r/EPA
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
EPA 440/2-84-001
February 1984
Water
Economic Impact Analysis of
Proposed Effluent Limitations
and Standards for the Plastics
Molding and Forming Industry
QUANTITY
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Economic Impact
Analysis of Proposed Effluent Limitations
and Standards for the Plastics
Molding and Forming
Industry
Prepared for
U.S. Environmental Protection Agency
Office of Analysis and Evaluation
401 M Street, SW
Washington, DC 20460
by
Meta Systems Inc
10 Kblworthy Street
Cambridge, MA 02138
February, 1984
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
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This document is an economic impact assessment of the recently proposed
effluent limitations guidelines and standards. The report is being distri-
buted to EPA Regional Offices and state pollution control 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 industrial facility that
must comply with effluent limitations or water quality standards.
The report is also being distributed by request to parties interested
in commenting on the proposed regulation. A limited number of copies of
this report are available from the Economic Analysis Staff in the Office
of Water Regulations and Standards EPA Headquarters:
401 M Street, S.W. (WH-586)
Washington, D.C. 20460
(202) 382-5397
The staff economist for this project is Ann Watkins (202/382-5387).
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Table of Contents
Section Page
Number Number
Section 1. Executive Summary 1-1
1.1 Introduction 1-1
1.2 Scope 1-1
1.2.1 Industry Coverage 1-1
1.2.2 Treatment Technology Options Considered 1-2
1.2.3 Industry Profile 1-4
1.3 Methodology, Data & Assumptions 1-5
1.3.1 Information Sources 1-6
1.3.2 Overview of Approach 1-7
1.3.3 Baseline Estimates 1-7
1.3.4 Cost Estimates of Treatment Technologies 1-7
1.3.5 Liquidity Analysis 1-9
1.3.6 Plant Closure Analysis 1-9
1.3.7 Other Impacts 1-9
1.3.8 Small Business Analysis 1-10
1.4 Economic Impact Analysis Results 1-11
1.4.1 Existing Sources 1-11
1.4.2 Small Business Analysis 1-11
1.4.3 Economic Impact on New Sources 1-11
1.4.4 Limitations 1-13
1.5 Organization of Study 1-13
Section 2. Industry Profile 2-1
2.1 Industry Overview 2-1
2.2 Industry Structure Reflected in §308 Survey 2-6
2.3 History of the Plastics Molding and Forming Industry 2-6
2.4 Growth Rates in the Plastics Molding and Forming Industry . . 2-10
2.5 Financial and Operating Ratios 2-11
2.6 Balance of Trade 2-14
2.7 Markets and Growth ForecastsBase Case 2-14
2.7.1 Plastic Packaging 2-15
2.7.2 Plastic Building and Construction Products 2-18
2.7.3 Plastic Consumer and Institutional Products 2-18
2.7.4 Plastic Electrical and Electronics Products 2-18
2.7.5 Plastic Transportation Products 2-19
2.7.6 Plastic Furniture and Furnishing Products 2-19
2.8 Baseline Projections 2-19
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Table of Contents
(continued)
Section Page
Number Number
Section 3. Economic Impact Methodology 3-1
3.1 Introduction 3-1
3.2 Baseline Estimates 3-2
3.2.1 Production Costs 3-3
3.2.2 Profitability 3-3
3.2.3 Annual Investment 3-3
3.2.4 Discount Rate, Time Horizon and Depreciation 3-3
3.3 Impact Projections 3-4
3.3.1 Plant-Level Impacts 3-4
3.3.1.1 Changes in Production Costs 3-4
3.3.1.2 Comparison to Annual Investment 3-4
3.3.1.3 Profitability 3-4
3.3.1.4 Liquidity Impacts 3-5
3.3.2 Closure Analysis 3-5
3.3.3 Industry-wide Impact of Closure Analysis 3-7
3.4 Price Increases 3-9
3.5 Employment 3-9
3.6 Community Impacts 3-9
3.7 Balance of Trade Impacts 3-9
3.8 Small Business Analysis 3-9
3.9 New Sources 3-10
Section 4. Effluent Limitations Options and Compliance Costs .... 4-1
4.1 Introduction 4-1
4.1.1 Best Practicable Control Technology
Current Available (BPT) 4-1
4.1.2 Best Available Technology Economically
Achievable (BAT) 4-1
4.1.3 Best Conventional Pollutant Control
Technology (BCT) 4-1
4.1.4 New Source Performance Standards (NSPS) 4-2
4.1.5 Pretreatment Standards for Existing Sources
(PSES) and New Sources (PSNS) 4-2
4.2 Treatment Technology Options 4-2
4.3 Current Treatment and Treatment Costs 4-3
4.3.1 Current Treatment 4-3
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Table of Contents
(continued)
Section Page
Number Number
4.3.2 Treatment Costing 4-4
4.3.2.1 Plant-Specific Costs 4-5
4.3.2.2 Treatment Costs for New Sources 4-6
Section 5. Results of the Analysis 5-1
5.1 Introduction 5-1
5.2 Impacts on §308 Survey Plants 5-1
5.2.1 Production Cost Changes 5-1
5.2.2 Profitability 5-1
5.2;3 Treatment Investment Costs Compared to Current
Annual Plant Investment 5-3
5.3 Price Changes 5-3
5.4 Impact on Liquidity 5-3
5.5 Closure Analysis 5-4
5.6 Employment 5-5
5.7 Industry Impacts Including Closure, Employment
Community, and Foreign Trade 5-5
5.8 New Sources 5-6
5.9 Small Business Analysis 5-9
5.9.1 Definition of a Small Business 5-9
5.9.2 Baseline Conditions 5-10
5.9.3 Economic Impacts Upon Small Businesses 5-10
Section 6. Limits of the Analysis 6-1
6.1 Introduction 6-1
6.2 Methodology Limitations 6-1
6.2.1 Cost Pass-Through 6-1
6.2.2 Closure Analysis 6-1
6.3 Data Limitations and Evaluation 6-1
6.3.1 Profit Rate 6-1
6.3.2 Compliance Costs 6-2
6.3.3 Annualization of Capital Costs 6-2
6.3.4 Salvage Value Estimates 6-3
6.4 Sensitivity Analysis 6-3
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List of Tables and Figures
Table Page
Number Number
Table 1-1. PM&F Industry Small Plants 1-10
1-2. Summary of Estimated Economic Impacts
