-------
Total costs of compliance are most affected by the share of new capacity
subject to NSPS and the growth rates of the individual product sectors.
The effect of different estimates of the capital recovery factor on unit
costs and price increases is relatively small.
1-13
-------
Section 2
The Economic Assessment Methodology
Introduction
This section presents the methodology, assumptions and data sources used
in the economic assessment of BAT and NSPS proposed effluent limitations for
PCB's on the Pulp, Paper and Paperboard Industry. Figure 2-1 shows the major
elements and information flows of the analysis. A methodology using demand/
supply analysis was developed to determine the likely effect of NSPS regula-
tions on price and output in the industry given Base Case estimates of price
and output and unit costs of compliance for new source mills. Since some
existing direct discharger mills are expected to incur compliance costs, a
mill closure methodology was developed to analyze the impacts of BAT costs.
The results of the capital availability and employment and indirect impacts
analyses flow directly from these results.
Much of the data and methodology used here are derived from that developed
in the 1980 Proposal Document.* Because the analysis here covers much less
ground, reference will sometimes be made to that document, rather than re-
producing the methodology in full.
Not all elements of the analysis are performed for each of the
regulations being analyzed in this study; this section describes the
procedures used for each regulation. These elements and regulations are
summarized in Table 2-1.
Table 2-1. Relationship of Analyses and Regulations
Analysis BAT
Demand/Supply (including capacity reduction)
Total Costs of Compliance
Capital Availability
Closure
Employment
Indirect
Small Business
X
X
X
X
X
x 1
X
X
X
X
*U.S. Environmental Protection Agency, Office of Water Regulations and
Standards, "Economic Impact Analysis of Proposed Effluent Limitations
Guidelines, New Source Performance Standards and Pretreatment Standards for
the Pulp, Paper and Paperboard Mills Point Source Category (2 vols.)." EPA
440/2-80-086, December 1980.
-------
Figure 2-1. Major Elements of the Analysis
Base Case
Forecasts of
Pri ce, Output,
Cash Flow
Pollution
Control
Costs of
Compliance
Mill
Production
and Financial
Data
NSPS
Demand/Supply
Analysis
BAT Mill
Closure
Analysis
Price and
Output Impacts
Costs of
Compliance
Capital
Availability
Analysis
Employment
and Indirect
Impacts
2-2
-------
Essentially, only mill-level analyses are performed for BAT, since only a
small number of mills have costs other than monitoring costs, and only a few
mill have significant impacts which may lead to output changes. On the other
hand, the effects of NSPS on price and output are more pervasive and warrant
a demand/supply analysis for the affected product sectors. The capital
availability analysis and employment and indirect impacts are calculated for
both regulations.
Costs of Compliance
Before examining impacts of the proposed regulations on price, output
and capacity expansion, EPA estimated unit costs of compliance for mills
in each subcategory. These unit costs were developed from costs provided
in the EPA Development Document based on standard mill sizes for each
subcategory and a standard assumption of 330 operating days per year. For
example, suppose costs of compliance for a 500 ton/day mill are $1 million/
year. Then average costs per ton are $1 million/year divided by (500 ton/
day x 330 days/year) which equals 6.06 $/ton.
Results for three kinds of costs are presented: capital, operating
and maintenance, and total annual costs. Total annual costs are the sum
of operating and maintenance costs and capital costs multiplied by a
capital recovery factor (CRF). The capital recovery factor indicates how
many dollars per year a company must earn per dollar of invested capital
to cover taxes, depreciation and the required return on capital. The
methodology used to develop the CRF is described in Appendix A. The value
of the CRF used is .22. Real costs of compliance are assumed to remain
unchanged between 1978 and 1985.
Demand/Supply Analysis
Overview
The core of the approach to estimating the impact of NSPS regulations
on the industry is a microeconomic demand/supply analysis for each market
(product) sector of the industry. The BAT analysis does not use a demand/
supply analysis. The NSPS analysis produces both a Base Case (assuming no
new regulations) forecast of price, output, and capacity expansion for
each product sector and forecasts of the effects of the cost of various
treatment options on those variables. The approach assumes that prices
are determined by the costs of new mills. In particular, the increase in
unit total annual costs at new mills due to compliance costs is assumed to
determine the increase in price. The demand curve then determines the re-
duction in output needed to accommodate that price increase. The decrease
in output is assumed to be absorbed entirely by an equivalent reduction in
the amount of new source capacity expansion. In the post-control cases,
variable costs are assumed to include total annual costs of pollution
2-3
-------
control. Unit compliance costs for each sector are an average of the
compliance costs for each subcategory producing that product weighted by
production shares. Market or product sectors rather than subcategories
are used because the relevant set of competing products depends on product
type, not manufacturing process. The organization of the industry into
product sectors corresponds closely to product groups used by The American
Paper Institute (API).
The long-run supply curve is assumed to be a horizontal line with marginal
cost equal to the unit production costs (including annualized capital costs)
of new capacity. This reflects the assumption of long-run equilibrium that
output expands to meet any demand for it at a price equal to or greater than
its full unit costs of production. This implies a growth rate of new capacity
which is used to estimate total costs of compliance for new sources. Rather
than attempting to estimate Base Case production costs for each product sector
explicitly, it is assumed that the 1985 Base Case price estimates already
reflect these costs, i.e., that the 1985 Base Case forecasts depict a
long-run equilibrium situation. This assumption allows much simplification
and is not crucial to the analysis because we are interested primarily in the
incremental impacts of the regulation.
The demand for each product sector is modeled using demand equations
estimated by Data Resources, Inc. and linked with DRI's macroeconomic
forecasts over the period of the analysis. The growth rate of demand is
the stimulus which leads to corresponding growth in capacity to meet
demand at the constant long-run cost.
The interaction between supply and demand is modeled by solving the system
of supply and demand equations for each product sector for equilibrium values
of price and output for each year of the forecast period.
Supply Curves
The supply curve shows the supply response of the industry to a given
price. The analysis of the impacts of new source costs focuses on the
long-run response of the industry without being concerned about shorter
run adjustments. The key assumption is that investment in new capacity
adjusts so that marginal new capacity earns a competitive return on its
capital costs. This implies that long-run price is equal to the unit
costs of marginal new capacity, including annualized capital costs, both
before and after the imposition of treatment requirements. It follows
that, in the long-run, incremental costs of compliance are fully passed
through in the form of higher prices so that new capacity continues to
earn a competitive return. Therefore, both pre- and post-impact supply
curves are represented as horizontal lines with marginal cost equal to the
full units costs of new capacity.
The supply curve methodology has two major tasks for each product
sector:
2-4
-------
o estimate capacity expansion, both overall and new source;
o estimate unit costs of compliance.
No attempt is made to estimate unit production costs of new capacity
explicitly. Instead, it is assumed that the Base Case price forecasts for
each product sector for 1985 reflect these full production costs (O&M costs
plus annualized capital costs).* This assumption is not crucial for the
analysis, since we are mainly interested in the incremental effect of the
regulation.
Capacity Expansion. Given the assumption of long-run equilibrium and
constant real price and unit cost, capacity grows at the same rate as
demand. This growth rate is applied to the 1984 level of capacity in each
product sector to determine the required increment to capacity for each
year of the period 1985-90. Capacity expansion in year t for product
sector j is denoted as DELCAPjt. Only capacity increases due to
"greenfield" mills or major alterations of existing plants are assumed to
be subject to NSPS requirements. Thus, it is necessary to forecast what
fraction of new capacity would be classified as a "new source." This is
done using information on installation of new machines from the American
Paper Institute's (API) capacity forecasts and planned capacity increases
in existing plants from the Economic 308 Survey. The estimated share of
new capacity in each product sector classified as "new source" is shown in
Table 2-2. The estimates presented here have a great deal of uncertainty.
Therefore, sensitivity analyses using alternative estimates are given in
Section 6. New source capacity for product sector j is
NSDELCAPjt = (i-vj) DELCAPjt (2-1)
where Vj is the share of non new source capacity.
Compliance Costs. The compliance costs added to the supply curves
are total annual costs per ton. Total annual costs are defined as O&M and
energy costs plus annualized capital costs (capital costs multiplied by
the capital recovery factor, .22). Unit costs are found by dividing model
mill costs by annual production (daily mill capacity x 330 days per year).
Because costs of compliance are defined on the basis of subcategories
rather than product sectors, it is necessary to relate capacity expansion
in each product sector with specific subcategories. Because announced
capacity expansion plans are usually described in terms of product sectors
rather than subcategories, a number of assumptions must be made to obtain
these estimates. The approach taken is to assume that expansion comes
*These price estimates were derived from the more complex demand/supply
methodology used in the 1980 Proposal Document. See Appendix C.
2-5
-------
primarily from integrated mill subcategories, and that it follows the
current mix of integrated subcategories in each product sector.*
The resulting estimates are given in Table 2-2, which shows the share
of new source capacity expansion in the Tissue product sector contributed
by each subcategory. Only Tissue is forecast to have new source capacity
from the Deink (Tissue) subcategory and no product sector is forecast to
have new source capacity from the Deink (Fine) subcategory. A preliminary
analysis indicated that the BCT Bleached Kraft subcategory would also
contribute new source capacity to Tissue. However, the product sector
capacity expansion estimates together with the new source and subcategory
share coefficients in Table 2-2 implied annual additions to capacity for
this subcategory which were small (less than 20 percent) relative to the
size of a new mill. Therefore, it was deemed unlikely that new source
mills in this subcategory would be built. The share coefficients of this
subcategory were dropped from Table 2-2 and the shares of the remaining
subcategories adjusted accordingly.**
Table 2-2. Relation of Subcategories to
Product Sector Capacity Expansion: Tissue
Annual Growth Rate of Output =1.1 Percent
Subcategory
Fraction of Total
Product Sector
New Source Capacity
Expansion met by
each Subcategory
Non-Integrated 0.50
Tissue Papers
Papergrade Sulfite 0.35
Deink (Tissue) 0.15
Source: EPA estimates.
*This distribution is described in detail in the 1980 Proposal
Document, pp. 3-24 to 3-28.
**The remaining shares were adjusted upwards by equal percentage
amounts so that they summed to unity for each product sector.
2-6
-------
Unit costs for each product sector are weighted averages of the costs
for each subcategory. Let:
UTAC^ = unit treatment cost for subcategory i (i =!,.../ n)
a^j = share of subcategory i in new source capacity expansion of
product sector j
Then the unit cost for product sector j is
UTAC. = r a.. UTAC. (2-2)
3 _ i !3 i
The share coefficients are also used to determine capacity expansion
in each subcategory, which is the sum of its shares of capacity expansion
in each product sector. The total increment to capacity for subcategory i
is:
m
DELCAPifc = I ai. DELCAP.fc (2-3)
j = 1
and the increment of new source capacity is
m
NSDELCAP = E a.. NSDELCAP.. (2-4)
Demand Curves
A separate demand curve is estimated for each product sector. The
demand curves used in the NSPS methodology are simplified versions of
those used in the 1980 Proposal Document. The methodology used to develop
the original demand curves is described in Appendix C. The simplified
demand curves take the following form:
4 t-T
Q = (c + Z d P .) (l+s)^ (2-5)
i=0
where:
Qt = quantity demanded (thousand tons/year) in year t
Pt = price (cents/lb.) in year t
s = average annual growth rate of demand
T = last year before NSPS takes effect (1984)
Although much simplified, these curves preserve the essential behavioral
features of the original demand curves: price elasticity of demand and
growth of end-use demand. The values of c and d^ are obtained by
inserting the 1984 values for all other variables in the right-hand side
2-7
-------
of the original demand equation besides the real price terms, setting all
the price terms equal to the 1984 level (to be consistent with long-run
equilibrium) and solving. The 1984 demand curves are given in Appendix D.
The structure of the equation implies that if capacity also grows at rate
s, long-run equilibrium is maintained, with price remaining at the real
1984 level and output growing at rate s. This is consistent with the
assumptions originally used to develop the capacity expansion forecasts,
and provides a convenient baseline against which to measure the impact of
treatment costs for new capacity on price and output.
Solution of the Model
The supply and demand curves for each sector are combined to form a
product sector model which can be solved to predict the equilibrium paths
of price and output over time. The system is closed by assuming the
relationship
Pt = MCt (2-6)
i.e., the competitive assumption of price being equal to long-run marginal
cost. The model is started by inputting the initial five values of present
and lagged price.
Figure 2-2 shows the determination of Base Case price and output. The
intersection of the demand curve DD and the supply curve SS yields price P
and output Q. Figure 2-3 shows the impact of adding treatment costs S'S
to the supply curve, causing it to shift upward to line S'S1. The price
increase is P'P (equal to S'S) and the change in output is Q'Q.
It is assumed that the reduction in output in 1990 due to the price
increase causes an equal drop in cumulative new source capacity expansion
over the forecast period 1985-90. This implies that all existing capacity,
except for normal retirement, stays open, which is plausible, since price
increases while the costs of almost all existing mills do not. (The amount
of Tissue capacity lost because of closures due to BAT PCB control costs is
small.) Given this, the marginal ton of new source capacity just earns a
competitive return while covering the added costs of compliance; any greater
capacity expansion would depress price below the required level.
Denoting NSCAP*ifgQ as the cumulative Base Case amount of new source
capacity in 1990, the post-impact amount of new source capacity is:
NSCAPi,90 = NSCAP*i,90 - Q'Qgo t2'7)
Assuming that new source capacity still grows of rate s over the forecast
period, this implies that the 1985 post-impact amount of new source
capacity:
NSDELCAPif85 = NSCAPi,90 / S \ (2-8)
2-8
-------
Price
Price
Figure 2-2. Base Case Demand/Supply
Output
Figure 2-3. Impact of Treatment Costs
P'
P1
S1
I
T
Q' Q
Output
2-9
-------
Total Costs of Compliance
Costs of compliance for existing sources are computed by imputing
average costs of compliance for each subcategory to individual mills
(e.g., for monitoring costs) or by using mill-specific costs computed by
EPA. These costs are then summed over all existing mills to determine
total costs of compliance.
Total costs of compliance for new sources are found by multiplying
total new source capacity (product sector or subcategory) by the relevant
value for unit costs of compliance. For example, total annual costs of
compliance for subcategory i are:
TTAC. = UTAC. x NSDELCAP. (2-9)
Total capital costs are determined in the same way.
Capital Availability
The capital availability analysis examines the ability of the industry
to finance investments in new capacity and capital costs of compliance for
existing and new capacity. The analysis compares the cash flow available
in a given year for investment with the total capital costs of capacity
expansion and the capital and variable costs of compliance with the BAT
and NSPS effluent limitations.
Cash flow for a given product sector is defined as:
CASH = (1-t) x (R-C-RV-B) (2-10)
where:
t = corporate income tax rate;
R = total revenue;
C = variable costs;
RV = reinvestment (assumed equal to depreciation);
B = interest payments.
It is difficult to obtain estimates of total reinvestment and interest
payments for a given product sector. The method used here is to take the
1978 values of these variables for all mills from the Economic 308 Survey,
and then to add the imputed amounts for new capacity based on the estimates
of new capacity costs and the cost of capital used in this study.
Costs of capacity expansion are obtained by multiplying unit capital
costs by the increment to capacity for each product sector in a given year.
Unit capital costs are estimated from responses to the Economic 308 Survey.
In algebraic terms,
TXCAP = UXCAP x DELCAPt (2-11)
2-10
-------
where TXCAPt is total expansion cost, UXCAP the capital cost per ton of
new capacity, and DELCAPt the total increment to capacity in year t.
