&EPA
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, O.C. 20460
EPA-440/2-83-007
June 1983
Water
Economic Impact Analysis
of Effluent Standards and
<
Limitations for the Metal
Finishing Industry
QUANTITY
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This document is an economic impact assessment of the
recently-issued effluent guidelines. The report is being
distributed to EPA Regional Offices and state pollution con-
trol agencies and directed to the staff responsible for
writing industrial discharge permits. The report includes
detailed information on the costs and economic impacts of
various treatment .technologies. It should be helpful to the
permit writer in evaluating the economic impacts on an indus-
trial facility that must comply with BAT limitations or water
quality standards.
The report is also being distributed to EPA Regional
Libraries, and copies are available from the National Technical
Information Service (NTIS), 5282 Port Royal Road, Springfield,
Virginia 22161 (703)487-4650.
If you have any questions about this report, or if you
would like additional information on the economic impact of the
regulation, please contact the Economic Analysis Staff in the
Office of Water Regulations and Standards at EPA Headquarters:
401 M Street, S.W. (WH-586)
Washington, B.C. 20460
(202)382-5397
The project officer for this study was Kathleen Ehrensberger
(202-382-5383).
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ECONOMIC IMPACT ANALYSIS OF EFFLUENT
LIMITATIONS AND STANDARDS
FOR THE METAL FINISHING INDUSTRY
U.S. Environmental Protection Agency
Office of Analysis and Evaluation
Washington, D.C. 20460
U.S. Environmental Protection Agency
Region 5. Library (PL-12J)
77 West Jackson Boulevard, 12th Fhnr
Chicago. 11 60604-3590
June 1983
EPA 440/2*83-007
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PREFACE
This document is a contractor's study prepared for the Office
of Water Regulations and Standards of the Environmental
Protection Agency (EPA). The purpose of the study is to ana-
lyze the economic impact which could result from the applica-
tion of effluent standards and limitations issued under Section
301, 304, 306 and 307 of the Clean Water Act to the metal
finishing industry.
The study supplements the technical study (EPA Development
Document) supporting the issuance of these regulations. The
Development Document surveys existing and potential waste
treatment control methods and technology within particular in-
dustrial source categories and supports certain standards and
limitations based upon a analysis of the feasibility of these
standards in accordance with the requirements of the Clean Water
Act. Presented in the Development Document are the investment
and operating costs associated with various control and treat-
ment technologies. The attached document supplements this ana-
lysis by estimating the broader economic effects which might re-
sult from the application of various control methods and techno-
logies. This study investigates the effect in terms of produc-
tion cost increases, plant closures and divestitures, employment
losses, and effects on investment.
The study has been prepared with the supervision and review of
the Office of Water Regulations and Standards of EPA. The work
was performed under contract no. 68-01-6214 by Booz, Allen &
Hamilton Inc. The report was completed in June 1983.
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TABLE OF CONTENTS
Page
Number
I. EXECUTIVE SUMMARY 1-1
II. INTRODUCTION II-l
III. CHARACTERISTICS OF THE METAL FINISHING III-l
UNIVERSE
IV. ECONOMIC IMPACT METHODOLOGY IV-1
V. DERIVATION OF COMPLIANCE COSTS V-l
VI. ECONOMIC IMPACTS VI-1
VII. REGULATORY FLEXIBILITY ANALYSIS VII-1
VIII. NEW SOURCE PERFORMANCE STANDARDS/ VIII-l
PRETREATMENT STANDARDS FOR NEW
SOURCES
IX. LIMITS OF THE ANALYSIS IX-1
APPENDICES
A - ANNUALIZATION METHODOLOGY
B - JOB SHOP AND IPCB MODEL AND ANALYSIS
C - CAPTIVE PLANT MODEL AND ANALYSIS
D - EFFECT OF THE BUSINESS CYCLE ON PROJECTED METAL
FINISHING IMPACTS
E - INPUT-OUT ANALYSIS
F - SENSITIVITY ANALYSES
G - TTO BASELINE MONITORING COSTS FOR PLANTS WITH
WATER USAGE GREATER THAN 250,000 G.P.D.
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I. EXECUTIVE SUMMARY
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I. EXECUTIVE SUMMARY
1. INTRODUCTION
This report presents the economic impacts of BPT/BAT
and PSES/PSNS Water Pollution limitations and standards on
the Metal Finishing Industry, and of amended PSES stan-
dards for job shop electroplaters. This study was pre-
pared under the supervision of the Office of Analysis and
Evaluation, U.S. Environmental Protection Agency. As
required by the Clean Water Act, this study presents for
consideration the economic impacts of the regulations
which would control the industry's discharge of its
effluents. Specifically this report includes:
The economic characteristics and size of the
Metal Finishing Industry
Derivation of compliance costs
Economic impact methodology
Economic impacts on the Metal Finishing Industry
due to the additional costs of meeting the
regulations
Analysis of new sources
Regulatory Flexibility Analysis
Methodology and cost appendices.
This Executive Summary presents a brief discussion of
the following:
Industry structure and characteristics
Derivation of compliance costs
Economic impact methodology
Economic impacts
Limits of the analysis.
The study is based on data from various sources, in-
cluding a 1976-77 Survey of the Metal Finishing Industry,
Dun and Bradstreet's Market Identifiers File, the Permit
Compliance System (PCS) File, the 1977 Census of Manufac-
turers, the technical contractor for these regulations,
and the Environmental Protection Agency files.
1-1
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2. INDUSTRY STRUCTURE AND CHARACTERISTICS
For purposes of the economic analysis, the Metal
Finishing Industry is divided into three segments: job
shops, captives, and independent printed circuit board
(IPCBs) manufacturers. The job shops are mostly small,
privately-owned operations classified as SIC's 3471 and
3479 by the Standard Industrial Classification Manual.
3099 of the estimated 5500 job shops in those SIC's are
forecasted to be affected by the BAT/amended PSES regu-
lations: 365 direct dischargers and 2734 indirect dis-
chargers. The remainder of the job shops do not perform
regulated operations. The 3099 job shop plants accounted
for $3.6 billion in sales in 1982 and employed 65,000
people. The job shop segment is competitive, with a
4-firm concentration ratio of 7.2 percent in SIC 3471 and
15.1 percent in SIC 3479.
The captive segment of the Metal Finishing Industry is
comprised of plants or production centers found within
manufacturing firms which provide metal finishing services
to the parent company. There are an estimated 10,000 cap-
tive plants that will be covered by these effluent guide-
lines, 7500 indirect dischargers and 2500 direct dischar-
gers. Captive metal finishing operations occur in an
estimated 150 four digit SIC's and vary in size from $1
million to over $100 million in sales in 1982 dollars.*
Further, captive plants vary with respect to the relative
importance of their metal finishing operations and the
degree with which they provide finishing services to out-
side customers. Plants range from those which metal fin-
ish all of their own goods to those which occasionally
finish in-house goods, and take in finishing work from
other producers. The total value of shipments of the cap-
tives is estimated at $140 billion, shipments of just the
metal finished goods is on the order of $76 billion, and
total employment in captive plants is 6.5 million. Metal
finishing process employment is estimated at 0.6 million.
The independent printed circuit board manufacturing seg-
ment population is estimated at 371 plants. A total of
Information based on the 1976 survey of metal finish-
ers. All dollar amounts in this report were updated
to 1982 dollars using the implicit price deflator,
durable goods sector, Survey of Current Business,
published by the Bureau of Economic Analysis, U.S.
Department of Commerce.
1-2
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327 IPCBs are indirect dischargers and 44 are direct dis-
chargers. The IPCB segment employs about 24,200 people
and accounted for an estimated $1.3 billion in sales in
1982.* [Exhibit 1-1 on the following page contains sum-
mary data on the industry.]
3. REGULATORY OPTIONS
The economic analysis evaluated two regulatory options
for existing industrial sources. A third option was also
evaluated for new sources. Each option sets a compliance
standard based on identified pollution control technolo-
gies. This economic analysis assesses the impact of in-
stalling these identified control technologies. The
following pollution abatement equipment, where applica-
ble, is assessed for each option:
Option I control includes:
Precipitation/clarification
Hexavalent chrome reduction
Alkaline chlorination
Sludge dewatering
No dumping of total toxic organics (TTO).
Option II equipment includes all of the equipment
necessary to meet Option I with the addition of a
Multimedia Filtration Unit.
Option III equipment includes all of the equip-
ment necessary to meet Option I plus in-plant
controls on cadmium.
4. DERIVATION OF COMPLIANCE COSTS
The derivation of water pollution control costs dif-
fers somewhat between job shops and captives.
(1) Job Shop Plant Costing
Information from the 1976-77 Survey of Metal
Plants Finishers on 244 job shop model plants in the
data base was submitted to the technical contractor
for costing. Each plant was run individually through
the technical contractor's cost generating program.
The key parameters considered were:
Flow constituents
Plant layout
* Information based on the 1976 survey of independent
printed circuit board manufacturers.
1-3
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Materials finished
Hours of operations
Finishing processes
Amperage, thickness of plate
Equipment in place
Tooling, piping
Construction, laboratory costs.
Except for the control of total toxic organics,
all direct discharging job shops are in compliance
with Option I requirements. Therefore, direct dis-
charging job shops were costed only for compliance
with the TTO limit and the marginal cost of achieving
Option II compliance requirements from Option I re-
quirements. An estimated 15.5 percent or 56 of the
direct discharging facilities are projected to base-
line monitor for TTO and 2.8 percent or 10 facilities
are projected to compliance monitor for TTO. Baseline
monitoring costs are $1,904 per facility while annual
compliance costs are $2,890 per facility. All 365
direct discharging job shops were costed for a multi-
media filtration unit under Option II.
Indirect discharging job shops are subject only
to existing PSES, plus the amended TTO limitations.
The TTO amendment will impose no capital costs. Thus
they were costed only for baseline and compliance mon-
itoring for the TTO limit. An estimated 15.5 percent
(or 424) of these facilities will have to compliance
monitor on a one time basis and 2.8 percent (or 77)
were projected to compliance monitor annually.
(2) IPCB Plant Costing
The independent printed circuit board manufac-
turers all already meet direct discharge limits or are
subject to PSES electroplating standards. This
rulemaking adds only TTO control to their obliga-
tions. It will involve no capital cost. Thus they
were costed only for monitoring TTO. The Agency
assumed that all 371 IPCBs will have to baseline
monitor at a per-plant cost of $1,904, and 27 percent
(or 100) will be required to compliance monitor with
per-plant costs of $2,890 annually.
(3) Captive Plant Costing
Information on processes of captive plants was
not available from the 1976-77 survey of metal finish-
ers. As a result, the technical contractor developed
1-4
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cost estimates on its own sample of 100 indirect dis-
charging captive model plants and 100 direct discharg-
ing captive model plants. Each plant in the sample
was costed by the technical contractor's costing pro-
gram for both Option I and Option II compliance
requirements. This costing assumes treatment of all
wastewater flows, even those generated from non-metal
finishing processes. Therefore, cost estimates may be
overstated.
The technical contractor also developed costs for
the electroplating flow of each indirect discharging*
model plant in its sample. This was done to isolate
the electroplating portion of the metalfinishing flow
which was costed in an earlier electroplating
pretreatment regulation.
The technical contractor's model plants were then
linked to the economic data base on the basis of water
flow -- the common variable. Total plant flow was not
functionally related to previously regulated flows.
Thus a strong functional relationship could not be
established on a plant-by-plant basis between the
technical contractor's plant total water flow and
estimated metal finishing investment costs. Instead,
the model plants were grouped into water usage cate-
gories (separate for each discharging mode) with their
corresponding costs. These groupings established a
relationship between water usage and costs so that the
model plants in the economic data base could be
costed. These cost groupings are displayed in
Appendix B.
Both baseline monitoring and compliance monitor-
ing estimates for total toxic organics were developed
by the Environmental Protection Agency. These costs
are for monitoring. Thus they are the same for all
plants that are required to comply regardless of
size. A detailed discussion of these costs is
presented in Chapter V.
Amongst the indirect dischargers, EPA drew a distinc-
tion between "integrated" and "non-integrated"
plants. Integrated plants are those whose metal fin-
ishing processes include both electroplating and non-
electroplating processes. Non-integrated plants have
only electroplating processes. The 1979 Electroplat-
ing Pretreatment Standards regulate all electroplating
processes in metal finishing plants.
1-5
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5. NEW SOURCE PERFORMANCE STANDARDS/PRETREATMENT
STANDARDS FOR NEW SOURCES
New Source Performance Standards/Pretreatment
Standards for New Sources were estimated for new source
metal finishers that will need in-plant cadmium controls.
The cadmium controls will result in an additional annual
compliance cost of between $14,388 and $24,436 (in 1982
dollars) per plant. These costs are not expected to have
adverse competitive impacts. A more detailed analysis is
presented in Chapter IX.
6. ECONOMIC IMPACT METHODOLOGY
As in costing, a different analysis was developed for
each industry segment. Each method is presented below.
(1) JOB SHOPS
The economic impact analysis for the job shops
consisted of a financial assessment of 244 model
plants and their capacity to handle the incremental
cost of the capital investment. This methodology is
the same as that used in developing the 1979 pretreat-
ment standards for existing source electroplaters.
Estimated costs and a linked price increase that
passes through these costs to customers are used to
calculate new financial statements for each model
plant. These statements forecast what the firm's
financial performance would be in the first year after
an investment. A closure is a plant that would close
either because of inadequate cash flow to support a
bank loan to purchase the equipment or from inadequate
profits to the owners. Plants with a coverage ratio
(which is the projected cash flow divided by scheduled
loan repayments) of less than 1.5 are deemed closures
in this analysis.
(2) INDEPENDENT PRINTED CIRCUIT BOARDS
The methodology for assessing the economic im-
pacts on the IPCB sector is identical to the method-
ology used in the job shop analysis, with one excep-
tion. The financial statements for the 100 IPCB model
plants did not contain information on owners' compen-
sation. Consequently, the equity infusion test con-
ducted for job shops could not be performed for
IPCBs. This deletion increases the likelihood that
this model would predict closures.
1-5
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(3) CAPTIVE ANALYSIS
The analysis of the economic effects on captives
of the investment in pollution control equipment is
based upon considerations of both changes in plant
costs and industry-wide changes in cost. Firms which
will experience much higher relative cost increases
than the industry average will not be able to raise
prices sufficiently to fully recover their added
cost. The closure routine identifies captive firms
which are candidates to close or divest their metal
finishing operations because they are unable to change
prices sufficiently to fully recover the costs of pol-
lution control. The flow chart on the next page illu-
strates the closure logic for the captive sector.
7. ECONOMIC IMPACTS
The estimated economic impacts of the regulations are
different for Option I compliance levels and Option II
compliance levels. In both cases, the costs of comply-
ing with the 1979 Electroplating Pretreatment Standards
were factored into the baseline conditions.
Exhibit 1-3 shows that the total annual compliance
burden of Option I is $118.0 million. Only indirect dis-
charging captives will have to make capital investments to
comply with this regulation. Surveys* conducted by the
Agency show that all direct dischargers and 72 percent of
indirect discharging captives have the necessary equipment
in place to meet compliance with Option I control levels.
One reason for the high rate of equipment in place is that
indirect dischargers are subject to earlier pretreatment
regulations. Also, direct dischargers have to comply with
NPDES permit limitations. All segments of the universe
may have to monitor for total toxic organics.
Exhibits 1-3 and 1-4 display the costs and impacts of
the regulation. The sections below describe the impacts
on each segment of the metal finishing universe.
The results of the first survey are outlined in a July
30, 1981 memorandum from Mr. Richard Kinch to Mr. Art
Herman. The second survey's sample design and selec-
tion procedure is described in an August 20, 1981
memorandum from Mr. Richard Kotz to Mr. David Pepson.
The results of the survey are contained in a memoran-
dum from Mr. Henry D. Kahn to Mr. David Pepson. The
results of the last survey are described in a memoran-
dum dated December 3, 1981 from Mr. Kinch to Mr. Berman,
1-7
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EXHIBIT 1-2
FLOWCHART OF THE CAPTIVE PLANTS CLOSURE ROUTINE
DIRECT
OR
INDIRECT
SELECT
DISCHARGER
COMPUTE
COST INCREASE
PER PLANT
AGGREGATE
COST
INCREASES
COMPUTER AVERAGE
WEIGHTED COST
INCREASE FOR
ENTIRE POPULATION
ISOLATE ALL
PLANTS WITH COST
INCREASE > POPULATION
AVERAGE
I
FURTHER ISOLATE
ALL PLANTS WITH
COST INCREASE
>5S
I
IbULAIt ALL
PLANTS WITH
COST INC)
10% AND
% MF<50%
AND PLANTS
WITH COST
INC>20%
i
PLANTS
WITH COST
INC < 10%
ARE PROJECTED
NOT TO CLOSE
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(1) Direct Discharging Job Shops
No establishments in this segment will be re-
quired to make capital investments in order to meet
Option I compliance level. An estimated 10 direct
discharging job shops may have to compliance monitor
for total toxic organics at an estimated annual cost
of $29,000 ($2,890 per facility) and an estimated 56
facilities may have to one-time baseline monitor at an
estimated $108,000 ($1,904 per plant). No closures
are forecasted for this segment. The cost of produc-
tion are estimated to increase by 0.02 percent.
(2) Indirect Discharging Job Shops
This regulation does not alter the metals and
cyanide limits for indirect discharging job shops.
Thus they will not have to make capital investments to
meet Option I compliance levels. This analysis
assumes that a total of 424 shops will have to base-
line monitor for TTO for a total one-time cost of
$807,000, and 77 shops will have to monitor for
compliance for a total cost of $220,000. The per-
plant annual costs of $2,890 are expected to increase
the cost of production* by 0.02 percent. No closures
are expected in this segment.
Since the compliance date is set for the year
1986, it was assumed that job shops will elect to
baseline monitor before that year and, thus, that the
costs for the two monitoring functions will not occur
in the same year. If the two monitoring functions had
occurred in the same year, one job shop might have
closed.
(3) Direct Discharging Independent Printed Circuit
Board Manufacturers
This analysis assumes that this segment of the
universe would monitor for total toxic organics. All
44 IPCBs may have to baseline monitor at a cost of
$83,700 and 12 may have to monitor for compliance
annually at an estimated total cost of $34,700. Pro-
duction costs are estimated to increase by 0.03 per-
cent. No IPCBs will close due to the requirements
regardless of compliance dates.
Cost of production increase is computed as the ratio
of annual compliance costs to revenues. This ratio
represents the percentage increase in revenues
required to cover the compliance costs.
1-8
-------
(4) Indirect Discharging Independent Printed Circuit
Board Manufacturers
This analysis assumes that all indirect discharg-
ing IPCBs will be required to monitor for total toxic
organics. If all 327 will have to baseline monitor
there will be a one-time cost of $623,000. A total of
88 indirect discharging IPCBs are established to com-
pliance monitor at a total cost of approximately
$254,000. Cost of production are estimated to in-
crease by 0.03 percent. No IPCBs will close due to
the requirements.
(5) Direct Discharging Captives
Except for compliance with the TTO limit, all
direct discharging captives have the necessary equip-
ment in place to meet Option I compliance require-
ments. A total of 900 direct captives may baseline
monitor at an estimated one-time cost of $1.7
million. In addition, 162 of the 900 may have to
compliance monitor at an annual total cost of
$468,000. No plant closures are forecasted for this
segment, and the estimated production cost increase is
0.01 percent.
(6) Indirect Discharging Captives
Total investment cost for this segment is esti-
mated at $351.0 million, with annual costs of $116.6
million. Baseline monitoring for total toxic organics
could affect 2,700 plants (including the 1,026 plants
with less than 10,000 G.P.D.) resulting in a total
cost of $5.1 million. Annual compliance monitoring
may affect 487 indirect captives with an estimated
total cost of $1.4 million. No closures or divesti-
tures are forecasted for indirect discharging cap-
tives. Cost of production is estimated to increase by
0.2 percent.
1. Indirect Discharging Captives With Water
Usage of Less Than 10,000 G.P.D.