of Treatment Costs on Existing Sources 1-12
1-3. Summary of Estimated Economic Impacts of
Normal Plant Treatment Costs on New Sources 1-14
2-1. Consumption of Plastics/Resins by Plastics
Molders and Formers by Process 2-4
2-2. Major Plastic Molders and Formers by Company
(Million of Ibs.) 2-5
2-3. Summary of 308 Survey Data for Wet-Process Plants
used in Economic Analysis 2-7
2-4. Plastics Molding and Forming Industry per Plant .... 2-8
2-5. Frequency Distribution of Manufacturing
Processes by Plant 2-9
2-6. Summary of Sales Dollar Distribution, Plastics
Molding and Forming Industry 2-12
2-7. Summary of Financial and Operating Ratios for PM&F
Plants of Different Sales Levels 2-13
2-8. Growth Rates for Major Plastics Product Markets in
Terms of Sales and Amount of Plastics Materials Used . . 2-22
3-1. PM&F Plants in the S308 Survey Included in
the Economic Analysis and Overall Industry Estimates . . 3-8
3-2. Normal Plant Size Characteristics by Subcategory
and by Flow 3-11
3-3. Baseline Financial and Operating Ratios
Existing Sources 3-11
3-4. Financial and Operating RatiosNew Sources 3-12
4-1. Summary of Recycle/Reuse Systems in Place in
in §308 Survey 4-4
4-2. Number of Plants with Wastewater Treatment-in-Place
in §308 Survey 4-4
4-3. Treatment Costs for 101 Direct
Discharge Plants in §308 Survey 4-7
4-4. Treatment Costs for Direct Discharge Plants in PM&F
Industry 4-8
4-4a. Treatment Costs by Subcategory 4-9
4-5. Treatment Costs per Normal New Source Direct
Discharge Plants 4-10
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Table
Number
List of Tables and Figures
(continued)
Page
Number
5-1. Industry Production Cost Changes by
Control Option 5-2
5-2. Profitability Reduction by Control Option 5-2
5-3. Treatment Investment Costs Compared to Current
Average Annual Plant Investment 5-3
5-4. Price Changes by Plant Type 5-4
5-5. Liquidity Impacts 5-4
5-6. Summary of Closure Analysis for the §308 Survey Plants. . 5-5
5-7. Number of Plant and Process Line Closures 5-7
5-8. Plastics Industry Employment Loss 5-7
5-9. Performance of New Sources 5-8
Figure Page
Number Number
2-1. Structure of the Plastics Molding
and Forming Industry 2-3
2-2. Major Economic Factors Affecting Plastics
Production (1970-1981) 2-16
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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 analyze the economic impact which could
result from the application of effluent limitations guidelines and
standards issued under Sections 301, 304, 306, 307, 308, and 501 of the
Clean Water Act to the plastics molding and forming industry.
This 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 techno-
logies within particular industrial source categories and supports certain
standards and limitations based upon an 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 treatment technologies. The
attached document supplements this analysis by estimating the broader
economic effects which might result from the application of various control
methods and technologies. This study investigates the effect of effluent
limitations guidelines and standards in terms of product price increases,
production and the continued viability of affected plants, foreign trade,
and other competitive effects.
The study has been prepared with the supervision and review of the Office
of Water Regulations and Standards of EPA. This report was submitted in
fulfillment of Contract No. 68-01-6426 by Meta Systems, Inc. and completed
in February 1984.
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Section 1
Executive Summary
1.1 Introduction and Purpose
This report presents an analysis of the economic impacts that are likely
to result from proposed effluent limitations guidelines and standards for the
Plastics Molding and Forming (PM&F) Industry. I/ The proposed regulation
includes effluent limitations guidelines and standards based on Best
Practicable Control Technology Currently Available (BPT), Best Available
Technology Economically Achievable (BAT), Best Conventional Pollutant Control
Technology (BCT), and New Source Performance Standards (NSPS), which are
proposed under authority of Sections 301, 304, 306, 307, 308 and 501 of the
Clean Water Act (Federal Water Pollution Control Act Amendments of 1972, 33
U.S.C. 1251 et. seq.,) as amended by the Clean Water Act of 1977 (Public Law
95-217). The primary economic impact variables assessed in this study
include the cost of the proposed regulation and the potential for this
regulation to cause plant closures, price changes, unemployment, community
impacts, shifts in the balance of foreign trade, impacts on new sources, and
impacts on small businesses.
1.2 Scope
1.2.1 Industry Coverage
Most of the processes by which plastics are molded and formed use little
or no water; only a small proportion of the PM&F plants use water. The
proposed effluent limitations guidelines and standards affect only those
plants that use process water (wet processes) and only those plants which are
direct dischargers (not indirect dischargers) . .?/ For regulatory purposes,
the PM&F industry is divided by- process used into two subcategories. These
are: (1) those plants with processes that use contact cooling and heating
water, and (2) those plants with processes that use cleaning and finishing
i/ This report uses the terms "plastics molding and forming" and
"plastics forming" interchangeably. Also used interchangeably here are the
terms "proposed regulation" and "proposed effluent limitations guidelines and
standards."