Costs of compliance to be met out of cash flow are capital and operating
costs of compliance for the year's new source capacity expansion and for
existing capacity. Capital costs for existing sources are only incurred in
the first year, while capital costs of new capacity increase each year along
with the rate of capacity expansion. Once capacity is in place, its annual
O&M costs continue indefinitely. Therefore, total compliance costs in the
year t = 1985 are:
CCOST = DELCAP (l-v)UCAP + (CAP - CAP )(l-v)QM + XSTCAP + XSTOM (2-12)
where:
CCOSTt = Compliance costs met out of cash flow in year t
T = Last year before NSPS is effective
UCAP = Unit capital costs of compliance
OM = Unit O&M costs of compliance
CAPt = Total capacity in year t
XSTCAP = Capital costs of compliance for existing sources
XSTOM = O&M costs of compliance for existing sources
Mill Level Impact and Closure Analysis
EPA has estimated compliance costs for individual existing mills, which
are compared with estimated mill sales to determine if the impact is signi-
ficant. In addition, profit and loss statements are developed for mills
which also have financial data available from the Economic 308 Survey to
determine the effect of treatment costs on their profitability. These
results are used to evaluate the results for the other mills using the
simpler treatment costs to sales impact ratio.
Comparing the total annual costs of compliance with the annual sales
value of the production of a mill gives a rough measure of the size of the
economic impact. We assumed that a cost to sales ratio of less than one
percent implies a negligible impact, while a ratio of greater than four
percent indicates a significant impact, i.e., the possibility of closure.
Mill sales are estimated as the product of annual production and the
average 1985 price (in 1978 dollars) of the products assumed to be
produced at the mill. Daily production figures from the Technical 308
Survey are multiplied by an assumed 330 days per year to yield annual
production. Product prices are taken from the Base Case estimates. In
the absence of additional information, Deink-Tissue mills are assumed to
produce only Tissue (964 $/ton), and Deink-Fine mills are assumed to
produce only Uncoated Freesheet (585 $/ton).
2-11
-------
Financial data from the Economic 308 Survey are available for some
mills that submitted surveys directly to EPA. This allows a more detailed
analysis of the effects of costs of compliance on mill profitability, and
provides a means to check the results of the cruder analysis based on the
cost to sales ratio. A profit and loss statement is computed for each
mill, showing revenues, variable and fixed costs, margin (revenues less
variable costs), after tax earnings, and cash flow. The margin indicates
whether the mill is covering its variable costs of production; if not it
may close. After tax earnings and cash flow indicate whether the mill is
covering its fixed costs and earning the required rate of return. The
effect of treatment costs on these measures is examined.
Although the methodology is very simple, some inconsistencies exist
because the data come from different sources. The source of the Base Case
financial estimates is, as mentioned above, the Economic 308 Survey, while
incremental treatment costs are estimated based on the Technical 308 Survey.
Estimates of production vary between the two sources, and have to be adjusted
to make meaningful comparisons. The basic strategy adopted is to put all
costs on a per ton basis.
Employment and Indirect Effects
Employment Impacts
Changes in output also cause changes in employment relative to the Base
Case. (At least some of this loss is offset due to increased purchases and
investment in other industries.) Rough estimates of these employment changes
can be obtained by multiplying the change in the value of output (sales) by
average sales per employee figures. The change in sales is obtained by
multiplying the change in output by the Base Case average price for each
product sector. Average sales per employee are obtained for general pulp,
paper and paperboard categories, based on 1977 U.S. Census of Manufactures
data on total employment and sales:
Total Sales
Value of Shipments Employment Employee
(millions $) (1,000) ($1,OOP/employee)
Pulp and paper 14,679 143.9 102
Paperboard 7,114 68.3 104
These figures are adjusted to 1978 dollars by multiplying the ratios by
the percent change in the GNP deflator from 1977 to 1978, 7.3 percent. No
adjustment is made for real productivity changes between 1977 and 1985.
2-12
-------
In mathematical terms, for a given product sector:
dEMP = dSALES/LPROD (2-13)
where:
EMP = Employment in product sector
LPRDD = Average sales/employee
SALES = PQ
and the prefix "d" denotes a change due to the proposed regulations.
Employment impacts are measured both for overall changes in output due
to price changes and for predicted individual mill closures. As mentioned
above, both numbers are likely to overstate the net impacts on employment,
because output can be expected to increase in other mills or in other
industries to take up some of the slack.
These employment coefficients have a number of weaknesses. Sales per
employee may vary significantly for different kinds of products. There is
a balancing effect, however. Large mills tend to have low employee per
ton ratios, but also low value per ton products, and vice versa for small
mills. Therefore, the ratio of sales to employees may vary less. New
capacity tends to be more capital intensive than existing capacity, so
using averages based on existing mills will underestimate the
sales/employment ratio, and hence overestimate employment impacts.
Indirect Effects on Earnings and Employment
Direct impacts from pollution control regulations such as output
reductions can be expected to have indirect effects, arising from
reduction in demand for inputs and reductions in consumption because of
both direct and indirect losses in earnings. Input/output analysis
provides a straightforward framework for accounting for these indirect
effects as long as the direct effects are small and a number of other
important limitations are recognized.*
The measure of net impact used by the Bureau of Economic Analysis
(BEA) and adopted here is earnings, defined as the sum of wage and salary
income, other labor income, and payments to proprietors. It does not
*See U.S. Water Resources Council, Guideline .5: Regional Multipliers
(Industry Specific Gross Output Multipliers for BEA Economic Areas)
prepared by Regional Economic Analysis Division, Bureau of Economic
Analysis, U.S. Department of Commerce, Washington, D.C., January 1977.
2-13
-------
include returns to capital.* The impact on earnings can be calculated by
multiplying the demand change in each sector by the ratio of earnings to
gross output (sales) in that sector and then summing earnings changes over
sectors.
This procedure has been used by BEA to calculate a ratio of change in
total earnings to changes in final demand for the "paper and related
products" industry, i.e. ,
d Total Earnings ._ ., , A
d Total Demand = '88 (2'14)
This number includes direct earnings changes. Deducting average industry
value added per dollar final sales of .48 yields the indirect earnings
multiplier :
- Ğ (2-15)
n
d Total Demand
This must be taken with some caution/ because it represents a national
average. However/ it was not feasible to use state-specific gross output
multipliers to obtain similar earnings/final demand ratios for each state.
First, doing so would underestimate impacts, since state multipliers only
capture indirect impacts in that state. Therefore, summing over state
impacts would not yield the national impact because out-of -state impacts
would not be captured. Second, the only existing complete set of state
multipliers is very outdated. More recent work on a few states indicates
that those multipliers are off by as much as 30 percent.**
The total indirect earnings impact of a change in output is just:
d INDEARN = .40 x dSALES (2-16)
where
INDEARN = indirect earnings.
Indirect employment impacts can be calculated from regional
employment/earnings ratios for the indirect impacts. The formula is:
dINDEMP = dINDEARN x INDLPROD (2-17)
*This is a more reasonable assumption for regional impact analysis
since owners of capital are likely to be outside the region. Use of this
measure would underestimate impacts at the national level. The extent of
this error is unclear since it depends on the effect of changes in wealth
on consumption. These effects are likely to be less than those of
earnings on consumption.
**Private communication, Joseph Cartwright, BEA.
2-14
-------
where INDLPROD is a national average value for the employment/earnings
ratio.
This approach does have a, number of limitations. Output in other sectors
may expand because of substitution. Second, the use of a single national
earnings/final demand ratio ignores regional differences in costs and input
mixes. Finally/ the effects of changes in wealth on consumption have been
ignored, thereby underestimating impacts somewhat.
Small Business Analysis
The regulatory Flexibility Act of 1981 requires agencies to conduct a
small business analysis to determine whether a substantial number of small
entities (in this case, paper mills) will be significantly affected. If
so, a formal Regulatory Flexibility Analysis is required. The method used
is to classify all mills in the data sample as either large or small and
then to compare the distribution of impacts on mills belonging to the two
sets. The impacts include the number of mills with compliance costs, the
distribution of the costs-to-sales ratio and the number of closures.
The Small Business Administration (SBA) provides a general definition
of a small business as a concern
" which is independently owned and operated and which is not
dominant in its field of operation. In addition to the
foregoing criteria, the Administration (of the SBA), in making
a detailed definition, may use these criteria, among others:
number of employees and dollar volume of business"*
To fulfill the need for additional specificity, the SBA has published
specific guidelines for identifying small businesses in various business
activities including manufacturing, based on the number of employees. The
most relevant set of guidelines for the small business analysis is given
in the Code of Federal Regulations, Title 13, Section 121.2-10 (definition
of small business for SBA loans). For companies in SIC group 2621 (paper
mills, except for building paper mills) the SBA defines a small firm as
one with fewer than 750 employees.
For the small business analysis, we believe that a cutoff figure of
750 employees is too high. Based on 1977 U.S. Census of Manufactures
data, the average number of employees per mill for paper mills is 349.**
Given the skewed distribution of mill sizes, with most mills smaller than
the average size, the SBA definition would include well over half the
number of mills in the industry. The analysis is primarily concerned with
*Small Business Act, Section 3.
**U.S. Department of Commerce, 1977 Census of Manufactures; Paper Mills
Except Building Paper; Preliminary Report, November 1977, p. 2.
2-15
-------
small firms with limited resources or those which would face barriers to
entry due to regulation. Such criteria are not likely to apply to such a
large number of mills. Because the pulp and paper mills tend to be capital
intensive, we believe that the employee criterion is inappropriate.
Because production is a better indication of size, we have elected to use
annual revenues as the basis of our small business definition.
In light of these considerations, we have defined small businesses to
be mills having less than $10 million in annual sales. Based on data from
the U.S. Census of Manufactures and the Economic 308 Survey, this defini-
tion covers about 20 percent of all mills in the Pulp, Paper and
Paperboard Industry.
2-16
-------
Section 3
Industry Structure, Financial Profile, Pricing
Industry Structure
This section provides a description of the Pulp, Paper and Paperboard
Industry.* Attention is given to productive and financial characteristics
relevant to the economic analysis.
The general structure of the industry was analyzed in terms of 26 product
sectors. A single mill can have production in more than one product sector.
Detailed descriptions of each of these product sectors is presented in
Volume II of the 1980 Proposal Document.
A number of important product sector characteristics were found to be
associated with the overall production level. Medium volume paper pro-
ducers are Solid Bleached Bristols, Uncoated Groundwood, and Bleached
Kraft Paper. The median mill size ranges from about 420 to 550 tons per
day. These mills tend to have somewhat newer capital stock and more wide-
spread regional distribution than the smaller specialty mills. Their
productivity growth rates are moderate with some mills planning expansion.
Large volume paper producers are Uncoated Freesheet, Unbleached Kraft
Paper, and Tissue. The median mill size ranges from 140 to 890 tons per
day. These firms tend to be publicly owned and multi-mill. The mills are
generally new, with high productivity growth rates and large planned
expansions.
Product sectors vary in terms of degree of integration from pulp to
papermaking. For purposes of this economic analysis, mills are classified
into three categories: integrated, nonintegrated and secondary fiber. In
general, the degree of integration is related to the value of the end
product. Mills producing low-price-per-unit products are usually inte-
grated, while mills making specialized, high value products frequently are
nonintegrated. Integrated mills are usually located in rural areas, while
nonintegrated and secondary fiber mills tend to be located in urban areas.
This analysis divides the United States into five regions. While the
Northeast has more mills than any other region, the Southeast has more
capacity. Also, more investment has been taking place in the Southeast
than in any other region.
The United States clearly dominates world production and consumption
of pulp, paper and paperboard products. However, over the past several
years, U.S. production as a percent of world production has been declining
slowly. Given the size of our industry, our relatively low-cost timber
*U.S. Environmental Protection Agency, Office of Water Regulations and
Standards, "Economic Impact Analysis of Proposed Effluent Limitations
Guidelines, New Source Performance Standards and Pretreatment Standards for
the Pulp, Paper and Paperboard Mills Point Source Category (2 vols.)". EPA
440/2-80-086, December 1980.
-------
supply, and current expansions, the U.S. can be expected to maintain its
major role in world production levels.
Research and development has never been a major activity for this
industry. On average, it allocates about 0.7 percent of its sales revenues
to this area. Research funds are divided between process development,
including pollution control, and product development. The most commercially
attractive innovations in the future are likely to be those which reduce
fiber requirements, effluent loads or energy requirements. However, new
technologies related to product development, such as fluff pulp, air
layering, and supercalendaring have recently led to new products.
Financial Profile
The Pulp, Paper, and Paperboard Industry entered 1980 expecting a major
downturn along with the rest of the U.S. economy. Data Resources, Inc.
predicts a drop of 3.5 percent in total U.S. paper and board production in
1980, but expects the future to be very good. The general financial per-
formance of paper and allied industries during the last several years has
been better than that during the late 1960's and early 1970's.
One of the distinguishing characteristics of this industry is the high
level of capital investment required. A majority of the capacity expan-
sion has occurred at existing facilities as opposed to greenfield mills
which tend to be more expensive. Much of this expansion has been financed
internally.
Using data compiled by Standard and Poor Corporation, the financial
condition of various firms and the different subcategories were analyzed
in terms of long-run, non-liquid asset ratios. Twelve firms which have
high ratios of net income to total assets were compared with ten firms
which have low ratios and seventeen small firms. The high ratio firms
tend to be less dependent on paper sales than the low ratio firms, and are
more likely to be producers of paper as opposed to board. The high and
low ratio groups have nearly the same ranking in terms of total sales.
While a few of the small firms are clearly in financial trouble, small
firms are not necessarily weak firms.
Subcategories were compared in terms of three ratios: working capital
to total assets, investment in the past five years to fixed assets, and
general, sales and administrative expenditures to cost of goods sold.
Working capital as a percent of total assets tends to be highest for small
and/or secondary fiber mills and nonintegrated mills. Generally, sales
and administrative expenditures as a percent of cost of goods sold also
tend to be high for mills producing highly differentiated products and for
secondary fiber and nonintegrated mills, although this relationship is
less strong. Investment over the last five years as a percent of fixed
assets tends to be higher for integrated mills, with both large-mill and
small-mill subcategories experiencing heavy investment.
3-2
-------
Pricing
This section addresses the question of how the pricing behavior of the
Pulp, Paper and Paperboard Industry might affect NSPS capacity expansion.
A review of the history of price and cost shows that a key factor in
industry pricing is the capacity utilization rate for the industry. When
capacity utilization is 92 percent or greater, the industry is usually
able to raise prices faster than costs increase.
Demand conditions have an important effect on the ability of the
industry to pass cost increases through to customers. In general,
consumption is strongly related to the overall level of business activity
of the economy. Among the exceptions to this are Unbleached Kraft,
Uncoated Groundwood and Solid Bleached Board.
The structure of the pulp and paper industry combines both competitive
and oligopolistic characteristics. In general, the industry can be des-
cribed as a commodity industry with minimal product differentiation. The
Dissolving Pulp, Molded Pulp, Uncoated Groundwood and Tissue sectors are
fairly highly concentrated. Most of the Board sectors have a low concen-
tration and consist of a large number of firms.
Detailed Description of Product Sectors
The following pages give detailed descriptions of the Uncoated
Freesheet and Tissue Product sectors.* As mentioned earlier, they contain
almost all production of the Deink-Fine and Deink-Tissue subcategories,
respectively.
*They are taken from the 1980 Proposal Document, v. II.
3-3
-------
UNCOATED FREESHEET PAPER
Product Sector
Definition of Product Sector
Uncoated freesheet paper in this report is defined as bleached uncoated
printing and writing papers containing not more than 25 percent groundwood
pulp in their furnish, such as offset, tablet, envelope, business (bond,
ledger, mimeo, duplicator), form bond, cover and text, and book paper.
