution of compliance costs among facilities based on the SBA
size classification of the owning firm and on the employment size of the facilities. As noted above, EPA
bases its findings regarding acceptability of small business impacts on the distribution of impacts according
to the SBA size classification of the owning firm. The analysis of cost impacts according to employment
size of facilities is meant to provide additional insight into how smaller facilities are likely to be affected by
regulation but in themselves do not conclusively determine the acceptability of small business impacts.
From these analyses, EPA found that the proposed regulation would impose a moderate but
manageable cost burden on small business entities. In particular, the proposed regulation is expected to
impose only modestly higher total costs on small business entities than the least stringent regulatory option
considered, and would impose considerably less total cost than the most stringent option considered. In
terms of the relative cost burden, EPA found that all of the regulatory options considered were likely to
impose a higher relative cost burden on small business entities than on MP&M facilities generally.
However, EPA judges that the expected cost burden on small entities is manageable based on accepted
standards of cost severity. Specifically, in previous regulatory analysis and development efforts, EPA has
generally regarded compliance costs less than 5 percent of revenue as being manageable and not likely to
10.14
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impose significant impacts. For the proposed regulatory option, EPA found that the relative cost burden
among small entities, on average, is expected to be well less than 5 percent of total facility revenue, and
that only a very slight percentage of small entities (less than one percent of facilities in each of the small
entity criteria) is expected to encounter compliance costs exceeding 5 percent of revenue.
Analysis of Total Annual Compliance Costs
Table 10-8 summarizes total annual compliance costs by business size classification of facility for
the alternative regulatory options. Total annual compliance costs are calculated as the annual after-tax cash
flow impact on facilities and reflect private costs of capital and the expected tax treatment of capital
outlays and operating costs of compliance. The column labeled Option 2a/2 combines results for Option 2a
for indirect dischargers and Option 2 for direct dischargers, and thus represents the proposed regulatory
option. Overall, this analysis shows that the aggregate compliance costs to small entities are substantially
lower under the proposed Option 2a/2 than under all the other options analyzed. At $54.5 million, the
estimated annual compliance cost for small business-owned facilities under the proposed Option 2a/2 is
approximately 40 percent less than the cost estimated for either the initially selected Option 2 or the other
secondarily defined option, Option lai/2. The analysis based on facility employment size class further
confirms the reduced impact of the proposed Option 2a/2 on small entities: the total costs of Option 2a/2
among facilities with 9 or fewer employees are only about 9 percent of the costs for Option 2 or
Option la/2; and the costs for Option 2a/2 among facilities with 10 to 79 employees are about half of the
costs for Option 2 or Option la/2. That the cost burden of Option 2a/2 on small business entities is so
much lower than that estimated for the other options supports EPA's choice of Option 2a/2 as the proposed
regulatory option and the finding that Option 2a/2 will not impose a significant economic impact on small
entities.
Analysis of Compliance Costs Relative to Facility Revenue
Table 10-9 summarizes the relative compliance cost burden among facilities by business size
classification. For this analysis, the compliance cost burden was assessed as the ratio of total annual
compliance cost (defined in the preceding section) to facility revenue. Table 10-9 indicates for each option
the average value of compliance costs as a percentage of revenue for facilities falling in the various facility
size classes being analyzed. In addition, the table lists the percentage of facilities in each size class expected
to incur compliance costs exceeding 5 percent of revenue. In a number of previous regulation development
and promulgation activities, EPA judged annual compliance costs that are less than five percent of facility
10.15
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revenue as not likely to impose a significant financial burden on the complying entity.1 This 5 percent rule-
of-thumb is used to evaluate the expected burden to small entities from the MP&M regulation.