2/ The Agency considered establishing categorical pretreatment standards
for new and existing sources discharging pollutants to POTW's. For the
reasons discussed in the preamble to the proposed rule, the Agency did not
propose pretreatment standards for the PM&F industry. (The preamble for the
proposed PM&F rule is found in the Federal Register, 49 FR5862; Feb 15, 1984.)
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water. This impact analysis divides wet PM&F plants into three industry
groups based on the regulatory subcategories: (1) plants with processes only
in the contact cooling and heating water subcategory; (2) plants with pro-
cesses only in the cleaning and finishing water subcategory; and (3) plants
with processes in both of the subcategories. V
1.2.2 Treatment Technology Options Considered
EPA identified and considered three options for each subcategory for BPT,
BAT and NSPS. They are summarized below.
Contact Cooling and Heating Water Subcategory
Option 1: All Flows^/
Sedimentation which consists of a tank in which the velocity
of the wastewater is reduced so that solid material can
settle. This option was rejected early in the development of
the proposed rule because this technology did not effectively
control dissolved pollutants. Therefore, no costs were
developed.
Option 2: Flows 15 gpm or less
Zero discharge by 100 percent recycle of the process water
using either a tank or a chiller.
Flows greater than 15 gpm
Recycle through a cooling tower and treatment of recycle unit
discharge in a package activated sludge treatment system that
includes an equilization tank.
Option 3: Flows 15 gpm or less
Zero discharge by 100 percent recycle through either a tank
or chiller.
Flows greater than 15 gpm
Recycle through a cooling tower and zero discharge by
contract hauling of the discharge from the recycle unit.
I/ For purposes of brevity throughout the economic analysis, these three
PM&F industry groups will be referred to as: (1) plants with contact cooling
and heating only; (2) plants with cleaning and finishing only; and (3) plants
with both subcategories.
2/ "Flow" refers to a plant's average process water usage flow rate in
gallons per minute (gpm). The term "average process water usage flow rate"
is defined by the proposed regulation in S463.ll.
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Cleaning and Finishing Water Subcategory
Option 1: All flows
pH adjustment and sedimentation in a tank which reduces the
velocity of the wastewater so that solid material can settle.
Option 2: All flows i/
Recycle through a sedimentation tank and treatment of the
discharge from the recycle unit in a package activated sludge
system that includes flow equalization and pH adjustment.
Option 3: All flows
Recycle through a sedimentation tank and contract haul of the
discharge from the recycle unit.
A more comprehensive description of these treatment technology options
and associated compliance costs is contained in the Development Document. 2/
Die proposed PM&F effluent limitations guidelines and standards affect
the plastics molding and forming plants whose water contacts the plastic
material or product or contacts forming equipment that are or have been in
contact with plastic materials. Contact may occur during the molding or
forming processes (e.g., when water is used to cool the plastic forms), or
during the process of cleaning or finishing (e.g., when water is used during
cleaning or finishing to wash the product or the mold).
The plastics molding and forming industry is composed of three types of
plants. Those that:
o Primarily form and mold plastics products or parts;
o Manufacture resins as well as form or mold plastics parts;
and
o Form or mold plastics products, but whose primary products
are not plastics.
The first type of plant is sometimes termed a "custom producer" and has
3079 as a primary SIC while the second and third types are termed "captive
producers" and have 3079 as a secondary SIC. $/ For this study, estimates
of the number of each of the above types of plants are based on EPA's survey
of PM&F plants in the State Industrial Guides. According to that estimate
i/ For purposes of costing Option 2, plants with flows up to 2 gpm are
assumed to recycle and contract haul the discharge from the recycle unit
because it would cost less than an activated sludge system.
2/ EPA Effluent Guidelines Division (EGD): "Development Document for
the Proposed Effluent Limitations Guidelines and Standards, New Source
Performance Standards and Pretreatment Standards for the Plastics Molding and
Forming Point Source Category," February, 1984. Hereafter "Development
Document."
I/ For definitions of the terms "custom" and "captive", see Section 2 of
this report.
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there are 10,260 PM&F plants in the United States, of which 7,900 plants have
a primary SIC of 3079, and 2,360 plants have 3079 as a secondary SIC. These
10,260 plants have an estimated annual net sales of $36 million, I/ and
employ about 580,000 persons.
1.2.3 Industry Profile
For purposes of economic analysis, the plastics industry can be described
as using three basic steps to produce a plastics product. The first step is
synthesizing a resin or polymer from various petro-chemical feedstocks. The
second step involves formulating the resin(s) with other materials to produce
an intermediate compound. The final step involves molding and forming these
compounds into specific products using heat and/or pressure. The end forms
are either a final product (such as a plastic bag), or a component of some
larger product (such as a plastic dashboard for a car). The production of
resins, polymers, and intermediate plastics compounds is regulated by other
categorical effluent limitations guidelines. 2/ Only the molding and
forming production processes, the final step above, are covered by the
proposed PM&F regulation. 3/ Thus, this study concerns any plastics
molding and forming process that discharges or may discharge pollutants to
waters of the United States. Plastic molding and forming includes processes
that blend, mold, form, or otherwise process plastic materials into
intermediate or final plastic products. They include commonly recognized
processes such as extrusion, molding, coating and laminating, thermoforming,
calendering, casting, foaming, and cleaning and finishing. Extrusion and
blow molding are the PM&F processes most likely to use contact water.
In the 20 year period following World War II, the plastics industry
experienced rapid growth. The versatility and unique properties of plastics
enabled them to penetrate into nearly every major consumer market. Major
markets include transportation, packaging, building and construction,
electrical and electronics, furniture and furnishings, consumer and
institutional, and industrial and machinery. The two largest markets are
packaging (36 percent of plastics consumption) and building and construction
(21 percent). Many of the products within these markets are produced by
extrusion and molding. However, the industry is facing growing competition.
I/ All dollar figures in this report are in 1982 constant dollars unless
otherwise specified.