Firms in Product Sector
There are 53 U.S. firms that produce uncoated freesheet. The major
producers are:
Champion International
International Paper Co.
Boise Cascade Corp.
Hammermill Paper Co.
Nekoosa Papers, Inc.
Union Camp Corp.
Mead Corp.
Weyerhaeuser Co.
Source: Meta Systems estimates based on Lockwood's, DRI estimates, and
E.G. Jordan estimates.
Concentration
In 1978, the top five firms' capacity share was 40.1 percent, and the
top eight firms' capacity share was 53.5 percent. This is thus an unconcen-
trated product sector. (Meta Systems estimates based on Lockwood's, DRI
estimates, and E.G. Jordan estimates).
Total Capacity and Utilization Rate
U.S. capacity to produce uncoated freesheet is 20,452* tons per day, or
10.12 percent of total U.S. paper, paperboard, and market pulp production
capacity (308 Survey). The 1979 capacity utilization rate for U.S. firms
producing uncoated printing and writing papers was 92.3 percent (Pulp and
Paper, March 1979 estimate).
Vertical Integration
About 80 percent of the firms in this product sector are backward
*Six mills in this product sector did not report capacity data and were
not included in this total.
3-4
-------
integrated to raw materials (DRI estimate). Paper is often sold in rolls to
end users for final conversion. Smaller orders, sold as cut paper, tend to
be converted at the paper mill site. Fifty-eight mills, or 56 percent of the
mills in this product sector, include converting operations (308 Survey).
Horizontal Integration
The 15 largest firms are horizontally integrated to other economic
production sectors, as indicated by the following earnings percentages:
Firm
Champion International
International Paper Co.
Boise Cascade Corp.
Hammermill Paper Co.
Nekoosa Papers, Inc.
Union Camp Corp.
Mead Corp.
Weyerhaeuser Co.
Allied Paper, Inc.
Potlatch Corp.
Georgia-Pacific Corp.
Westvaco Corp.
Finch, Pyrun & Co., Inc.
Scott Paper Co.
Crown Zellerbach Corp.
Percent Earnings
in Paper and
Paperboard Sector
47%
79%
53%
93%
96%
89%
44%
43%
64%
20%
90%
92%
55%
Publicly or
Privately
Owned
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Source: Paper Trade Journal, June 30, 1979, pp. 44-47.
Economic and Technological Trends
Demand for uncoated freesheet papers has increased rapidly in the past
20 years. The underlying causes are as diverse as the markets which use
uncoated freesheet. Among these causes are:
o increases in demand for business forms, created largely by computers;
o office automation and concomitant demand for copy, electric type-
writer and duplicator papers, etc.;
o increases in offset printing use and development of commercial
printing as a major market;.and
3-5
-------
o very low nominal price increases which offer an incentive to use
these papers (the average price for uncoated book papers was actually
lower, in nominal terms, in 1972 than in 1960).
This very competitive sector underwent significant capacity expansions
in the 1960s. High operating rates, needed to offset large capital invest-
ment costs, and low variable cost increases combined in the 1960s and early
1970s to keep prices low. However, suppliers, hurt by excessive inventories
in 1975, are now less prone to expand capacity, suggesting a future of in-
frequent large increments of capacity increase (following periods of very
high capacity utilization).
Business demand for several types of uncoated freesheet business
forms, computer stock, off-set paper for commercial printing and other con-
verting, business papers, and book papers remains strong, as do future
growth prospects. Cover and text papers probably will not grow due to con-
sumer acceptance of lower priced, lower quality grades over this very high
quality paper. Demand for Kraft envelopes will probably also remain roughly
stable. (ADL, 1977; Kline Guide; DRI, Pulp and Paper Review, August 1979;
discussions with DRI Pulp and Paper Service staff).
Mills
Number of Mills
The 53 firms in this product sector control 103 mills which produce
uncoated freesheet. These are listed below by production subcategory:
Number
of Mills
Percent of Mills in
This Product Sector
Production Subcategory Name
17
*
7
*
20
5
5
34
*
17%
*
7%
*
19%
5%
5%
33%
Fine Bleached Kraft & Soda
Semi-Chemical
Papergrade Sulfite
Groundwood Coarse, Molded
Newsprint
Groundwood Fine Papers
Misc. Integrated Mills
Deink (Fine Papers)
Misc. Secondary Fiber Mills
Nonintegrated Fine Papers
Nonintegrated Lightweight
Nonintegrated Filter & Non-
woven
Nonintegrated Paperboard
Misc. Nonintegrated Mills
Source: 308 Survey.
3-6
-------
Size
The average mill capacity is 401 tons per day, with a standard devia-
tion of 423; the median capacity is 271 tons per day (308 Survey).
Location
Uncoated freesheet producing mills are located generally in the north-
east and north central regions of the United States, with a breakdown as
follows:
Region Number of Mills
Northeast 38 (37%)
Southeast 13 (13%)
North Central 40 (39%)
Northwest * ( *%)
West and Southwest * ( *%)
103
Source: 308 Survey.
Indirect Dischargers
Thirty-four mills, or 33 percent of the mills in the uncoated freesheet
product sector, are indirect dischargers. The percents of mills in each
region which are indirect dischargers are as follows:
Region % of Mills
Northeast 39
Southeast *
North Central 35
Northwest *
West and Southwest *
Source: 308 Survey.
Planned Capacity Expansion
Planned daily capacity expansion in the uncoated fieesheet product
sector is expected to be 1,247 short tons per day. This represents a reduc-
tion of capacity in two mills and an expansion of capacity in 17 mills. This
expansion will be an increase of 6.1 percent in capacity to produce uncoated
freesheet by all mills. A capital investment of $190,579,000 is planned for
3-7
-------
this expansion. These data apply to projects which were under construction
in 1978 or budgeted and approved for expenditure^ (308 Survey)
Assuming 252 operating days per year as listed in the American Paper
Institute (API) capacity survey, the planned daily capacity expansion re-
ported in response to the 308 Survey equals 439,000 tons annually. Capacity
expansion as reported in the API'Survey from 1978 to 1982 is 1,004,000 tons
annually (API Survey). The 308 Survey reported capacity expansion for the
uncoated freesheet paper product sector is thus lower than capacity expansion
reported by API.
Age and Productivity
The age structure in the uncoated freesheet product sector is mixed.
Mills producing uncoated book, excluding offset, and cover and text papers
are generally old, while those producing offset papers and chemical wood pulp
'papers are typically young. Only a few mills, but a fairly high number of
new machines, have been recently added in the sector. Productivity growth in
this product sector has been very high, especially in the 1960s, and the
degree of technological obsolescence is high only in those grades with an
old age structure. (Discussions with DRI Pxilp and Paper Service staff, August
2, 1979). Capital investment during the past five years by mills producing
in this product sector totals $2,766,964,000. Investment per unit capacity
equals $54,000, which is moderate compared to the industry as a whole. (308
Survey). (Note: High capital investment does not necessarily correlate with
low-cost production.)
Employment
Meta Systems estimates that the uncoated freesheet product sector
employed roughly 36,600 people in 1978. This represented approximately 14.6
percent of total pulp, paper, and paperboard mill employment. (Meta Systems
estimates based on E.G. Jordan data.)
3-8
-------
TISSUE
Product Sector
Definition of Product Sector
Tissue in this report includes sanitary grades (i.e. , toilet, facial,
napkin, toweling, sanitary napkin, diaper, wiper, and special sanitary
papers) for brand name sale (or produced for store brands) in supermarkets,
drugstores, etc., and sanitary grades for industrial use and waxing,
wrapping, wadding, and miscellaneous grades.
Firms in Product Sector
There are 42 U.S. firms that produce tissue. The major producers are-.
Scott Paper Co.
The Proctor & Gamble Co.
Kimberly-Clark Corp.
American Can Co.
Crown Zellerbach Corp.
Fort Howard Paper Co.
Georgia-Pacific Corp.
Brown Co.
Source: Meta Systems estimates based on Lockwood's, DRI estimates, and
E.C. Jordan estimates.
Concentration
In 1978, the top five firms' capacity share was 65.5 percent and the
top eight firms' capacity share was 80.1 percent. This is thus a
concentrated product sector (Meta Systems estimates based on Lockwood's,
DRI estimates, and E.C. Jordan estimates).
Total Capacity and Utilization Rate
U.S. capacity to produce tissue is 12,792 tons per day, or 6.33 percent
of total U.S. paper, paperboard, and market pulp production capacity
(308 Survey). In 1979, U.S. firms' capacity utilization rate was 88.3
percent (Pulp and Paper, April 1979 estimate). (This may be low due to
effects of several West Coast mill strikes in 1978 and 1979.)
Vertical Integration
Most of the firms in this sector are vertically integrated (ADL, 1977
and DRI estimates). Vertically integrated here means integrated from raw
materials (wood, wastepaper, etc.) to converted product. Fifty-eight mills
3-9
-------
or 64 percent of the mills in this product sector include converting
operations (308 Survey).
Horizontal Integration
The 15 largest firms are horizontally integrated to other economic
production sectors as indicated by the following earnings percentages:
Firm
Scott Paper Co.
The Proctor & Gamble Co.
Kimberly-Clark Corp.
American Can Co.
Crown Zellerbach Corp.
Fort Howard Paper Co.
Georgia-Pacific Corp.
Brown Co.
Hudson Pulp & Paper Corp.
Diamond International Corp.
Erving Paper Mills
Marcal Paper Mills, Inc.
Potlatch Corp.
Nitec Paper Corp.
Statler Tissue Co.
Percent Earnings
in Paper and
Paperboard Sector
92%
15%
92%
9%
55%
100%
20%
78%
90%
54%
64%
64%
Publicly or
Privately
Owned
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Private
Private
Source: Paper Trade Journal, June 30, 1979, pp. 44-47.
Economic and Technological Trends
In the 1950s and 1960s, consumer tissue displaced reusable fabrics in
the napkin and towel product categories. By roughly 1968 this displacement
was completed. Future demand for tissue products will relate closely to
factors such as consumer disposable income and household growth (since
tissue displacement of reusable fabrics has subsided). Consumer tissue is,
and is expected to continue to be, more recession-proof and less subject
to cyclical swings in consumption levels than the pulp and paper industry,
or the economy as a whole. Many consumer tissue producers rely heavily
on non-price incentives to market their products, in contrast to the
majority of paper and paperboard products producers whose sales of
commodities are almost entirely based upon price considerations.
The only economical substitute for consumer tissue is a return to
reusable cloth fabrics. A new process to produce fluffier tissue using
3-10
-------
less pulp has very recently been developed (discussions with DRI Pulp and
Paper Service staff; ADL, 1977; Kline Guide).
Industrial tissue products may contain a large amount of recycled
material in addition to, or as a substitute for, virgin wood pulp. Much
of it is therefore produced, in non-integrated secondary fiber mills.
Industrial tissue demand closely" follows employment patterns and consumption
is based almost solely on price (rather than on non-price characteristics
as in the consumer tissue sector). Demand for industrial tissue is less
recession-proof than demand for consumer tissue, and fluctuates as
employment and GNP fluctuate. It is likely that future industrial tissue
production will shift toward large vertically integrated producers and
away from the urban based smaller non-integrated producers. Though the
integrated producers use more virgin fiber in their furnish, which is more
costly than waste fi-ber, the economies of scale associated with large
operations, the present relatively low cost of company-owned wood, and the
ability to offer consumers higher quality products will create difficulties
for the marginal, non-integrated producers. In addition, it is possible
that increases in industrial tissue prices may cause some consumers to
economize on consumption (discussions with DRI Pulp and Paper Service staff;
DRI, Pulp and Paper Review, August 1979, pp. 67-68; ADL, 1977; Kline Guide).
Mills
Number of Mills
The 42 firms in this product sector control 89 mills which produce
tissue paper. These are listed below by production subcategory:
Number Percent of Mills in
of Mills This Product Sector Production Subcategory Name
* *% Market Bleached Kraft
* *% BCT Bleached Kraft
* *% Fine Bleached Kraft and Soda
* *% Semi-Chemical
6 7% Papergrade Sulfite
* *% Unbleached Kraft (Bag)
10 11% Misc. Integrated Mills
12 13% Deink (Tissue)
17 19% - Tissue from Wastepaper
* *% Paperboard from Wastepaper
S 6% Misc. Secondary Fiber Mills
* *% Nonintegrated Fine Papers
25 28% Nonintegrated Tissue Papers
3-11
-------
Number Percent of Mills in
of Mills This Product Sector Production Subcategory Name
* *% Nonintegrated Lightweight
* *% Misc. Nonintegrated Mills
89~
Source: 308 Survey.
Size
The average mill capacity is 285 tons per day, with a standard
deviation of 353, and the median capacity is 137 tons per day (308 Survey)
Location
Tissue producing mills are located mainly in the northeast and
north central sections of the United States, with a regional breakdown as
follows:
Region Number of Mills
Northeast 38 (43%)
Southeast 12 (13%)
North Central 22 (23%)
Northwest 8(9%)
West and Southwest 9 (10%)
89
Source: 308 Survey.
Indirect Dischargers
Twenty-seven or 30 percent of the mills in the tissue product sector
are indirect dischargers. The percents of mills in each region which are
indirect dischargers are as follows:
3-12
-------
Region % of Mills
Northeast 32
Southeast *
North Central 27
Northwest . 0
West and Southwest 78
Source: 308 Survey.
Planned Capacity Expansion
Planned daily capacity expansion in the tissue product sector is
expected to be 1,141 short tons per day. This represents an expansion of
capacity in 13 mills. This expansion will be an increase of 8.9 percent
in the capacity to produce tissue by all mills. A capital investment
of $377,552,000 is planned for this expansion. These data apply to
projects which were under construction in 1978 or budgeted and approved
for expenditure. (308 Survey)
Assuming 352 operating days per year as listed in the American Paper
Institute (API) capacity survey, the planned daily capacity expansion
reported in response to the 308 Survey equals 402,000 tons annually.
Capacity expansion as reported in the API Survey from 1978 to 1982 is
751,000 tons annually (API Survey). The 308 Survey reported capacity
expansion for the tissue product sector is thus lower than capacity
expansion reported by API.
Age and Productivity
The age structure of consumer tissue mills is fairly young,- there have
recently been many new mills and machines added. The age structure of
the tissue mills is old but becoming younger as large integrated companies
move in; there have been several new mills and several new machines added
in the 1970s. Productivity growth in this product sector is high (3 to
4 percent per year). Consumer tissue mills' technologies are modern, since
this is a prime basis of competition among producers. The degree of
technological obsolescence in industrial tissue mills is high; however,
many old, inefficient mills are being replaced (discussions with DRI Pulp
and Paper Service staff, August 2, 1979). Capital investment during the
past five years by mills producing in this product sector totals
$1,270,515,000. Investment per unit capacity equals $43,000, which is
moderately low compared to the industry as a whole. (308 Survey)
(Note: High capital investment does not necessarily correlate with
low-cost production.)
3-13
-------
Employment
Meta Systems estimates that the tissue product sector employed roughly
37,400 people in 1978. This represented approximately 15.0 percent of
total pulp, paper, and paperboard mill employment. (Meta Systems estimates
based on E.G. Jordan data.)
3-14
-------
Section 4
Effluent Control Guidelines
Introduction
This section describes the basis for the various control options
considered in the analysis of BAT and NSPS effluent guidelines for PCB
control.
Option Descriptions
Best Available Technology Economically Achievable (BAT) Effluent
Limitation
PCB control limitations are proposed for the Deink-Fine and Deink-Tissue
subcatories. Two control technologies are considered. The first is the
level met by best performing mills at BPT. The second is based on chemically
assisted clarification in addition to Option 1, using an alum dosage of 150
mg/1. There are also monitoring costs. See Final Development Document.