This sub-segment of the affected universe is
made up of 2,850 non-integrated indirect dis-
charging captives. They may be required to
invest in Option I equipment as well as monitor
for total toxic organics. A total of 912 plants
(32 percent of population) may have to make the
investment in equipment. Total capital invest-
ment costs are estimated to be $35.9 million with
annual costs of $11.8 million. The onetime base-
line monitoring costs for total toxic organics
1-9
-------
could affect 1,026 plants with total costs of
$1.9 million. Annual compliance monitoring costs
for total toxic organics may total $500,000,
affecting 185 plants. No plant closures are
forecast for this segment. Cost of production
will increase by about 1 percent.
Exhibits 1-3 and 1-4 summarize the estimated costs and
impacts of complying with Option II. The investment costs
for Option II are estimated at $1,510.6 million with
annual costs of $502.1 million. A total of 50 direct dis-
charging job shops would close, with an employment loss of
1,365 workers and a cost increase of four percent of total
sales. Direct discharging captives would experience 21
plant closures and 10 divestitures, with an employment
loss of 760 and a cost increase of 0.5 percent. Indirect
discharging captives would experience 8 plant closures and
employment loss of 185.
1-10
-------
II. INTRODUCTION
-------
II. INTRODUCTION
This chapter provides a brief overview of the content
and direction of the report. It serves to highlight the
rationale for the rule-making effort as well as the ap-
proach chosen for the industry analysis. To guide a
review of the work the chapter deals with the following
major issues:
History of the metal finishing regulation
Unique nature of the industry
Organization of the economic impact analysis
1. THE REGULATION
The metal finishing industry has been affected by EPA
pollution control regulations since 1972. The 1972 Clean
Water Act (as amended) states:
"By July 1, 1977, existing industrial dischargers
were required to achieve effluent limitations
requiring the application of the best practicable
control technology currently available1 ("BPT"),
Section 301(b)(1)(A); and by July 1, 1983, these
dischargers were required to achieve "effluent
limitations requiring the application of the best
available technology economically achievable...
which will result in reasonable further progress
toward the national goal of eliminating the dis-
charge of all pollutants' ("BAT"), Section
301(b) (2) (A).
New industrial direct dischargers were required
to comply with Section 306 new source performance
standards ("NSPS"), based on best available
demonstrated technology, and new and existing
dischargers to publicly owned treatment works
("POTWs") were subject to pretreatment standards
under Sections 307(b) and (c) of the Act. While
the requirements for direct dischargers were to
be incorporated into National Pollutant Discharge
Elimination System (NPDES) permits issued under
Section 402 of the Act, pretreatment standards
were made enforceable directly against dis-
chargers to POTWs (indirect dischargers)."
II-l
-------
Pretreatment Standards for Existing Source Electro-
platers were promulgated in September of 1979.
With the revisions of the 1977 Clean Water Act, Sec-
tions 301(b)(2)(a) and 301(b)(2)(C) of the Act now require
the achievement by July 1, 1984 of effluent limitations
requiring application of BAT for "toxic" pollutants,
including the 65 "priority" pollutants and classes of
pollutants which Congress declared "toxic" under Section
307(a) of the Act.
In this rulemaking, the Agency has defined the costs
and pollution control technologies appropriate for efflu-
ent limitations for existing sources after July 1, 1977,
("Best Practicable Control Currently Available") and after
July 1, 1984 ("Best Available Technology Economically
Achievable"). Costs and levels of technology appropriate
for pretreatment of wastewater discharges to POTW's from
both new and existing sources were also identified.
2. THE INDUSTRY
For purposes of this regulation, the metal finishing
industry consists of any manufacturing establishment per-
forming one or more of the following process operations:
electroplating, electroless plating, anodizing, casting,
chemical etching and milling or printed circuit board
manufacture. If these operations are present, this regu-
lation applies to wastewater discharges from any of the 45
unit operations shown in Exhibit II-l on the following
page.
Two commercial segments are most likely to perform
these operations. One is the small, job shop covered
under SIC's (Standard Industrial Code Classification) 3471
and 3479. The other sector includes any establishment
producing a final good in which metal finishing is an
intermediary step in the production cycle. Such estab-
lishments are called "captives" and are primarily asso-
ciated with SIC's 34 through 39. The two segments
comprise the metal finishing industry. They are, however,
structurally different, and different economic analyses
are required for each:
The job shop segment constitutes a definable
market (SIC's 3471/3479). It produces a final
product which is metal finishing services. The
captive sector is not an industry; rather it
represents plants within which a metal finishing
process is performed.
II-2
-------
EXHIBIT II-l
Metal Finishing Category Unit Operations
UNIT OPERATIONS'
1. Electroplating
2. Electoless Plating
3. Anodizing
4. Conversion Coating
5. Etching (Chemical Milling)
6. Cleaning
7. Machining
8. Grinding
9. Polishing
10. Tumbling
11. Burnishing
12. Impact Deformation
13. Pressure Deformation
14. Shearing
15. Heat Treating
16. Thermal Cutting
17. Welding
18. Brazing
19. Soldering
20. Flame Spraying
21. Sand Blasting
22. Other Abrasive Jet Machining
23. Electric Discharge Machining
24. Electrochemical Machining
25. Electron Beam Machining
26. Laser Beam Machining
27. Plasma Arc Machining
28. Ultrasonic Machining
29. Sintering
30. Laminating
31. Hot Dip Coating
32. Sputtering
33. Vapor Plating
34. Thermal Infusion
35. Salt Bath Descaling
36. Sovlent Degreasing
37. Paint Stripping
38. Painting
39. Electrostatic Painting
40. Electroplating
41. Vacuum Metalizing
42. Assembly
43. Calibration
44. Testing
45. Mechanical Plating
II-J
-------
A job shop faces a demand curve for its services
while the demand curve facing captive metal
finishers is for a final product, one of whose
production inputs is a metal finishing service.
That is, the demand for metal finishing in cap-
tive operations is a derived demand for produc-
tion inputs, rather than a primary demand for a
specific good or service.
The prices for job shop services are determined
by the market. However, there are no market
prices for captive metal finishers. The "prices"
of metal finishing services performed by captives
are determined by accounting procedures and are
used for internal transfers alone.
Given the fundamental differences between the two
sectors, two separate designs and methods were developed
for the industry impact analysis.
3. ORGANIZATION
This report consists of nine chapters and six appen-
dices. The third through the sixth chapters represent the
major substantive sections. In the third chapter the
characteristics of the metal finishing universe are pre-
sented. Chapter five presents the costs developed by the
Agency's technical contractor, coupled with the guidance
from the Agency on such matters as the affected segment of
the universe, degree of equipment in place and stringency
of the regulatory scenarios. Chapters four and six are
tightly linked with designing the methods for calculating
impacts and displaying the estimates of resulting impacts
on the industry. Subsequent chapters reflect the added
considerations of the regulatory review including:
Regulatory Flexibility
The effect of New Source Performance Standards
and of Pretreatment Standards for New Sources on
future entry to the industry.
The report closes with a discussion of the possible
limitations on the reliability or validity of the analysis,
II-4
-------
III. CHARACTERISTICS OF THE METAL FINISHING UNIVERSE
-------
III. CHARACTERISTICS OF THE METAL FINISHING UNIVERSE
1. INTRODUCTION
This description of the economic and financial charac-
teristics of the metal finishing universe is organized on
the basis of the three industry sectors, job shops, IPCBs
and captives. Job shops, IPCBs, and captives are engaged
in similar production activities, but face different
economic variables. The job shop sector constitutes a
definable industry and provides finishing services as a
final product to outside customers. Job shops fall into
the standard industrial classifications (SIC) of 3471 and
3479. The captive sector does not constitute an industry
in the normal sense. Captives perform metal finishing
operations as part of the production process and for the
most part do not provide finishing services to outside
customers as a final good. Further, captive operations
occur in an estimated 150 different four-digit SIC's, with
metal finishing applied to hundreds of products. This
analysis uses products and markets for final goods as the
basis for dividing the metal finishing universe into
sectors since they are the focus of the economic activity
affecting the universe. This chapter characterizes the
three sectors of the metal finishing universe in terms of
economic significance, size, financial strength and
competitive structure.
2. JOB SHOP SECTOR
A metal finishing job shop is defined as a firm whose
primary operations are classified as SIC's 3471 or 3479,
and which owns less than 50 percent of processed materials
on an annual basis. There are an estimated 3099 firms
performing regulated operations in these SIC's. 2734 are
indirect dischargers and 365 are direct dischargers. In
general, job shops are small, owner-operated, single-plant
firms that provide metal finishing services to outside
customers. The job shop industry sector appears to be
competitive since it has a four firm concentration ratio
of 7.2 percent in SIC 3471 and 15.1 percent in SIC 3479.
The 1976-77 survey of the industry* indicated that the
Data are from the U.S. Environmental Protection
Agency's, Economic Analysis of Pretreatment Standards
for Existing Sources of the Electroplating Point
Source Category, August, 1979. Information on the
characteristics of the metal finishing universe was
derived from the 1976-77 survey of the industry.
III-l
-------
demand curve facing the industry is inelastic. The 424
owners surveyed reported that an average price increase of
10 percent did not have a measurable effect on quantity
sold.
Exhibit III-l presents total employment, total sales
and total plant water use characteristics of the job shop
segment for establishments in various size ranges. The
exhibit shows that a total of approximately 67,000 people
are employed in job shops with an average of 22 employees
per shop. The segment has sales of $3.1 billion with the
average shop selling slightly more than $1 million. On a
daily basis, the industry uses approximately 114 million
gallons of plant water of which 90 million gallons is used
for metal finishing production.
Exhibit III-l
Total Industry Employment
Sales & Water Use (OOO's)
Size Total Total Total
Interval Employment Sales (1982$) Plant Water
1-4 7.8 $ 54.0 13.9
5-9 9.8 40.1 15.3
10-19 11.6 53.0 17.7
20-49 16.7 78.0 38.7
50-99 13.9 50.4 22.6
100-249 7.4 34.5 5.7
67.2 310.0 113.9
Exhibit III-2 presents a summary of typical balance
sheet items for establishments in the job shop segment
across various size ranges. The exhibit shows a linear
relationship between the establishment size and dollar
value for each item. The column labeled SD contains
standard deviation measures for the total sample mean.
Of the 244 firms providing profit data, the mean
profit before tax was $30,100 and the mean after tax
profit was $15,600. Not all plants providing financial
information had a profit in 1975. Sixty plants reported
an operating loss. These losses averaged $4,400 on a
before-tax basis and $3,400 on an after-tax basis.
III-2
-------
Exhibit III-2
Typical Balance Sheet Items*
Employment
Item
Current Assets
Fixed Assets
Current Liabilities
Long-Term Debt
Net Worth
Total
Sample
Mean
$380
334
218
133
403
(SD)
$996
574
524
365
906
1-19
(OOO's
$196
131
101
48
194
20-99 100+
Dollars)
$481 $2,793
526 1,459
323 1,163
203 861
528 3,207
3. INDEPENDENT PRINTED CIRCUIT BOARD INDUSTRY
The Independent Printed Circuit Board Industry per-
forms finishing operations similar to those performed by
job shops.** Of the estimated total of 371 IPCBs, 327 are
indirect dischargers and 44 are direct dischargers.
Printed board shops are on average, larger than the typi-
cal job shop. Mean total employment is 60 people with 35
in production finishing. For the industry as a whole,
this accounts for a total of 24,200 people with 13,100 in
operations directly related to production of printed
boards. These independent manufacturers have larger per
plant sales than do the job shops. Only 35% sell less
than $1.0 million annually while 43% sell over $2 million
per year. Plant sales on average are $3.0 million with
total industry sales estimated at $1.3 billion. IPCBs are
financially stronger than job shops with average sales to
fixed assets ratio of 6.8 compared with 3.8 for job shops,
and profit to total assets ratio of 10 percent compared
with 8 percent for job shops. Exhibit III-3 below shows
average selected financial items of IPCBs derived from the
100 model plants.
* Data derived from the 1976 survey of metal finishers.
All dollar values have been adjusted to 1982 levels
using the implicit price deflator, durable goods
sector, contained in the Survey of Current Business,
Bureau of Economic Analysis, U.S. Department of
Commerce.
** Data on IPCBs were derived from the 1976 survey of the
metal finishing universe.
III-3
-------
EXHIBIT III-3
SELECTED FINANCIAL ITEMS - $1982 (000) --""
Income Items
Sales $3,040
Profit Before Tax 130
Profit After Tax 51
Balance Sheet Items
Current Assets $ 800
Fixed Assets 446
Current Liabilities 558
Long Term Debt 203
Net Worth 566
4. CAPTIVE SECTOR
Captive metal finishing operations occur in approxi-
mately 150 different four digit SIC's.* The Environmental
Protection Agency estimates that 10,000** captive plants
perform regulated processes. There are virtually hundreds
of different products that are wholly or partially metal
finished. Each one of these products has a unique price,
demand, and demand elasticity. In the 1976-77 survey of
captives it was found that 24 percent of the plants judge
that their in-house metal finishing contributes at least
10 percent of the final cost of the finished good. For 40
percent of the sample, metal, finishing's contribution to
the value of the finished good was less than 3 percent.
In general, captives use metal finishing as part of the
production process for the purpose of protecting the final
product and/or enhancing its aesthetic value.
Metal finishing application may occur in the same
plant where the final good is produced, or the firm may
use a specialized plant to provide finishing services to
all its other plants. Captive plants that engage in metal
finishing operations are rather large. One-sixth of all
establishments (16.7 percent) have at least 1000 total
employees, with 57 percent having between 100 and 999
employees. An average of 60 people are employed in metal
finishing activities, while only an average of 20 people
* Source - From a List of Subscribers for Products
Finishing magazine in 1979.
** More detailed explanation follows in chapter IV.
III-4
-------
are employed in actual finishing operations. The average
sales of a captive plant are $14 million a year, while the
average sales of the whole firm are more than $50 million
a year. Exhibit III-4 below summarizes the major char-
acteristics of the captive universe.
EXHIBIT III-4
Characteristics of the Captive Universe
I. Disch. D. Disch. Total
Number of Plants 7,500 2,500 10,000
Sales (Billions 1982 $) 127.2 41.8 169.0
Total Employment (000) 4,900 1,640 6,540
Employment in Metal
Finishing Process (000) 450 150 600
Total Process Water Use 3.6 1.5 5.1
(BCD)
Total Metal Finishing
Water Use (BCD) 1.5 0.6 2.1
Source: 1976-77 Survey of Metal Finishers.
III-5
-------
IV. ECONOMIC IMPACT METHODOLOGY
-------
IV. ECONOMIC IMPACT METHODOLOGY
1. INTRODUCTION
Two distinct impact methodologies were designed. One
examines impacts on the job shop sector and independent
printed circuit board manufacturers, while the other
analyzes the captive sector of the metal finishing uni-
verse. The rationale for this segmentation is summarized
below:
The job shop segment constitutes an identifiable
sector (SIC's 3471/3479). It produces a final
product which is metal finishing services. The
captive sector is not an industry, but rather a
metal-finishing process performed across 150
four-digit SIC's.
A job shop faces a demand curve for its products
while the demand curve facing a captive is for a
final product. That is, the demand for metal
finishing in captives is derived demand for pro-
duction inputs.
The prices for job shop services are determined
by the market. However, there are no market
prices for captive metal finishers. The prices
of metal finishing services employed by captives
are determined by accounting procedures and are
used for internal transfers alone.
The 1976-77 Survey of Metal Finishers provides an
elaborate financial and economic data base for
individual job shops and the entire job shop sec-
tor. The availability of data for the investiga-
tion of the captive sector was limited and the
use of secondary data sources was extensive.
The IPCB segment of the universe is similar to
job shops in its characteristics. Most of the
data elements that existed for job shops were
also available for IPCBs.
Due to the above reasons, the job shop and IPCB impact
methodology relied on the use of a capital budgeting model
while the captive sector methodology is driven by price
considerations.
IV-1
-------
2. JOB SHOP SECTOR AND IPCB iMETHODOLQGY
The job shop impact methodology centers around a plant
closure model developed specifically for job shops in the
metal finishing industry. The reason for pursuing a plant
specific closure model is four-fold:
Primary data on a large, representative sample of
job shops had been gathered previously*.
Critical data on a plant's fiscal condition and
financial performance had been obtained for a
sizable number of respondents.
Plants are known to be small and undercapital-
ized, making cash flow and liquidity the key
factors in their continued survival.
Job shops can be defined as a discrete market and
economic segment. Given that price rises can be
computed directly and demand elasticity can be
estimated reliably, a sound basis exists for
forecasting the plants' direct response tp
incremental capital burdens.
Since the job shop sector is characterized by a large
number of small, heterogeneous producers, the relevance of
the impact methodology rests on meeting the following
criteria:
Primary surveys of plants and companies that
establish the affected population and character-
ize accurately the industry's economic, fiscal
and wastewater control position.
Technical costing geared toward the unique condi-
tions and needs of individual plants using cost
and sizing rules that mirror the "real world".
Estimation of candidates for closure based on an
analysis of the price/cost impacts of the pollu-
tion control investment decision from the stand-
point of owners, managers, competitors, custo-
mers, and lenders.
Extrapolation of sample plant impacts to the in-
dustry as a whole based on a defensible decision
rule that reflects accurately the dynamics of the
marketplace; e.g., baseline closures, attrition
rates, induced closures and new entrants.
Information gathered from the 1976-77 Survey of Metal
Finishers.
IV-2
-------
The closure model developed for the job shop metal
finishers is a financially driven set of operational
analyses designed to identify economically disadvantaged
firms by virtue of:
Limited capital access or
Insufficient profits.
Determinations of which firms would close are based on
projections of what the firm's financial standing would be
one year after the pollution control investment was made.
The basic premise is that those future conditions would be
evaluated by:
A banker to determine if he would lend the firm
sufficient funds for the investment, or by
The owner(s) to determine if sufficient profits
are projected to make it worthwhile for him
(them) to remain in business, or whether the
state of the business warrants an investment of
further funds--called an equity infusion--into
the firm in order to secure a bank loan.
These closure determinations are predicted by the clo-
sure model based on pro forma balance and income statement
forecasts and quantitative decision rules. The methodol-
ogy is developed in six steps:
Determination of allowable price increase as
reported by the individual job shop or average of
job shops, interest rates and lengths of loans
Forecast of financial statements
Coverage ratio test
Equity infusion test
Profitability test for baseline closure
determination
Classification of firms.
(1) Determination of Variable Values
Exhibit IV-1, on the following page, displays the
data and variables used by the model. The model
accepts as inputs from the user the five variables
shown. The first four the interest rate and length
of loans are input as numbers; the fifth variable--
allowable price increaseis a set of options
including :
IV-3
-------
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Forecast price increase of respondent
Average forecast price increase of
respondents
Cost pass through
Weighted cost pass through.
Cost pass through is calculated as follows:
Cost Pass Through = Pollution Control Cost x
(0.2 + Loan's Interest - .02) + Pollution
Control Operating Costs.
Where the 0.2 reflects a 5 year depreciation
schedule and the .02 a 5 year flow through
of the investment tax credit.
Weighted cost pass through is the average of cost
pass through of the 244 respondents weighted by sales
values as follows:
244
Z, Cost Pass Through (i)x Sales (i)
244
£ Sales (i)
The cost pass through case is used to estimate
price level changes. This assumes that each firm has
sufficient market protection for that firm to pass its
unique pollution control cost increase on to its cus-
tomers; the aggregate industry-wide price increase,
therefore, would be that of average cost producers.
(2) Forecast of Financial Statements
Two sets of equations are used to produce finan-
cial statements:
Current statements are prepared using the
respondent's balance sheettaken directly
from the survey (referenced above) --and
supplemented by the calculations shown on
Exhibit IV- 2.
Projected statements are prepared using the
current balance sheet information and the
input variables in the formulas shown in
Exhibit IV-3.
IV-4
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(3) Coverage Ratio Test
The coverage ratio is the projected cash flow
divided by scheduled loan payments. If the projected
coverage ratio is greater than or equal to 1.5, a firm
is considered to be able to obtain a loan. This level
is typical for small businesses, as long as the owner
provides his guarantee. The 1.5 provides for some
coverage of seasonal trends and temporary business
down turns. If the projected coverage ratio is less
than 1.5, then an equity infusion test is made.