2/ The proposed regulation on the organic chemicals, plastics and syn-
thetic fibers category covers the synthesis of resins and polymers and the
formulation of intermediate plastic compounds.
2/ Molding and forming processes (e.g., extrusion and pelletizing) used by
plastic resin manufacturers to process crude intermediate plastic material for
shipment off-site are excluded from the PM&F proposed regulation and are
regulated under the organic chemicals, plastics, and synthetic fibers cate-
gory. However, plastic molding and forming processes used by plastic resin
manufacturers to process plastic materials on-site into intermediate or final
plastic products by further molding and forming are controlled by the effluent
limitations guidelines and standards for plastics molding and forming.
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During the last few years the growth and development have slowed. These
changes reflect the increasing maturity of the plastics industry (including
saturation of some major product markets) as well as changes in national
business cycles, and increasing materials prices. Foreign competition has
also affected the industry's growth. The average growth rate (in terms of
pounds of plastics produced) between 1976 and 1981 was about 6 percent per
year. During the same period, production costs increased and profitability
decreased. For 1982, profits after taxes were barely 3 percent of sales and
return on net worth was only 7 percent.
While the industry's rate of growth has slowed compared to previous
decades, the development of new grades and types of plastics materials and
improved processing technology should allow plastics to continue to penetrate
other markets. The Kline Guide predicts an industry growth rate (in terms of
pounds of plastics produced) of 7.0 percent per year between 1981 and 1986.
Higher growth rates are predicted for two markets within the industry: 11.2
percent for the electrical and electronic market (particularly plastic
housing for protection of electronic instruments and machines) and 9.4
percent in the building and construction market (plastic used in such items
as wire and cable, plumbing, wall covering and flooring). In addition, a
large growth potential exists in some segments of the packaging market. The
Bureau of Alcohol, Tobacco and Firearms, based on safety recommendations of
the Food and Drug Administration (FDA), recently approved the use of
Polyethelene Terephthalate (PET) bottles as liquor containers. Processes to
produce some of the products for these growth sectors such as the extrusion
of plastic coating on wire and cable, the extrusion of plastic pipe and blow
molding of PET bottles, are wet processes and so potentially would be
impacted by the proposed regulation.
1.3 Methodology, Data and Assumptions
This section summarizes the data, methodology, and assumptions used to
analyze the economic impacts of the proposed effluent limitations guidelines
and standards on the plastics molding and forming industry. It describes the
ways in which information on industry characteristics (from the §308 Survey
and from published sources) are used together with estimated costs of the
treatment technology options (developed by EPA in a separate study I/) to
identify plants that may not be able to afford the installation of pollution
control equipment. This section also summarizes the approaches used to
identify potential plant closures, employment, price, and other impacts on
plants in the industry. More detailed descriptions of the analytical
techniques, and assumptions used appear, where appropriate, throughout the
remainder of the report.
I/ EPA Effluent Guidelines Division (EGD): "Development Document for
the Proposed Effluent Limitations Guidelines and Standards, New Source
Performance Standards and Pretreatment Standards for the Plastics Molding and
Forming Point Source Category," February 1984. Hereafter "Development
Document."
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1.3.1 Information Source
This study is based on data from several sources. They include
government reports, text books, trade association data, the trade press,
discussions with individuals associated with the industry, and, of particular
importance, plant-level surveys conducted by EPA under authority of Section
308 of the Clean Water Act (the §308 Survey).
The §308 Survey was designed to provide accurate and current information
on some of the economic and technical characteristics of the industry's
plants. I/
All the survey questionnaires were returned directly to EPA by the
respondents, and procedures were employed to protect the confidentiality of
any data subject to such a claim in accordance with 40 CFR Part 2. These
procedures included removing the plant's identification from each
questionnaire and assigning a code number to each before processing.
Financial data were available for 384 plants in the industry that
completed survey questionnaires. Data from 101 direct discharging plants
(i.e., 20 percent of all direct discharging PM&F plants) were used in the
closure analysis. Of the remaining 283 plants in the economic data base,
data were not used for 111 plants because they do not discharge wastewater
and data were not used from another 172 plants because they are indirect
dischargers and so are not affected by this regulation. A financial profile
was developed for each of the 101 plants included in the closure analysis,
using the questionnaire data and publicly available data. Using §308 survey
data EPA also developed costs of treatment technology options for each of
these 101 plants.
Publicly available data used in this report include financial information
from the Society of Plastics Industries (SPI), 2/ FINSTAT, 2/ data from
the U.S. Census of Manufactures, 1977, i/ state Industrial Guides, the
Kline Guide to the Plastics Industry §/ and various trade publications.
I/ For other details on the §308 Survey design, see the Development
Document.
2/ The Society of the Plastics Industry, Inc., Financial Operating Ratios,
1978, 1980 and 1982.
I/ FINSTAT is financial statistical data, summarized by the firm size,
derived from Dun & Bradstreat's Financial Profiles data base and compiled by
Social and Scientific Systems, Inc., a contractor to the U.S. Small Business
Administration's (SBA) Office of Advocacy. SBA provided summaries of the data
for EPA's use.
I/ U.S. Department of Commerce, Bureau of Census, 1977 Census of
Manufactures.
I/ C. H. Kline & Co., Inc., The Kline Guide to the Plastics Industry,
Fairfield, NJ, 1982.
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1.3.2 Overview of Approach
In general, effluent limitations guidelines and standards impose added
costs on plants in the industry. These costs include capital expenditures on
pollution control equipment (fixed costs) and operating and maintenance
expenses (variable costs), both of which cause the average production costs
of a plant to increase. Under such conditions, plant owners have the
following options:
o Raise the price of their products and pass through the
increased costs to purchasers;
o Absorb the increase in costs; or
o Shut down the operation and go out of business.