New Source Performance Standards (NSPS)
PCB control limitations for NSPS are proposed for the Deink-Fine and
Deink-Tissue subcategories. The first NSPS technology is that of best
performing mills plus in-process controls, which equals the treatment level
required by promulgated NSPS for conventional pollutants. The second NSPS
technology for PCB control is chemically assisted clarification in addition
to Option 1 using an alum dosage of 150 mg/1. There are also monitoring
costs.
-------
Section 5
Economic Impact Analysis
Introduction
This section presents the results of the economic analysis of the
proposed regulations described in Section 4. Results for the following
parts of the analysis are included:
o Base Case Forecast: Price, output, cash flow and capacity
expansion for 1985; average growth rates of output, capa-
city and cash flow for the period 1985-90;
o BAT Impacts: Costs of compliance;
o NSPS Impacts: Costs of compliance, impacts on price,
output, new source capacity expansion;
o Capital Availability: Effect of compliance costs on
ability of industry to finance new investment out of
current cash flow;
o Employment and Indirect Impacts: Effects of output
changes on employment, non-industry earnings, and
non-industry employment;
o Closure Impacts: Effects of closure on employment and
non-industry earnings and employment; and
o Small Business Analysis.
Because the proposed regulations affect only two subcategories, Deink
(Fine paper) and Deink (Tissue) and the production of two products, Tissue
and Uncoated Freesheet, falling in these two subcategories, the
presentation is restricted to these subcategories and products.*
Base Case Forecast
This section presents a summary of the Base Case to provide a
reference point for the results of the impact analysis given in the
following sections. The Base Case describes the .industry both in terms of
product sectors and subcategories. Table 5-1 presents the Base Case
forecasts of price, output, cash flow and capacity expansion in 1985, as
well as the average growth rate of output, cash flow and capacity over the
period 1985-90 and cumulative capacity expansion 1985-90. Given the
assumption of long-run equilibrium which underlies the analysis, and
*Based on the Economic 308 Survey, 95 percent of Deink-Tissue
production is Tissue, and 86 percent of Deink-Fine production is Uncoated
Freesheet. The other product sectors are therefore excluded from analysis.
-------
<0
o
(U
u
o
w
w o
(0 -U
o o
0)
01 CO
co
(Q 4J
CQ O
3
t3
0
I
in
oo
en
in
(U
t-i "0 U
0 >t
> >, C X
^ 4J O 0 C
j *tĞ4 .,_{ ^ Q
(0 O W 1 -U
-( Ğj c m
3 Pi fQ 00 G
s Ğj a. Ğn o
3 rj x r-t o
U U ~ rH
"c
-u c
3 0 -P
P crt o
3 r-t 0
O o
(0 4J
r^ J3 3
4J -u O
4) C >>
w >i O X.
(0 4J -^i m c
U -H w oo o
U C 4J
(1) IQ <0 *
4-1
0 H
ro r-t
00 CM
ro oo
w Ğ
O VO
r> CM
c~ in
CM
O CM
in **
00 VO
in en
-u
u
01 (0
4-> 0) 0)
(0 0) 3
0 M W
O &* 10
C -H
10
<0
4J
(Q
g
4J
0)
e£
W
>B
(J)
o
u
s
0
03
5-2
-------
assuming that real costs do not change, prices in real terms remain
constant over the forecast period.
The Base Case is defined as follows:
1. BAT Treatment is in place to remove and monitor
pentachlorophenol, trichlorophenol and zinc.
2. NSPS Treatment is in place to remove and monitor
conventional pollutants, pentachlorophenol, trichloro-
phenol, and zinc. This level of treatment is
equivalent to NSPS Option 2, as described in the 1982
Promulgation Document.*
Capacity increases due to "greenfield" mills or major alterations of
existing plants were assumed to be subject to NSPS requirements. Thus it
was necessary to forecast what fraction of new capacity would be classified
as a "new source."** This was done using information on installation of
new machines from the American Paper Institute's (API) capacity forecasts
and planned capacity increases in existing plants from the 308 Survey.
The estimated share of new capacity in each product sector classified as
"new source" is shown in Table 5-1. This implies cumulative new source
capacity expansion over the period 1985-90 of 1.050 million tons per year
and 274,500 tons per year for Uncoated Freesheet and Tissue, respect-
ively. The estimates presented here have a great deal of uncertainty.
Therefore, sensitivity analyses are given in Section 6.
Because costs of compliance are defined on the basis of subcategories
rather than product sectors, and because the analysis focuses on new
capacity, it is necessary to relate capacity expansion in each product
sector with specific subcategories. The methodology for doing this was
Table 5-2. Summary of Base Case Forecast
1985-1990: Subcategories
Subcat
Deink
Deink
.egory
(Fine)
(Tissue)
Cumulative
New Source
Capacity Expansion
(1985-90)
(1000 ton/y)
0.0
43.9
* U.S. EPA., Office of Water Regulations and Standards, "Economic
Impact Analysis of Effluent Limitations and Standards for the Pulp, Paper
and Paperboard Industry," October 1982, EPA 440/2-82-015.
** Capacity expansion at existing sources are often not considered new
sources for the purposes of NSPS. EPA estimated the amount of new
capacity which would fall under this classification.
5-3
-------
described in Section 2. Table 5-2 shows the resulting 1985 value of new
source capacity expansion.
BAT Impacts
Two approaches have been adopted in analyzing the impact of these PCB
costs. First, for all mills in the two subcategories for which EPA
computed treatment costs, these costs are compared with estimated mill
sales. Second, profit and loss statements were developed for three mills
which also had financial data available from the Economic 308 Survey to
determine the effect of treatment cost on mill profitability. The results
of the second approach were used as a guide to evaluating the validity of
the results of the simpler first approach.
Each mill faces two types of costs. Costs for monitoring PCB's are
independent of the size of the mill and are shown in Table 5-3. Total
costs of monitoring for the fourteen mills in Deink (Fine) and Deink
(Tissue) subcategories are $182,000 per year, as shown in Table 5-5.
Each of the fourteen mills also incurs PCB control costs. Model mill
costs are shown in Table 5-4. Two options are considered: BAT Option 1 is
defined as the level of best performing mills; BAT Option 2 is chemically
assisted clarification. Four mills currently can meet the proposed limits
for BAT Option 1 with existing pollution abatement treatment but none can
meet the limits for chemically assisted clarification.
As shown in Table 5-5, total control costs for BAT Option 1 are 21.2
million dollars in capital costs and 7.0 million dollars in total annual
costs. For BAT Option 2, there are 43.0 million dollars in capital costs
and 18.6 million dollars in total annual costs. Including monitoring
costs, total annual costs are 7.2 million dollars for BAT Option 1 and
18.8 million dollars for BAT Option 2.
Our first approach was to calculate a cost-to-sales ratio for each
mill. Sales was estimated as the product of annual production and the
1985 price*. Annual production was calculated assuming 330 production
days per year and by using daily production estimates available from the
Technical 308 Survey. Deink-Tissue mills are assumed to produce only
Tissue, and Deink-Fine mills to produce only Uncoated Freesheet.
Treatment costs, expressed in 1978 dollars, were estimated by EPA for each
mill.
The results of this cost-to-sales ratio analysis are summarized in
Table 5-5. Defining a significant impact as one where this ratio is
greater than four percent, no mills are significantly affected by Option
1, while three mills are significantly affected by Option 2. Under BAT
Option 1, 10 of 14 mills have a ratio of less than two percent, while
under BAT Option 2, 12 of 14 mills have a ratio greater than two percent.
*1985 average price expressed in 1978 dollars.
5-4
-------
Table 5-3. PCS Monitoring Costs at Direct
Discharging Mills (BAT and NSPS)
1
1
I
Subcategory 1
Deink (Fine)
Deink (Tissue) ,
Cost-to-Mill
(1000 $/yr)
13
13
I Total Cost
I per Unit
I Capacity
I $/ton/yr
0.08
1 0.39
Source: EPA estimates.
Note: Costs were chosen so as to be high estimates of the likely
costs. In every case, the upper limit of a range of costs are used. When
a subcategory had model mills of different sizes, the smallest one was
used in calculating unit cost.
Table 5-4. PCB BAT Control Costs for Direct Discharger Mills
(1978-$1000)
(Assuming All Mills are at BPT Final Effluent Levels
and Operate Activated Sludge Systems)
BAT Option 1*
BAT Option 2**
Model
Mill Size (t/d)
Capital
Total
Annual
Capital
Total
Annual
Deink-Fine Papers
180
400
800
Deink-Tissue Papers
1422
2328
3669
848
1424
2294
3387
5342
7971
2522
4265
6836
25
50
180
480
685
1 1422 1
269
389
830 f
1134
1648
3387 ,
740
1112
, 2479
*Best performing mills option.
**Chemically assisted clarification.
Source: EPA estimates.
5-5
-------
Table 5-5. Results of BAT Analysis
BAT
Option 1
BAT
Option 2
o Number of Mills w/Costs
PCB Monitoring
PCB Control
14
10
14
14
Total
Capital Annual
Capital
o Total Costs
of Compliance
(Millions of 1978 $)
o Distribution of Mill Treatment
Cost-to-Sales Ratio
Total
Annual
PCB Monitoring
PCB Control
Total
0.00
21.17
21.17
1
0.182
6.97
7.15
I
0.00
43.02
43.02
0.182
18.62
18.80
0-1%
1-2%
2-4%
> 4% +
7
3
4
0
0
2
9
3
Source: EPA estimates.
+Indicates significant impact,
5-6
-------
As a measure of the validity of. the approach described above, we
performed a mill profitability analysis on three mills for which we also
had financial data from the Economic 308 Survey. Revenues, profits and
cash flow were calculated both with and without costs of compliance.
Under BAT Option 1, all mills would maintain positive profits, which is
consistent with the result based on cost-to-sales ratios that impacts are
not large. Under BAT Option 2, impacts for two are large, causing their
profits to turn negative. Only one of these had a cost-to-sales ratio
greater than four percent. The difference in estimated impact for the one
mill arose from the value placed upon its tissue product, which was less
than one-half of the average market value used in the ratio analysis.
Because total sales were estimated as the product of production and unit
sales value, we overestimated total sales, and underestimated the ratio of
cost-to-sales. Despite the different estimated impacts for this mill, in
general the results of impact calculation using the two different
approaches agree favorably. The conclusion is that the simpler cost
method using the ratio of cost-to-sales as a measure of impact is
reasonable.
NSPS Impacts
Costs of Compliance
Table 5-6 shows costs of PCB control for model mills. Total annual
costs are calculated as the sum of total capital cost times the capital
recovery factor of 0.22 and variable costs. Unit costs, as shown in Table
5-6, are calculated assuming 330 production days per year. No added costs
of compliance are associated with NSPS Option 1, which is equal to the
promulgated NSPS for conventional pollutants. Costs for NSPS Option 2 are
based on tertiary chemical clarification. For the Deink (Fine) sub-
category unit total annual cost of compliance is 15.1 dollars per ton.
For the Deink (Tissue) subcategory, unit total annual cost is 30.7 dollars
per ton. These unit costs are used in calculating the price change in the
demand/supply analysis.
Demand/Supply Analysis, Total Cost of Compliance
This section presents the results of the demand/supply analysis
together with total costs of compliance for NSPS regulations. Because
there is no expected capacity expansion in the Deink (Fine)* subcategory,
the discussion is limited to Deink (Tissue) subcategory and its related
product sector, Tissue. Table 5-7 shows unit cost of compliance, price,
production and new source capacity changes from the Base Case. We have
assumed that all reduction in output is borne by new source capacity. The
average compliance cost per ton of capacity for the tissue sector is based
on the mix of subcategories contributing to new source capacity shown in
Table 2-2 and the unit costs shown in Table 5-6. Table 5-8 shows 1990 new
5-7
-------
Table 5-6. NSPS Costs of Compliance for
Model Mills
I Annual Costs(1000$/yr)
Subcategocy
I Size of
IModel Mill
I (t/d)
Capital
Cost
(1000$)
O&M I Energy
Unit Cost
I ($/t)
Total I I Total
Annual (Capital! Annual
Option 1;
Deink (Fine)
Deink (Tissue)
Option 2;
500
100
0
0
0
0
0
0
0.0
0.0
0.0
0.0
Deink
Deink
(Fine)
(Tissue) .
500
100
5,
1 2'
604
402
1,194
I 464|
73
22
2,
I1'
499
013
33.
I 72'
9
8 1
15.1
30.7
Source: EPA estimates.
All costs in 1978 dollars.
source capacity based on product sector shares and unit and total costs of
compliance for the two Deink subcategories.
Table 5-7 shows that there are no impacts on price, output and capacity
due to NSPS Option 1. In NSPS Option 2, as price is expected to rise 0.5
percent, output is expected to fall 0.02 percent in response to the added
costs of PCB control in the Tissue sector. Cumulative new source capacity
in 1985-90 is estimated to drop .42 percent or 1,160 tons per year to
273,350 tons per year in the Tissue product sector. Comparing Table 5-8
with Table 5-2, new source capacity in the Deink (Tissue) subcategory is
estimated to decline 2.8 percent due to NSPS controls.
Capital Availability Analysis
This subsection presents the results of the capital availability
analysis for the two product sectors which will be affected by the
proposed regulations. Table 5-9 shows the demands on cash flow due to
capital costs of expansion (based on total Base Case capacity expansion in
1985 and unit capital costs of capacity expansion) and one-year compliance
costs** due to BAT Options 1 and 2 and NSPS Options 1 and 2, and total
Base Case cash flow.
*See Table 5-2.
** For BAT, one year compliance cost is total capital cost plus total
annual operating costs. For NSPS, one year compliance cost is the product
of new source capacity in 1985 and unit capital cost plus unit annual
operating cost. (See Table 5-7 for unit costs.)
5-8
-------
JJ
I
3
O
1
(0
o
JJ
O
at
cn
0) U
O 3
C T3
m o
H M
rH 0<
I-
0 "
u cn
&
VM cn
O Z
co o
JJ JJ
ca
0 0)
U 3
a
1-1
(0 CO
JJ JJ
0 O
EH ĞJ
tt
m
cu
0)
H
JJ
<0
rH
3
6
U
co
JJ
cn
8
rH
(0
JJ
0
EH
d)
U
S n
(I) 3
Z 0
cn
0)
o
c
(0
H
cu
Q
f^)
U-J
O
^
4J
rH
u
(0
CU
(0
o
c
0
jj
o
3
o
fi
CO
JJ
co
0
CJ
JJ
*i*4
c
D
*-Ğk
fft
c
0
H
rH
rH
H
£
c
0
H
co
c
(0
P]
w
w
JJ
3
a
3
O
C
H
^^
C
o
JJ
X
2
rH
flj
JJ
g
^
JJ
C
0)
o
u
0)
Cu
^**
O
en
I
in
00
GT\
rH
*"*
JJ
C
(U
o
01
fa
o
en
cn
rH
JJ
C
0)
o
u
01
Cu
01
0
H
u
rH
10
JJ
Q
£4
JJ
0
3
0
0
M
PH
a
3
C
c
ğ
rH
(0
4J
H
a
(Q
u
4)
CT
C
f0
f*
u
^ğx
>.
"X,
Jj
o
o
0
rH
*"
0)
s
(0
£4
o
^^
JJ
O
O
O
r-J
01
s
fl
j2
CJ
"c
o
JJ
>s>
V,
It
£
c
c
(4
^
r
0)
T3 Si
CD co
JJ 0)
(0 0>
0 >H
U fe
C
D
O
O
o
o
o
o
f-%
CN
O
t
O
o
o
o
o
CN
"T
VO
a\
o
o
o
o
CN
0) C
3 0
CO -H
cn JJ
H 0.