(4) Equity Infusion Test
The amount of equity that the owner(s) would have
to invest to qualify for a smaller loan, thus raising
projected coverage ratio to 1.5, is defined as the
equity infusion. An owner would invest equity infu-
sion and borrow pollution control cost minus equity
infusion. The test is that the owners would make the
investment if they could maintain an income of
$28,330* during the year of the investment. Thus, an
equity infusion would be made if:
Projected Profit After Taxes +
Owners Compensation - Equity Infusion $28,330
Number of Owners
(5) Profitability Test
No profitability test was incorporated into the
model, but the following two rules were used to
predict baseline closures:
A baseline closure is a firm that would
close regardless of the pollution control
investment because of poor pre-investment
profitability; defined as profit after tax +
owner's compensation of less than $19,000
per working owner.
$15,000 was used as the cut-off in the Electroplating
Pretreatment analysis. This figure is based on U.S.
Bureau of the Census data which shows that $15,000 was
the median family income in 1976. This explanation is
part of the Electroplating Pretreatment record. The
$28,330 figure adjusts $15,000 from 1976 to 1982
dollars using the Commerce Department's implicit price
deflator.
IV-5
-------
A baseline closure is a firm that would
close if an imposition of $100 would result
in a 1.0 or less coverage ratio.
(6) Classification of Firms
As a result of the foregoing testsall of which
are incorporated into the model except for the profit-
ability testthe firms are classified into categories,
Non-closure, no equity infusion needed
Non-closure due to equity infusion
Candidate for closure due to lack of
profitability
Candidate for closure due to lack of capital
access
Vulnerable firm on pre-investment basis,
i.e., baseline closure.
The relationship between the model plants (i.e.,
plants which responded to the Survey with usable data)
and the universe of job shops was established using
variables and values provided from several sources.
This analysis revealed that model plants show suffi-
cient similarity to the universe to allow closures for
the model plants to represent impacts in the universe
on a directly proportional basis.*
Development of the extrapolation rules entailed
several sequential steps summarized as follows:
The number of baseline closures (i.e.,
plants likely to close prior to BATEA
investment) was estimated.
The model plant data base was corrected for
the baseline closures. Of the 244 model
The same model plants were used in the analysis of the
electroplating pretreatment regulation. The rationale
and selection procedure for using these model plants
are documented in Chapter IV and Appendix D of the
Economic Analysis of Pretreatment Standards for
Existing Sources of the Electroplating Point Source
Category, EPA-440/2-79-031, August 1979.
IV-6
-------
plants, 28 were baseline closures (22 in-
direct dischargers and 6 direct dischar-
gers.) In addition, 56 indirect discharging
plants were projected as electroplating clo-
sures due to lack of capital access. This
left 160 indirect discharging plants and 22
direct discharging plants for analysis of
the effects of these regulations.
Extrapolations from the model plant impacts
to the corrected universe were conducted on
a straight line basis.
The impact closure rate estimated by the closure
routine was applied across the balance of job shops
remaining after purging the universe of baseline clo-
sures. The rationale for this approach is that there
is not sufficient sample data to support the develop-
ment of a probability distribution from which unique
closure probability estimates could be developed for
selected plant characteristics, such as size, sales,
water use, etc. Employing this technique does not
alter the aggregate result, but may slightly over-or
under-estimate the number of closures and primary
economic impacts associated with a specific category
of job shops. A more detailed presentation of the job
shop model, its key assumptions, input variables, and
logic is presented in Appendix B.
3. CAPTIVE SECTOR METHODOLOGY
Economic analysis of the captive metal finishing uni-
verse is complex. Captive metal finishing operations oc-
cur across 150 industries (four-digit SIC level). Each
industry sells different types of products. Consequently,
any one industry faces a unique demand curve for its pro-
ducts. Moreover, the economic structure of each industry
varies, especially in degrees of competition and concen-
tration ratios. In addition, individual firms within each
industry face different demand elasticities. There are
well established empirical techniques for the investiga-
tion of markets and for estimating demand and demand
elasticities, but there are several difficulties involved
with metal finished products:
Output for metal finishing cannot be measured
readily as it is not a final product; rather, it
is an input into the production function with
varying degrees of use in many final products.
The prices of metal finished products vary with
The elasticity of demand in their final use. The
price charged by any one firm will depend on:
IV-7
-------
The extent of price or non-price competition
in its industry
Types of manufacturing processes used in the
industry
The availability of products substitutes
The geographic distribution of the firm's
customers and suppliers.
In captive firms there is no market price for
metal finishing since all output is for interme-
diate consumption.
The analysis of the metal finishing industry is fur-
ther complicated because individual firms process more
than one product and use several types of metal finishing
processes. Many firms can substitute between inputs, pro-
ducts, and processes to meet external requirements. Any
substitution between products can change total revenues as
well as operating and capital costs. A firm will not
necessarily pass on this cost to consumers in the products
most affected by the cost increases; rather, it will
increase prices according to the elasticities of demand.
The more inelastic the demand the more flexibility the
firm has to increase the price.
In general, there are three methods available for es-
timating the impacts of pollution control expenditures.
They are the following:
A plant specific, financially driven closure
model that assesses the cash flow and profitabil-
ity of the plant under two conditions: pre- and
post-expenditures for pollution controls. Plants
whose cash flows and equity positions cannot sup-
port the purchase are judged candidates for clo-
sure. This is essentially the method that was
used for the analysis of the job shop metal
finishers.
A general industry model that estimates the abil-
ity of industries and individual firms to pass on
the incremental direct costs associated with pol-
lution control expenditures. These models rely
on the knowledge of the following:
Concentration in the industry
General structure of the industry
Industry growth trends
Prices of final goods
IV-8
-------
Prices of inputs
Production technology
Substitute products.
In addition to the above, the analysis depends
upon formulations of scenarios of demand elasti-
cities and cross elasticities.
A macro-economic approach which attempts to esti-
mate the impact of the capital expenditures on
the economy as a whole and derive values for the
following variables:
Employment level in the economy
Price level [inflationary pressures]
Relative prices
Interest rates
Aggregate level of demand and supply
Capital availability.
None of the approaches cited above were used in their
pure form in this analysis due to the following reasons:
Plant specific financial or operating data do not
exist for cases at the four-digit SIC level.
With more than 150 four-digit SIC industries a
sector analysis is not cost-effective.
Adopting a macro approach similarly poses limita-
tions for this analysis. Not only are the avail-
able macro models static/ they often require
input specifications for demand coefficients or
price changes, the very factors one wishes to
predict. Moreover, macro models are insensitive
to small price changes (as is the case here) and
thus their application is unwarranted.
The chosen approach is effectively a blending of
methods which best satisfies the prevailing data con-
straints. This analysis relies on a sample of plants
(1087) for which key data requirements are available with
the use of simplifying yet realistic assumptions.
The impact of the pollution control expenditures on an
individual plant is estimated by comparing the individual
plant cost increase due to pollution control costs with
the average cost increase that will occur industry wide.
The potentially impacted firms are those which experience
cost increases in excess of the industry's average. It is
expected that firms with a ratio of pollution control
expenditures to total revenues which significantly exceed
IV-9
-------
the industry average will not be able to raise prices by
an amount (percent) equal to their added costs. These
plants are singled out as potentially impacted firms.
The plant impact routine which is illustrated by the
flow chart in Exhibit IV-4 on the following page identi-
fies those captive firms which are candidates for further
analysis because their cost increases exceed the industry
average cost increase. The following steps explain in
some detail the logic of the routine.
The routine is based on information available
from the 1976-77 Survey of Metal Finishers from
which key data are present for 1087 plants.
The sample of 1087 plants is first divided into
two groups by mode of discharge:
Direct dischargers (270 plants)
Indirect dischargers (817 plants).
Per plant investment cost tables which relate
metal finishing waterflow to cost are read into
the computerized routine. A different table is
read for each option. The routine matches each
model plant's waterflow with the table and
assigns investment costs. The cost tables are
displayed in Appendix C.
Each plant's estimated capital pollution control
expenditure is then annualized* and divided by
the plant's value of sales to obtain the price
increase necessary to cover the added costs of
pollution control for each individual plant. To
clarify, the cost increase per plant is computed
as,
Cost Increase = Annual Pollution Control Costs
Value of Sales
The cost increase for the total population of
plants is then computed by summing the annual
pollution control costs of all plants and
dividing by the summation of the total sales of
all plants.
Annualization computations assumptions are described
in Appendix A.
IV-10
-------
EXHIBIT IV-4
FLOWCHART OF THE CAPTIVE PLANTS CLOSURE ROUTINE
1087
MODEL
PLANTS
DIRECT
OR
INDIRECT
1
r
SELECT
DISCHARGER
COMPUTE
COST INCREASE
PER PLANT
AGGREGATE
COST
INCREASES
COMPUTER AVERAGE
WEIGHTED COST
INCREASE FOR
ENTIRE POPULATION
ISOLATE ALL
PLANTS WITH COST
INCREASE > POPULATION
AVERAGE
FURTHER ISOLATE
ALL PLANTS WITH
COST INCREASE
ISULAIt ALL
PLANTS WITH
COST INC>
10% AND
% MF<50%
AND PLANTS
WITH COST
INC>20%
PLANTS
WITH COST
INC < 10%
ARE PROJECTED
NOT TO CLOSE
-------
The entire population is divided into those
plants with projected cost increases lower than
the sample average and those higher than the sam-
ple average. Those plants with projected cost
increases less than the average were considered
to experience minor economic impact and flagged
out as non-closures.
Plants with increases greater than the industry
average are further distinguished according to
those with a projected cost increase of greater
than either the sample average or five percent,
whichever is larger. The five percent figure was
chosen because a five percent price increase is
considered a major change, as it is significant
enough to alter demand-supply relationships.
All the plants with price increases greater than
5 percent are divided into those which are
multi-plant corporations and those which are
single plant corporations. A multi- plant
corporation is one where the production process
is performed in more than one plant. In these
cases the firm uses one, or any one of its plants
for performing metal finishing services for all
its products. A single plant corporation is one
that operates only a single plant and metal
finishing is a major part of the production pro-
cess. The segmentation of the plants into multi-
plant companies and single plant firms was done
for the following reasons:
Multi-plant firms' structure indicates an
economic and/or financial advantage in hav-
ing a captive metal finishing operation.
The annual pollution control cost for a
plant which is part of a multi-plant firm is
very small relative to the firm's value of
sales.
Multi-plant corporations have a greater
access to capital due to their size.
All single plant firms were singled out as candi-
dates for closure if the projected cost increase
was greater than 5 percent. A firm with a five
percent cost increase is assumed to be unable to
compete in an industry where the average price
increase is less than one percent.
IV-11
-------
All multi-plant corporations are singled out as
candidates to divest their captive operation if
the projected price increase in the captive plant
is 10 percent or more and the percentage of pro-
ducts receiving metal finishing is less than 50
percent of the products produced in that plant.
As mentioned above, multi-plant corporations are
not as vulnerable to the rising costs of pro-
duction and thus would only divest their metal
finishing operation under extreme conditions. A
captive plant that metal finishes less than 50
percent of its products and has an overall price
increase of more than 10 percent due to metal
finishing pollution control costs will effect-
ively experience a 20 percent increase in the
cost of the metal finishing process. Thus, it
will have a great incentive to contract out its
metal finishing operations or do away with the
process altogether in favor of a less costly
alternative.
A detailed description of the computerized routine,
its logic, variables, and cost inputs is presented in
Appendix C.
In addition, an analysis of secondary impacts on final
consumption goods is carried out with the use of an input-
output (I/O) analysis. (I/O model is discussed in detail
in Appendix A.)
IV-12
-------
V. REGULATORY OPTIONS AND DERIVATION
OF COMPLIANCE COSTS
-------
V. REGULATORY OPTIONS AND DERIVATION OF
COMPLIANCE COSTS
Effluent treatment options and their associated costs
form the basis for the assessment of the economic impacts
of water pollution controls. This chapter addresses the
following:
Regulatory options
Derivation of compliance costs
Derivation of the size of the affected universe.
1. REGULATORY OPTIONS
The Environmental Protection Agency evaluated two
regulatory options for existing industrial sources. A
third option was also evaluated for new sources. Each
option sets a compliance standard and assigns specific
pollution abatement equipment.
Option I control includes:
Precepitat ion/clarification
Hexavalent Chrome Reduction
Alkaline Chlormation
Sludge Dewatering
No dumping of total toxic organics.
Option II equipment includes all the equipment
and requirements necessary to meet Option I, with
the addition of a multimedia-filtration unit.
Option III equipment includes all the equipment
necessary to meet Option I plus in-plant controls
on cadmium.
The pollution control equipment requirements are the
same for both job shops and captives.
2. DERIVATION OF COMPLIANCE COSTS
The derivation of water pollution control costs dif-
fers somewhat between job shops, IPCBs, and captives.
V-l
-------
(1) Job Shop and IPCB Plant Costing
Information from the 1976-77 Survey of Metal
Finishers on 244 job shop model plants and 100 IPCB
model plants in the data base was submitted to Hamil-
ton standard for costing. Each plant was run indi-
vidually through the technical contractor's cost
generating program. The key parameters considered
were:
Flow constituents
Plant layout
Materials finished
Hours of operations
Finishing processes
Amperage, thickness of plate
Equipment in place
Tooling, piping
Construction, laboratory costs.
Except for the control of total toxic organics, all
direct discharging job shops are in compliance with
option I requirements. Therefore, direct discharging
job shops were costed only for compliance with the TTO
limit and the marginal cost of achieving Option II
compliance requirement from Option I requirements. An
estimated 15.5 percent or 56 of the direct discharging
facilities may be required to baseline monitor for TTO
and 2.8 percent or 10 facilities are projected to com-
pliance monitor for TTO. Baseline monitoring costs
are $1,904 per facility while annual compliance costs
are $2,890 per facility. All 365 direct discharging
job shops were costed' for a multimedia filtration unit
under Option II. (A detailed description of the cost
generating program is provided in Appendix B.)
Indirect discharging job shops and IPCBs were
costed only for baseline and compliance monitoring of
total toxic organics. A total of 15.5 percent or 424
of the job shops were assumed to baseline monitor on a
one time basis, and 2.8 percent (or 77) may have to
compliance monitor on an annual basis. All IPCBs were
assumed to baseline monitor and 27 percent were
assumed to monitor for compliance.
(2) Captive Plant Costing
Information on processes of captive plants was
not available from the 1976-77 Survey of Metal
Finishers. As a result the technical contractor
developed cost estimates on its own sample of 100
V-2
-------
indirect discharging captive model plants and 100
direct discharging captive model plants. Each plant
in the sample was costed by the technical contractor's
costing program for both Option I and Option II com-
pliance requirements.
The technical contractor also developed costs for
the electroplating flow of each indirect discharging
model plant in its sample. This was done to isolate
the electroplating portion of the metal finishing flow
which was costed in an earlier electroplating pre-
treatment regulation.
The technical contractor's model plants were then
linked to the economic data base on the basis of water
flow -- the common variable. Total plant flow was not
functionally related to previously regulated flow.
Thus a strong functional relationship could not be
established on a plant-by-plant basis between the
technical contractor's plant water flow and estimated
metal finishing investment costs. Instead, the model
plants were grouped into water usage categories
(separate for each discharging mode) with their
corresponding costs. These groupings established a
relationship between water usage and costs so that the
model plants in the economic data base could be
costed. These cost groupings are displayed in
Appendix C.
(3) Costs Associated With Compliance With the Total
Toxic Organic Limit
The Agency does not expect facilties using sol-
vents to incur additional costs to dispose of these
solvents because solvent wastes can be recovered pro-
fitably by plants or sold to waste haulers. All
facilities using toxic organics were assumed to incur
baseline monitoring costs, however. Additionally, the
economic analysis assumes that a portion of those
using toxic organics will annually incur compliance
monitoring costs.
Baseline Monitoring Costs
Solvent solutions are the major potential
source of TTO violations. Currently 24% of
the capitive faciities perform solvent de-
greasing. The economic analysis assumes that
facilities performing solvent degreasing
will be required to conduct an initial base-
line monitoring. This assumption somewhat
overstated the actual number of facilities
performing the initial monitoring because
V-3
-------
some solvent degreasers may use non-toxic
solvents and be excluded from the initial
monitoring. However, there are other, less
significant, potential sources of toxic
organics besides solvent degreasing. To
account for these other potential sources,
the Agency increased the number of plants
which reported performing solvent degreasing
by 50 percent. This increased (36 percent)
figure was used as a conservative estimate
of those facilities that will need to submit
a baseline monitoring report.
Compliance Monitoring Costs
Most facilities are expected to be able to
use a certification procedure in lieu of
compliance monitoring. To account for the
possibility of control authorities requiring
compliance monitoring, the agency used the
percent of those facilities performing
solvent degreasing which dump their solvents
as its estimate of the percent of plants
needing to compliance monitor. Currently 24
percent of plants perform solvent degreasing
and 27 percent of the plants performing
solvent degreasing dump their solvents;
therefore, 6.5 percent (27 x 24 percent), is
the percent estimated to compliance
monitor. It is likely that most of these
facilities will cease dumping toxic
organics. Thus the estimate probably
overstates the likely compliance costs.
The same procedure was used to estimate
monitoring costs for job shops and independent printed
circuit board manufacturers. The percent of job shops
performing solvent degreasing was 10.3%; that for IPCB
manufacturers was 100%.
The resulting costing assumptions for all three
segments follow:
Percent of Universe Affected
Job Shops IPCB Captives
Baseline Monitoring 15.5% 100% 36%
Compliance Monitoring 2.8% 27% 6.5%
V-4
-------
3. ESTIMATION OF THE SIZE OF THE UNIVERSE
The agency relied primarily on the Permit Compliance
System (PCS) File for the estimation of the captive metal
finishing universe. That file was also used to estimate a
total of 365 direct discharging and 2734 indirect
discharging job shops in SIC's 3471 and 3479.
The PCS File showed that there are approximately 2,500
direct discharging captives in SIC's 25-39 that will be
covered by the metal finishing effluent guidelines. Most
of these plants are in SIC's 34-39. The 1976-77 Survey of
Metal Finishers indicated that there were three times as
many indirect dischargers as direct dischargers, and thus,
it was determined that there are 7,500 indirect discharg-
ing captives in the metal finishing universe. The same
ratio of direct to indirect discharging job shops was used
to estimate the size of the indirect discharging sement.
(1) Segment of the Universe Affected By This
Regulation
Not all of the estimated 13,500 metal finishing
establishments will need to make additional Invest-
ments in order to comply with this regulation. The
Environmental Protection Agency conducted three sur-
veys to update information on pollution control equip-
ment in place.* The results of these surveys were
incorporated into the agency's estimates of the
affected universe. The affected universe is as
follows:
Direct Discharging Job Shops - the surveys
conducted by the agency determined that none
of the 300 direct discharging job shop will
have to invest in order to comply with
Option I Standard, except for monitoring of
The results of the first survey are outlined in a July
30, 1981 memorandum from Mr. Richard Kinch to Mr. Art
Berman. The second survey's sample design and selec-
tion procedure is described in an August 20, 1981
memorandum from Mr. Richard Kotz to Mr. David Pepson.
The results of the survey are contained in a memoran-
dum from Mr. Henry D. Kahn to Mr. David Pepson. The
results of the last survey are described in a mem-
orandum dated December 3, 1981 from Mr. Kinch to
Mr. Berman.
V-5
-------
total toxic organics. One time, baseline
monitoring may be required for 56 of the job
shops, and 10 job shops may have to com-
pliance monitor on an annual basis. All 365
job shops would have to make additional
investments in order to meet Option II
requirements.
Indirect Discharging Job Shops. - All 2734
indirect discharging job shops are already
covered by the electroplating pretreatment
regulation. These job shop will not be
required to invest additional funds to meet
Options I or II of this regulation. They
may, however, be required to monitor for
total toxic organics. It is estimated that
424 indirect discharging job shops may have
to baseline monitor, and 77 may have to
monitor for compliance.
Direct and Indirect Discharging Independent
Printed Circuit Board Manufacturers. - Based
on information collected during an earlier
electroplating study this agency determined
that a total of 371 IPCBs will be affected
by this regulation. A total of 327 are
indirect dischargers and 44 are direct dis-
chargers. All 371 IPCBs may be required to
baseline monitor for TTO and 27 percent or
88 indirect dischargers and 12 direct dis-
chargers may have to compliance monitor
annually.