The approach of this study is to examine the impact to the
industry given that one of these were to occur. Other impacts such
as employment, community, and foreign-trade effects are evaluated
based on impacts of the proposed effluent regulation on the
industry.
1.3.3 Baseline Estimates
Baseline estimates are used in this analysis to represent the
economic characteristics of the PM&F industry in 1985-86 absent the
proposed effluent limitations guidelines and standards. The
difference between the baseline estimates and the estimates of the
economic characteristics of the PM&P industry with the proposed
regulation represents the incremental impacts that can be attributed
to the proposed regulation.
1.3.4 Post Estimates of Treatment Technologies
The treatment technology control systems, costs, and effluent
limitations guidelines and standards proposed for the plastics
molding and forming industry were derived in a separate analysis by
EPA. A comprehensive description of the methodology and the
recommended technologies and costs are provided in the EPA's
proposed Development Document for Effluent Limitations Guidelines
and Standards for the Plastics Molding and Forming Point Source
Category. EPA identified and considered three technology treatment
options for BPT, BAT and NSPS as summarized above.
This report analyzes the economic impact of these costs on three
groups of existing plants in the plastics molding and forming
industry. These include: (1) those plants with processes only in
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the contact cooling and heating water subcategory; (2) those plants with
processes only in the cleaning and finishing water subcategory; and
(3) those plants with processes in both subcategories.
The EPA estimated wastewater treatment costs for 101 direct discharging
plants based on engineering estimates of treatment costs for each applicable
option. Adjustments are made for those plants with treatment-in-place. If
the technology treatment option includes recycling water, the quantity of
water recycled or reused is estimated and multiplied by $1.07/1,000 gal i/
to obtain the value of water savings. For options other than 100 percent
recycle, monitoring costs are added to the treatment costs. The monitoring
costs are $6,000 per year for plants with water use equal to 100 gpm or
more, and $600 per year for plants with water use less than 100 gpm. EPA
assumes that the cost per sample is $50 and that plants with water use of
100 gpm or more will monitor the effluent ten times per month and plants
with water use less than 100 gpm will monitor once every month. The total
annual costs are the sum of the amortized capital costs and the operation
and maintenance costs (O&M). Capital costs are amortized assuming a cost of
capital of 10 percent over 10 years for reasons explained in Section 3. The
treatment costs for each industry group have been extrapolated from the
plant-specific costs to estimate the costs for the 501 direct dischargers
which represent the impact of the proposed regulation on the entire PM&F
industry.
Treatment technology costs for new sources were developed in a manner
similar to that for existing plants. These estimated costs apply to all new
sources regardless of whether they result from major modifications of
existing facilities or are constructed as greenfield sites. The
technologies considered for new sources are the same as those for existing
sources.
Comparing estimated costs for the treatment technologies to expected
revenues, the Agency developed a high- and a low-flow "normal" plant for each
of the two subcategories.2/ A normal plant is a theoretical plant that
has the operations covered by the subcategory and production that is the
average level of production in the subcategory. Section XII of the
Development Document presents in detail the composition of the plastics
molding and forming "normal" new source plants. $/
i/ National average of industrial water supply costs from Office of
Analysis and Evaluation, U.S. Environmental Protection Agency, Analysis of
Water Supply and POTW Wastewater Treatment Changes, November 1983.
2/ The Agency did not develop a normal plant with processes in both
subcategories.
/ Section XII of the Development Document uses the terms "small" and
"large" to refer to "low-flow" and "high-flow" normal plants. However, in
this economic analysis, the terms "small" and "large" are used only to
describe plant size in terms of employment.
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1.3.5 Liquidity Analysis
The liquidity analysis focuses on the ability of plants to finance
capital investment from their current cash flow, without relying on outside
sources of capital. An implicit assumption in this approach is that if a
plant can invest in pollution control and still remain profitable, given the
current cost of capital, the capital market would also be willing to provide
the money for the pollution control investment. The liquidity analysis
estimates pre-tax income before treatment costs and assumes that a pre-tax
income greater than treatment costs enables a plant to pay for treatment
costs from current cash flow.
1.3.6 Plant Closure Analysis
In general, the proposed regulation will force a rational plant owner to
decide: (a) whether to make an additional investment and incur additional
fixed and operating costs or; (b) to sell the plant. The alternatives
available to the owner are to:
o Sell the planteither as an operating entity or as scrap;
or
o Make the investment and realize the value of the cash flows
expected from remaining open.
Because a plant will remain open for several years if the owner invests
to meet the proposed effluent limitation guidelines and standards, the
analysis takes into account the present value of cash flow over the life of
the plant (with treatment) plus the terminal salvage value (salvage value at
the end of a plant's useful life) and compares that to the current
liquidation value of equity for the plant. If the present value of the cash
flow plus the terminal salvage value is greater than the current salvage
value of the plant, then the plant is worth more open and operating than it
is closed. However, if the current salvage value is greater, a rational
plant owner will close the plant and sell it for the salvage value. To
estimate salvage value, the Small Business Administration's FINSTAT data are
used to obtain two ratios for the industry in SIC 3079: (1) total assets to
sales; and (2) total liabilities to total assets. Tte ratio for the firms in
the FINSTAT data are ranked. For reasons explained in detail in Section 3,
the ratio at the 75th percentile (with a value of .685) is used to repre-
sent the industry-wide assets to sales ratio and the median of the total
liabilities to assets ratio (with a value of .292) is used as the industry-
wide value.
1.3.7 Other Impacts
Prices. Price changes are estimated for each of the three groups of PM&F
plants. It is calculated as the ratio of treatment cost to plastics sales.
This analysis assumes all cost changes are passed through to consumers.
1-9
-------
Thus, the price change is the maximum that would be estimated from this
regulation.
Employment. Unemployment is estimated directly from the plant closure
analysis. Community impacts are assumed to occur as a result of employment
losses and plant or process line closures.