EH O
O fl
0 H
00
O rH
O CO
CN
O *
O O
1
in
O ro
m t-
O CN
H
CN
O O
o o
1
VO
O rH
0 rH
o m
O 0
O rH
in 01
03 vo
in 01
O Oft
0 *
O VO
0 rH
rH
JJ
0)
0)
O Si
oi cn
JJ CU 0>
(00) 3
O 1-1 CO
U b CO
C -H
D EH
co
01
jj
(0
jj
co
at
0)
u
3
0
cn
00
co
jj
co
0
o
5-9
-------
Table 5-8. NSPS Costs of Compliance
by Subcategory
Subcategory
Option 1:
Deink (Fine)
Deink (Tissue)
1 Cumulative
I New Source
1 Capacity
I Expansion
1 (1985-90)
I (lOOOt/y)
Unit Costs
($/ton)
Capital
0.0 0.0
43.9 0.0
1 Total
I Annual
Total Costs of Compliance
1985-90
(Million $ 1978)
1
Capital 1
0.0 0.0
0.0 0.0
Total
Annual
0.0
0.0
Option 2;
Deink (Fine)
Deink (Tissue)
0.0
42.7*
33.9
72.8
15.1
30.7
0.0
3.18
0.0
1.34
*Calculated as the product of NSPS capacity (See Table 5-7), and the
fraction of new source Tissue capacity which is within the Deink (Tissue)
subcategory (0.16).
Source: EPA estimates.
Table 5-9 presents the cash flow estimate together with the two major
demands on cash flow: funds for capacity expansion and for compliance
costs. In a worst case capital squeeze situation, the industry would have
to meet both needs out of its own cash flow. The results can be taken to
represent a worst case, since the effect of price increases on revenues
and hence cash flow is not taken into account. (Demand for most product
sectors is inelastic, so an increase in price raises revenues.)
It is evident from Table 5-9 that one year compliance costs are a
small fraction of total cash flow. For Uncoated Freesheet, total one year
compliance costs, using BAT Option 2 and NSPS Option 2, are 0.8 percent of
cash flow; for Tissue the figure is higher, 4 percent, but still
insignificant. If BAT Option 1 is selected the percentages are still
smaller. The difference between NSPS Option 1 and 2 does not affect the
results either. Therefore, costs of compliance do not appear to be a
major problem for these sectors of the industry even under the most
pessimistic assumptions about cash flow and compliance costs.
5-10
-------
in
00
<ğ 2
rt ^
w
f!
! ^
*J 4J 0
rH -r*
C U 01
D (d -w
&8
U 0
>.
4J
H
0
Id
Q
5
C S
01 O
Id -H
*
Ğ C
o< o
Cn -r4
z -u
p.
Q
i-H
C
W 0
0< -H
tn jj
Q
04
C
EH 0
pa 4J
a
rH
l|
s
c
IM O
O -H
01
01 C
01 Q
O X
CJ K
C
o
H *^
01 -U
c \
X
H
C S*
t 0 \
H 4->
01
G 0
ĞJ O
i QJ o
X rH
w >-
4J
c
C
o
a
vo r-
\O P-
in en
m rH
rH rH
o o
o ^o
o o
-
o o
0 0
o o
p- p>
rH 0
rH -*
i \.^\
% t
rH
O 03
00 f^O
in P*
O-l
0 i
4J
r4
O
(d
o
0)
H
i
^
c
*H
0} 0)
^J ^^
01
0 MH
0 0
SC
Ğ
^9 Q
0 -H
01
01 C
u* Qj
d 'H
0 0
Id
01 &
a id
rH 0
O< >i
0) \
01 01 U 4J
1*4 1 1 v*i
ia . 01 a o
rH 01 0 0 O
rH (U O 01 ^O
0 -u
T3 (d rH S VO
g (d ID
CO -H 4-> C H
P- 4J --H
-ğ
O
-------
Employment and Indirect Impacts
Impacts Due to Output Changes
The results of the direct employment, indirect earnings and indirect
employment impact analyses are derived from the sales value of lost output,
which is approximated by the product of 1990 lost output and the average
Base Case price for the Tissue sector, 964 dollars per ton.
The following ratios were used to estimate these impacts:
1. direc.t employment$103,000/per employee;
2. indirect earnings to sales ratio0.40;and
3. indirect earnings per employee$20,000.
No impacts result from NSPS Option 1. For NSPS Option 2, lost output in
1990 is 1,160 tons, which has a sales value of 1.12 million dollars.
Direct employment loss is therefore, 11 jobs. Indirect earnings losses
are estimated to be 0.45 million dollars which would involve an indirect
employment loss of 22 jobs.
Impacts Due to Closure
Using a definition of possible closure of a cost-to-sales ratio
greater than four percent, no closures are expected to result from BAT
Option 1 and three closures will result under BAT Option 2 (see Table
5-5). Revenues for these three plants were calculated as the product of
annual production and the average sales value. Total revenue lost due to
closure of these three mills is estimated to be 41.3 million dollars.
Using the ratios cited in the "Employment and Indirect Impacts" section,
this loss in revenue implies a direct loss of 402 jobs. The indirect
earnings loss is 16.6 million dollars. The indirect employment loss is
792 jobs.
iğ
Small Business Analysis
Small mills are defined for this analysis as those having annual product
value of $10 million or less. Using this criterion, only one out of the
fourteen Deink-Fine and Deink-Tissue mills which incur BAT costs for PCB
control is classified as a small mill. Because the cost-to-sales ratio is
greater than four percent under BAT Option 2, it is predicted to close under
that option. Three of the remaining thirteen mills are also projected to
close under Option 2. It is unclear whether this option has a greater impact
on small mills as only one mill is classified as small.
For BAT Option 1, the selected option/ no significant impacts are
expected for the one mill classified as small.
5-12
-------
Section 6
Limits of the Analysis
This section discusses the major limitations of the assumptions,
methodology and results of the analysis. It also presents the results of
a number of sensitivity analyses which test the robustness of the results
of Section 5. It is organized into parts which parallel those of the
methodology and results sections (2 and 5, respectively), i.e., Base Case
projections including demand equations and construction of supply curves;
costs of compliance; demand/supply analysis; total costs of compliance;
mill-level impacts and closure; capital availability; and employment and
indirect impacts.
Base Case Projections
Demand Forecast
The demand forecast has two major components, growth of end-use demand
and price elasticity of demand. The DRI macroeconomic forecast drives the
end-use demand sector growth which determines the product sector growth
rates used in the analysis. The growth rate does not affect the Base Case
price level, since the analysis assumes that demand and supply grow at the
same rate regardless of what the rate is. The growth rate does affect the
speed at which new source capacity grows, and hence also the rate of
growth of costs of compliance.
The estimate of price elasticity does not affect the constant long-run
price or the rate of growth of output as long as the market remains in
equilibrium. It does affect the response of demand to a cost change, and
hence the extent of the effect of NSPS costs on the loss of output in a
given sector. The elasticity estimates are subject to both random and
model specification errors. The effects of the price elasticity estimates
fall mainly on the capacity expansion forecasts, because these correspond
to the loss in output resulting from the price increase.
Supply Curves
The supply curves used in the analysis are quite simple, reflecting
assumed constant long-run unit costs of capacity expansion equal to the
1985 Base Case price for each product sector. The assumption about the
level of costs is not crucial since we are concerned mainly with the
incremental cost of the proposed regulations. Use of the long-run supply
curve does ignore short-run adjustments, but these are less important
given the focus on new source costs. The assumption of constant real
costs over the forecast period is more reasonable than it seemed a few
years ago, due to the leveling off of fuel prices.
-------
Costs of Compliance
Pollution control costs were developed by EPA. Costs were developed
from "model" mills and hence will only approximate actual costs borne by
individual mills. However, they should provide reasonable estimates of
overall compliance costs in a given subcategory or product sector.
In calculating total annual costs, a single cost of capital was used
for all mills. However, total annual costs are not overly sensitive to
variations in the cost of capital. For example, capital costs for most
subcategories tend to be about nine times operating and maintenance plus
energy costs. Using a CRF of .22 implies capital costs are about three
times total annual cost. Therefore, using a value for the CRF 10 percent
higher or lower causes total annual costs to be seven percent higher or
lower.
Like variable production costs, variable pollution control costs are
not escalated from real 1978 levels. Therefore total annual pollution
costs are underestimated. Price impacts would be underestimated by a
similar magnitude, but the impacts in percentage terms will be less
affected. Also, real cost increases may be much less than previously
predicted, due to the leveling off of fuel prices. Pollution control
costs of new mills may be overestimated if they are able to reduce costs
by making changes in design or production processes prior to construction.
However, it is quite reasonable to make the conservative assumption of
excluding them.
Demand/Supply Analysis
The demand/supply model can be characterized as one of competitive
long-run equilibrium. In a long-run equilibrium growth path, price is
determined by long-run average total cost. This adjustment is assumed to
take place instantly on the supply side, although demand takes a few years
to adjust completely. One issue is whether the industry behaves in a
long-run competitive manner by fully passing through the treatment cost
increase. The problem of how to describe imperfectly competitive markets
has vexed economic theory for a long time. It is not possible to predict
the outcome of price and output in an oligopolistic market. No single
"noncompetitive" model could be used to forecast impacts of treatment
requirements on price and output. Assuming long-run full cost
pass-through is probably a reasonable approximation.
In this analysis a capital recovery factor of 0.22 was used to estimate
total annual costs of NSPS. In order to examine the sensitivity of the
analysis to this assumption, two sets of alternate costs for Option 2 were
generated, using values of 0.27 and 0.17 for the CRF. These costs were then
used as inputs to the model to solve for price and output changes for each
of the product sectors. These different scenarios were each compared to the
1985 base case. Table 6-1 summarizes the results of this sensitivity
analysis.
6-2
-------
Table 6-1. Price and Output Changes in the Tissue Product Sector
from the Base Case With Different Values for the
Capital Recovery Factor: NSPS Option 2
Capital Recovery Factor
0.22 I 0.27 I 0.17
Price Change
$/ton
percent
5.00
0.52
6.80
0.71'
3.00
0.31
Change in Output (1990)
1000 tons
percent
-1.16
-0.02
-1.60
-0.03
-0.72
-0.01
Using a CRF of 0.22, total Tissue output is estimated to decline by
0.02 percent in 1990 relative to the Base Case, and average price is
estimated to rise by 5.00 dollars per ton product, or 0.52 percent. Using
a CRF of 0.27, total output will decline by 0.03 percent if price rise
6.80 dollars per ton, or 0.71 percent. If a CRF of 0.17 is applied, total
output is predicted to decline by 0.01 percent if prices rise an average
of 3.00 dollars per ton, or 0.31 percent. Because these impacts are
consistently small, the analysis is not particularly sensitive to the
estimate of the capital recovery factor.
Total Costs of Compliance
Estimates of total costs of compliance due to NSPS depend on the
estimates of capacity expansion, the share of new capacity classified as
direct discharging, the share of new capacity classified as "new source,"
and the mix of subcategories assumed. On the other hand, eventually most
new capacity will be subject to NSPS. Therefore use of a constant share
of NSPS capacity over time is probably inadequate.
Table 6-2 shows the effect of two other assumptions concerning new
source capacity. In the first case, it is assumed that there is no decline
in new source capacity expansion due to NSPS costs. In the second case, it
is assumed that the share of new source capacity among all capacity expan-
sion is 41 percent for Tissue., one-half the original value. Total costs of
compliance are the product of new source capacity and unit costs of com-
pliance. The first alternate assumption has almost no effect on estimated
total costs of compliance. This is due to the fact that little new source
capacity was lost in the original scenario because there was only a very
small change in output, 0.02 percent. Results using the second alternative
assumption are quite different from the original scenario. If the new
source fraction of total capacity expansion is cut in half, estimated total
6-3
-------
Table 6-2: Effect of Alternate Assumptions About the Share of
New Source Capacity Expansion on Costs of Compliance:
Tissue Product Sector NSPS Option 2
(1978 Dollars)*
Scenario
Cumulative New
Source Capacity
Expansion
(1985-90)
(1000 ton/yr)
Costs of Compliance
(Millions 1978$)
1 Total
Capital 1 Annual
1. Result Using Base Assumption
(New Source Fraction of
Capacity Expansion = .82)
2. No Decline in New Source
Capacity Expansion
3. New Source Fraction of
Capacity Expansion = .41
273.35
274.51
134.89
3.18
3.20
1.57
1.34
1.35
0.66
*Cost calculated using unit costs from Table 5-7.
capital costs and total annual costs are reduced by 50 percent as well.
Therefore the value of the new source fraction does have a significant
effect on this portion of the analysis.
Mill-Level Impacts and Closure Analysis
Mills with significant impacts were identified using the criterion of
a cost-to-sales ratio of greater than four percent. This criterion does
not take mill-specific financial conditions into account, and is not based
on more general average levels of profitability in the industry. The
results of the financial analysis of the three mills with Economic 308
Survey data available were consistent with the four percent criterion in
all cases for Option 1, and in two out of three cases for Option 2. If
the cutoff criterion were two percent rather than four percent, four mills
would have significant impacts under BAT Option 1, and nine mills would
have significant impacts under BAT Option 2, a much more severe impact.
See Table 5-5. However, those results would not be consistent with the
financial analysis for the three mills.
6-4
-------
Capital Availability
The comparison of cash flow and capital requirements depends on the
sector-specific estimates of cash flow, the forecast of capacity expansion
in each subcategory, including the mix of existing and new sources, costs of
compliance, and the capital costs of new capacity. The cash flow estimates
are based on revenues and costs taken from the demand/supply analysis.
Revenues are the product of total output and price. Variable costs are the
integral under the supply curve. However, in sectors with a variety of
different grades, the price used may not have been the sector-wide average
price, so revenues may be under- or over-estimated. Unfortunately, other
information on cash flow broken down by product sector is not available.
Revenue estimates would also be affected by using a different macroeconomic
forecast for the base case. However, it is unlikely that these changes
would significantly affect the overall financial evaluation of the industry,
although the evaluations for individual sectors might change, since
compliance costs are such a small fraction of total cash flow.
There is considerable uncertainty about the base costs of new
capacity. Since costs of capacity expansion in a single year are larger
than total costs of compliance in any of the treatment options, these
estimates have an important effect on the overall financial picture of the
industry, although they do not affect the estimate of the incremental
effect of NSPS regulations.
Employment and Indirect Impacts
Employment. The employment to sales ratios derived are quite crude.
They probably overestimate employment impacts because they are based on
existing rather than new mills.
Indirect Earnings and Employment Effects. The estimates of indirect
earnings and employment impacts rest on a very simple input/output
framework. The approach tends to overestimate impacts because it does not
take into account that the reduction in earnings and jobs in particular
product sectors will be at least partially offset by increased growth due
to higher investment elsewhere.
6-5
-------
Appendix A
Capital Recovery Factor
The capital recovery factor (CRF) measures the rate of return that an
investment must achieve each year in order to cover the cost of the
investment and maintain net earnings, including depreciation and taxes.
Stated another way, the capital recovery factor is the excess of revenues
over variable costs, per dollar of invested capital, needed to cover the
cost of borrowing, depreciation and net profit-related taxes, while
preserving the market value of the firm's stock.
The formula for CRF used in previous analyses was:
A(N,K ) - td
CRF = = (A-l)
where:
N = lifetime of investment
Kf = average after-tax cost of capital
A(N,Kf) = annuity whose present value is 1,
given N and Kf [Kf/(l-(H-Kf)-N)]
d = depreciation rate
t = corporate income taxes
Changes in the tax code dealing with rapid depreciation and investment tax
credits require alterations in the formula for calculating the capital
recovery factor. The revised formula is:
A(N,K )(.9-c)
CRF = (A-2)
1 - t
where: c = E
j-l
where:
n = depreciation lifetime under tax code
d1 = new depreciation rate
Other variables -as above.