Table 10-8: Total Annual Compliance Costs by Business Sfee, All Dischargers (SBOO, J#*£)
Facility Classification
All Facilities
By SBA Firm-Size Criteria
Small Business-Owned
Other (not Small Business-Owned)
By Facility Employment Class
1-9 Employees
10 - 79 Employees
80 or more Employees
Regulatory O
Initial Options
Option 1
186,399
78,015
108,384
9,384
29,400
147,615
Option 2
197,710
91,370
106,339
9,613
32,351
155,746
Options
579,912
281,815
298,097
10,054
74,660
495,198
rtion
Subsequent Options
Option Ia/2
.193,541
89,978
103,563
9,332
31,828
152,380
Option 2a/2
137,067
54,539
82,528
831
15,910
120,326
Source: Environmental Protection Agency
As shown in Table 10-9, compliance costs as a percentage of facility revenue are overall quite low
even for the most stringent and costly Option 3. Average compliance costs as a percentage of revenue range
from 0.10 percent for the proposed Option 2a/2, to a high of 0.65 percent for Option 3.
At the same time, under all regulatory options, estimated compliance costs as a percentage of
facility revenue are higher for small entities than for MP&M facilities generally both for the proposed
Option 2a/2 and, as well, for the other options considered. However, for Option 2a/2, the difference in the
cost burden between small entities and the larger size classifications is much less than for the regulatory
options considered. Specifically, for the proposed Option 2a/2, total annual compliance costs for small
business-owned faculties are estimated to average a very low 0.11 percent of revenue while averaging 0.06
percent for facilities not owned by a small business. In contrast, the disparity in cost burden between small
and not-small businesses is much greater for the other options: under the Option la/2, the cost burden for
small business-owned faculties averages 0.53 percent while averaging 0.11 percent for facilities not owned
by a small business. The findings are similar on the basis of the facility employment class sizes. The
smaller facility employment size classes bear a very slightly higher cost burden under Option 2a/2: 0.10
percent for facilities with 9 or fewer employees and 0.12 percent for facilities with 10 to 79 employees,
compared to 0.09 percent for facilities with 80 or more employees. However, this difference is again much
For example, see the economic impact analysis documents for the recently proposed effluent guideline for the
Pesticide Formulating, Packaging, and Repackaging Industry and the final effluent guideline for the Pesticide
Manufacturers Industry.
10.16
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less than the disparity in cost burden estimated for the other options. Under Option la/2, the comparable
values are: 1.08 percent for facilities with 9 or fewer employees, 0.42 percent for facilities with 10 to 79
employees, and 0.13 percent for facilities with 80 or more employees
Table 10-9j T
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closure impacts and compliance cost burdens of the proposed option will not constitute an undue impact on
small business entities. Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 605(b), the
Administrator certifies that the proposed regulation will not have a significant economic impact on a
substantial number of small entities.
10.18
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References
Apogee Research, Inc. (March 1992). A Report on Clean Water Investment and Job Creation,
prepared for National Utility Contractors Association
Automotive Industries (1992). Detroit's Struggle To Control Costs. December, 1992.
Business Week (1993). Stuck! How Small Companies Cope When They Can't Raise Prices.
November 15, 1993.
Cochran, William G. Sampling Techniques, 3rd Edition. Wiley, New York, New York, 1977.
Dun's Marketing Services, Inc. (1994). Million Dollar Directory. New Jersey, 1994.
Financial Accounting Standards Board. Statement of Financial Accounting Standards No. 89,
Financial Reporting and Changing Prices. December 1986, Stamford, Connecticut.
Haley, Charles W. and Schall, Lawrence D., The Theory of Financial Decisions. McGraw-Hill,
New York, 1979.
Hardware /lge(1988). Industry Outlook, 1990 to 1995. September, 1988.
Hardware Age (199ff). Retail Update. December, 1990.
Hardware Age (1992). 1992 Consumer Profile. December, 1992.
Hardware Age (1992). Distribution Update DC October, 1992.
Moody's Investor Service (1994). Moody's Industrial Manual. New York, New York, 1994.
Robert Morris Associates (1991). 7997 Annual Statement Studies. Philadelphia, Pennsylvania.
Robert Morris Associates (1993). 7993 Annual Statement Studies. Philadelphia, Pennsylvania.
Semiconductor International (1993). Forecast'93. January, 1993.
Standard & Poor's (1994). Standard American Stock Exchange Reports. New York, New York.