Direct Discharging Captives - Agency surveys
determined that all 2500 direct discharging
captives have the necessary equipment in
place to meet Option I requirements, except
for compliance with the TTO limits. A total
of 900 direct discharging captives may be
required to baseline monitor for total toxic
organics and 162 of the 900 may need to
monitor for compliance annually. All direct
discharging captives would have to make
additional investments to meet Option II
compliance levels.
Indirect Discharging Captives - The Agency's
technical data base indicated that half
(3750) of the 7500 indirect discharging cap-
tives are integrated plants and half (3750)
are non-integrated. The electroplating pre-
treatement regulation covers all process
flows at the nonintegrated plants, except
V-6
-------
for plants with process water usage of less
than 10,000 G.P.D. A total of 912 of these
plants will have to make investments in
order to comply with Option I requirements.
The electroplating standards also regulate
the electroplating processes of the inte-
grated plants. Agency surveys determined
that of the 3750 integrated plants:
17 percent will not need to install
treatment because they meet EPA limita-
tions through the use of in-process
controls.
51 percent have already installed
Option I level pollution treatment
equipment for all relevant processes.
This leaves 1200 integrated plants with
water usage of more than 10,000 G.P.D. that
EPA estimates will bear additional costs to
meet Option I standards.
A total of 2700 indirect discharging
captives may be required to one-time
baseline monitor for total toxic organics,
and 487 of those may need to monitor for
compliance. The analysis assumes all
indirect discharging captives would have to
make additional investments to meet
Option II compliance levels.
V-7
-------
VI. ECONOMIC IMPACTS
-------
VI. ECONOMIC IMPACTS
The estimated economic impacts of Option I compliance
levels and Option II compliance levels are presented
below. Compliance with Option I standards will have very
small effects on the metal finishing universe, while com-
pliance with Option II would have measurable impacts.
1. BASELINE CONDITIONS
Baseline conditions for both job shops and captives
were factored into the analysis in order to isolate the
impacts of the metal finishing regulation on the universe.
(1) Job Shop Baseline Conditions
All indirect discharging job shops are regulated
by the electroplating pretreatment regulations, there-
fore, the job shop closure model was operated to fac-
tor out all model plants which were forecasted to
close due to either a poor financial position before
investment in electroplating compliance or because of
their inability to meet compliance requirements. Of
the 216 indirect discharging model plants 56 were
judged as baseline or electroplating closures and
dropped from the sample. The remaining 160 model
plants were assumed to represent the indirect dis-
charging job shop universe and the results
extrapolated in a straight line. For the direct
discharging job shop population, 6 baseline closures
were dropped from the sample of 28 model direct
discharging job shops.
(2) IPCB Baseline Conditions
A total of 40 IPCB model plants had all the
financial data needed for impact analysis. A total of
5 model plants were baseline closures and 1 plant was
judged as a closure due to the electroplating
pretreatment regulation. The remaining 34 model
plants were assumed to represent the IPCB segment of
the universe and the results extrapolated in a
straight line.
(3) Captive Baseline Conditions
The indirect discharging segment of the metal
finishing industry is also covered by the Electro-
plating Pretreatment regulation promulgated by EPA in
VI-1
-------
1979. The baseline costs for this segment of the
metal finishing population have been reassessed since
the 1979 electroplating analysis. The current
estimates -- derived by employing assumptions iden-
tical to those for deriving the metal finishing costs
and using 1982 as the baseline year -- are $512
million in capital costs and $169 million in annual
costs. As a result of these compliance expenditures;
EPA estimates that the 1979 electroplating standards
could cause 24 baseline plant closures and 6 electro-
plating process line divestitures. Because the pro-
cess coverage of the Metal Finishing regulation is
more comprehensive, it will require an additional
capital investment for approximately 16 percent of all
indirect discharging plants with water usage greater
than 10,000 G.P.D., and 32 percent of plants with
water usage less than 10,000 G.P.D. A vast majority
of the metal finishing plants will not need an
additional investment in treatment technology because
they:
Have only electroplating process flows and
are therefore completely covered by the
Electroplating Pretreatment regulation.
(Except plants using less than 10,000 G.P.D.)
Have already installed pollution control
equipment that treats ail their metal fin-
ishing processes
Have in-plant "process" controls that treat
process flows sufficiently to meet proposed
EPA Limitations.*
For those plants requiring an additional invest-
ment in pollution control equipment, electroplating
compliance costs are factored into the baseline condi-
tions. The costs attributable strictly to this Metal
Finishing regulation are then added on so that incre-
mental economic impacts can be measured. In other
words, impacts on the model plants were studied first
with the costs of compliance of the electroplating
flow alone. Those model plants that were projected to
close under electroplating costs were judged as
baseline closures. A model plant projected not to
close with electroplating costs alone but projected to
close with the sum of electroplating and metal
finishing costs was judged a metal finishing closure.
Examples of an electroplating baseline closure and a
metal finishing closure are presented below:
This is based on EPA surveys of the metal finishing
industry.
VI-2
-------
Model plant number 250 in Exhibit C-8 uses 50,000
gallons per day in its total metal finishing
process. The electroplating process annual com-
pliance costs are estimated to be $63,100 (Exhi-
bit C-5) and the metal finishing process compli-
ance costs are estimated to be $41,330. This
plant is considered as a baseline closure since
it will experience a 6.3 percent cost increase
with electroplating costs and 10.4 percent in-
crease with the combined electroplating - metal
finishing costs.
An example of a model plant which is judged to be
a metal finishing closure is plant number 113 in
Exhibit C-4. This plant is estimated to incur
$1904 in TTO baseline monitoring costs and
$154,814 in equipment costs to comply with Op-
tion II. This plant is projected to close since
it is a single plant firm with sales of 1 million
annually and an estimated cost increase of about
15 percent.
2. CAPITAL AVAILABILITY CONSIDERATIONS
The job shop methodology explicitly takes into consi-
deration the ability of plants to finance new invest-
ments. In fact, the closure model is based on financial
variables. In general, the small relative magnitude of
these investments will not have a measurable impact on
capital or financial markets.
Total annual compliance investment for captives is
$351.0 million. This is compared to total investment in
plant and equipment for SICs 34-38, estimated for 1982 by
Data Resources Incorporated, as being $46.6 billion.*
Compliance investment is less than 0.3 percent of
total industry investment. This is a relatively small
proportion of total investment, and should not affect
capital availability or long-term capital growth in the
industry.
3. ESTIMATED IMPACTS OF OPTION I
Exhibit VI-1 on the following page displays the in-
vestment and annual costs associated with option I compli-
ance requirements. The total investment cost necessary to
comply with the metal finishing regulation is estimated at
$351 million with annual costs of $118.0 million. The
U.S. Long-Term Review, Data Resources, Inc.,
Table 3-7, p. 1.69.
VI-3
-------
(1) Direct Discharging Job Shops
No establishments in this segment will be re-
quired to make capital investments in order to meet
option I compliance'level. A total of 10 direct
discharging job shops may have to compliance monitor
for total toxic organics at an estimated total annual
cost of $29,000. A total of 56 job shops may have to
baseline monitor at an estimated $108,000 no closures
are forecast for this segment. The average cost of
production are estimated to increase by 0.02 percent.
(2) Indirect Discharging Job Shops
Indirect discharging job shops will not have to
make capital investments to meet option I compliance
levels. A total of 424 shops may have to baseline
monitor for TTO at a one-time cost of $807,000, and 77
shops may have to compliance monitor annually at a
cost of $220,000. The per plant annual costs of $2890
are expected to increase the cost of production by
0.02 percent. No closures are expected in this
segment.
Since the compliance date is set for the year
1986, it was assumed that job shops will baseline
monitor before that year and that the costs for the
two monitoring functions will not occur in the same
year. If the two monitoring functions had occurred in
the same year, one job shop might have closed.
(3) Direct Discharging Independent Printed Circuit
Board Manufacturers
The only additional requirement for this segment
of the universe will be control of total toxic
organics. All 44 IPCBs may have to baseline monitor
at a cost of $83,700 and 12 will have to compliance
monitor annually at an estimated cost of $34,700.
Cost of production are estimated to increase by 0.03
percent. No IPCBs will close due to the monitoring
requirements regardless of compliance dates.
(4) Indirect Discharging Independent Printed Circuit
Board Manufacturers
Indirect discharging IPCBs will be required to
control total toxic organics. All 327 may have to
baseline monitor at a one time cost of $623,000. A
total of 88 indirect discharging IPCBs are assumed to
require compliance monitoring at an estimated annual
cost of $254,000 for this segment. Cost of production
are estimated to increase by 0.03 percent. No IPCBs
will close due to the monitoring requirements.
VI-4
-------
( 5) Direct Discharing Captives
Except for compliance with the TTO limit, direct
discharing captives have all the necessary equipment
in place to meet option I compliance requirements. A
total of 900 direct captives are assumed to be
required to baseline monitor at an estimated one-time
cost of $1.7 million. In addition, 162 of the 900 may
have to compliance monitor at a total annual cost of
$468,000. No plant closures are forecast for this
segment, and the estimated production cost increase is
0.01 percent.
(6) Indirect Discharging Captives
Total investment cost for this segment is esti-
mated at $351.0 million with annual costs of
$118.0 million.* Baseline monitoring for total toxic
organics may affect 2700 plants (including the 1020
plants with less 10,000 G.P.D.) with a cost of
$5.1 million. Annual compliance monitoring is assumed
to affect 487 indirect captives with an estimated cost
of $1.4 million. No closures or divestitures are
forecasted for indirect discharging captives. Cost of
production is estimated to increase by 0.2 percent.
1. Indirect Discharging Captives With Water
Usage of Less Than 10,000 G.P.D.
This segment of the affected universe which
is made up of 2850 non-integrated indirect
discharging captives will be required to invest
in option I equipment as well as monitor for
total toxic organics. A total of 912 plants (32%
of population) may have to make the investment in
equipment. Total capital investment costs are
estimated to be $35.9 million with annual costs
of $11.8 million. The one time baseline monitor-
ing costs for total toxic organics will affect
1026 plants with costs of $1.9 million. Annual
compliance monitoring costs for total toxic
organics will come to $500,000 affecting 185
plants. No plant closures are forecasted for
this segment. Cost of production will increase
by less than 1 percent, with a range of 0.01
percent to 1 percent.
This cost includes $5.4 million RCRA total compliance
costs. These costs were generated by the technical
contractor and are factored into the annual costs of
model plant.
VI-5
-------
4. ESTIMATED IMPACTS OF OPTION II
Exhibits VI-1 and VI-2 summarize the estimated costs
and impacts of complying with option II. The investment
costs for option II are estimated at $1510.6 million with
annual costs of $502.1 million. A total of 50 direct dis-
charging job shops are forecast to close. This would
imply an employment loss of 1365 workers and a cost
increase of 4 percent of total sales. Direct discharging
captives will experience 21 plant closures and 10
divestitures, with an employment loss of 760 and a cost
increase of 0.5 percent. Indirect discharging captives
will experience 8 plant closures and employment loss of
185.
The overall industry impact of filtration would be a
closure rate of 0.8 percent and an employment loss.of 0.4
percent; the direct discharging job shop sector, however,
would experience a disproportionate burden: a closure
rate of 14 percent and an employment loss of 19 percent.
5. ESTIMATED SECONDARY PRICE IMPACTS
The secondary price impacts were derived with the use
of an input-output analysis. The analysis estimates the
inflationary impact of a change in the price of metal fin-
ishing services. The input-output analysis, explained in
Appendix E, provides a method of examining in a simple but
quantifiable way the relationship between prices in a par-
ticular economic system. It makes possible an estimate of
the consequences of a change in any one price upon the
others in the system. (Appendix A provides a detailed
exposition of the input-output model). The input-output
analysis assumes that all increases in costs, direct or
indirect, are passed on: i.e., that each sector raises
the price of its primary inputs, plus the rise in the
price of the inputs absorbed from other industries. This
assumption gives an upper-bound on closure estimates. It
is important to note that the input-output model employed
assumes that the whole economy could be adequately rep-
resented by static input-output technical coefficients.
Therefore, estimation results based on the I/O model
should be read with this inherent limit in mind.
Exhibits VI-3 and VI-4 show the secondary price impact
on the following:
SIC's 34-39
Personal consumption expenditures
Gross private fixed capital formative
Net exports
Total federal government purchases.
VI-6
-------
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EXHIBIT VI-3
ESTIMATED PRICE INCREASES FOR
2-DIGIT SIC'S (IN PERCENT)
SIC OPTION I OPTION II
34 0.1 0.3
35 0.1 0.3
36 0.05 0.2
37 0.05 0.1
38 0.05 0.1
39 0.05 0.2
EXHIBIT VI-4
ESTIMATED TOTAL PRICE IMPACT OF EPA BATEA
METAL FINISHING REGULATIONS ON PRINCIPAL
FINAL DEMAND COMPONENTS
FINAL DEMAND SECTORS PERCENTAGE PRICE INCREASE
Option I Option II
Personal Consumption Expenditures 0.01 0.02
Gross Private Fixed Capital Formation 0.005 0.01
Net Exports 0.01 0.02
Total Federal Government Purchases 0.007 0.01
-------
VII. REGULATORY FLEXIBILITY ANALYSIS
-------
VII. REGULATORY FLEXIBILITY ANALYSIS
The Regulatory Flexibility Act (Public Law 96-354) is
a regulatory reform initiative designed to ensure that,
while achieving statutory goals, regulations do not impose
unnecessary costs on "small entities." Small entities are
defined in Section 2(a)(3) as "small businesses, small
organizations, and small governmental jurisdictions with
limited resources." The analytical requirements for regu-
latory flexibility analysis are enumerated in Sections 603
and 604 of this statute. Section 605(b) qualifies these
requirements and states that:
"Sections 603 and 604 of this title shall not apply to
any proposed or final rule if the head of the agency
certifies that the rule will not, if promulgated, have
a significant economic impact on a substantial number
of small entities."
Option I, the selected option, will affect the following
segments of the metal finishing unvers:
Indirect discharging captives
Direct discharging captives
Indirect discharging job shops
Direct discharging job shops
Printed circuit board.
The economic impact analysis set forth in this document
indicates that for Option I there will be no economic im-
pacts in terms of plant closures for any metal finishing
establishments, including those affected that are consi-
dered to be small entities. Thus, there will not be "a
significant economic impact on a substantial number of
small entities." However, an investigation into regula-
tory flexibility issues has been undertaken. These issues
include:
Definition of a small firm
Establishment of an "optimal" small firm criterion
Regulatory impacts on small firms.
1. DEFINITION OF A SMALL FIRM
In considering reasonable definitions of small firms
in the metal finishing industry, four separate approaches
appeared promising. The four methods considered the fol-
lowing criteria:
VII-1
-------
Number of employees/ using either total employ-
ment or metal finishing production employees
Sales volume or value added by manufacturing
Pollution generation volume either in terms of
metric tons of contaminant or types of contami-
nants in the wastestream
Production/process water volume in gallons per
day.
Several problems are apparent with each index, al-
though a basis for selecting one, the last criterion, is
readily defensible. Briefly, the operant difficulties in
relying on these measures include:
Number of employees in the firm does not show a
large positive correlation with sales of the
firm. Businesses with relatively few employees
can generate sales volumes greater than that of a
plant with ten times the employment. The problem
here is plant technology and automation levels.
In metal finishing a highly automated plant could
be a production giant, yet appear, on the basis
of employment, to be a small business.
Dollar volume in sales or value added is equally
unsatisfactory due to the fact that by itself it
fails to reflect market vulnerability. As SBA
has long maintained, a small business is small
only in relation to its competitors. Small in
this sense means lacking the stature to influence
price or production trends in the industry.
There is no obvious basis for establishing any
sales level as a distinguishing cut-off for a
small firm in this industry because of the
heterogeneity of the producers.
For regulatory purposes establishing pollution
generating volume is a highly relevant factor for
defining plant size. Regardless of employment or
sales, plants generating large hazardous waste
volumes are of more importance than those gene-
rating trivial quantities. The problem here is
that waste volume is a function of many plant-
specific considerations (processes, chemicals,
and operations), and data on a plant's pollution
volume are not readily available.
VII-2
-------
Plant water volume correlates moderately well
with both employment and sales, while not a pre-
dictor of economic size/ water volume is at least
associated with plant economics. Additionally,
plant water volume correlates with but does not
predict pollution generation volume. It serves,
therefore, as a reasonable measure of plant size
both on economic and technological grounds.
Extensive sensitivity analysis performed in the eco-
nomic impact analysis for the earlier electroplating pre-
treatment regulation showed that the most vulnerable
plants had a water flow level of less than 10,000 G.P.D.
EPA, therefore, chose plant water volume as the primary
criterion to use in assessing the economic impact on a
substantial number of small entities. It selected the
10,000 G.P.D. flow level used in the earlier Electro-
plating Pretreatment Regulation as the cut-off level for
identifying potential small business economic impacts.
2. REGULATORY IMPACTS ON SMALL FIRMS
Exhibit VII-1 displays the costs and impacts of Option
I compliance requirements on small firms. It shows that
no small firms are forecasted to close and that while
small firms make up almost 40 percent of the affected uni-
verse they account for less than 12 percent of the annual
costs projected for this regulation. No small entities
will experience annual compliance costs in excess of 2
percent of sales with the majority of plants below one
percent. Annual cost of compliance for facilities with
water flows less than 10,000 GPD range from $2,890 for
monitoring of total toxic organics which affects all seg-
ments of the universe, to $15,523 for some indirect dis-
charging captives. It can be concluded then, that small
firms are not expected to experience significant economic
impacts.
VII-3
-------
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-------
VIII. NEW SOURCE PERFORMANCE STANDARDS/PRETREATMENT
STANDARDS FOR NEW SOURCES
-------
VIII. NEW SOURCE PERFORMANCE STANDARDS/PRETREATMENT
STANDARDS FOR NEW SOURCES
The Federal Water Pollution Control Act of 1972 (the
"Act") requires that New Source Performance Standards
(NSPS) represent the best available demonstrated control
technology, processes, and operating methods. Where prac-
ticable, no pollutant discharge at all is supposed to be
allowed. Where pollutant discharge is unavoidable, these
standards are to represent the greatest degree of effluent
reduction achievable. NSPS applies only to direct
dischargers.
Pretreatment Standards for New Sources (PSNS) will
regulate indirect dischargers. The Act states that pre-
treatment standards shall prevent the discharge to a
publicly-owned treatment works (POTW) of any pollutant
that may interfere with, pass through, or otherwise be
incompatible with the POTW. The amendments to the Act
further stipulate that industrial discharges must not in-
terfere with use and disposal of municipal sludges.
Both NSPS and PSNS apply specifically to new sources.
New sources are defined as any building, structure, facil-
ity, or installation that discharges pollutants and for
which construction is started after proposal of the rele-
vant standards, but only if the standard is promulgated
within 120 days of their proposal or after promulgation of
the standard which are applicable to the source.
One option was selected for all new source standards.
The NSPS/PSNS treatment system consists of the Option 1
end-of-pipe treatment system (described earlier in this
report) plus in-plant controls for cadmium. In-plant con-
trols could include evaporative recovery, ion exchange,
and recovery rinses. The purpose of these in-plant con-
trols is to reduce cadmium concentration levels in the raw
waste stream.
Due to the nature of this option, only new sources
that perform cadmium plating operations will incur addi-
tional compliance requirements beyond the proposed
BPT/BAT/PSES standards. EPA estimates that 15 percent of
existing sources plate with cadmium. It is likely, there-
fore, that the NSPS/PSNS requirements will concern only a
small segment of the metal finishing population.
VIII-1
-------
Information collected on the existing cadmium users
indicates that they are generally larger and more diverse
than non-cadmium users*, specifically:
Job shop cadmium platers are generally much
larger than job shops that do not plate with
cadmium.
Job shop cadmium platers use twice as many types
of metals as non-cadmium platers.
Indirect discharging captive cadmium platers con-
sume twice as much water as either their direct
discharging counterparts or the non-cadmium users,
Direct discharging cadmium platers use less water
than all other types of captives, but they gene-
rally employ more people and work with more
metals.
The incremental cost to new sources of controlling
cadmium was used as the basis for measuring these stand-
ards' competitive effects. Annual control costs were
calculated for five different water flow categories. The
Environmental Protection Agency supplied information on
annual costs of cadmium control as a function of water use
volume.** The costs were based on the following agency
specifications:
Use of evaporators capable of treating 20 G.P.H
Cadmium flow accounting for 2.7 percent of total
plant process flow
Raw materials savings resulting from recovery of
cadmium chloride and chromic acid, both bypro-
ducts of the pollution control process
Annualization calculations based on 13 percent
cost of capital, five year depreciation schedule,
and ten year asset life.