The assumptions and data used to obtain values for the above variables are
described below.
Average Cost of Capital
The cost of capital, Kf, is the average percentage return that
suppliers of debt and equity demand. For firms which have more than one
type of capital, Kf is calculated as the average of the after-tax costs
of debt and the costs of equity, weighted by the share of market value of
-------
each relative to the total market value of the firm. In equation form:
K = bi(l-t) + (l-b)r (A-3)
where:
*
Kf = average cost of capital after taxes
i = average cost of debt
r = average cost of equity
t = corporate income tax rate
b = share of debt financing
The costs of debt and equity are measured by the current market value
of outstanding debt and stock, rather than the original costs when the
debt and equity were issued. The argument that projects should be
evaluated using the weighted average cost of capital as the discount
factor has been made elsewhere* and rests on several assumptions. Firms
are assumed to have an optimal debt/equity ratio (or at least some
preferred debt/equity ratio), to have already obtained that ratio, and to
strive to maintain it over time. In addition, it is assumed that new
projects do not alter the overall risk position of the firm. (A change in
the risk level might result in a change in the debt/equity level.)
Therefore, new projects, on average, will be financed with these same
desired fractions of debt and equity.
Cost of Debt. Since firms often have more than one debt issue, it is
necessary to calculate an average cost within a company as well as across
companies. The following information on the debts of 27 pulp and paper
companies was obtained from Standard and Poor's Bond Guide (January
1980).**
1) yield to maturity
2) debt outstanding
3) closing price
First, the total market value of each bond issue is calculated as the
bond price multiplied by the amount of debt outstanding. Second, the
average cost of debt is calculated as a weighted average of the various
values for yield to maturity, where the weights equal the ratio of the
market value of each bond issue to the total value of debt. The average
before-tax cost of debt for these companies is 11.03 percent.
*See, for example, J. Fred Weston and Eugene F. Brigham, Managerial
Finance (6th ed.), Dryden Press, 1978, Chapter 19.
**It is assumed that the cost of capital to pharmaceutical companies is
very close to that for chemical companies in general.
A-2
-------
Cost o£ Equity. A firm's cost of equity can be expressed in equation
form as:
r = - + g (A-4)
P
where e is the annual dividend, P is the stock price, and g the expected
growth rate of dividends.* To estimate the firms' cost of equity, the
fpllowing data were obtained from Standard and Poor's Stock Guide (August
1979):
1) dividend yield;
2) closing price;
3) number of shares outstanding.
This information was collected for both preferred and common stocks.
An estimate of the expected growth rate was obtained using data on
production levels for the years 1979-1980 from the DRI model. The annual
compound rate of growth for total paper and paperboard production was
calculated to be 3.5 percent. Since this is an estimate of production,
not sales or income, an inflation factor must be added in. Based on the
DRI inflation projections for 1980-1990, an annual compound rate of
inflation of 7.5 percent was calculated. Thus, the expected growth rate
of dividends (g in the above formula) is 3.5 + 7.5 = 11.0 percent. (This
assumes that real prices remain unchanged.)
Separate costs of capital were calculated for common stock and
preferred stock. The yield to maturity on the common stock of 53 forest
product companies is 5.2 percent, which yields a cost of equity of:
5.2 + 11.0 = 16.3
This is more accurately described as the cost of retained earnings. The
cost of new issues of common stock is higher than the cost of retained
earnings because of the flotation costs involved in selling new common
stock. Since new issues are a very small proportion of a firm's capital,
they are not included in our calculation of the overall weighted cost of
capital.
Preferred stock is a hybrid between debt and common stock. Like debt,
it carries a commitment on the part of the corporation to make periodic
fixed payments. Thus, the cost of capital is equal to:
r = | (A-5)
without an estimate of the expected growth rate of dividends.
*See, for example, J. Weston and E. Brigham, op.cit.
A-3
-------
Depreciation
Depreciation is normally defined as the fraction of revenues set aside
each year to cover the loss in value of the capital stock. Due to recent
changes in the federal tax code, the economic life of a capital item is
now considerably longer than the depreciation life for tax purposes.
Based on earlier work the lifetime of capital stock for this industry is
assumed to be about 10 years.* The depreciation rate for most personal
property now is straight-line over five years (20 percent). These values
are used in the revised calculation of the capital recovery factor.
Tax Sate
The current federal corporate income tax rate is 20 percent on the
first $25,000 of profits, 22 percent on the next $25,000, and 46 percent
on all profits over $50,000. For this analysis, plants are assumed to be
paying an even 46 percent federal tax on all profits. A study by Lin and
Leone** indicates that state and local income taxes also are a significant
factor in pollution control investments. State corporate income tax rates
may be as high as 9.5 percent. In their study, a weighted average of 7
steel-producing states yielded an average state corporate income tax rate
of 7.55 percent. State income taxes, of course, are deductible expenses
in computing corporate income tax. A state corporate income tax rate of 8
percent is assumed here. Deducting this figure before computing the
federal income tax rate reduces the net effect of the 8 percent rate to
about 4 percent. Thus, the overall effective income tax rate is
approximately 50 percent.
Sensitivity Analysis
Table A-l presents various values for the capital recovery factor,
assuming various weighted costs of capital (Kf) and different
formulations allowing for changes in the federal tax code. Both the rapid
depreciation and the investment tax credit serve to lower the capital
recovery factor, thus reducing the return necessary to justify a given
investment.
*Draft Industry Description; Organic Chemical Industry, Vol. I, Meta
Systems, December 1979.
** An Loh-Lin and Robert A. Leone, "The Iron and Steel Industry," in
Environmental Controls, (Robert A. Leone, ed.), Lexington, MA: Lexington
Books (1976), p. 70.
A-4
-------
Table A-l
Alternative Derivations of the Capital Recovery Factor
Variable
Weighted cost of
capital (Kf)
Values
.10 .15 .20 .10 .13 .15
.20
Life of asset (N) 10 10 10 10 10 10 10
A(N, Kf) .163 .199 .239 .163 .185 .199 .239
Depreciation life (n) 10 10 10 5 5 5 5
Depreciation rate (d) .10 .10 .10 .20 .20 .20 .20
Tax rate (t) .50 .50 .50 .50 .50 .50 .50
c .379 .352 .335 .299
CRF(l) .226 .298 .378
CRF(2) .201 .240 .265 .335
CRF(3) .169 .202 .225 .288
where: CRF(l) is original formula (A-l in text)
CRF(2) allows for rapid depreciation but not investment tax credit
CRF(3) allows for both rapid depreciation and investment tax credit
(A-2 in text)
The weighted cost of capital is estimated based on the current costs
as reflected in the current prices and yields of a sample of corporate
stocks and bonds for that industry. In January of 1980, the weighted cost
of capital for the pulp and paper industry was estimated to be about 12
percent. There are two major assumptions in using this method. First
that current prices and yields accurately reflect future costs of
capital. However, interest rates have increased significantly since the
summer of 1979. Second, that the current portfolio mix will remain
constant over the next several years. Given changes in tax codes, and
changes in the availability of certain sources of capital such as
industrial revenue bonds, this is unlikely. Therefore the cost of capital
is expected to be higher than 12 percent. Given the mix of financing
sources available, the weighted cost of capital for the period covered by
this study is assumed to be close to 15 percent.
A-5
-------
A single, industry-wide CRF equal to 22 percent has been used in our
analysis. For a given investment, a firm's CRF will vary with their cost
of capital and mix of financing. However, it was not possible to estimate
a separate CRF for each establishment or firm.
A-6
-------
Appendix B
The 308 Survey
The economic analysis of various pollution control options is based
in large part on information collected through a questionnaire issued by
EPA under authority of section 308 of the Clean Water Act (the 308
Survey). This questionnaire was sent to approximately 700 mills in the
pulp, paper and paperboard industry. A total of 633 responses to the
308 questionnaire, representing 648 mills, were included in the analysis.
A follow-up on the non-respending mills showed that in most cases these
mills were closed at the time of the survey, or were not producers of
pulp, paper or paperboard.
Purpose of the Survey
The survey was designed to provide information on mill character-
istics, production costs, investment in new capital, and market struc-
ture. Of primary concern was information on production costs. At the
time of the survey there was only one public source which contained con-
sistent and detailed manufacturing cost information organized in a way
directly useful to an impact study.* These costs were for representa-
tive new facilities typical of good technical practice in 1974, however,
and a host of assumptions would have to be made to translate them into
a form which would allow us to construct marginal cost curves for in-
dustry product sectors. To develop new manufacturing cost functions
and to verify or modify the assumptions made to translate the cost
functions into cost curves for the sectors, information for individual
mills was needed on the relationship between costs and capacity,
capacity utilization, production processes and products, and age of
capital.
To determine impacts it is essential to consider questions of
demand. The DRI Forest Products model provided the capability to esti-
mate demand on a product-by-product basis. However, we wanted to be
able to test the assumptions of this model against information obtained
from individual firms concerning the markets for their products. In
addition, the demand analysis projects capacity expansion on the basis
of announced plans for expansion and specified investment behavior. To
assess the forecasts we needed information on individual mills' plans
for expansion.
*Economic Impacts of Pulp and Paper Industry Compliance with
Environmental Regulations, Report for Office of Planning and Evaluation,
U.S. Environmental Protection Agency, Arthur D. Little, Inc., May 1977.
-------
Questionnaire
The questionnaire contained 24 questions, and was organized into
ria-^-t-c
five parts:
Identification; Name and address of mill and (if different) name
and address of parent company; name, address and telephone of
individual responsible for completing the questionnaire.
Capacity; Mill capacity in various grades of pulp, paper, and/or
paperboard.
Economic Information: Assets and capital investment, revenue,
expenses, quantities sold and transferred, and annual production
and inventory change information for two fiscal years.
Annual Operating Costs and Capital and Operating Costs arising
from Federal Regulations; Fiber, chemicals, labor and energy
costs in the most recent fiscal year; and estimates of capital
and operating costs for air and water pollution control and OSHA
compliance.
Future Plans; Planned capital expenditures on air and water
pollution control and capacity expansion by product or process;
plans to curtail operations; and if applicable, user charges of
POTW's.
Confidentiality
Two procedures were employed to protect the confidentiality of the
data. Those mills which sent their responses directly to EPA were pro-
tected by the procedures specified in Article XXI, Parts A to F of
contract No. 68-01-4675. These included EPA removing the Identification
Section from each questionnaire and assigning a code number with region
and subcategory identifiers to each questionnaire before they were for-
warded to Meta Systems for processing.
Those mills which did not respond directly to EPA sent their com-
pleted questionnaire to a third party (Arthur Andersen & Co.) whom they
had hired to hold the data and protect its confidentiality. Both sets
of data (mills responding directly to EPA and mills responding to
Arthur Andersen & Co.) were stored on Arthur Andersen's computer, and
Arthur Andersen personnel monitored the use of the data to prevent the
exposure of 308 Survey data on an individual mill.
B-2
-------
Limitations of Survey
As noted above, the response rate to this 308 Survey was excellent,
and for the most part the quality of the data appears quite good. How-
ever, there are a few problems with the questionnaire and/or the
responses. In the case of the question dealing with annual operating
costs, it is unclear what the mills included in "other costs." It was
assumed that these costs included the operating costs necessitated by
current pollution control regulations, although this may not always be
the case.
A couple of problems arose with responses by indirect dischargers.
Due to the wording of the question, the flow level and user charge in-
formation is ambiguous. Also, final determination of whether a mill
was an indirect or direct discharger was left to the technical con-
tractor.
In some cases, a mill's reported production and capacity levels
were inconsistent. Various stages of the analysis required one or the
other level. Since it was not possible to determine which was correct,
the production and capacity data were used as they appeared on the
mill's response.
B-3
-------
Appendix C
Demand/Supply Methodology
Overview
The core of the approach to estimating the impact of BCPCT and
BATEA regulations on the industry is a microeconomic demand/supply
analysis for each market (product) sector of the industry. The analysis
produces a base case forecast of price, output, "contribution to
capital" (revenues less variable costs) and capacity utilization for
each product sector in the absence of new regulations. It also fore-
casts the effects of the costs of various treatment requirements on
those variables. The approach assumes that individual product markets
are competitive and that prices depend on the variable costs of the
marginal (high cost) mills in the various sectors. Market or product
sectors rather than subcategories are utilized because the relevant
set of competing products depends on product type, not manufacturing
process. The organization of the industry into product sectors corres-
ponds closely to product groups used by API.
For each sector, supply curves are constructed from manufacturing
cost and production data collected in the 308 Survey and pollution con-
trol cost estimates provided by the technical contractor. The supply
curves explicitly relate mill subcategories, the basis for defining
treatment costs, with product sectors, where the interaction of demand
and supply takes place. Supply curves are generated for a base case
with no additional pollution control requirements and for each of sev-
eral control options. The supply curves for different years are adjusted
to account for forecasts of capacity expansion through 1985.
The demand for each product sector is modeled using demand equa-
tions estimated by Data Resources, Inc. and linked with DRI's macroeco-
nomic forecasts over the period of the analysis, 1979-85. This provides
a demand forecast to match the capacity expansion forecasts on the
supply side.
The -interaction between supply and demand is modeled by solving
the system of supply and demand equations for each product sector for
equilibrium values of price, output, "contribution to capital" and
capacity utilization for each year of the forecast period.
-------
Figure C-l shows the information flows and stages of analysis which
form the demand/supply analysis.
Figure C-2 presents a more analytical picture of the relation-
ship of the various elements of the analysis, and suggests some impor-
tant implications of the methodology adopted. Quantity produced is
measured along the horizontal axis and price and unit cost along the
vertical axis. The base case assumes no new treatment requirements.
Given demand curve DD and supply curve SS, market equilibrium implies
price = P and output = Q. The excess of revenues over variable costs
("contribution to capital") is given by area CEP.
Let S'S1 represent the industry supply curve with treatment
costs. This yields a new equilibrium with price = P', quantity = Q1
and contribution to capital = C'E'P1. A number of elementary but im-
portant observations flow from this analysis. First, as long as demand
and supply are somewhat elastic, price will rise and output will fall.
If supply is not perfectly elastic (i.e., if SS and S'S' are not hori-
zontal) the price increase will be less than the cost increase for the
original marginal producer (i.e., PP'
-------
FIGURE C-l. Demand/Supply Analysis
SUPPLY
DEMAND
TECHNICAL
CONTRACTOR
INFORMATION
DRI MACRO-
ECONOMIC
MODEL
OTHER
DRI
INFORMATION
i
DEMAND INDICATORS,
EXPORTS, IMPORTS, NON-
PAPER SUBSTITUTE PRICES,
OTHER EXOGENEOUS
VARIABLES
MAP FROM MILL SUBCATEGORIES
TO PRODUCT SECTORS
c
RANK CAPACITIES 8V UNlt7\
COSTS TO OBTAIN SUPPLY )
CURVES J
(
GENERATE FITTED
\SUPPLY CURVE (1978 BASE}
SUPPLY CURVE FORECASTS
1979-90
C
; SOLVE DEMAND/SUPPLY \
EQUILIRIUM MODEL )
FORECASTS OF PRICE,
OUTPUT, CAPACITY
UTILIZATION, CONTRIBUTION
NOTE: RECTANGULAR BOXES DENOTE INFORMATION FLOWS.
OVAL BOXES DENOTE UNITS OF ANALYSIS.