Foreign Trade. Impacts on the U.S. foreign trade balance are analyzed
based on estimated changes in price and production resulting from treatment
costs.
1.3.8 Small Business Analysis
Public Law 96-354, known as the Regulatory Flexibility Act, requires EPA
to determine if a significant impact on a substantial number of small
businesses occurs as a result of the proposed regulation. If there is a
significant impact, the act requires that alternative regulatory approaches
that mitigate or eliminate economic impacts on small businesses must be
examined. This section addresses these objectives by identifying whether or
not small businesses in the plastics molding and forming industry are
significantly impacted by the proposed"regulation.
The definition of a small business is not precise or universal. The
Small Business Administration (SBA) definition of "small business" generally
means a specific number of employees for each manufacturing industry by
Standard Industry Classification (SIC). For businesses, "small" is limited
in SBA regulations by dollar amount of gross sales. In this analysis number
of employees is used to determine size.
The plants in this analysis have been ranked by total number of employees
and by number of employees engaged in plastics molding and forming. These
plant rankings are then compared with their corresponding measures of impacts
due to the regulation to determine whether a significant correlation exists
between size and the seriousness of the economic impacts. For purposes of
this analysis, a small plant is defined as one having 70 or fewer employees.
Table 1-1 shows the characteristics of this plant among the § 308 Survey
plants.
Table 1-1.
PM&F Industry
Small Plants
Number of Direct I Typical Small PM&F Industry Plant
Discharge §308 Survey Plants | (Based on Median Values)!/
Total I "Small" (Flow (gpm) I Employment | Sales ($1,000)
101 46 16.7 27 1,470
I/ This typical small plant represents the entire industry and is based
on employment.
Source: §308 Survey.
1-10
-------
1.4 Economic Impact Analysis Results
1.4.1 Existing Sources
The results of this analysis are presented for plant level impacts, price
increases, closure, employment, community impacts, foreign trade, small
businesses, and new sources. The impact of treatment costs at the plant level
are measured by production cost increases, profitability changes, and a
comparison of treatment costs to average annual investment. The results are
shown in Table 1-2.
1.4.2 Small Business Analysis
A comparison of the number of plastics employees with the change in
return on investment (ROI) due to compliance costs shows that for all three
technology options, and all three industry groups, smaller plants generally
have larger changes in ROI. The same comparison for total employees at a
plant yields the same results. Since regulatory Options 1 and 2 will not
result in plant closures in any of the three industry groups, the analysis
indicates that all plants, including the smaller ones, can afford the costs
of these regulatory options. I/ The impacts associated with Option 3,
however, are higher for two industry groupings: (1) contact cooling and
heating; and (2) cleaning and finishing. Since the level of impact is
significant and since smaller plants tend to have larger impacts, Option 3
for both subcategories would place a burden on smaller entities.
1.4.3 Economic Impact on New Sources
Since options considered for NSPS are the same as the options for exist-
ing sources, there are no barriers to entry caused by the proposed regulation.
The results of the new source analysis presented in Table 1-3 are indications
of how normal plants would perform with the addition of treatment costs under
the three regulatory options by flow size. The performance of highland low-
flow normal new plants in the contact cooling and heating and cleaning and
finishing subcategories is shown.
=/ Note that the small plants mentioned here are not the same as the
small "normal" plant described as a new source in Section XII of the
Development Document. The definition of a small plant, for purposes of this
small business analysis, is based on the number of employees per plant. In
the Development Document's description of "normal" new source plants, small
refers to the size of a plant's flow rate. These two "small" plants are not
the same because a small plant (in terms of number of employees) does not
necessarily have a small flow.
1-11
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-------
1.4.4 Limitations
The possible limitations of the methodology and data used in this analysis
are reviewed. The magnitude of these possible limitations is examined using
sensitivity analysis. The parameters-tested in the sensitivity analysis are
the profit rate, compliance costs, cost of capital, and salvage value esti-
mates. The results of the sensitivity analysis for plants with contact
cooling and heating only, and plants with cleaning and finishing only, show
that from the standpoint of plant closures, the impact analysis is not very
sensitive to changes to any of the parameters mentioned above.
1.5 Organization of the Study
The remainder of the study is organized in five sections. Section 2
provides a description of the plastics molding and forming industry as well as
of the past and expected future performance of its firms. The complete
methodology of the study is discussed in Section 3. Section 4 details the
costs of the alternative treatment technologies being considered. Section 5
presents the findings of the economic impact analysis, and Section 6
summarizes the limitations of the analysis.
1-13
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1-14
-------
Section 2
Industry Profile
2.1 Industry Overview
This section examines the structure of the plastics molding and forming
industry and prevailing market conditions for PM&F products because these
factors influence the industry's ability to afford additional capital outlays
for pollution control equipment.
For purposes of economic analysis, the plastics industry can be described
as using three basic steps to produce a plastics product. The first step is
synthesizing a resin or polymer from various chemical feedstocks and
intermediate chemicals such as ethylene, ammonia, or methane. The feedstocks
originate from raw materials such as petroleum, natural gas and coal. The
second step involves formulating the resin(s) with other materials to produce
an intermediate compound. The final step involves molding and forming these
compounds into specific products using heat and/or pressure. The production
of resins, polymers, and intermediate plastics compounds are regulated by
other categorical effluent limitations guidelines.i/ Only the molding and
forming production processes, the final step above, are covered by the
proposed PM&F regulation. 2/
This study concerns any plastics molding and forming process that
discharges or may discharge pollutants to waters of the United States.
Plastics molding and forming includes processes that blend, mold, form or
otherwise process plastic materials into intermediate or final plastic
products. They include commonly recognized processes such as extrusion,
molding, coating and laminating, thermoforming, calendering, casting,
foaming, and cleaning and finishing. Extrusion and blow molding are the PM&F
processes most likely to use contact process water.