* This information is based on two memos. The first is
dated March 5, 1981 and is from Mr. Jack Nash to
Mr. Richard Kinch. The second is dated May 1, 1981
and is from Mr. Lior Samuelson to Mr. Art Berman.
** This information is contained in a December 3, 1982
memorandum from Mr. Richard Kinch to Ms. Kathy
Ehrensberger.
VIII-2
-------
The annual costs of cadmium control are shown in Exhibit
Vll-1.
EXHIBIT VIII-1
Incremental NSPS/PSNS Annual Cost By Metal
Finishing Water Flow Category
(In $1982)
Incremental Annual Costs
Flow G.P.D of Option 3
0-10,000 $14,388
10,000-25,000 20,727
25,000-75,000 24,436
75,000-200,000 15,860
200,000-500,000 21,054
500,000+ 17,550
The cost effects for five plant sales categories due
to NSPS/PSNS requirements were calculated by the following
three step process:
For each plant sales category, model plants were
clustered according to water flow.*
Within each sales category, cost effects were
calculated for each water flow cluster by divid-
ing the incremental Option 3 compliance cost by
plant sales. This approach is similar to the one
used to measure economic impacts of Options 1 and
2 on the captive metal finishing population.
A weighted average cost effect was calculated for
each plant sales category based on the relative
importance of the water flow clusters.
The results of these calculations are presented in
Exhibits VIII-2 to VIII-7. The cost effects range from
.02 percent for the largest plants to 2 percent for the
smallest. In general, as plants' sales volumes grow
larger, the cost effects become very small. In addition,
the cost effects for nearly 90 percent of the plants (as-
suming that new sources have a size distribution equiva-
lent to existing sources) are .75 percent or less.
Based on the available data, it does not seem that the
additional costs to comply with the additional costs to
Source: 1976-77 Survey of Metal Finishers.
VIII-3
-------
EXHIBIT VIII-2
NSPS/PSNS Average Cost Effects
(in 1982$)
Percent of Existing
Category Plants in Sales Average Cost Effects
Sales Cateory To Option 3 Costs
1mm 11.0% 2.0%
5mm 23.2 0.5
10mm 14.8 0.2
50mm 35.8 0.4
100mm 16.2 0.2
comply with the NPS/PSNS standards will erect significant
entry barriers or create competitive disadvantages. The
main reasons are the following:
The incremental cost of compliance with Option 3
is small. (Between 0.02 percent and 2.0 percent
of the value of sales).
Only a small percentage of the metal finishing
universe uses cadmium. Assuming that this trend
holds for new source metal finishers, the vast
majority of plants will have no compliance re-
quirements at all due to NSPS/PSNS cadmium
controls.
In some processes, cadmium plating may be substi-
tuted for other metals. This will relieve these
new sources of NSPS/PSNS cadmium controls. In
cases where substitution is not possible due to
the characteristics of cadmium, cost can be
passed through as a result of inelastic demand.
In general, the decision of a firm to enter into the
market for metal finishing will be insensitive to the in-
cremental burden of NSPS/PSNS. For captives, metal fin-
ishing is an input into the production process. As such,
they perform metal finishing in-house to ensure continuous
supply, to minimize work flow disruptions, and to lower
transportation and packaging costs. If the relative costs
of NSPS/PSNS were high, captives could decide to obtain
finishing services from existing job shops. New job shop
sources will have the same effluent guideline requirements
as existing sources unless the new plants use cadmium.
The decision to use cadmium will be dictated by the demand
for cadmium plating. Elastic demand will mean a high pro-
bability of no cadmium use while inelastic demand means
little or no competitive impacts.
VIII-4
-------
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IX. LIMITS OF THE ANALYSIS
-------
IX. LIMITS OF THE ANALYSIS
The purpose of this chapter is to summarize the issues
that bear upon the "power" of the findings presented here-
in. The data and analytic constraints must be understood
in order for the estimates of industry impacts to be held
in perspective. Accordingly, the applicability of the
results rests with how well the data, logic and assump-
tions of the models reflect reality.
The focus of this chapter are the major limitations
involving study issues relating to the:
Quality and quantity of the data
Agency survey updates on equipment in place
Type of models used
Biases due to analysis assumptions.
1. QUALITY AND QUANTITY OF THE DATA
A major strategic consideration in the planning of
this study was the appropriate source of information.
Agency timing constraints regarding new financial and
economic survey work necessitated the use of data from
prior analyses. This decision could have a bearing on the
findings of this study. The Economic Impact Analysis
relies on data obtained in the 1976-77 Survey of Metal
Finishers. The forecasted impacts may be sensitive to any
change in the economic and/or financial characteristics of
the Metal Finishing universe between 1976-77 and 1983;
however, Appendix D suggests that changes are unlikely to
be significant.
2. AGENCY SURVEYS ON EQUIPMENT IN PLACE
The Agency conducted two surveys of the Metal
Finishing universe. The purpose of the surveys was to
update information on the proportion of metal finishers
that would require additional pollution control equipment
in order to meet proposed BAT regulations. The survey of
direct dischargers* was conducted on a sample derived from
The survey's sample design and selection procedure is
described in an August 20, 1981 memorandum from
Mr. Richard Kotz to Mr. David Pepson. The results of
the survey are contained in a memorandum from
Mr. Henry D. Kahn to Mr. David Pepson.
IX-1
-------
the NPDES permit records, while the surveys of indirect
dischargers* relied on the technical contractor's data
base. The projected magnitude of compliance costs and
plant closures is sensitive to any changes in the results
of the surveys due to sampling or data base biases. It is
likely additional equipment has been installed since the
survey; thus this analysis may overstate costs.
3. TYPE OF MODELS USED
Two distinct models were used to analyze the economic
impacts. In general, the design of the models was
constrained by data availability. The job shop model is
essentially a capital budgeting closure analysis that
assumes full cost pass through. Different assumptions on
the elasticity of demand, interest rates, and the model
plants' financial condition may yield different results.
The model used to analyze the impacts on the captive
sector assumes various critical price increase limits.
Any plant projected to require a greater price increase is
considered a candidate for closure. A change in the
critical price limits would alter the results of the
analysis. In addition, the captive analysis assumes a
full cost pass through. A precise prediction of price and
output changes due to the regulation is not possible due
to the complexity of the Metal Finishing universe. The
approach taken here therefore, limits somewhat the
accuracy of the forecasts.
4. BIASES DUE TO ANALYSIS ASSUMPTIONS
In an effort not to understate compliance costs, the
Agency made certain conservative assumptions which may
have yielded higher compliance costs than are estimated in
this report. Three examples are described below.
(1) Flow Reduction
A major variable which determines total costs is
flow volume. In general, the larger a plant's flow
volume, the larger its cost of compliance will be.
Because plants will achieve compliance cost savings by
reducing their wastewater flow volume, it is likely
that this will happen. However, the Agency treated
current flow volume as a constant, i.e., no flow
reduction was assumed. The effect of this assumption
is that compliance costs may be overstated.
Results of these surveys are described in a July 30,
1981 memorandum and a December 3, 1981 memorandum from
Mr. Richard Kinch to Mr. Art Herman.
IX-2
-------
(2) Removal Credits
Indirect dischargers may be able to obtain
pollutant removal credits from their POTW's. This
means that the actual pollutant removal requirements
for plants are reduced. As a result, a less costly
form of pollution control will be possible in some
cases. However, the Agency did not assume this when
deriving its compliance cost estimates. It assumed
that the existence of removal credits will not reduce
compliance costs. As a result, compliance cost
estimates may be overstated.
(3) Treatment of Non-Metal Finishing Process
Wastestreams
A substantial number of metal finishing plants,
particularly captives, have other process wastestreams
in addition to those which are metal finishing.* All
of a plant's wastestreams are typically treated by one
end-of-pipe treatment system, though this may not
always be the case. EPA assumed that a treatment
system will be sized according to total process
wastewater flow, rather than just metal finishing
flow. The treatment system is assumed to treat all of
a plant's wastewater flow. Thus, it is possible that
treatment systems were sized and costed which are
larger than necessary. This bias may result in an
overstatement of estimated costs.
The costs of treating these streams are also
considered when EPA promulgates other categorical
standards. In essence, EPA has counted such costs
twice, in separate rulemakings.
IX-3
-------
APPENDIX A
ANNUALIZATION OF INVESTMENT COST
-------
APPENDIX A
ANNUALIZATION OF INVESTMENT COST
Operating and maintenance costs of a pollution control treat-
ment system were estimated by the technical contractor as being 12
percent of total investment costs. This percentage of investment
costs was added to a capital recovery factor to derive annual costs
as a percentage of capital costs.
The capital recovery factor (CRF) measures the required
rate of return on an investment in order to cover investment
costs and maintain a firm's net earnings. The formula for CRF
is:
CRF = A(N,Kf) (.9-x)
1-t
n
where: x =\ td
£
N = physical life of investment
Kf = average after-tax cost of capital
A(N,Kf) = annuity whose present value if 1, given N
and Kf [Kf/(l-(l+Kf)-n)]
t = marginal corporate tax rate
d = annual depreciation rate
n = depreciation lifetime
The values used in this calculation are:
Physical life of investment: 10 years
Average after-tax cost of capital: 13 percent
Marginal corporate tax rate: 48 percent
Annual depreciation rate: 20 percent
Depreciation lifetime: 5 years
These values were assumed for the following reasons:
The Survey shows that 10 years is an appropriate esti-
mate for a treatment system's physical life
The after-tax cost of capital was derived using assump-
tions based on current economic conditions. These
assumptions include:
- A typical firm's capital structure of 25 percent
debt and 75 percent equity
A-l
-------
Nominal cost of debt = 12 percent
The cost of debt was based on quotations
from the New York Bond Exchange (June 17,
1983) which showed that the average bond
rate was approximately 12 percent.
Nominal cost of equity = 15 percent
Cost of equity is determined based on
shareholders' expectations. Yields on
competing securities is the major input
into the or determination of the cost of
equity. Equity constitutes a riskier
investment than debt and its cost is
normally higher. Firms do not publish
their cost of equitymost companies
can only estimate the cost of equity
ex-post. The cost of equity was assumed
to be 15 percent in this analysis since
the cost of equity is usually one to five
points higher than the cost of debt.
The 13 percent cost of capital estimate is based on the
cost of debt and equity stated above and represents an
overall industry average calculated for the purposes of
this analysis. A given firm's cost of capital may vary
somewhat from this estimate, based on its relative fi-
nancial position, performance, capital structure, credit
rating, size, and overall economic environment in which
it operates.
Corporate taxes are based on a graduated schedule20
percent on the first $25,000 in profits; 22 percent on
the next $25,000; and 46 percent for all profits above
$50,000. Most profitable firms will therefore pay taxes
at 46 percent on the margin, but slightly less than that
on the average. Less profitable firms will pay 20 per-
cent or 22 percent in taxes, while unprofitable firms
pay nothing. To account for these differentials, a mar-
ginal rate of 44 percent, slightly less than the rate,
which most firms pay, was assumed. Also, state corporate
income taxes (deductible from federal taxes) may be as
high as 9.5 percent, and average slightly less. An 8
percent rate is assumed here, or an effective rate of
about 4 percent. Thus, the total tax rate assumed for
this analysis is 48 percent.
Economic Impact Analysis for Proposed Effluent Limitations and
Standards for the Organic Chemicals, Plastics and Synthetic
Fibers Industry, United States Environmental Protection Agency,
March, 1983, p. 2A-4.
A-2
-------
Changes in the tax code over the last two years not
allow firms to depreciate capital investments over a
5 year period. A depreciation rate of 20 percent was
therefore assumed.
Finally, note that the CRF formula accounts for a investment tax
credit of 10 percent, reflecting another farily recent change in
the tax code.
When all these numbers are plugged into the CRF formula, a
value of 21 percent is derived. To determine the annualization
rate for pollution control investment costs, this value is added
to the operating and maintenance costs which comprise 12 percent
of investment costs. This yields a value of 33 percent. For
example, plant number 2036 in Exhibit B-6 is projected to invest
$234,143. Using this annualization methodology yields a value
of $77,267 as the annual cost.
A-3
-------
APPENDIX B
JOB SHOP AND IPCB ANALYSIS
-------
APPENDIX B
JOB SHOP AND IPCB ANALYSIS
This Appendix presents a detailed description of the
job shop and IPCB impact methodology and the inputs
associated with it.
1. THE CLOSURE MODEL
The model operates in the same manner for both job
shops and IPCBs. There are two primary operations of the
closure model: the first operation involves assigning and
costing pollution control equipment for each model plant,
and the second operation involves factoring this
incremental cost into the financial condition of each case
to predict firms likely to close. Each operation is
described below.
(1) Assigning and Costing Pollution Control Equipment
Operationally the routine can assign any or all
of the following treatment cost components:
Chrome reduction
Cyanide oxidation
pH adjustment
Clarifier/filter
Line segregation
The following decision rules took into account the
following specific components of each firm. A firm
received:
Chrome reduction if:
Chrome was present
Chromating or anodizing was present
Cyanide oxidation if:
Cadmium was present
Copper, zinc, tin or precious metals
were present
pH adjustment was assigned:
For all plants
B-l
-------
Clarifiers or filters were assigned if:
Trace metals were present
Metals removal was required by the
regulation
Filters were prescribed for interior
space-constrained firms
Clarifiers for all other plants
In addition to specifying the pollution control com-
ponents, the routine applies a cost factor to each.
Components are costed as a function of two factors:
The proportion of the total plant flow
through the component
The unit cost of the component as a cost
equation (dollars x GPH)
Different types of finishing operations have
characteristic flow levels for their pollution control
equipment. Metal finishing process water flow was
allocated to the various waste treatment components
according to the following assumptions made by the
technical contractor:
Plants requiring installation of cyanide
destruction and pH equipment have about
56 percent of their metal finishing water
flowing to the cyanide destruction unit.
Plants requiring installation of hexavalent
chromium reduction and pH adjustment equip-
ment have about 23 percent of their metal
finishing water flowing to the chrome reduc-
tion unit.
Plants requiring installation of systems
fall into two categories:
Plants which perform more than six
operations have about 62 percent of
their metal finishing water flow to the
cyanide destruction unit and about
4 percent of their metal finishing
water flowing to the hexavalent
chromium reduction unit.
3-2
-------
Plants with six or fewer operations
have about 8 percent of their metal
finishing water flow to the cyanide
destruction unit and about 10 percent
flowing to the hexavalent chromium
reduction unit.
In all cases, all the metal finishing water
flows through the pH adjustment unit.
2. Variable Definitions
The cost program (PPC) is in Fortran. The total
capital costs for a plant are the summation of all treat-
ment components plus line segregation cost, adjusted by a
credit for needed equipment already in place. The key
variables are identified and the flow logic of the model
(Exhibit B-l) is presented below:
(1) IA -- Indicates whether the firm needs equipment
type I.
Position 1 - chrome equipment
2 - cyanide total option equipment
3 - cyanide amenable option equipment
4 - batch process operation clarifier
5 - continuous process operation
clarifier
6 - filter
7 - pH adjustment equipment
(2) IB -- Shows that the firm had used some metals
but that those metals do not require a particular
type of treatment.
(3) RIG -- Stores the percentage of credit given for
considering equipments already in place.
(4) ICROP -- Pointers to processes anodizing and
chromating for checking purposes.
(5) IOP -- Type of operation performed by the firm:
1) Anodizing 6) Electrolysis on metals
2) Coloring 7) Chemical milling
3) Phosphating 8) Non-aqueous plating
4) Chromating 9) Bright dip
5) Electrolysis 10) Chemical etching
on plastics 11) Electrochemical milling
(6) IMETal -- Indicates which metals did the firms
use:
B-3
-------
1) Copper 8) Tin
2) Nickel 9) Gold
3) Chromium 10) Silver
4) Cadmium 11) Platinum
5) Zinc 12) Iron
6) Solder 13) Brass
7) Lead 14) Bronze
1 for in use, 0 for not used
(7) Credit -- Percentage of credit selected to be
applied to equipments in place, in 0 #% 1.
1) for chrome treatment
2) for cyanide treatment
3) for clarifier
4) filter
5) pH adjustment
(8) ICN -- Stores pointers to metals which require
cyanide treatment.
(9) IPHD -- Indicators of whether a metal needs pH
adjustment.
1 for yes, 0 for no.
Positions are the same as IMETal array.
(10) ICLFL -- Indicates which of the fourteen metals
need a clarifier/filter.
1 for yes, 0 for no.
Positions are the same as IMETal array.
(11) IMPLac -- Indicates whether the firm already owns
the equipment or has the treatment in place.
1 for yes, 0 for no.
1) chrome equipment/treatment
2) cyanide treatment
3) clarifier
4) filter
5) pH adjustment
(12) OMM -- Percentage factor for calculating operat-
ing and maintenance cost for pollution control.
(13) CTOTal -- Total capital cost for pollution
control.
B-4
-------
(14) IGOOD -- Number of complete data firms.
(15) INODO -- Number of incomplete data firms.
(16) Select -- Choice for selecting one single cost
component.
1 for yes, 0 for no.
(17) HILO 2 for selecting the highest cost.
1 for selecting the lowest cost.
(18) PCentl -- Percentage factor for adjusting capital
cost increase/decrease.
(19) COMC -- Operating and maintenance cost for pollu-
tion control.
(20) TType -- Type of firm.
1 - job shops
2 - printed boards
(21) Rxcost -- Cost of treatment already in place for
captives.
(22) ICRCUT -- Cutoff level for chrome.
(23) ICNCUT -- Cutoff level for cyanide.
(24) ICLCUT -- Cutoff level for clarifier.
(25) IFLCUT -- Cutoff level for filter.
(26) IPHHI -- Cutoff level for pH adjustment, upper
limit.
(27) IPHLO -- Cutoff level for pH adjustment, lower
limit.
(28) Within high-low range, it is required.
(29) ICNOPT -- Cyanide option total.
(30) INOUT -- Area expansion indicator for clarifier/
filter consideration.
interior expansion
exterior expansion
(31) Low -- Lowest cost component.
B-5
-------
(32) High -- Highest cost component.
(33) IHRS Number of hours in operation per day.
(34) IPFLOW Water flow level in gpH unit.
(35) ICLQ -- Value separating, by water flow level,
batch/continuous operation.
(36) ID -- Identification number for the firm.
(37) IPFLOW -- Water flow level in gpH unit.
(38) ICN2 -- Cost component adjustment for cyanide
1 for total, 0 for amenable.
(39) ICN2FL -- Cost component adjustment according to
flow.
1 for total, 0 for amenable.
3. FINANCIAL CLOSURE MODEL
The closure routine identifies firms that are pro-
jected to close because of either:
Limited capital access, or
Insufficient profits.
Determinations of which firms would close are based on
projections of what the firm's financial standing would be
one year after the pollution control investments were
made. The basic premise is that those future conditions
would be evaluated by:
A banker to determine if he would lend the firm
sufficient funds for the investment, or by
The owner(s) to determine if sufficient profits
are projected to make it worthwhile for him
(them) to remain in business, or whether the
state of the business warrants an investment of
further funds -- called an equity infusion --
into the firm in order to secure a bank loan.
These closure determinations are predicted by the
closure model based on pro forma balance and income state-
ment forecasts and quantitative decision rules. For job
shops the balance and income statement were derived from
the 1976-77 Survey of Metal Finishers. For IPCBs the
financial information on 100 model plants was obtained
from Dun and Bradstreet. As such, owner compensation
B-6
-------
information was not available and the closure determina-
tion was made without the use of equity infusion. The
costs for the electroplating baseline were generated by
the model and are assumed to be the same as those gen-
erated for the 1979 Electroplating Economic Impact
Report. All other costs were estimated by the Environ-
mental Protection Agency and were inputed to the model.
These costs are described in the next section. The flow
chart shown in Exhibit B-2 presents an overview of the
sequential logical steps of the model.
4. COSTS OF COMPLIANCE
The costing rules for direct discharging job shops and
IPCBs differed somewhat from those applied to indirect
discharging job shops. The cost inputs are described
below.