Standard & Poor's (1994). Standard NASDAQ and Regional Stock Exchange Reports. New
York, New York.
Standard & Poor's (1994). Standard New York Stock Exchange Reports. New York, New York,
1994.
U.S. Department of Commerce (1991). Bureau of Economic Analysis, The 1982 Benchmark
Input-Output Accounts of the United States. Washington, DC
U.S. Department of Commerce (1991). Bureau of Economic Analysis, "Benchmark Input-Output
Accounts for the U.S. Economy, 1982," inSurvey of Current Business, July 1991, Washington,
DC
Ref.l
-------
U.S. Department of Commerce (1992). Bureau of Economic Analysis, Regional Multipliers: A
User Handbook for the Regional Input-Output Modeling System (RMSII). Washington, DC
U.S. Department of Commerce, Bureaus of the Census (1984-1993). Statistical Abstract of the
United States. Washington, D.C., Annual.
U.S. Department of Commerce, Bureaus of the Census (1987). Enterprise Statistics.
Washington, D.C.
U.S. Department of Commerce, Bureaus of the Census (1987). Concentration Ratios in
Manufacturing. Washington, D.C.
U.S. Department of Commerce, Bureaus of the Census (1988-1991). Annual Survey of
Manufactures. Washington, D.C., Annual.
U.S. Department of Commerce, Bureaus of the Census (1990). 1987 Census of Manufactures.
Washington, D.C.
U.S. Department of Commerce, International Trade Administration (1987-1992). U.S. Industrial
Outlooks. Washington, D.C., Annual.
U.S. Environmental Protection Agency, Office of Water (February 1993). Job Creation Fact
Sheet, internal document
U.S. EPA (1991). U.S. Environmental Protection Agency 1989 Machinery Manufacturing and
Rebuilding Data Collection Portfolio. Metals Branch.
U.S. EPA (1992). EPA Guidelines for Implementing the Regulatory Flexibility Act. Office of
Regulatory Management and Evaluation, Office of Policy, Planning, and Evaluation.
U.S. EPA (1994). Sustainable Industry: Promoting Strategic Environmental Protection in the
Industrial Sector, Phase 1 Report, Metal Finishing Industry. Office of Policy, Planning and
Evaluation.
U.S. EPA (1995). Cost-Effectiveness Analysis of Proposed Effluent Guidelines and Standards
for the Metal Products and Machinery Industry (Phase I). Office of Water.
U.S. EPA (1995). Development Document for Proposed Effluent Limitations Guidelines and
Standards for the Metal Products and Machinery Phase I Point Source Category. Office of
Water.
U.S. Executive Office of the President (1993). FY1993 Economic Report of the President.
Washington, D.C., January.
Value Line Publishing, Inc. (1991). Value Line Investment Survey. New York, New York.
Value Line Publishing, Inc. (April 2, 1993). The Value Line Investment Survey. New York, NY.
Value Line Publishing, Inc. (May 8,1992). The Value Line Industry Review. New York, NY
Ref.2
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Appendix A
Methodology for Estimating the Cost of Capital
A.1 Overview of Real Weighted Average, After-Tax Cost of Capital
The cost of capital is the expected total payment required by providers of a firm's capital for
financing the firm's assets. The cost of capital is generally accepted as the relevant measure for discounting
firm or project cash flows as the basis for firm or project valuation. In the MP&M impact analysis, the cost
of capital is used for discounting facility cash flows both in the baseline financial viability analysis and in
the analysis of compliance investment decisions. The concept of cost of capital used for the impact analysis
is the Real, (i.e., absent the effects of inflation) Weighted Average, After-Tax Cost of Capital (RWACC).
RWACC for a facility was calculated by first estimating a nominal, weighted average, after-tax cost of
capital (WACC) for the facility and then adjusting this value for the effects of inflation. WACC is defined
as follows:
WACC = [(DBT/TA) x i x (1 -1)] + [(EQTY/TA) x e]
where:
WACC = Nominal, weighted average, after-tax cost of capital;
DBT = Debt component of total capital;
TA = Total assets;
i = Nominal interest rate on debt;
t = Corporate income tax rate (0.34);
EQTY = Equity component of total capital, or net worth; and
e = Nominal cost of equity.