=/ The proposed regulation on the organic chemicals, plastics and
synthetic fibers category covers the synthesis of resins and polymers, and
the formulation of intermediate plastic compounds.
£/ Excluded from the proposed PM&F regulation are plastics molding and
forming processes (e.g., extrusion and pellitizing) used by plastics resin
manufacturers to process crude intermediate plastic material for shipment
off-site. These processes are regulated under the organic chemicals,
plastics, and synthetic fibers category. However, plastics molding and
forming processes used by plastic resins manufacturers to process plastic
materials on-site into intermediate or final plastics products by further
molding and forming are controlled by the effluent limiations guidelines and
standards for plastics molding and forming.
-------
As illustrated in Figure 2-1, the plastics molding and forming industry
is composed of three types of plants. Those that:
1. Primarily form and mold plastics products or parts;
2. Manufacture resins as well as.form and mold plastics parts;
3. Form and mold plastics products, but whose primary products are not
plastics.
The first type of plant is sometimes termed a "custom producer"!/ and has
3079 as a primary SIC. The second and third types are termed "captive
producers"2/ and have 3079 as a secondary SIC. Based on a random five
percent sample from State Industrial Guides^/ there are approximately
10,260 plastics molding and forming plants in the United States, of which
7,900 plants have a primary SIC of 3079, and 2,360 plants have 3079 as a
secondary SIC. These 10,260 plants employ about 580,000 persons and have
estimated annual sales of $36 billion. This economic analysis is based on
the Agency's estimates that 18.5 percent of these plants have wet processes
and 26.4 percent of the wet plants are direct dischargers. Thus, the Agency
estimates that 501 PM&F plants have wet processes and are direct dischargers;
these 501 plants may be affected by the proposed limitations guidelines and
standards, kj
Many of these plastics molding and forming plants perform two or more
processes. Based on information from the 1983 EPA §308 Surveys, on average
there are two processes per plant. Extrusion and injection molding were the
most frequently used processes among plants responding to EPA's §308 Survey.
These two processes account for 66 percent of plastic resin consumption (see
Table 2-1). Extrusion and injection molding also appear frequently in
Table 2-2 which presents a list of major plastics molding and forming
companies, including the number of plants they operate and the amount of
resins they use.
Concentration ratios measure the degree to which production in a given
industry is controlled by a few companies. These ratios are calculated in
terms of value of shipments or number of plants. They are available for only
that part of the plastics molding and forming industry which is represented
in SIC 3079, custom producers. According to U.S. Census of Manufactures
data, the custom plastics molding and forming industry is not very concen-
trated: the top four firms account for only 7 percent of shipments and 0.7
percent of all establishments.
I/ "Custom" refers to manufacturing a product to a specific order for
another company.
U There is no universally accepted definition of the term "captive
producer". The 1982 Kline Guide identifies "captives" as those plants that
manufacture resins and also produce some, plastic parts. The Society of the
Plastics Industries (SPI) uses the term "proprietary" instead of "captive."
In this analysis, a "captive" is defined as any plant that forms or molds
plastics, but whose primary product is something other than plastics products.
2/ These Guides list the companies and manufacturing facilities by state.
i/ See the Development Document for a discussion of how these percentages
(18.5% and 26.4%) were derived.
2-2
-------
Figure 2-1.
Structure of the Plastics Molding
and Forming Industry
85%
100%
Plastics Materials
15%
Merchant
Shipments
60%
Captive Molding and
Forming by Basic
Plastic Resins Suppliers
e.g., Dupont Polymer
Products Plant
40%
Captive Molding & Forming
by Other End-Product
Industries
e.g., Ford Motor Company's
Milan Plastics Plant!/
Custom Plastics
Molders and Formers
e.g., Westchester
Plastics
i/ In addition to motor vehicles, these plants often are found in
industries which manufacture metalworking machinery, electronic components,
medical instruments and supplies, and toys and sporting goods.
Source: Adapted from The Kline Guide to the Plastics Industry, 1982.
2-3
-------
Table 2-1. Consumption of Plastics Resins
by Plastics Molders and Formers by Process
1
1
Percent of 1
Total Resin I
Process Consumption I
Extrusion 44.7
Injection molding 21.7
Blow molding 9.4
Reinforced plastics
(open molding) 4.3
Other molding 5.2
Foaming 7.8
Calendering 2.7
Casting 2.1
Laminating
(structural) 2.1
Total 100.0%
1 1
I/ Major Market Key:
CI = Consumer and Institutional
Pk = Packaging
T = Transportation
EE = Electrical and Electronics
BC = Building and Construction
F = Furniture and Furnishings
Average
Annual
Percent
Increase
1976-81
3.9
2.0
13.8
5.2
8.0
1.3
(0.1)
0.4
Major a
Market"
Pk, BC, CI, EE
CI, Pk, T
CI
T, BC, CI
BC, CI
CI
CI, Pk
EE, T, F
Source: The Kline Guide, 1982.
2-4
-------
Table 2-2. Major Plastics Holders and Formers by Company
(Million Lbs.)