(1) Direct Discharging Job Shops
Agency surveys determined that the direct dis-
charging job shop segment of the metal finishing uni-
verse has all the necessary equipment in place to meet
Option I compliance levels. The only additional cost
that would be incurred by this segment relate to
monitoring of total toxic organics. As discussed in
Chapter V, EPA Effluent Guidelines Division made the
assumption that 15.5 percent or 56 job shops will have
to baseline monitor, and 2.8 percent or 10 job shops
will have to monitor for compliance. Exhibit B-3
shows the monitoring costs associated with TTO. All
direct discharging job shops would have to invest in
order to meet Option II compliance .requirements.
Exhibit B-4 shows all 28 direct discharging model
plants and their associated Option II costs.
(2) Indirect Discharging Job Shops
All indirect discharging job shops were regulated
by the 1979 electroplating pretreatment regulation,
therefore, the only additional investments that they
will have to make is in monitoring of total toxic
organics and solvent disposal. Exhibit B-3 displays
the costs of total toxic organics in those cases where
it will be necessary. Solvent disposal will ordi-
narily impose no costs; however EPA has performed a
sensitivity analysis of the impact of any such costs.
The effects are summarized in Appendix F.
(3) Independent Printed Circuit Board Manufacturers
(IPCB)
The independent printed circuit board industry
was regulated by the electroplating pretreatment
B-7
-------
regulation. Under the metal finishing regulation,
this segment could have to monitor for total toxic
organics. It is assumed that there are 371 IPCB
manufacturers that will be affected by this regula-
tion. A total of 327 are indirect dischargers and 44
are direct dischargers.
This analysis assumes that all 371 IPCBS will
baseline monitor, at a cost of $1904 each. It also
assumes that 27 percent or 108 will have to monitor
for compliance at an annual cost of $2890 per plant.
Exhibit B-3 shows the monitoring costs associated with
TTO.
5. APPLICATION OF COSTS AND SAMPLE CLOSURE
Under Option I of this regulation, job shops will only
have to incur cost of monitoring for toxic organics.
Monitoring has two components, the first is baseline
monitoring which occurs once, and the second is compliance
monitoring which occurs quarterly. The compliance date
for TTO at job shops and IPCB's is 1986. Therefore, it
was assumed that most plants will baseline monitor before
1986. In other words, expenditure for baseline and
compliance monitoring will not occur in the same year.
Exhibit B-5 shows a direct discharging plant (number
42) that was projected to close under Option II compliance
requirements. It displays the present financial condition
of the firm and the projected condition after investment
in pollution control. The capital costs for the firm were
generated by the routine and are estimated to be
$288,000. The plant will borrow 89.5 percent of that
amount. Before investment the firm's coverage ratio is
shown to be 77.7, considerably above the cut-off point of
1.5. After the investment the coverage ratio drops to
1.3, below the cut-off. This plant is projected to close,
even with an equity infusion of more than $30,000. The
displayed closure category of 1 means a closure, category
4 is an equity infusion save, and 2 means that the plant
will survive.
6. EFFECTS ON RETURN ON INVESTMENT
The job shop segment of the universe was analyzed for
investment impacts due to meeting Option I TTO require-
ments. This applies to both direct and indirect dis-
chargers. Because detailed financial information is
available for job shops, the effects of regulatory compli-
ance on the industry's average return on investment (ROI)
can be gauged.
The economic impact analysis presents the following
financial data for 28 representative model plant job shops
3-8
-------
Average sales: $1,111,000
Average Net Income: $5,000
Average net income for 21 profitable
plants: $65,000
Average net income for 7 unprofitable
plants: -$209,000
Average Assets: $603,000.
Six of the seven unprofitable plants were baseline
closures. Thus, the average net income of $65,000 for
profitable plants is assumed to be an indicator of
industry income levels.
The industry's baseline ROI, calculated as $64,000/
603,000, is 10.8 percent. Average TTO compliance costs
are $2,890 per plant for the 2.8 percent of the affected
plants. Assuming a 35 percent tax rate, this works out to
be $1,878 in actual cost per plant. Thus, the post-
compliance ROI is $62,122/603,000, or 10.3 percent. ROI
is reduced for these plants by 0.5 percent due to the
regulation. Note, however, that only 2.8 percent of the
job shops will incur these costs; 97.2 percent of the
plants incur zero costs. As a result, the overall effect
on the industry's ROI is not significant.
Option II relates only to direct discharging job
shops. For this option, annual costs per plant are
approximately $13,425. On an after-tax basis, this
represents a cost of $8,725 per plant. Thus, the
post-compliance ROI for this option is $55,275/603,000, or
9.2 percent. The average ROI decreases by 1.6 percent.
Unlike Option I, this effect will be borne by all direct
discharging job shops, for there are virtually none which
are currently in compliance with Option II requirements.
B-9
-------
EXHIBIT B-l
PROGRAM FLOWC!- \RT
BEGIN
ALLOCATE SPACES
FOR ARRAYS BY
DIMENSION STATM.
SET INITIAL VALUES
IN VARIABLES BY
DATA STATM NTS.
SET COUNTER
VARIABLES
AND POINTERS
ICROPO) = 1
ICROP(2) = 4
IF1RST = 1
1PAGE = 1
NTOT = 0
IGOOD = 0,INODO
NT = 5, NT2 = 10. N
NP2 = 9
SET SEN ARRAY
EQUAL 1.0
EOF -«
INPUT FROM LFN # NT:
ITYPE, ICRCUT, ICNCUT,
ICLCUT, IFLCUT, IFLCUT
IPHLO. IPHHIJCLO,
IPHO ARRAY, ICLFLD ARRAY
IOUT, ICNOPT, ICLNUM,
ICN2, ICN2FL.PENT1.
CREDIT ARRAY, OMM.
SELECT, HI LO
ATTHE END, GOTO EOF
READ
SELECTION
AND CONTROL
INFORMATION.;
NEXT PAGE
-------
/ READ IN
/ JOB SHOPS &
/PRINTED BOARD/
/ DATA
START READING OF RAW
DATA, READ ONE FIRM
AT A TIME; THEN
SOLVE FOR COST, AND
REPEAT UNTIL END OF
FILE. FN =NT2
READ
2 IMETAUI) > 0
AND I , IDP(I) >0
AND IPLOW > 0
SET VALUES TO
VARIABLES
CHECK FOR
COMPLETENESS OF
INFORMATION.
START COST ANALYSIS
ONF1RMSPROVIOED
COMPLETE
INFORMATION.
IFCHOSETO
IGNORE EQUIPMENT (TREATMENT)
ALREADY
IN PLACE.
IS IT A
COMPLETE
CASE?
THE FIRM MUST REPORT
ATLEASTAWATER FLOW
OF >0 AND ONE
TYPE OF OPERATION OR
USE AT LEAST ONE
METAL OTHERWISE NO
CALCULATION IS DONE FOR
THIS FIRM.
SET INDICATOR
IN COST
FOR INCOMPLETE-
NESS
INITIALIZE
IHRS = 8
RXCOST ;>
WRITE COST
ON LFN #
NP2
IGNORE EQUIPM
IN PLACE
IEQ= I INPLAC(I)
INEE = ALL1
NEXT PAGE
-------
START WITH THE
ASSUMPTION THAT
ALLTYPES OF
POLLUTION CONTROLS
ARE NEEDED.
SET ARRAY IA,
IB, IC = 1
CHECK FOR NEED OF
CHROME TREATMENT:
EITHER ANODIZING/CHROMATING
IS PERFORMED OR
CHROMIUM IS PRESENT.
ICfl = IMETAL(ICRM)
HOP (I)
YES
SET CYANIDE
TREATMENT OPTION
IFTHE FIRM DOES
NOT NEED IT,
CHECK FOR NEED OF
CYANIDE TREATMENT:
PRESENCE (USE) OF CYANIDE
CATEGORY METALS OR
OPERATION BRIGHT DIP
IS PERFORMED.
ICN=2 IMETAL(I)
HOPUCNOR)
IFTHE FIRM
DOES NOT NEED IT,
YES
NO
ASSIGN CLARIFIER
OR FILTER NEED
ACCORDING TO INOUT
INOUT: INDICATOR
FOR INTERIOR/EXTERIOR
SPACE EXPANSION.
NEXT PAGE
-------
II = 1A(4)
CHECK FOR CLARIFIED/
FILTER NEED: (CL/FU
IF ANY METAL THAT
REQUIRES CLARIFER/FILTER
IS USED
YES
IF
METALS
REPORTED DO
ASSIGN
CONTINUOUS/BATCH
PROCESSING CLARIFIER
CHECK FOR WHETHER FIRM
HAS NO METALS AT ALL
OR ONLY METALS THAT 00
NOT REQUIRE CL7FL
WATER FLOW> ICLQ
WILL BE ASSIGNED
A
CONTINUOUS CLARIFIER,
OTHERWISE BATCH.
CHECK FOR PH ADJUSTMENT
NEED:
IF ANY METAL THAT REQUIRE
PH ADJUST. IS USED.
IF FIRM HAS METALS
THAT DO NOT NEED
PH ADJUSTMENT AS DISTINGUISHED
FROM NO METALS AT ALL
IFIPHNED
0 AND
IMET>0
YES
YES
YES
ASSIGN FLOW
PERCENTAGES TO
EACH COMPONENT
FOR FIRMS WHICH
HAVE METALS THAT DO
NOTREQUIREPH AOJSTMT
NO
CHANGE
%FOR PRINTED
BOARDS
NEXT PAGE
-------
QCH-CHROME LEVEL
QCN-CYANIDE LEVEL
QCL- CLARIFIER LEVEL
QFL- FILTER LEVEL
QPH- PH LEVEL
IF THE TOTAL WATER
GENERATED PER DAY IS
LESS THAN = CUTOFF LEVEL
THEN THE FIRM 00 NOT
NEED THE TREATMENT.
ICRCUT: CUTOFF FOR CHROME
ICNCUT : CUT OFF FOR CYANIDE
ICLCUT: CUTOFF FOR CLARIFIER
ICLCUT: CUTOFF FOR FILTER
IPHCUT: CUTOFF FOR PH
99999999 IS A
CONTROL SIGNAL FOR
REMOVING THE NEED
REGARDLESS OF
ANYTHING
CALCULATED
WATER FLOW
LEVEL FOR
EACH COM PONT.
CUTOFF LEVEL
99,999,999
ADJUST FOR
CREDIT GIVEN FOR
EQUIPMENT IN PLACE
ADJUST TOTAL
NEED FOR
EQUIPMENT
(TREATMENT) ALREADY
IN PLACE.
i
f
RMULT(1) = 1.0-
CREOITfl)
INEED(1) =
INEED(2) = IA(2)+ IB(2)+ IA(3) + IB(3)
INEE013) = IA(4) + IB(4) + IA(5) IB(5)
INEEO(4) = IA(6) + IB(6)
INEED(5)-IA(7)+IB<7)
(" IF CHOOSING TO GIVE
CREDIT FOR TREATMENT
/ ALREADY IN PLACE AND ONLY
S IFTHE FIRM NEEDS
THAT TYPE OF
TREATMENT,
RIC(I) = RMULT(I)
PLACE RMULT VALUES
INTO RIC FOR
TRANSFERINGTO
SUBROUTINE COSTER.
CALCULATE
LINE SEGREGATION
COST
1)
ICOF
NEXT PAGE
INIT1ALYZELINE
SEGREGATION COST.
1) IFTHE FIRM NEEDS EQUIP
AND HAS EQUIP IN PLACE,
COST IS HALF.
2) IFTHE FIRM NEED < 2
PIECES OF EQUIPMENT, COST IS HALF
3) IF Nb~EdulplN PLACETNEED"
> 2. ASSIGN FULL COST
-------
CALL COSTER
TO CALCULATE
CAPITAL COST
CTOTAL = CTOTAL
RXTOTAL
IFWANTTO
SELECT COST AS THE
HIGHEST OR LOWEST
COMPONENTS COST,
WANT TO
SELECT THE
HIGHEST.
SEARCH FOR
LOWEST COST
COMPONENT (=LOW)
WANTTO SELECT
THE LOWEST
CTOTAL = HIGH/
LOW
NEXT PAGE
-------
ADJUST FOR
CAPITAL INCREASE/
DECREASE
1CCOROING TO CHOICE
COMPUTE
OPERATING &
MAINTENANCE
COST.
CTOTAL = CTOTAL
*PC£NT1
COMC = OMM
XCTOTAL
WRITE
RESULTS
OF ANALYSIS
EOF
WRITE OUT
SUMMARY
INFORMATION
REPORT
LISTING
-------
EXHIBIT B-2
BOOZ-ALLEN AUTOMATED
FINANCIAL CLOSURE MODEL
BEGIN
READ IN COMPUTED JOB
SHOP COMPLIANCE COSTS
PCC,, PCCj, PCC, PRO-
DUCED FOR EACH PLANT
BY THE COST PROGRAM
100
IPCB
MODEL
PLANTS
CHECK FOR COMPLETENESS
OF INFORMATION ON
440 PLANTS IN THE
DATA BASE
FOR ALL 244 MODEL
PLANTS COMPUTE KEY
VARIABLE VALUES
ALL BALANCE SHEET
ITEMS MUST BE PRES-
ENT AND BALANCE
WITHIN ± 5%.
YIELDS 244 MODEL
PLANTS
REQUIRED PRICE INCREASE TO MEET PCC
COST PASS THROUGH (CPT) PERCENT
WEIGHTED COST PASS THROUGH (CPTW) PERCENT
COMPUTE PLANT'S
CURRENT INCOME
MEASURES
COMPUTE PLANT'S
CURRENT BALANCE
SHEET POSfriON
CASH FLOW
SALES
DEPRECIATION
COVERAGE RATIO
PROFfT ABILITY
LIQUIDrTY
ASSIGN THE ANNUALIZED
POLLUTION CONTROL
COMPLIANCE COST TO
EACH MODEL PLANT USED
CURRENT ASSETS
FIXED ASSETS
CURRENT LIABILITY
LONG-TERM DEBT
NET WORTH
INDIRECT OR DIRECT
DISCHARGES CAN BE
SELECTED. PLANTS
WITH AND WITHOUT
EQUIPMENT IN PLACE FTC.
COMPUTE O&M (12% OF CAPITAL)
SET INTEREST RATE (15%)
SET LOAN REPAYMENT PERIOD (5 YEARS)
±
RECOMPUTE THE
PLANT'S INCOME
STATEMENT
RECOMPUTE THE
PLANT'S BALANCE
SHEET POSITION
INCREASE SALES BY AMOUNT EQUAL TO
THE INCREMENTAL COST OF POLLUTION
CONTROL EQUIPMENT
INCREASE OPERATING COSTS BY
DEPRECIATION AND INTEREST EXPENSE
INCREASE PROFIT AFTER TAX BY
THE INVESTMENT OF TAX CREDIT
INCREASE ASSET POSITION
INCREASE LIABILITIES
INCREASE NET WORTH
-------
CALCULATE A SET
OF FINANCIAL
PERFORMANCE
MEASURES
CASH FLOW
COVERAGE RATIO
OPERATING RATIOS
PROFITABILITY
LIQUIDITY
LEVERAGE
FOR JOB SHOPS
CALCULATE AN
"EQUITY INFUSION-
VALUE FOR EACH
PLANT < 1.5
SELECT ALL PLANTS
WfTH A PROJECTED
COVERAGE RATIO
>1.5
PCR =
1
LABEL THEM "IN
^ BUSINESS " PWp
ANALYSIS ON THIS
GROUP
P CASH FLOW
LTD + PCC
5
r
SELECT ALL PLANTS
WfTH A PROJECTED
COVERAGE RATIO<1. 5
THESE ARE THE
POTENTIAL CLOSURES
5
THE EQUITY INFUSION VALUE
IS A DOLLAR AMOUNT THAT
BRINGS THE PCR TO
AT LEAST 1.5
NO
EQUTTY
IMFUSION
FOR
IPCB
IS
OWNER'S
INCOME OVER
$28,330
IF THE OWNER'S
COMPENSATION IS AT
LEAST $28,330 WITH
THE INFUSION, THE
RULE IS THE OWNER
WILL SEEK THE LOAN
PLANT IS
ANEQUfTY
INFUSION
SAVE
IF THE OWNER'S
COMPENSATION IS
BELOW $28,300 WFTH
THE INFUSION, THE
RULE IS THE OWNER
WOULD CHOOSE TO CLOSE
PLANT IS
CALLED A
CLOSURE
-------
EXHIBIT B-3
Total Toxic Organics Monitoring Costs for Job Shops and IPCBs*
Direct Dischargers Indirect Dischargers IPCBs
Affected Affected Affected
Costs Universe Costs Universe Costs Universe
Baseline $1904 46 $1904 418 $1904 371
Monitoring
Compliance $2890 8 $2890 76 $2890 100
Monitoring
* Baseline monitoring costs are one-time expenditures affecting 15.5
percent of the job shop universe. Compliance monitoring costs
occur quarterly and may affect 2.8 percent of the universe. The
baseline monitoring costs will affect 100 percent of the IPCBs and
compliance monitoring is assumed to affect 27 percent of the
IPCBs. The assumptions for cost generation are discussed in
Chapter V.
-------
EXHIBIT B-4
Option II Capital Costs for 28 Direct Discharging Model Plants
Plant ID
37-85341
49-88571
357-85306
107-82478
50-81413
64-81761
71-83418
423-85093
416-81663
409-88938
80-82916
82-81121
110-88731
136-82003
194-85528
313-85251
176-88218
127-85436
42-82991
331-81256
284-82371
50-83301
89-83538
162-83212
250-83151
182-85493
357-83121
152-83563
G.P.D.
6
18
96
800
889
954
1000
1300
1496
2240
2494
2696
4292
4496
5000
5000
1800
9530
22990
120000
24000
80000
174900
37000
12620
1800
2700
49690
Capital Costs ($1982)
10,219
25,252
25,522
10,917
32,655
11,266
39,867
64,682
100,860
10,709
22,977
116,559
88,356
144,750
68,394
68,394
57,340
90,998
288,000
113,942
219,643
20,856
151,742
227,073
228,121
15,898
65,048
93,432
-------
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-------
APPENDIX C
CAPTIVE PLANT ANALYSIS
-------
APPENDIX C
CAPTIVE PLANT ANALYSIS
This Appendix serves to introduce the captive impact
routine, to define its key variables, cost inputs, and to
illustrate its operational flow logic. It is designed to
utilize as primary inputs the cost of compliance infor-
mation developed by the technical contractor and the
Environmental Protection Agency, and plant specific
information on 1087 captive plants gathered in the 1976
survey of the metal finishing universe. The routine was
designed by the economic contractor to best utilize
existing technical and economic data bases, in order to
project the impacts of the proposed regulation.
The routine generates information on the following:
Annual and investment costs per plant and the
universe
Projected cost increases for the universe and
each model plant
Projected plant closures and divestitures
This appendix is organized into the following sections:
Variable definitions - defines all the variables
in the computerized impact routine
Program flow chart - describes the impact
routine's logic and inputs
Costs of compliance - describes the actual cost
inputs into the impact routine and explains the
manner with which they were compiled
Summary of impacts
Effects on return on investment and international
trade.
1. VARIABLE DEFINITIONS
The variables listed below make up the captive impact
routine. Most of the variables' values were derived from
the 1976 survey of the metal finishing universe. Cost
variable inputs were derived by the technical contractor
C-l
-------
and inputed by the economic contractor. Some variables
are generated by the routine itself.
1) ID - Identification number for each plant in the
data base
2) TEMP - Total employment in each plant
3) Discharge - Direct or Indirect Discharger
4) SINGLE? - Whether the plant is a part of a
multi-plant firm
5) MFEMP - Metal finishing employment in plant
6) WATERU2 - Metal finishing process water use
7) PCC1 - Investment costs
8) MIDAVSL1 - Sales volume of the plant
9) MIDAVSL2 - Sales volume of the firm
10) PART2 - Percentage of finishing services provided
to outside customers
11) ANNLCOST - Annual per-plant and universe costs
12) PRICING - Projected increase in costs per plant
13) APRICINC - Average cost increase for entire
universe or segments of universe
14) ISO - Isolates plants according to cost increase
categories
15) MFPROD - Percentage of products that receive
metal finishing
2. PROGRAM FLOW CHART
The program flow chart (Exhibit C-l) is a guide to the
computerized impact routine and its logic. It shows the
actual steps taken to estimate candidates for closure or
divestitute, and calculates costs and cost increases. The
routine utilizes cost inputs which are exhibited in
Section 3 of this Appendix. The logic of the routine
centers around two elements:
Computation of per-plant cost increase
Decision rules for plant closures and
divestitures.