C-3
-------
FIGURE C-2. Shift in Supply Curve Due to Treatment Costs
PRICE,
COST
P'
P
C'
0
Q' Q
OUTPUT
C-4
-------
FIGURE C-3. Example of Marginal Cost and Average Cost Curves
UNIT
COST
OUTPUT
FIGURE C-4. Example Where Marginal Cost Equals Average Cost
UNIT
COST
AC=MC
OUTPUT
C-5
-------
An estimate of the supply curve for the entire sector can be
obtained by ranking all mills manufacturing a given product in terras
of unit cost, and then pairing the unit cost of a given mill with the
cumulative production of all mills with unit costs less than or equal
to that mill's. This is the procedure followed in this study. Although
the curve so obtained strictly equals the industry supply curve only
under the assumptions of perfect competition and constant marginal cost
for each mill, we believe that it represents a good approximation even
if these assumptions are relaxed somewhat. The following example
illustrates the curve construction procedure.
Example. Suppose the individual mill data for a given product
sector are as follows:
Mill Production cost, $/ton Output, 1000s tons/year
1 210 800
2 180 3000
3 260 900
4 175 3400
5 205 900
6 200 1000
(total = 10,000)
Mill #4, being the lowest-cost producer, forms the first step on
the curve with unit cost = 175, production = 3400. Mill #2 is the next
lowest cost producer; its incremental output adds 3000 to the ac-
cumulated production, with a unit cost of 180. The rest of the curve
is constructed similarly, until all production is accounted for, with
the highest cost producer being the point (260;10,000). This process
results in a step function like that shown in Figure C-5. The length
of each step is the production of that one mill, and the height of the
step is that mill's unit cost.
In practice, the approach proceeds roughly as outlined above;
with a supply curve constructed for each product sector. First, all
of the mills that produce a given product, say Newsprint, are selected
from the 308 Survey data base. Next, unit variable manufacturing cost
is determined by summing the questionnaire responses for the individual
cost components for that product: wood and pulp, chemicals, labor,
energy, and other, and then dividing by the mill's output of that pro-
duct. This is the basic step of the transformation of costs from sub-
category to product sector.
C-6
-------
FIGURE C-5. An Example of a Constructed Supply Curve
UNIT COST
$/TON
3400
6400 Q 7400 8300 9100 10,000
OUTPUT 103 TONS/YEAR
C-7
-------
The structure of the supply curve has some implausible implications.
Suppose the intersection of the demand curve (DD) and the supoly curve
yields price P and quantity Q as in Figure C-5. The figure implies that
all mills with unit costs below that of mill 6 operate at full capacity,
while mill 6 absorbs all the slack, and mills with higher costs do not
operate at all, which is not realistic.* Nevertheless, the use of aver-
age costs gives a picture of the cost structure within a given product
sector. Since high cost mills have the greatest variability of output,
this should give a reasonable approximation of the shape of the supply
curve.
Another limitation of the procedure is that it assumes that demand
and supply in the entire product sector is cleared by a single price.
In many markets, especially papers, there is a significant variation in
quality and characteristics among subgrades, and prices will vary corres-
pondingly. Therefore, producers that appear to have high costs may pro-
duce higher quality products with higher prices. Using a single price
could distort the relative profitability of different mills. There is
less harm on the demand side because prices of similar grades can be
expected to move together.
Standardizing Costs. All costs are adjusted to first quarter 1978
dollars to agree with the pollution control costs provided by the techni-
cal contractor. To do this, all cost data from 308 responses must be
inflated/deflated to correspond to this fixed base. The ends of the
accounting base years in the 308 responses vary from January 1976 to
December 1978. To adjust these costs, approximate deflators of two sorts
were developed. The first type are deflators directly applicable to
specific products, as obtained from DRI time series for average operating
costs for these products. For products where no such direct deflators
were available, estimates of cost changes for each input were developed,
covering wood, pulp, and secondary fiber, labor, chemicals, and energy.
Separate regional cost factors were also developed for each input. In
both cases, the time period selected for adjustment was based on the mid-
point of the year-long accounting period as reported by the mill.
No further adjustments were made to Survey costs to account for
real (constant price) input cost increases between 1978 and 1983-85, the
period of the analysis. Although forecasts of costs of the various input
categories are available, it was felt that using these forecasts directly
would overstate the cost increases because of process changes mills would
make in response to higher costs. Nevertheless, it is expected that real
production costs will increase 5 to 15 percent over this period.**
*In the analysis, reported production was used as a proxy for capacity
to construct the supply curves, since production costs were only available
for that amount. This tends to understate capacity somewhat. However,
this is compensated for in the calibration of the supply curves described
below.
**DRI Pulp and Paper Review, June, 1980, passim.
C-8
-------
Functional Form of the Supply Curve. Both for reasons of confi-
dentiality and because of the cumbersome form of the step functions
derived by the above procedure, the calculated values of unit costs
and cumulative production are used to estimate econometrically a smooth
supply function which approximates the step function. The fitted
curve is the one used in the demand/supply analysis. It has the
general form:
t
c - f (q)
where
c = unit cost
q = cumulative production
A variety of functional forms were investigated for each product
sector and the choice of which to use in the demand/supply analysis
depended on such criteria as reduction in sum of squares, significance
of coefficients, and standard errors of estimate.
Calibration of jupply Curve to Base Case. Because the survey data
on production are taken from several different years and coverage was
not complete, the supply curve generated by the above procedure does not
correspond to actual supply conditions in any particular year.
Specifically, the cumulative production obtained from the curve corres-
ponding to the price of a product in 1978 is not necessarily equal to
reported output of that product in 1978. (In most cases, cumulative
production at the 1978 price is within ten percent of actual 1978 pro-
duction, but usually lower. In a few cases it is higher.)
In order to calibrate the demand/supply model for each sector, the
estimated supply curve is shifted right or left so that it is consistent
with the 1979 price (in 1978 dollars) and level of output.* Strictly
speaking, this procedure assumes that the "unobserved" capacity has vari-
able costs equal to the y-intercept of the fitted supply curve. In
practice, as long as the unobserved capacity has variable costs less
than those of the marginal high-cost mill, the calibration will not
affect the shape of the supply curve in the region of its intersection
with the demand curve. Therefore, it will not affect the forecast of
price and output in the demand/supply analysis.
*1979 is the most recent year for which annual information is avail-
able. Therefore, there is no need to start with 1978 levels and "fore-
cast" 1979 levels. This approach is identical to that used to model
capacity expansion in subsequent years.
C-9
-------
Inclusion of Pollution Control Costs. Pollution costs for
several levels of control were determined by the technical contractor
for individual mills and for the basic divisions of subcategory.
Generally, one level of production process controls and two levels
incorporating end-of-pipe treatment were considered. Costs were cal-
culated for capital, operation and maintenance (O&M) and energy on an
annual basis. Where appropriate, regional factors modifying these
costs were developed.
The treatment costs added to the supply curve are total annual-
ized unit costs which include capital charges (investment costs multi-
plied by the CRF), as well as variable costs. This is because the
decision to install pollution control equipment and remain operating
is a long-run decision. We assume that firms can correctly predict
future trends so that only those which expect to recover at least the
total costs of their pollution control system will stay open. This
approach ensures that the marginal producer remaining open will recover
total treatment costs.
The procedure for estimating the supply function including pollu-
tion control costs is to divide the costs of a specified level of
pollution control for each mill, by the mill's capacity to obtain a
treatment cost per ton. This unit cost is then added to the unit vari-
able manufacturing cost of that mill. This implies that a mill's
treatment costs are allocated across its various products on an equal
per ton basis. The mills are reranked by unit cost and the supply
curve is reestimated using these new cost figures. The new curve will
shift upwards, reflecting the increased costs of additional pollution
control. Note that if a mill had inframarginal unit costs before treat-
ment, but has unit costs greater than the marginal mill after treatment,
its position in the supply curve will shift to the right of the marginal
mill. For example, Figure C-6 shows the supply curve from Figure C-5
after pollution costs have been added. In this case, the cost rankings
of mills #1, #5, and #6 have switched.
The Adjustment of the Supply Functions to Account for Capacity
Expansion. The supply functions were generated using the data on pro-
duction, capacity, and costs available at the time of the 308 Survey.
However, because we forecast supply through 1985, and because the supply
curve will change shape with additions of new capacity and retirement of
old capacity, these supply curves must be adjusted to account for capa-
city expansion.
C-10
-------
FIGURE C-6.
Supply Curve Resulting from the Reranking of
Mills with Treatment Costs
UNIT COST
$/TON
OUTPUT 1O3 TONS/YEAR
NOTE: HORIZONTAL DASHED LINE (---) SHOWS PRE-CONTROL
UNIT VARIABLE COST
HORIZONTAL SOLID LINE ( ) SHOWS UNIT VARIABLE
COST PLUS TOTAL ANNUAL POLLUTION CONTROL COST
c-n
-------
There are several sources of information on current and future
capacity. The capacity figures published by the American Paper Insti-
tute (API) are generally considered to be the most reliable of those
publicly available. The responses to the 308 Survey also provide in-
formation on current capacity and expansion to which the mills are
committed. Most of this expansion is to be on stream by 1981. Current
API figures include probable expansion through 1982. The 308 Survey
and API are in reasonably close agreement on capacity, both current and
planned, to 1981.
DRI forecasts future capacity through 1985. They base their
current capacity on API data, and use API estimates for expansion
through 1982. After 1982 their forecast of capacity is based primarily
on creating the capacity needed to meet the demand forecast by the DRI
model. An additional source of information on future expansion is the
historical trend for each product sector. The projection must take into
account the cycles in investment which appear to be common for several
product sectors. Through 1982 we use the API estimates of capacity.
Estimating expansion beyond 1982 is more difficult because firms do not
have definite plans that far in advance. The construction of a complete
investment model is particularly difficult in an industry like pulp and
paper, where expansions involve large sums of money and occur infrequently.
Rather than treating investment as an endogenous variable, we have chosen
to estimate future capacity based on API and DRI forecasts.
Two checks are imposed on these estimates of capacity expansion
to ensure that they are reasonable. The first is capacity utilization.
To a certain extent, output can be increased by making greater use of
current capacity. According to API estimates, in 1977 there were
27,381,000 tons of paper produced, with a capacity of 29,859,000 tons.
Thus, the overall capacity utilization rate was approximately 91.7 per-
cent. Included in the measure of capacity is an allowance for normal
maintenance, grade changes, and other downtime. Therefore, it is pos-
sible to have a capacity utilization rate of more than 100 percent, but
only for a short period. On the other hand, if the capacity utilization
factor declines sharply, there is reason to conclude that the capacity
estimate is too high. This criterion was used to evaluate the results
of the demand/supply analyses using initial capacity expansion estimates.
In some cases, the capacity forecasts were revised if the changes in
capacity utilization implied by the demand/supply forecasts varied sig-
nificantly and/or were inconsistent with other information about the
likely prospects for that product factor.
C-12
-------
A second check is the profitability of investments in new
capacity. The present discounted value of the excess of price over
variable cost per ton after tax can be taken as the value of the
investment. If this value exceeds the unit costs of new capacity
from the 308 Survey, then the capacity expansion forecast is profit-
able. The methodology is discussed more fully in the section on
capital availability analysis.
To actually model the effect of capacity expansion on the
fitted supply curves, it is assumed that new capacity has unit
variable costs equal to the minimum of that for existing capacity.
Therefore, the addition of new capacity can be represented simply
as a rightward shift of the existing cost curve, with unit costs of
new capacity equal to the y-intercept of the original cost curve.
This adjustment is exactly analogous to that used to calibrate the
supply curve to the 1979 base period.
Consider the example in Figure C-7. Figure C-7a represents a
product sector supply function as it might appear in 1979. If five
units of additional capacity were projected for 1980, the supply
curve would be shifted as shown in Figure C-7b; i.e., the new capa-
city would come in as low variable cost production onthe left end
of the supply function. If additional capacity was expected to
come on-stream in the following year, it would be introduced in
exactly the same fashion.
It should be noted that this assumption about variable costs of
new capacity could be relaxed without affecting the results of the
demand/supply analysis. As long as variable costs are less than the
variable costs of the marginal existing mill, the intersection of the
demand and supply curves is unaffected. Therefore, price and output
changes due to treatment costs will not be affected either. However,
relaxing this assumption does affect the amount of "contribution to
capital" available for capacity expansion. Therefore, the capital
availability analysis must be examined for sensitivity to this factor.
Supply functions are prepared in this manner for individual pro-
duct sectors with and without pollution controls for each year from
1978 to 1985.
Total Cost of Compliance. The capacity expansion forecasts are
also used to predict total costs of compliance to the Proposed Regula-
tion for capacity in place by 1983. Costs of compliance for mills in
place in 1978 are taken directly from the sums of treatment costs esti-
mated for mills in the 308 Survey. The expansion forecasts can be used
directly to calculate costs of compliance by product sector for mills
in place by 1978. To compute costs by subcategory, expansion forecasts
C-13
-------
FIGURE C-7. Modeling Capacity Expansion Using the
Product Sector Supply Curves
FIGURE C-7a. Supply Curve in 1979
600
UNIT COST
{dollars/ 400
ton )
200
20 40 60 80 100
PRODUCTION (tons/year)
FIGURE C-7b.
Supply Curve in 1980
with Five Units of
New Capacity
UNIT COST
(dollars/
ton)
600
400
200
5 tons of new capacity
20 40 60 80
PRODUCTION (tons/year)
100
C-14
-------
for each subcategory roust be developed based on the product sector
forecasts. First, an expected mix of subcategories corresponding to
expansion in each sector was estimated. It was assumed that expansion
after 1978 in each sector would contain the same fractions of inte-
grated subcategories as found in the 308 Survey. Only a small increase
in nonintegrated capacity is predicted.*
Starting in 1982, capacity increases due to "greenfield" mills or
major alterations of existing plants are assumed, subject to NSPS stan-
dards. Thus it is necessary to predict what fraction of new capacity
would be classified as a new source. This was done using information
on installation of new machines in API's capacity forecasts and planned
capacity increases in existing plants from the 308 Purvey.
Demand Side Analysis
This section outlines the methodology used to model demand for
pulp and paper products. It includes a discussion of general factors
affecting demand in the industry, the structure of the equations making
up the model, the results of the eco'hometric estimation, and the macro-
economic forecast which drives the demand side of the demand/supply
model.
Factors Affecting Demand. Demand for specific products within
the industry exhibits considerable variety, since each product has its
own unique characteristics. The economic and technological trends
affecting demand for the twenty-seven product sectors that have been
defined for the industry are summarized in the product profiles in Draft
Volume II. Some product sectors have been severely affected by the
penetration of substitute materials into their traditional markets.
Examples of this trend are the substitution of polyethylene bags for
Bleached Kraft bags, of plastic film for Glassine and Greaseproof paper,
of plastic containers for Molded Pulp products, and of plastic bottles
for Solid Bleached Milk cartons. Other product sectors have not suc-
cumbed to penetration. For example, most Unbleached Kraft papers have
superior packaging properties and consequently have maintained market
shares.
Technological change in end use markets has affected some pro-
ducts. Demand for Solid Bleached Bristols is down since there is
increased use of computer magnetic tape rather than cards. Uncoated
Freesheet use, on the other hand, has grown due to the burgeoning
need for business forms and paper for computers and copying machines.
*This is because most new expansion does occur in integrated mills
and because doing so automatically accounts for the increase in market
pulp capacity that must, for consistency, accompany increase in non-
integrated capacity .
C-15
-------
Technological changes in product production have improved demand in
some sectors such as Newsprint, Uncoated Groundwood Paper, and very
recently, Tissue, by improving product characteristics and therefore
consumer acceptance.
The demand for each product is linked to the level of activity
of particular sectors of the economy. For example, Special Industrial
Papers demand follows overall industrial production, and Coated Print-
ing Papers demand is related to the level of advertising in the U.S.