Apart from the simple numerical computation of the WACC formula, calculation of WACC for a
facility involved three major elements: (1) the facility interest rate (i); (2) the facility cost of equity (e); and
(3) the facility debt and equity weightings (DBT/TA and EQTY/TA). Each component requires several
steps, as summarized below.
A.1
-------
A.2 Calculating the Facility Interest Rate
1- Compute an interest rate premium for each facility. From data in the facility DCP, EPA computed
the premium of reported interest rate relative to prime rate at the time of DCP preparation, 1991.
DCP respondents were asked to provide a borrowing cost for capital investments. Most
respondents gave an explicit interest rate value while some gave the value as a premium to prime
rate (e.g., 'prime plus 1'). To provide a basis for generalizing the cost of capital to a longer period
than the year in which DCP responses were provided, all interest rate values were converted to a
premium relative to prime rate. Specifically, for all facilities not reporting interest rates as a
premium to prime, the average prime rate for 1991, 8.46 percent, was subtracted from the reported
interest rate value. For facilities reporting their interest rate as a premium to prime, the reported
premium was used in the interest rate analysis.
2. Calculate a generalized facility interest rate. To generalize the facility's interest rate to a longer
analysis period, the prime rate premium was added to the average prime rate observed over the
period 1980-1991. This 12-year period covers a relatively broad set of economic conditions,
including relatively high inflation (1980-81), two recessions (1981-1982 and 1990-1991), two
periods of credit tightness (1980-82 and 1989-90), and a period of relatively stable, sustained
economic growth from 1983-1989. Thus, the average prime rate over this period, 11.42 percent,
may be considered representative of values likely to be observed in an indeterminate future.
Accordingly, the facility's estimated cost of debt capital was calculated as the interest rate premium
added to 11.42 percent.
A.3 Calculating the Facility Cost of Equity
The calculation of cost of equity is based on the principles of the Capital Asset Pricing Model
(CAPM). The CAPM theory posits that the cost of equity to a firm varies with the riskiness of the firm's
equity returns relative to that of general investment opportunities. Under this theory, the cost of equity can
be decomposed into several components: a base required rate of return associated with riskless investments;
a premium rate of return associated with a general portfolio of investments that are riskier than the so-
called 'Hskless investments;" and a multiplicative adjustment to the premium rate of return based on the
riskiness of the individual firm's equity returns relative to that of the general portfolio of investments. The
application of this theory to the current analysis means that the cost of equity for a facility can be expressed
as follows:
A.2
-------
where:
e
R
m
e = Rr + (Rm - Rr) x &
= Nominal required return on equity for a particular firm;
= Return on so-called "riskless" assets;
= Return on a general portfolio (market) of investments; and
B = Ratio of the covariance of firm and general market returns to the variance of
returns for the general market (the "Beta" coefficient).
These parts of the CAPM relationship were determined as follows:
1. Return on riskless assets (ELr) was taken as the average return on U.S. Treasury long-term bonds
over the period 1980-1991, or 10.06 percent. This return is presumed to be riskless except for the
expected long-term effects of inflation, which are discounted from the cost of capital in a later step.
2. The market return premium (Rm - Rr), or the premium of market returns over the return on
riskless assets, was taken as the long-term premium of return earned on the broad stock market
relative to U.S. Treasury bond returns. The estimated premium value used in this analysis is 8
percent.
3. The Beta coefficient (B) was determined differently depending on whether the facility is part of a
firm whose securities are traded in public markets and for which a measure of 8 is calculated by
secondary sources. For facilities owned by publicly-traded firms whose securities are rated by the
Value Line Investment Survey, B is taken directly from Value Line Investment Survey reports. For
all other facilities, B is determined on the basis of the industry 6 calculated by Value Line for the
industry that most nearly matches the MP&M sector from which the facility receives the largest
share of its revenues.
With these data, the estimated value for e, the nominal cost of equity, was calculated using the
CAPM relationship.