C-2
-------
(!) Computation of Cost Increases
The computation of the per plant cost increase is
simply a division of the plant's estimated annual cost
of compliance for any regulatory option by the annual
sales volume of that plant. In the program flow chart
this appears as the comparison of variable ANNLCOST to
variable MIDAVSL1. A division of the summation of all
the plants' annual costs by a summation of their total
sales yields the cost increase for the entire universe.
(2) Decision Rules for Plant Closures
Decision rules were developed to utilize existing
data and arrive at meaningful economic projections.
The decision rules to project a plant as a
closure are the following:
Any plant with a projected cost increase of
5 percent or more, and outside customers
amounting to at least 50 percent of the
total revenue
Any plant with a projected cost increase of
10 percent or more.
The decision rule for metal finishing divestitures is
that all multi-plant corporations whose metal
finishing production plant will experience a cost
increase of 10 percent or more will divest of the
metal finishing operation.
The decision rules were determined judgmentally
based on the assumption that plants with a projected
cost increase higher than the decision rules,
especially when those are higher than the industry
average will not be able to raise prices by an amount
equal to their added costs and will close down.
Exhibit C-l shows the operation of the decision
rules for plant closures and divestitures. The logic
centers around the projected cost of production
increase for a plant. That cost increase is computed
as the ratio of the annual costs of compliance and the
annual sales of the plant. In the flow chart it is
shown as the comparison of variables ANNLCOST to
MIDAVSL1. The per-plant cost increase is compared
with the weighted average cost increase of all the
sample plants. If it is lower it is dropped from
further closure consideration. All single plant
firms, those that are shown in the chart as 1:1, 2:2,
3:3, 4:4, 5:5 (the numbers stand for sales values
C-3
-------
where 1 is $1 million, 2 is $5 million, 3 is
$25 million, 4 is $50 million, and 5 is $100 million.
For example, a 1:1 firm is a single plant operation
with sales of 1 million) with higher than average cost
increases are compared with a 5 percent cost increase
cutoff. If their cost increase is higher they are
projected to close. The 5 percent cutoff was used
rather than the average because of the low industry
average (below 1 percent). Five percent was judged
appropriate due to the inelastic nature of the demand
for metal finishing. In other words, a firm could
withstand up to a five percent increase in the cost of
operation due to compliance with this regulation
without jeopardizing its economic viability.
For multi-plant corporations, i.e., those
depicted in Exhibit C-l as 1:2, 1:3, 1:4, 1:5, 2:3,
2:4, 2:5, 3:4, 3:5 (a 1:3 plant has sales of 1 million
but is part of a firm whose sales are $25 million) the
cut-off was determined to be 10 percent increase on
costs for the plant. The reason for the closure
criteria differential between single plant firms and
multi plant firms is that parent corporations conduct
in-house finishing operation for advantageous economic
reasons, i.e., cost advantages. It is in a parent
corporation's interest to maintain these advantages.
This is especially true if a metal finished good from
one profit center plant is used as an input to another
profit center plant's process.
All the results were extrapolated in a straight
line to that universe. The relationship of the number
of model plants to the actual in the universe is shown
below:
Model Plants Universe
Directs 231 2500
Total Indirects 856 7500
Indirects (under 10,000 GPD) 326 2850
3. COSTS OF COMPLIANCE
Technical cost estimates were developed by the
technical contractor and the Environmental Protection
Agency. The grouping and application of these costs was
performed by the economic contractor.
(1) Direct Discharging Captives
The technical contractor generated investment
cost estimates for 100 of its model plants that are
direct dischargers. Costs were produced for option I
C-4
-------
regulatory requirements and Option II regulatory
requirements. As discussed in Chapter V of the
report, Agency surveys determined that all 2500 direct
discharging captives have the necessary equipment to
meet Option I requirements. All direct discharging
captives will have to make additional investments to
meet Option II requirements. The technical con-
tractor's cost data for Option II was grouped by metal
finishing water use categories, it is displayed in
Exhibit C-2. The cost groupings were then matched
according to water usage with the 231 direct dis-
charging model plants in the economic data base.
In addition to the equipment-based costs gener-
ated by the technical contractor, the Environmental
Protection Agency estimated the additional per plant
costs of monitoring for total toxic organics. These
costs shown are in Exhibit C-3 and are part of the
Option I regulatory requirements. Exhibit C-4
displays a list of 231 direct discharging captive
model plants and the associated Option I costs. The
total toxic organics costs were applied randomly to
the model plant population. For example, plant number
85 in Exhibit C-4 has a flow of 60,000 GPo'. The
plant's annual Option I costs (TTO limits alone) are
estimated to be $2,890. Option II annual cost for
this plant are $26,426 as shown in Exhibit C-2.
(2) Indirect Discharging Captives
The indirect discharging segment of the metal
finishing universe was costed for -the following:
Electroplating baseline costs
Metal finising flow costs for Option I
Total toxic organics monitoring costs
Option II costs.
1. Electroplating Baseline Costs -- The tech-
nical contractor, developed costs for the
electroplating flow of 100 of their model
plants. These costs were grouped into six
water usage categories so that matching with
the economic contractor was possible.
Exhibit C-5 displays these electroplating
baseline cost groupings for integrated
indirect discharging captive plants. The
technical contractor data base showed that
there were no integrated plants under 10,000
G.P.D. Therefore, no costs were attributed
to them.
C-5
-------
2. Metal Finishing Flow Costs for Option I --
The technical contractor developed total
metal finishing flow estimates for 100 of
their model plants. These same plants were
also costed for their electroplating flow.
The technical data showed that only 26 of
the 100 model plants had metal finishing
flow beyond their electroplating water
flow. The difference between the costs
associated with the metal finishing flow and
the electroplating flow for the 26 model
plants constitute Option I compliance cost
estimates. Exhibit C-6 shows the cost of
the metal finishing portion of total flow
for the 26 integrated plants in the
technical data base. The relationship
between the cost and total plant water flow
could not be established on a per plant
basis; therefore, the costs were matched
with the 530 model plants in the economic
data base in a random fashion. Exhibit C-7
shows the cost groupings for the metal
finishing flow alone. The costs within each
water flow category were matched randomly
with Booz, Allen model plants in the same
flow category. Exhibit C-8 shows a list of
all indirect discharging model plants with
water usage greater than 10,000 G.P.D. and
their associated Option I costs. The
results were extrapolated to the universe of
1200 plants.
(1) Costs for Indirect Discharging Captives
Under 10,000 G.P.D. The technical
contractor Generated Option I com-
pliance cost estimates for this
segment. The average cost for plants
in this segment that must invest in
pollution control equipment is $12,633
annually. There are an estimated 2,850
indirect discharges with water use of
less than 10,000 G.P.D. A total of 912
have to make investments to meet
Option I compliance levels. The
remaining were found by agency surveys
to be in compliance. Exhibit C-9
shows a list of all model plants in the
economic data base with water usage of
less than 10,000 G.P.D. and their
associated compliance costs.
3. Monitoring Costs for Total Toxic Organics --
The Environmental Protection Agency
C-6
-------
developed monitoring costs for total toxic
organics. These costs are shown in
Exhibit C-2. It is assumed that 36 percent
of all indirect discharging captive
facilities will have to one-time baseline
monitor, and 6.5 percent will be required to
compliance monitor on an annual basis.
4. Option II Costs -- The technical contractor
generated Option II costs for 100 of their
indirect discharging model plants. The
incremental costs of achieving Option II
compliance levels from Option I were grouped
according to water usage categories. These
groupings are displayed in Exhibit C-10.
These costs were matched with all 856 Booz,
Allen indirect discharging model plants and
extrapolated to the universe of 7500.
4. SUMMARY OF IMPACTS
(1) Option I
No captive plant closures on divestitures were
associated with Option I compliance levels. None of
the 530 indirect discharging model plants 'whose water
use level is greater than 10,000 G.P.D had a cost
increase of greater than 5 percent. The distribution
of cost increases in percent is the following:
0-1 Percent -- 507 plants
1-2 Percent 20 plants
2-3 Percent -- 3 plants.
Only 25 of the indirect discharging captive model
plants with water usage of less than 10,000 G.P.D had
cost increases of 1.3 percent or more. The other 226
experience a cost increase of less than one percent.
(2) Option II
The distribution of cost increases for the 856
indirect discharging captive model plants in Option II
is the following:
0-1 percent -- 471
1-2 percent -- 356
2-3 percent -- 21
3-4 percent -- 7
Greater than 5 percent -- 1
One model plant out of 856 indirect discharging model
plants was projected to close under Option II. This
C-7
-------
translates into 8 plants in the universe. The cost
increase distribution for the 231 direct discharging
model plants in Option II is the following:
0-1 percent -- 149
1-2 percent 58
2-3 percent -- 19
3-4 percent -- 2
Greater than 5 percent -- 3
A total of 3 model plants had cost increases
greater than 5 percent. One model plant was projected
to close and 2 model plants projected to divest. This
translates into 10 plant closures and 21 divestitures
in the universe of direct discharging captives.
Plant number 300 in Exhibit C-4 is a direct
discharging plant with water use of 261,800 G.P.D.
Exhibit C-2 shows that his annual compliance cost for
Option II is $76,653, which accounts for more than 7
percent of the plant sales. Since this plant is a
single plant facility that provides 80 percent of its
services to outside customers it is projected to be a
closure.
5. EFFECTS ON RETURN ON INVESTMENT AND INTERNATIONAL TRADE
(1) Regulatory Effects on Investment
The analysis of the impacts on investment for the
captive sector consists of a comparison of investment
for regulatory compliance and annual fixed investment
in SIC Code 34-38. Specific financial information on
captives is not available, but aggregate annual
investment data does exist for SIC's 34-38 which
include most metal finishing facilities.
Total annual compliance investment at Option I
for captives is $116.9 million. This is compared to
total investment in plant and equipment for
SICs 34-38, estimated for 1982 by Data Resources
Incorporated, as being $46.6 billion.1 Compliance
investment is less than 0.3 percent of total industry
investment. This is a relatively small proportion of
total investment, and should not affect capital
availability or long-term capital growth in the
industry.
U.S. Long-Term Review, Data Resources, Inc.,
Table 3-8, p. 1.69.
C-8
-------
The annual Option II compliance costs for
captives are $480 million. This is approximately 1
percent of industry's total projected investment
(compared to 0.3% for Option I). This percentage of
total investment should not affect capital avail-
ability or long-term capital growth in the industry.
(2) International Trade Effect
In general, effects on international trade will
be driven by changes in the relative prices of metal
finishing products. In order to determine whether the
U.S. trade balance will deteriorate following a price
hike of U.S. export products following compliance with
the metal finishing regulation, the Marshall-Lerner
condition that the sum of U.S. impact demand elasti-
city and export supply elasticity for metal finished
products exceeds unity must hold. That is, the elas-
ticity of U.S. demand for foreign metal finished
products and the elasticity of U.S. supply for metal
finished products must add up to more than one in
order for U.S. trade deficit in these products to
persist.
Metal finishing processes are utilized as inputs
to production in many 4-digit SICs, each with unique
demand and international trade conditions. U.S.
demand for domestic and foreign metal finished
products could be estimated from a U.S. import demand
model relating import volume to relative prices of
domestic to imported metal finishing products.
However, given that the estimated increase in the cost
and thus price of domestic metal finished products is
on the order of one tenth of one percent, the impact
on international trade would be immeasurably small and
could not be detected by any economic model. In
addition, the variability in the relative prices of
international currencies due to floating exchange
rates exerts a continuous and far greater impact on
the terms of trade than a small increase in the
domestic price of the goods.
C-9
-------
EXHIBIT C-2
Option II Plant Cost Groups
Plant G.P.D.
0 -
10,001 -
25,001 -
75,001 -
200,001 -
Greater than
for Direct
Category
10,000
25,000
75,000
200,000
500,000
500,000
Discharging Captives*
Investment Cost
25,500
49,043
80,080
145,600
231,375
435,800
Annual Cost**
8,415
16,184
26,426
48,048
76,353
154,814
* The technical contracotr determined the investment cost for
treating 100 model plants. The 100 model plants were grouped into
the six water flow categories shown. The investment cost
corresponding to a particular water flow category represents the
average investment cost for plants falling within that water flow
category. The investment costs were annualized according to the
methodology specified in Appendix A.
** These costs represent the marginal cost of achieving Option II
compliance from Option I baseline.
-------
EXHIBIT C-3
COST OF MONITORING FOR TOTAL TOXIC ORGANICS FOR CAPTIVES*
Indirect Dischargers Direct Dischargers
Costs Affected Universe Costs Affected Universe
Baseline $1904 2700 $1904 900
Monitoring
Compliance $2890 487 $2890 162
Monitoring
Baseline monitoring are one time costs affecting an estimated 36
percent of the captive universe. Compliance monitoring are annual
costs affecting an estimated 6.5 percent of the captive universe.
Cost estimates provided by the Environmental Protection Agency.
The assumptions for cost generation are discussed in Chapter V.
-------
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EXHIBIT C-5
Electroplating Baseline Compliance Costs ($1982)
For Integrated Indirect Discharging Plants*
Plant G.P.D. Category
Investment Cost
Annual Cost
10,000 - 25,000
25,001 - 75,000
75,001 - 200,000
200,001 - 500,000
Greater than 500,000
121,750
191,150
273,600
597,250
1,281,500
40,200
63,100
90,000
197,000
422,900
* Costs were grouped into gallons per day categories by the economic
contractor from data on 100 model plants supplied by the technical
contractor.
-------
EXHIBIT C-6
Option 1 Investment Costs ($1982) for the
Metal
Plant ID
1063
2036
2045
4132
6084
6129
8061
9036
11123
11155
12082
17030
20173
28083
28116
28117
30063
34037
45031
45034
47035
47048
47059
47062
62032
3041
Finishing Portion Of
Water Flow (G.P.D)
114,610
350,000
69,700
216,000
108,800
51,880
21,010
23,560
29,880
31,700
40,400
479,600
383,900
25,300
836,000
36,480
425,680
89,940
607,540
81,616
781,800
54,080
254,130
19,120
198,700
311,900
Total Flow for 26 Model
Investment Cost
2,560
234,143
8,636
3,563
3,293
213,300
233
15,420
54,623
62,743
22,360
551,130
374,290
95,243
913,726
159,396
301,566
171,115
1,038,196
249,606
1,022,136
125,240
468,426
7,956
75,276
471,890
Plants*
Annual Costs
844
77,267
2,757
1,175
1,086
70,400
77
5,090
18,025
20,705
7,380
181,872
123,515
31,430
301,529
52,600
99,500
56,479
342,604
82,370
337,305
41,320
154,580
2,625
24,841
155,724
Of the 100 indirect discharging model plants in the technical data
base, only 26 had metal finishing water flow in excess of their
electroplating flow.
-------
EXHIBIT O7
Metal Finishing Plant Cost Grouping for Option I*
Plant G.P.D. Category Investment Cost
10,000 - 25,000 233
7,956
15,420
25,001 - 75,000 8,356
213,300
54,623
62,743
22,360
95,243
159,296
125,240
75,001 - 200,000 2,560
3,293
75,276
171,115
249,606
200,001 - 500,000 234,143
3,563
551,130
374,290
301,566
468,426
471,890
Greater than 500,000 913,726
1,038,196
1,022,136
Annual Cost
77
2,625
5,090
2,757
70,400
18,025
20,705
7,380
31,430
52,600
41,330
844
1,086
24,841
56,479
82,370
77,267
1,175
181,872
123,515
99,500
154,580
155,724
301,529
342,604
337,305
In the impact routine - costs were randomly assigned to plants in
the various water use categories
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EXHIBIT C-10
Option II Plant Cost Groupings
Plant G.P.D.
0 -
10,001 -
25,001 -
75,001 -
200,001 -
Greater than
For Indirect
Category
10,000
25,000
75,000
200,000
500,000
500,000
Discharging Captives*
Investment Cost
10,340
24,500
49,100
80,200
135,000
240,000
Annual Cost
3,412
8,085
16,203
26,466
44,550
79,200
These costs represent the marginal cost of achieving Option II
compliance from Option I baseline. These costs were derived from
costs generated by the technical contractor on 100 model plants.
The cost associated with each waterflow group represents the
average cost of plants that fall within that category.
-------
APPENDIX D
EFFECT OF THE BUSINESS CYCLE ON PROJECTED
METAL FINISHING IMPACTS
-------
IX
EFFECT OF THE BUSINESS CYCLE ON PROJECTED
METAL FINISHING IMPACTS
Most of the economic data on which this study is based
was gathered in the year 1976. Since the proposed regula-
tion will not take efffect until 1986, we have examined
how the metal finishing universe has performed relative to
the economy.
The vast majority of metal finishing is performed by
captive plants who can be found in many four digit SIC
industries, especially in 34 to 39. Since captives use
finishing as an input to the production process of a wide
variety of products, the durable goods sector of the econ-
omy was chosen as a proxy for metal finishing perfor-
mance. Exhibits D-l and D-2 display a comparison of real
G.N.P. and the durable goods sector of the economy for the
years 1976-1986. The exhibits show that no meaningful
discrepancies exist, as the durable goods sector followed
a pattern similar to the economy as a whole, no adjust-
ments were made to the economic analysis.
EPA performed an additional analysis of the
macroeconomic variables and forecasted the economic and
financial performance of regulated industries over
1983-1990 as a function of the macroeconomic conditions.
This analysis is presented in "Macroeconomic Conditions
and Performance of Regulated Industries," JRB Associates,
June, 1983.
There appears to be a strong correlation between
macroeconomic conditions and the production and health of
most industry sectors. Using both DRI and OMB forecasts,
macroeconomic variables are projected to return to levels
similar to the 1977-1979 period, the time period during
which most data were collected.
D-l
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-------
EXHIBIT D-2
Historical Data and Forecasts for Real GNP,
Durable Goods Output and Industrial
Production Levels Through 1986
YEAR
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
REAL GNP
(BILLIONS OF
1972 $)1
1,298.2
1,369.7
1,438.5
1,479.4
1,474.0
1,502.6
1,476.7
1,509.2
1,575.6
1,620.0
1,671.3
DURABLE GOODS
COMPONENT OF
GNP (BILLIONS
OF 1972 $)1
126.5
138.0
146.8
147.2
137.1
140.0
137.8
146.6
160.5
165.7
171.4
INDUSTRIAL
PRODUCTION INDEX
(1972 = 100) 2
109.0
115.5
122.0
127.2
122.8
126.1
116.2
119.0
128.5
134 .2
138.7
I/ Based on historical data and forecasts contained in
U.S. Long-Term Review; Winter 1982-83, Data Resources,
Inc.
2_/ Based on historical data from Business Statistics,
U.S. Department of Commerce, Bureau of Economic
Analysis, and forecasts contained in Industry Planning
Service, Wharton Econometric Forecasting Associates,
February 1983, Vol. 2, Number 2.
-------
APPENDIX E
INPUT-OUTPUT ANALYSIS
-------
APPENDIX E
INPUT-OUTPUT ANALYSIS
This appendix first sets out a framework within which
the interrelationships between consumption, production and
metal finishing requirements can be measured. Then a
method of quantifying the price relationships of the sec-
tors in an economy/ the input-output price model, is dis-
cussed.
All economic activities can be divided into two compo-
nents, final demand and intermediate production. Final
demand includes the personal consumption expenditures of
consumers, the expenditures of business for capital goods
replacement and/or augmentation, the expenditures of
government at all levels, and the net exports. Interme-
diate production represents the inter-industry transac-
tions necessary to produce the final goods and services.
The inter-industry model, termed "input-output analysis",
developed by Wassily Leontief [1] and recently estimated
for the year 1972 by the Department of Commerce, provides
the required framework [2] for estimating and analyzing
the above mentioned interrelationships.