Some products are also affected by national policy. The future use of
the various recycled paperboards, for instance, will be influenced by
national recycling policies.
Demand Model. Because most pulp and paper products are inter-
nationally traded, an analysis of demand must take into account both
domestic and foreign demand and supply for a given product. The basic
identity is:
Apparent Consumption = Shipments + Imports - Exports (C-l)
Shipments, i.e., domestic production, are the supply side of our model.
Forecasting equations for imports and exports have been developed by
DRI. In most cases, DRI's forecasts of exports and imports are taken
as exogenous to the demand/supply models used in the present analysis,
since their magnitudes are relatively small. (Dissolving Pulp is the
exception.)
In the next step of the analysis, apparent consumption is analyzed
into two components, actual consumption and inventory changes. In equa-
tion form:
Apparent Consumption = Consumption + Inventory Change (C-2)
This reflects the fact that consumers of paper and board products buy
them to add to their inventories, as well as consuming them immediately
for their given "end-use". Because inventory demand tends to be very
volatile, it is preferable to separate it out and focus on the under-
lying end-use demand, i.e., actual consumption. Actual consumption is
more stable and reflective of long-term effects of demand such as sub-
stitution and technological change. Not doing so would tend to over-
estimate the price elasticity of demand.
Lastly, in DRI's estimation approach, actual consumption is
analyzed as the product of an "end-use factor" (EUF) and a "demand
indicator" (IND). In equation form:
C-16
-------
Consumption = EUF x IND (C-3)
One can think of the demand indicator as an index which measures the
effect on demand (consumption) of the size of the end-use consumption
market while holding price and other factors constant. In the case
of consumer Tissue, for example, an obvious candidate for a demand
indicator would be the number of households in the U.S. Everything
else equal, one would expect a doubling in the number of households
to double the demand for consumer Tissues. In economic terms, the
demand indicator represents shifts in the demand curve. In other
cases, the demand indicator might be the index of production of the
end-use industry. The choice of a demand indicator for a particular
product sector depends on which macroeconomic variable best correlates
with the size of the end-use sector.
Several product sectors are represented by more than one demand
indicator because components of their demand are experiencing different
market trends. Each demand indicator is weighted by the share of that
component of total demand. For instance, demand for Coated Printing
Paper has three major components. Demand for the smallest coated
one-side paper is declining because of substitution by plastics.
However, demand for the two types of coated two-side paper is growing,
resulting in an overall increase in demand for the sector.
Conversely, the end-use factor can be thought of as the demand of
an average unit of the end-use sector. In the case of tissues this
would be a single average household. In some other sector it would be
a unit of production of the end-use industry. Therefore, the end-use
factor captures all other factors affecting demand (price, substitute
price, technological change) except the size of the end-use sector.
It is the demand curve "normalized" to a unit of the end-use sector.
Multiplying the end-use factor (demand per end-use unit) by the demand
indicator (number of end-use units) gives us back the total demand of
the end-use sector, which, in equilibrium, equals actual consumption.
End-Use Factor Equations. DRI's approach is to estimate econo-
metrically the end-use factor equation. Given time series for consump-
tion and the chosen demand indicator, equation C-3 yields a time series
of the end-use factor. This end-use factor is then regressed against
the appropriate own and substitute price series and other independent
variables to obtain the coefficient estimates for the equation.
C-17
-------
A typical end-use factor equation has the following form:
EUFfc = C + L(PQt/PDt) + L(PQt/PSt) + L(Xfc) (C-4)
where
EUF = end-use factor
C = constant term
PQ = price of paper grade
PD = GNP deflator or other price index
PS = price of substitute good
X = other independent variables, e.g., time or
proxy for technological change
n
L = lag operator (e.g., L(Xt) = I aixt_^)
i=o
t = time subscript
The constant term captures the "exogenous" component of demand. The
second term in equation C-4 measures the effects of changes in the real
price of the paper grade, the third term measures the effect of relative
changes in own and substitute prices, and the fourth term captures the
effects of othe exogenous variables on demand. Lags on most price terms
range from four to eight quarters.
In most cases, the end-use factor equations are estimated with
quarterly data. In these cases quality is always a function of lagged
relative price (not current price). This form makes them awkward to
use in the demand/supply analysis bacause the elasticity of demand in the
current quarter is zero. However, because the supply curves are based on
annual data, it was necessary to convert the demand curves to an annual
basis to make them compatible. As a result of the annualization proce-
dure, demand becomes a function of current as well as lagged price. This
is because the lagged price terms for the most recent quarters are allo-
cated to the current year when the aggregation from the quarterly to
yearly basis is made.
Insufficient data were available to estimate end-use factor equa-
tions for three sectors: All Other Paper, Molded Pulp, and Market Pulp
(except Dissolving Pulp). Problems include the multiplicity of differ-
ent products included in these sectors and the difficulty of identifying
demand indicators and obtaining price series. Analysis of the demand
for Market Pulp is further complicated by the wide substitutability among
different grades. As a result, demand/supply analyses could not be done
for these sectors.
C-18
-------
The actual demand equation used in the demand/supply model is
constructed by retracing the steps outlined in equations C-l and C-4.
Multiplying the end-use factor equation* A-4 by the DRI forecast of
the demand indicator, and adding the forecasted values of inventory
change and exports, less imports, yields an equation relating U.S.
production to the price and other variables in equation C-4.
Results of Estimation. The full results of the estimated end-
use factor equations are given in Appendix 2-B. A useful way to sum-
marize the results is to use the concept of elasticity of demand.
Price elasticity of demand is defined as the percent change in quantity
demanded resulting from a given percent change in price, all other
factors held constant. It gives a convenient summary of the relation-
ships specified by a given demand equation. The formula for elasticity
is:
e. =
AP
where Q is quantity demanded and P is price. A high value of e (greater
than one) means that demand is relatively price-sensitive, whereas a low
value of e implies the opposite. Products with low demand elasticities
are in a better position to pass through to the customer the added costs
of pollution control. The own price elasticity shows the effect of a
product's own price on its demand, and the cross-price elasticity shows
the effect of the price of substitute goods on its demand.
Table C-l lists the pulp and paper industry sectors, their own-
price elasticities, their substitutes/ and their cross-price elasticities,
In most cases, confidence intervals for these estimates are small. The
table shows that the own-price elasticity estimates of most of the pro-
duct sectors are relatively inelastic. Exceptions are Bleached and Un-
bleached Kraft Papers, Glassine and Greaseproof Papers, Cotton Fibre Pa-
pers, Uncoate~d Groundwood Papers, Thin Papers, and Solid Bleached Board;
all with elasticities greater than one. Some product sectors are extreme-
ly inelastic. These include Tissue paper, Uncoated Freesheet, and Solid
Bleached Bristols.
Several product sectors have high cross-price elasticities, imply-
ing that price rises due to pollution costs could significantly affect
demand if they are not matched in the competing sectors. Glassine and
*A11 variables except the own price PQ and EUF in the end-use factor
equation are also assumed exogenous in the demand/supply model. As with
other variables, these are taken from DRI forecasts. These forecasts are
described below.
**
"Appendix 2-B" refers to Appendix 2-B in the Draft Report.
C-19
-------
TABLE C-l.. SUMMARY OF DEMAND ELASTICITIES
Price
Unbleached Kraft
Bleached Kraft
Glassine
Spec. Industrial
Newsprint
Coated Printing
Uncoated Freesheet
Uncoated Groundwood
Thin Papers
Solid Bl. Bristols
Cotton Fiber
Tissue
Own Price
Elasticity*
1.
3.
2.
,49
.86
.14
.73
.63
.64
.38
2.65
1.07
.41
2.06
.06
Substitute
Plastic Film
Plastic Film
Plastic Film
n.a.
Uncoated Groundwood
Uncoated Groundwood
Uncoated Groundwood
Newsprint, Uncoated
Book Papers
Chemical Woodpulp
Papers
n.a.
Chemical Woodpulp
n.a.
Cross-Price
Elasticity
of Substitute
.17
.67
1.16
n.a.
.35
.23
.22
2.65
.82
n.a.
1.12
n.a.
Board
Unhl. Kraft Liner.
Bl. Kraft Liner.
Bl. Kraft Folding
Semi-Chem Corr.
Recycled Liner.
Recycled Corr.
Recycled Folding
Constr. Paper & Bd.
Molded Pulp
Solid Bl. Board
All Other Board
.61
.61
.73
.61
.61
.61
.73
.68
n.a.
1.15
.65
Plastic Films, Polystyrene,
Hard Plastic Packaging
**
Plastic Pouches, Film &
Hard Packaging
**
**
**
Plastic Pouches, Film &
Hard Packaging
Solid Wood Products
n.a.
Plastic Film
Plastic Pouches, Film &
Hard Packaging
.42
.42
.48
.42
.42
.42
.48
n.a.
n.a.
.39
.07
Dissolving
Market
.59
n.a.
n.a.
n.a.
n.a.
n.a.
Total
Source: DRI demand equations
*Absolute Value
**Same as for unbl. kraft liner
n.a.: data not available for emprirical estimate of elasticity
C-20
-------
Greaseproof papers, Cotton Fibre papers, and Uncoated Groundwood papers
all have cross-price elasticities greater than unity. The cross-price
elasticity for Bleached Kraft Papers is also relatively high. Products
which have very low cross-price elasticities include Unbleached Kraft
Papers and Uncoated Freesheet. For some product sectors such as Tissue
and Solid Bleached Bristols, data are not available to estimate cross-
price elasticities.
The Macroeconomic Forecast. Values of the exogenous variables in
the demand models, such as demand indicators, are taken from the March
1980 "trend" forecast of the U.S. economy, made by DRI's macroeconomic
model for the period 1980-85. This forecast shows a recession with de-
clines in real GNP through the last three quarters of 1980 followed by
gradual recovery in 1981. Inflation is expected to abate gradually
after the credit squeeze in the first half of 1980, although the "core"
rate of inflation due to wage increases could remain at around ten per-
cent through the early 1980's. In the following years, 1982-85, a pre-
dicted move toward a balanced budget is expected to reduce the share of
consumer spending in GNP, while tax cuts and increased defense expendi-
tures are predicted to boost investment spending. This shift from con-
sumption to investment spending has implications for the relative
recovery rates of different paper and board grades. It is expected that
paper grades associated with advertising (Newsprint, Coated Printing
Papers) and fiber boxes and other packing materials used for consumer
goods will fare less well. Table C-2 shows the movements of some impor-
tant variables in the forecast.
Solution of the Model
The supply and demand curves for each sector are combined to form
a product sector model with can be solved to predict the equilibrium
path of the market over time.* As described earlier, the demand rela-
tionship described in equations C-l and C-4 relates price to U.S. produc-
tion. The supply curve developed relates U.S. production to the marginal
cost (dollar per ton) of that output. Adding the assumption of compet-
itive behavior,
Price = Marginal Cost (C-5)
closes the system. This is the basic structure of the demand/supply
models used to forecast price and output in each product sector.
*The procedure for the five linerboard and corrugating medium sectors
is somewhat more complex. The supply and demand of all five sectors is
modeled jointly to capture substitute and complementary relationships.
C-21
-------
TABLE C-2. AVERAGE ANNUAL PERCENT CHANGE OF ECONOMIC VARIABLES IN DRI CONTROL FOREC.
1979 1980 1981 1982 1983 1984 1985
Real GNP 2.3 0.2 1.5 4.3 3.4 2.6 3.8
Consumer Price Index 11.4 12.9 10.2 9.6 8.8 8.0 8.1
Consumer Expenditures
except Services 1.3 0.1 0.6 3.4 3.4 2.7 3.5
Printing, Index 4.1 -1.6 0.3 6.2 3.9 3.0 4.5
Wholesale Prices (Costs)
Energy 26.6 48.7 27.5 19.1 12.2 10.5 12.4
Chemicals 11.8 19.0 12.2 9.6 7.6 6.0 6.7
Source: DRI Pulp and Paper Review (March 1980), p. 15.
C-22
-------
The demand side of the model is driven by values of the exogenous
variables from the DRI model and lagged prices. On the supply side,
total capacity is given exogenously. For each year, the model is solved
for the market-clearing price and quantity. A base case is established
for 1979 to 1985. This not only creates a reference case, but also es-
tablishes a series of lagged prices to start the analysis of the effects
of treatment costs. Starting with 1983, supply curves embodying costs
from each treatment option are used to calculate an equilibrium price and
quantity for each year and option. Although mills are not required to
begin treatment until 1984, they are assumed to incur costs beginning in
1983. The model also calculates total industry contribution to capital
(revenues less variable costs). Projections for each treatment option
are made through 1985.
C-23
-------
Appendix D
Demand Curves
The parameters used to determine the demand for a product sector in a
given year t are presented in Table D-l. The coefficients d^ are weights
on the prices lagged from year t. The parameter S is the annual growth
rate of demand in the sector. Under the assumption of long-run equilibrium
(see Appendix C), S was taken as identical to the growth rate of supply.
Note that the units of P and Q in the demand curves are different from
those in the supply curves/ and must be adjusted accordingly to be
comparable with them.
The demand curves for Unbleached Kraft Linerboard, Semi-Chemical
Corrugating Medium and Recycled Corrugating Medium actually show the
demand for total fiber box shipments (in millions of square feet) as a
function of price (in dollars per million square feet). A series of
conversion equations is needed to determine price and output for each of
these papergrades.
Some product sectors are omitted because they were not available
(Molded Pulp) or no NSPS capacity was expected to be built.
-------
Table D-l. Parameters for Product Sector Demand Curves
Model Coefficients*
Product Sector
Unbleached Kraft
Bleached Kraft
Glassine
Spec. Industrial
Newsprint
Coated Printing
Uncoated Freesheet
Uncoated Groundwood
Thin Papers
Solid Bl. Bristols
Cotton Fibre
Tissue
Board
Unbl. Kraft Liner.
Bl. Kraft Liner.
Bl. Kraft Folding
Semi-Chemical Corr.
Recycled Liner
Recycled Corr.
Recycled Folding
Constr. Paper & Board
Molded Pulp
Solid Bl. Board
All Other Board
Pulp
Dissolving Pulp
c
9453
NA
NA
1065
7579
9147
12108
7216
NA
NA
NA
5140
469391
NA
4350
469391
NA
469391
NA
8983
NA
4563
7156
<30
-105.7
NA
NA
-7
098.6
-29.4
-20.3
-69.9
NA
NA
NA
-4.42
-1944
NA
-21.7
-1944
NA
-1944
NA
-79.9
NA
-33.8
-124
*1
-194.7
NA
NA
-3.5
-19.7
069.8
-67.91
-124.1
NA
NA
NA
0
-3198
NA
-65.9
-3198
NA
-3198
NA
-119.8
NA
-42.5
89.8
<*2
-39.7
NA
NA
0
0
-6.7
-20.52
-30
NA
NA
NA
0
-698
NA
-9.6
-698
NA
-698
NA
-10
NA
-27.9
-11.84
d3
0
NA
NA
0
0
0
0
0
NA
NA
NA
0
0
NA
0
0
NA
0
NA
0
NA
-4.2
0
d4
0
NA
NA
0
0
0
0
0
NA
NA
NA
0
0
NA
0
0
NA
0
NA
0
NA
-.9
0
s
.02
NA
NA
.02
.06
.03
.03
.06
NA
NA
NA
.01
.04
NA
.02
.04
NA
.026
NA
.01
NA
.01
.008
NA
NA
NA
NA
NA
NA
NA
*The coefficients assume price is in 1978 cents per pound and output in
1000 tons per year.
Source: DRI, Meta Systems estimates.
D-2
-------