A.4 Facility Debt and Equity Weightings
The total cost of capital to a firm was calculated by combining the costs of debt and equity
according to the blend of debt and equity financing of the firm's assets. For facilities owned by public
reporting firms, the weightings used in the MP&M impact analysis were taken from public financial data
-------
as summarized in Value Line Investment Survey for the firm's fiscal year most nearly coinciding with
calendar year 1989. For all other facilities, the debt and equity weightings were taken from the balance
sheet information provided in the DCP response. Public financial report information, where available, were
used for setting the debt and equity weights because the financial structure of the consolidated firm is more
likely to represent the long-term blend of debt and equity used to finance both ongoing and new facility
assets. In contrast, because of the broad latitude available to DCP respondents in deciding how to allocate
firm-level debt to the facility, facility-level financial structure data are highly subjective and may not
meaningfully depict the blend of equity and debt used in financing facility assets, and, in conjunction, the
cost of capital incurred by the firm.
The debt weighting (DBT/TA) used for facilities not owned by public-reporting firms was
calculated by first computing the ratios of debt to total assets for each year for which data were available.
Debt is considered to be the sum of all reported liabilities, both current and long-term. Total assets is the
sum of all assets, again both current and long-term, reported in the DCP. The individual yearly values were
averaged arithmetically to give a debt-to-total asset ratio for the facility. The equity weighting (EQTY/TA)
was calculated as "one minus the debt weighting" (i.e., EQTY/TA = 1 - [DBT/TA]).
A.5 Calculating the Weighted Average Cost of Capital
With three main pieces of the equation available, the remaining parts of the calculation of WACC
followed the WACC formula outlined above. The remaining item of interest is the use of the tax rate to
account for the deductibility of interest payments in computing income taxes. In this analysis, EPA used the
highest federal corporate tax rate of 0.34 (based on the 1992 Internal Revenue Code). This rate is
encountered as soon as a firm has total taxable income exceeding $335,000. If total taxable income would
be less than this amount, the use of the 0.34 tax rate will overstate the value of the interest tax shield in
reducing cost of capital. Also, EPA did not consider the joint effect of federal and state tax deduction of
interest. This exclusion may understate the value of tax deductibility of interest; however, the effect on the
total cost of capital should be minor.
A.6 Adjusting for Inflation
The remaining step in calculating the cost of capital for facilities is to remove the effects of
inflation. Real cash flows that is, absent the effects of inflation were used to value the facility, both
pre- and post-compliance with an effluent guideline. Correspondingly, the cost of capital for discounting
the cash flows should be a real rate. The formulation for the real cost-of-capital is as follows:
A.4
-------
RWACC = (WACC - g) / (1 + g)
where:
RWACC = Real, weighted average cost-of-capital; and
g = Expected rate of inflation over the period of the investment under consideration.
For this analysis, EPA used the average rate of inflation observed over the period 1980-1991, 4.7 percent,
as an indicator of possible future inflation. The resulting value of RWACC was carried forward to the
impact analysis and was used in the valuation of facilities, pre- and post-compliance, and in adjusting the
facility liquidation value, which is assumed to be received over a three-year period, to a single year value.
A.5
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Appendix B
Summary of Threshold Values for
Analysis of Financial Stress Short of Closure
This appendix details the sources and methodology used to derive the threshold values for return on
assets (ROA) and interest coverage ratio (ICR) used in the Analysis of Financial Stress Short of Closure. These
thresholds were compared to pre- and post-compliance ROA and ICR values for sample facilities in order to
determine if facilities choosing to remain in business after promulgation of effluent guidelines would experience
moderate impacts on their ability to attract and finance new capital.
The thresholds depend on 1989 financial data from Robert Morris Associates' (RMA) Annual Statement
Studies, giving income and financial structure information about 4-digit SIC industry groups. These data include
quartile values for a population of firms having less than $250 million in total assets submitting financial
statements to banks. These criteria introduce some bias, since firms with particularly poor financial statements
might be less likely to apply to banks for loans, and some types of firms may be more likely to use bank financing
than others. However, the Robert Morris Associates data offers the advantages of being available for individual
4-digit SIC industry groups and for quartile ranges.