The basic input-output structure is developed by
dividing the productive and final demand activities of an
economy into a number of sectors, which are arrayed in
matrix form. The distribution of the sales and purchases
of each industry is then estimated for each sector during
a 1-year period. As an example, Table E-l, panel (a),
shows all economic activities divided into three producing
sectors and one component of final demand. Reading across
the rows, one finds the sales (in dollars) of the output
of the sector named at the beginning of the row to the
sector named at the head of each column. Or, reading down
the column, one finds the purchases by each sector named
at the head of the column from the sector named at the
beginning of the row. Final demand can be further disag-
gregated into the components used in the national income
accounts. Thus, the total final demand for the output of
an industry is the sum of those components:
Y=C+I+G+T, (1)
E-l
-------
Table E-l. Example of Input-Output Tables
(a) Transactions table, X matrix (Dollars)
Producing
Consuming sectors
sectors agriculture
Agriculture
Manufacturing
Services
40
40
0
manufacturers services
80
40
60
0
20
20
Total inter
mediate
output
120
100
80
Total
final
demand
80
300
120
Gross
Output
200
400
200
Total inter-
mediate inputs
80
180
40
Value added
120
220
160
500
Gross inputs
200
400
200
(b) Direct requirements
Producing
sectors
Agriculture
Manufacturing
Services
Value added
Total
agriculture
0.20
0.20
0
0.60
1.00
table, A matrix (Dollars/Dollars)
Consuming sectors
manufacturers
0.20
0.10
0.15
0.55
1.00
services
0
0.10
0.10
0.60
1.00
(c) Total requirements (direct and indirect) table, S matrix (Dollars/Dollars)
Producing
sectors
Agriculture
Manufacturing
Services
agriculture
1.33
0.30
0.05
Consuming sectors
manufacturers
0.30
1.20
0.20
services
0.03
0.13
1.13
E-2
-------
where*
Y = [yjj final demand for the output of industry
i, where i = 1. . . .n/
C = [cjj personal consumption expenditure compo-
nent of final demand for industry i
output,
I = [iiJ private investment expenditure compo-
nent of final demand for industry i
output,
G = [gjj government expenditure component of
final demand for industry i output, and
T = [tjj net export component (exports minus
imports) of final demand for industry i
output.
The gross output of an industry is the sum of its
sales to other industries and to final demand:
Z = XL + Y, (2)
where
Z = [zjj gross output of industry i,
X = [*ij] sales of industry i to industry j,
where j ,= l....n, and
L = n dimensional unit vector.
Analogously, the gross input of industry is the sum of
its purchases from other industries and of value added:
Z = X'L +V, (3)
where
V = [vj_] value added by industry i, and
xi = [Xji] purchases of industry from other indus-
tries.
* Square-oracketed, lower-or upper-case subscripted
variables denote vectors or matrices.
E-3
-------
Gross national product is measured as the sura of final
demand (expenditure approach) or the sum of value added
(income approach).
Up to this point, the input-output table is essenti-
ally a system of accounting identities. However, in situ-
ations where producers are regarded as having only a
limited choice regarding factor (i.e., input) intensities
and where adjustments to shifts in demand take the form of
quantity (i.e., output) rather than price adjustments, the
transactions table can be utilized to develop a general
set of production coefficients. Specifically, a set of
technical coefficients can be derived from the transac-
tions table. A technical coefficient is defined as the
dollar input purchases from industry i per dollar output
from industry j, or
A = [aij], (4)
where
aij = xi
Thus, continuing with our example in Table E-l, panel
(b), the values in each column represent the composition
of input to the industry named at the head of the column.
To produce $1.00 of output, the manufacturing sector re-
quires $0.20 of inputs from agriculture, $0.10 from manu-
facturing, $0.15 from services, and $0.55 of valued added.
Substituting the value of Xj_j from equation (4) into
equation (2) yields the result
Z = AZ + Y. (5)
This is equivalent to
(I-A)Z = Y, (6)
where
I = the identity matrix.
From equation (6) one can find the "total requirements
matrix," S
Z = SY, (7)
where
E-4
-------
Each SJM represents the dollar output of industry is
required both directly and indirectly per dollar of final
demand from industry j.
In Table E-l, panel (c), the Sj_j elements of the
hypothetical economy are shown. Reading down the column,
eacn entry represents the output of the industry named at
the beginning of the row per dollar of final demand from
the industry named at the head of the column. Thus, to
deliver $1.00 of manufactures to final demand requires
$0.30 of output by the agriculture sector, $1.20 by
manufacturing (the $1.00 for final demand plus the addi-
tional manufacturing output required to produce the
required output of all three sectors), and $0.20 of the
output of the services sector.
The three basic input-output tables thus provide the
framework for analyzing the interrelations in an economy.
To summarize:
1. The transactions table, X matrix, shows the flows
between sectors per unit of time;
2. The direct coefficients table, A matrix, indi-
cates the direct output requirements of each sec-
tor to produce one dollar's worth of output by
every other sector; and
3. The total requirements coefficients table, S mat-
rix, indicates the total (direct and indirect)
output of each sector required to deliver one
dollar's worth of output of every other sector to
final demand.
The Bureau of Economic Analysis (BEA), U.S. Department
of Commerce has developed several input-output tables of
the U.S. economy. The latest, a 478-producing-sectors
table based on the structure of production for 1972, has
been employed in this study [2].
E-5
-------
2. PERSONAL CONSUMPTION EXPENDITURES INTERRELATIONSHIPS
One drawback of input-output tables in terms of the
objective of this study is their lack of resolution in the
final demand sectors. Specifically, personal consumption
expenditures are usually represented by a single column
vector. Because the purpose of the impact model is to
identify interrelationships between personal consumption
expenditure items and the requirements for materials pro-
duced by the affected sectors, such as metal finishing
requirements, this vector must be disaggregated into a set
of consumer expenditure items. Unpublished BEA data used
in developing the 1972 input-output table were used to
develop a "bridge" between the 478 producing sectors in
the input-output table and 477 personal consumption expen-
diture items.
Assuming there are m consumer products, one can define
aggregate expenditures on these products as
E = [era] the total dollar expenditure
on each consumer product at
retail prices. (8)
The Personal Consumption Expenditure (PCE) bridge is
the allocation of the PCE vector among the m consumer
expenditure items:
C = UL, (9)
where
C = [cjj the personal consumption expenditure
component of final demand for industry
i output,
L = [111 m dimensional unit vector, and
u = tuinJ tne dollar amount of final demand sales
from sector i required for production
or distribution of consumer product m.
Using the hypothetical economy above, suppose all
final demand was for three consumption goods which could
be disaggregated as shown in Table E-2, panel (a).
E-6
-------
(a)
Table E-2. Example of Diagrregated Personal
Consumption Expenditures Tables
Industrial composition of personal consumption expenditures table, U
matrix (Dollars)
Producing
sectors
Agriculture
Manufacturing
Services
TOTAL (E)
PCE item
123
0 80 0
200 0 100
80 20 20
280 100 120
(b) Distribution of the industrial
composition of personal consumption
expenditures table, B matrix
(Dollars/Dollars
Producing PCE item
sectors 123
Agriculture 0.00 0.80 0.00
Manufacturing 0.71 0.00 0.33
Services 0.29 0.20 0.17
TToo TToo TToo
(c) Total requirements personal consumption
expenditures table, K matrix
(Dollars/
Producing PCE item
sectors 123
Agriculture 0.22 1.07 0.25
Manufacturing 0.89 0.27 1.02
Services 0.47 0.27 0.36
Total final
demand
80
300
120
500
E-7
-------
The bridge can be converted into a set of fixed coef
ficients in a manner similar to that employed in develop
ing the direct coefficients:
= b
im
where
bim = dollar of final demand sales from sector i
directly required per dollar expenditure on
consumer product.
The distribution of the industrial composition of each
expenditure item in the hypothetical economy is shown
Table A-2, panel (b) .
Last, from equations (7) and (10) we can create a mat-
rix of the total output of each sector required per dollar
of PCE on each item:
K = SB. (11)
The final matrix, Table E-2, panel (c) , shows the out-
put (in dollars) required by each industry named at the
beginning of the row to produce and deliver one dollar's
worth of the personal consumption expenditure item named
at the head of the column.
In this hypothetical economy, private investment,
government expenditures, and net exports are zero. There-
fore, from equation (1) it is apparent that aggregate PCE
expenditures are assumed to equal aggregate income, i.e.,
C = Y. Therefore, equations (7) , (9) , and (10) can be
combined to state the further requirement that total pro-
duction in the hypothetical economy equals the sum of the
output requirements of all PCE items; i.e.,
Z = SY = SUL = SBE,
or (12)
Z = KE.
E-8
-------
3. THE PRICE SYSTEM
Input-output analysis offers a method of quantifying
the price relationships of the sectors in an economy.
Since the cost of any sector's output is composed of the
costs of the materials inputs purchased from other sectors
and such items as wages, profits, taxes, and depreciation
which are a part of value added, there are implied price
relationships in an input-output table. By defining unit
price equal to unit cost, the price relationships between
the price of different goods can be expressed as:
PI = ailPl + a2iP2 + ... anipn + vi;L1
P2 = ai2Pl + a22P2 + an2Pn + V2 2
Pn = ainPl + a2nP2 + ... annpn + vn n
(13)
where
Pi = the price of good i,
a^j = the technical coefficients,
VJL = the share of primary inputs, and
i = the price of primary inputs.
By using the equation system (7), the effects of a
price change in one sector upon the relative prices of
every other affected sector's output can be calculated
assuming each industry passes on its increased costs plus
the rise in costs of inputs purchased from other indus-
tries to final demand. For the exposition of the input-
output price model, refer to References 4 and 5.
An example of the procedure for determining price im-
pacts on the value of final demand is shown below for the
three sector economy shown in Table E-l. It is assumed
here that prices of all sectors and all primary inputs in
the base periods are equal to unity for the sake of sim-
plicity. Further, suppose the price level in manufactur-
ing increases 10 percent due to the increased costs neces-
sary to comply with the proposed standard. The problem is
to determine the new level of prices for agriculture and
services.
E-9
-------
When we assume that the prices of primary inputs in
other sectors (i.e./4>i and $3) are not permitted to
change, the relationship (13) for the three sector economy
can be easily solved as below by first transposing all the
know elements in each of the three equations to the right
hand side and the unknown variables (and their coeffi-
cients) to the left hand side. Given our assumption, the
"unknowns" are P]_, P^, and 2/ and all other elements
are known or assumed known. Thus, equation (13) for a
three sector economy, with our stated assumption, may be
written as:
P2
Pi = allPl + a3lP3 +
V2*2 = ~a12Pl ~ a32P3 + (1
P3 = a!3Pl + a33P3 + (a23P2
and solved as follows:
PI
P3
(1 - an) 0 - 331
a!2 V2 a32
-a13 0 (1 - 33)
-1
a2lP2 +
(1 - a12) P2
a23?2 + V3*3
P3J
_T
0.8
0.2
0
1.25
.455
0
Thus
.55
.
.90
X
0 0
1.818 -.303
0 1.11
PI = 1.025
P3 = 1.011, and
?2 = 1.10 by assumption,
.2(1.1) + .6(1.0)
.8(1.2)
.1(1.1) + .8(1.0)
X
.82
.88
.91
=
1.025
.951
1.0.0
E-10
-------
So the effect of a 10 percent price increase in manufac-
turing has been a 2.5 percent increase in agriculture
prices and a 1 percent increase in the price of services.
Using the share of final demand accounted for by each
sector, a cost of living index can be computed. To illu-
strate this idea, recall the total final demand column
from Table E-2, panel (1), in which the sector components
of personal consumption expenditures were as follows:
agriculture, 80; manufacturing, 300; services, 120. Thus,
total final demand, or personal consumption expenditures,
is 500, so the relative share for each sector is,
respectively,
80, 300 and 120.
500 500 500
The respective prices from the preceding example are p^
= 1.025, P2 = 1.10 and P3 = 1.01, so a cost-of-living
index, C , can be obtained as follows:
c = 1.025 80 + 1.10 300 + 1.01 120
500 500 500
or
c = 1.0664
Thus, the increase in the cost of living as a result of a
10 percent price increase in manufacturing, was 6.6
percent.
E-ll
-------
4. ESTIMATES OF PRICE IiMPACTS OF EPA REGULATIONS
The new level of prices for the 477 PCE items due to
the proposed EPA regulations are determined following the
increases of the price level of the metal finishing uni-
verse (SIC's 34, 35, 36, 37, 38, 39). Exhibit E-3 indi-
cates the estimated price increases for each 2-digit SIC.
The price impact on the major components of total final
demand in the economy is computed based on the price in-
crease in the metal finishing universe.
E-12
-------
EXHIBIT E-3
Estimated Price Increases For
2-Digit SIC's (In Percent)
SIC
34
35
36
37
38
39
Option I
0.3
0.3
0.1
0.1
0.1
0.1
Option II
0.9
0.9
0.3
0.2
0.2
0.3
-------
EXHIBIT E-4
Estimated Total Price Impact of EPA BATEA
Metal Finishing Regulations or Principle
Final Demand Components
Final Demand Sectors
Personal Consumption Expenditures
Gross Private Fixed Capital Formation
Net Exports
Total Federal Government Purchases
Percentage Price Increase
OPT I OPT II
0.01 0.02
0.005 0.01
0.01 0.02
0.007 0.01
-------
REFERENCES
1. Leontief, Wassily, Input-Output Economics, Oxford Uni-
versity Press, New York, 1966.
2. U.S. Department of Commerce, Office of Business Econo-
mics, 1972 Input-Output Structure of the U.S. Economy.
3. Bingham, T. H. and B. S. Lee, "An Analysis of the
Materials and Natural Resource Requirements and Resi-
duals Generation of Personal Consumption Expenditure
Items, "RTI Final Report No. 41U-967, Prepared for
Resource Recovery Division, Office of Solid State Man-
agement Programs, EPA, Feb. 1976.
4. United Nations, Problems of Input-Output Tables and
Analysis, New York, 1966.
-------
APPENDIX F
SENSITIVITY ANALYSES
-------
APPENDIX F
SENSITIVITY ANALYSES
This Appendix presents the results of sensitivity
analyses performed on alternative assumptions pertaining
to the metal finishing regulation. Sensitivity analyses
were performed on the following assumptions:
Wastewater monitoring costs
Total toxic organics costs
Metals and cyanide technology control costs.
1. WASTEWATER MONITORING COSTS
End-of-pipe monitoring costs currently incurred by the
regulated facilities are shown in Exhibit F-l. Munici-
palities and permit writers have discretion in specifying
monitoring frequencies. The economic analysis relies on
frequencies traditionally specified. If monitoring is
required 10 days per month, these costs will change.
Exhibit F-l shows the change in monitoring costs asso-
ciated with a monitoring frequency of 10 days per month.
The costs shown in Exhibit F-l were estimated by the
technical contractor for the various wastewater usage
categories. Per plant waste water monitoring costs were
then assigned to model plants in the economic data base by
these water flow categories. The marginal costs of
wastewater monitoring costs for the regulated facilities
were estimated by extrapolating from the model plants.
Total annual costs and impacts are shown in Exhibit F-2.
No closures or divestitures are projected to result from
the additional wastewater monitoring requirements. Thus
the change would not alter the determination that these
standards are economically achievable.
2. TOTAL TOXIC ORGANICS COSTS
Two sensitivity analyses were performed for TTO. The
first assumed an increase in the quarterly monitoring
requirement to monthly monitoring, and the second assumed
an increase in the size of the affected universe.
F-l
-------
2(a) TTO Monthly Monitoring
In this sensitivity analysis, it was assumed that
plants are required to monitor for TTO on a monthly
basis. This assumption is particularly conservative
for job shops and other small plants that have tradi-
tionally had relatively infrequent monitoring per-
iods. The number of plants that will be required to
monitor remains unchanged in this sensitivity analy-
sis. Exhibit F-3 shows the affected universe, costs,
and impacts of this analysis. It is assumed that
there will be no change in the baseline monitoring
requirement but that the annual cost of compliance
monitoring will increase from $2890 per plant to $8610
per plant. One indirect discharging job shop is proj-
ected to close as a result of additional costs.
2 (b) Increase in the Size of the Universe Required to
Monitor for TTO
It was assumed in this analysis that baseline
monitoring requirement would remain unchanged, and
that the number of facilities required to compliance
monitor would double. Thus, for job shops 5.6 percent
of the population will have to monitor rather than 2.8
percent. A total of 13 percent of captives will be
required to monitor rather than 6.5 percent, and 54
percent of IPCBs will monitor instead of 27 percent.
It was also assumed that 2.8 percent of the indirect
discharging job shops using toxic organics will have
to pay $3600 annually to dispose of the toxic
organics. The 2.8 percent figure is the number of
indirect discharging job shops which the Agency
estimates currently dump their solvents. Thus, this
sensitivity analysis also assumes that none of the
indirect discharging job shops could profitably
reclaim or recycle their solvents but instead assumes
that all would have to pay to dispose of their
solvents. This conservative assumption more than
doubles the expected annual compliance costs for the
affected universe, yet leads to no additional
impacts. Exhibit F-4 shows the costs and impacts of
this analysis. No closures or divestitures are
projected to result from the additional costs. Thus
the economic achievability of these regulations is not
altered.
F-2
-------
3. METALS AND CYANIDE TECHNOLOGY CONTROL COSTS
In this sensitivity analysis all costs associated with
the control technology of metals and cyanide were in-
creased by 30 percent. This analysis covered indirect
discharging captives under Option 1. Each plant's compli-
ance cost was increased by 30 percent and the impacts
assessed. The methodology for this impact assessment is
discussed in Chapter IV and Appendix B. The annual cost
of compliance increased from $115.6 million to $150.2
million and the investment cost from $351.0 million to
$456.3 million. No closures resulted from the 30 percent
cost increase. Again, no reassessment of regulatory deci-
sions is necessary.
F-3
-------
Exhibit F-l
WASTEWATER SAMPLING FREQUENCY AND ASSOCIATED COSTS***
Wastewater Discharge
GPP
0 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 +
Sampling Frequency
Assumed in
Regulation
12 per year
24 per year
52 per year
104 per year
156 per year
Estimated*
Current
Monitoring Costs
$1,200
$2,400
$5,200
$10,400
$15,600
For 10 samples per month
Wastewater Discharge**
GPP
0 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 - 250,000
250,000 +
Additional
Sampling
108/yr
96/yr
68/yr
16/yr
-36/yr
Additional
Cost*
$10,800/yr
$ 9,650/yr
$ 6,800/yr
$ 1,600/yr
($ 3,600/yr)
* Assumes $100 per sample 4/28/83 quote from Technical
Contractor is $80 - $100 per sample).
** Total Metal Finishing Flow.
*** Source: Development document and technical contractor
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APPENDIX G
TTO BASELINE MONITORING COSTS FOR PLANTS
WITH WATER USAGE GREATER THAN 250,000 GPD
-------
APPENDIX G
TTO BASELINE MONITORING COSTS FOR PLANTS
WITH WATER USAGE GREATER THAN 250,000 GPD
The Agency assumed that all facilities using toxic
organics will incur baseline monitoring costs (Chapter V of
the report presents estimates of the universe that will be
required to baseline monitor). All facilities using less
than 250,000 GPD in their metal finishing operations are
peojected to incur a one time cost of $1,904 for baseline
monitoring. This cost projection is based on monitoring by
taking three samples. Plants which use more than 250,000 GPD
are projected to incur additional baseline monitoring costs
of $1,904 since they are required to take six samples.* The
total additional baseline monotoring costs for plants with
metal finishing water use of greater than 250,000 GPD is
estimated to be $1.3 million. This cost will be distributed
equally among the 683 plants in the metal finishing universe
that use total toxic organics and whose water use is greater
than 250,000 GPD. Exhibit G-l on the following page displays
the additional TTO baseline monitoring costs and the number of
affected plants in each segment of the metal finishing universe.
The additional TTO costs for plants with water use greater than
250,000 GPD will not result in plant closures or divestitures.
*Sampling requirements are outlined in 40 CFR 403.12B.
-------
EXHIBIT G-l
Additional TTO Baseline Monitoring Costs For
Plants With Water Use Greater Than 250,000 GPD
Plants Greater
Than 250,000 GPD
% of Universe
% TTO Users
Affected Plants
Additional Cost
Plant Closures
DD Job Shops
0
0
15.5
0
0
0
ID Job Shops
68
2.5
15.5
11
20,944
0
IPCBs
0
0
100
0
0
0
DD Captives
525
21
36
189
359,856
0
ID Captives
1,341
17.9
36
483
919,632
0
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