To streamline the data collection effort, the 44 largest 4-digit SIC industry groups, by value of shipments,
were selected to cover at least 75 percent of value of shipments from each of the seven MP&M Phase I sectors.
The average coverage was 80.5 percent of value of shipments. Data gathering efforts focused on this select group
of industries.
The data gathered from Robert Morris Associates' Annual Statement Studies include:
1. ICR2
15%
2. ICR50%
Average ratio of earnings before interest and taxes (EDIT, defined below)
to interest expense for the lowest quartile of values in each 4-digit
industry group
Median ratio of earnings before interest and taxes to interest expense
B.I
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3. Net Profit Median net profit
4. Depreciation/Sales Median ratio of depreciation expense to sales
5. Sales Median sales
6. OPINC
Median operating profit
These industry-specific values are consolidated into weighted sector averages, weighted by value of
shipments within each sector. The remainder of the steps below are conducted for each sector.
Interest Coverage Ratio Threshold
RMA provides a measure of interest coverage that approximates the one needed for the Analysis of
Financial Stress Short of Closure. This is the EBIT/INT ratio, designated ICR^:
ICRRMA = EBIT / INT
EBIT, or earnings before interest and taxes is conventionally defined as follows:
EBIT = Total Revenue - Total Costs + Interest + Tax
By substituting this definition of EBIT into the definition of ICRRMA,
ICRnMA = (Total Revenue - Total Cost + Interest + Taxes) / Interest
The definition of ICR needed for the Analysis of Financial Stress Short of Closure is:
(Total Revenue - Total Cost + Interest + Taxes + Depreciation)
Interest
B.2
-------
The relationship between the two can be expressed as the ratio:
!C_RAFssc= (Total Revenue - Total Cost + Interest + Taxes + Depreciation)
I^RRMA (Total Revenue - Total Cost + Interest + Taxes)
1 + Depreciation / (Total Revenue - Total Cost + Interest + Taxes)
RATIO
The denominator is analogous to RMA's Operating Income (OPINC), which is defined as:
OPINC = Total Revenue - Total Cost + Interest + Taxes)
Therefore, substituting,
RATIO= 1 + Depreciation / OPINC
And
Depreciation = Depreciation to Sales Percentage x Sales / 100
Therefore,
ICRAFSSC= ICRRMAX RATIO
and the threshold value is
ICRaireshold= ICR25%x RATIO
Return on Assets
A threshold for ROA is calculated in a way similar to ICR, by calculating an ratio to adjust RMA values
to values defined and used in the Analysis of Financial Stress Short of Closure.
Observing, as above, that
EBIT = Total Revenue - Total Costs + Interest + Tax
then interest expense is calculated as a function of RMA's median ICR as follows:
Interest Expense = OPINC
B.3
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RMA's return on assets is:
(Total Revenue - Total Costs + Tax) / Assets
Net Profit/Assets
while the formulation of ROA needed for the Analysis of Financial Stress Short of Closure is:
ROAAFSSC= (Net Profit + Interest + Depreciation) / Assets
Therefore, the ratio of the Analysis of Financial Stress Short of Closure measure to the RMA measure
of ROA is:
RATIO = Net Profit + Interest + Depreciation) / (Net Profit)
= 1 + (Interest + Depreciation) / Net Profit
The threshold value of ROA can thus be calculated from the 25th percentile value of ROA using the
following definition:
ROAthrtthold= ROA^x RATIO
The resulting threshold values for ICR and ROA are:
v -"' Thr<&Wil$ fijr Finandal Stress Short of Oosure j
- "" " x ' Prfe-TajeR^lnirn interest Coverage;
Sector rett Assets i%). iSta'^P
1.
2.
3.
4.
5.
6.
7.
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Space
Mobile Industrial Equipment
2.82
2.86
1.51
3.09
2.86
2.86
1.86
2.10
2.11
1.89
2.15
2.11
2.11
1.76
Source: Environmental Protection Agency
B.4
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