Corporation
(Number of PM&F Plants) -
General Motors
(11 plants)
Western Electric (8)
Mobil (10)
Ford (7)
Car Ion (Indian Head) (7)
Ethyl (16)
Union Carbide (3)
General Electric (4)
Exxon (4)
General Tire (6)
American Hoechst (5)
Crown Ze Her bach (4)
Bemis
St. Regis (5)
Dart & Kraft (6)
Amoco (Standard Oil,
Indiana) (8)
Bo r den (4)
W.R. Grace (2)
Arco (4)
Owens-Illinois (5)
Firestone
Hancor
Monsanto (2)
Phillips Petroleum (6)
Presto (Coca-Cola)
3M
I Approximate Annual
1 Consumption of
1 Plastic Polymer
/ | (million Ibs)
455
395
370
335
305
300
285
190
180
180
175
140
135
135
130
120
120
115
110
105
100
100
100
100
100
i 10° i
Principal
Process
Injection
Extrusion
RIM
Extrusion
Extrusion
Injection
Calendering
RIM
Extrusion
Extrusion
Blow molding
Injection
Extrusion
Injection
Extrusion
Injection
Extrusion
Extrusion
Extrusion
Extrusion
Injection
Blow molding
Calendering
Extrusion
Extrusion
Blow molding
Calendering
Extrusion
Extrusion
Extrusion
Extrusion
Casting
1
1
1 Principal
I Product
Auto parts
Wire/cable
Film
Auto parts
Conduit
Film
Bottles
Jars, closures
Film
Appliance parts
Film
Auto parts
Packaging
Film
Packaging
Film
Housewares
Bottles
Wall coverings
Film
Film
Bottles
Film
Pipe
Film
Pipe
Film
. Film
±/ May not include all plastics forming plants of the listed corporations.
Source: The Kline Guide.
2-5
-------
2.2 Industry Structure Reflected in S308 Survey
The proposed effluent limitations guidelines and standards apply to
plastic molding and forming plants that have wet processes and are direct
dischargers.^/ For regulatory purposes, as described in the Development
Document, the wet process plants are divided into two subcategories based on
the type of wastewater generated. Subcategory 1 consists of contact cooling
and heating water from PM&F processes. Subcategory 2 consists of cleaning
and finishing water from PM&F processes. Plants may fall into one or the
other, or both, of the subcategories, depending on the type of PM&F processes
at the plant.
Information from EPA's §308 Survey on the wet process plants used in the
economic analysis is summarized in Table 2-3. The Development Document
describes the §308 Survey and the sampling procedures used. As shown in the
table, the majority of wet-process plants generate wastewater only from
contact cooling and heating processes; slightly over one-quarter are direct
dischargers; and over one-half attribute all their sales to plastics molding
and forming.
Table 2-4 presents minimum, maximum and average measures of plant
employment, production and sales as well as number of plastics materials
used, processes, and products produced for plants responding to the §308
Survey. On average, each plant employs 119 plastics workers, and produces
between one and two types of plastic products. The value of shipments per
employee during 1982 is $89,000 2/ an(j is lower than other sectors of the
plastics industry. For example, the capital-intensive plastics materials and
resins industry has a sales to employee ratio which is nearly three times
larger.
A summary of the frequency distribution of manufacturing processes for
the §308 Survey plants is presented in Table 2-5.
2.3 History of the Plastics Molding and Forming Industry
Major plastics materials were initially developed in the 1930's and
1940's. The demand for plastics products increased greatly during World War
II because they served as excellent substitutes for materials, such as
natural rubber and copper, that were in short supply. Following the war, the
plastics industry invested enormous sums in research and development of new
and more efficient polymerization processes, new low-cost basic manufacturing
I/ The Agency considered establishing categorical pretreatment standards
for new and existing sources discharging pollutants to the POTWs. For reasons
discussed in the preamble to the proposed rule (49 FR5862; Feb. 15, 1984}, the
Agency did not propose pretreatment standards for the PM&F industry.
y In contrast, SPI (1983) reports that the sales per employee is
$63,000 during 1982. This discrepancy may be due to the fact that SPI
estimates are calculated based on median data, while §308 Survey estimates
are based on average data and are only for wet process plants.
2-6
-------
Table 2-3. Summary of §308 Survey Data for Wet-Process Plants
Used in the Economic Analysis^/
Table 2-3a. Distribution of Plants by Industry Group
1 Plants With 1 Plants With 1 Plants I Total
1 Contact Cooling 1 Cleaning and I With Both I Number of
. and Heating Only. Finishing Only . Subcategories . Plants
Number
Pe rcent
Number
Percent
317 43
1 1 1
83 11
Table 2-3b. Distribution of Plants by
II II
1 | Indirect 1 Zero |
1 Direct I Only I Only I
101 160 111
II II
26 42 29
24 384
1
6 100
Discharge Status
Both Zero 1 Total
and I Number of
Indirect 1 Plants
12 384
1
3 100
Table 2-3c. Number of Plants with 100 Percent
of Sales Attributable to Plastic Molding and Forming
Number
Percent
Number
1 Yes 1 No
1 1
. 203 181
53 47
Table 2- 3d. Number of Plastics
and Forming Employees
1 No. Plants I Mean I
1 with Employ- I Employ- I Median
1 ment Data 1 ment I Employment
355 130 57
1 1 1
1 Total Number
1 of Plants
i 384
100
Molding
1 Maximum 1
1 Employ- 1 Minimum
1 ment 1 Employment
2,844 1
1 1
I/ Compiled from EPA S308 Survey data of the Plastic Molding and Forming
Industry.
2-7
-------
Table 2-4. Plastics Molding and Forming Industry Data
per Plant
1
Total Employment
Plastic-related
Employment
Total Production
(Thousands Ibs. )
Total Sales
(1,000 1982$)
Plastics Sales
(1,000 1982$)
Plastics Sales
per Plastics Employee
(1,000 1982$)
No. Plastics Materials
Used
No. Processes
No. Product Groups .
Maximum 1
8,672
2,600
450,000
570,216
277,441
107
10
9
6
1 Minimum I
2
1
4
106
26
26
1
1
1 1 1
Average
428
119
23,682
32,809
10,586
89
2.2
1.7
1.4
Source: Compiled from EPA §308 Survey data of the Plastics Molding and
Forming Industry.
2-8
-------
Table 2-5. Frequency Distribution of Manufacturing
Processes by Plant
I No. Plants reporting
Process I use of the process
Extrusion, including Compounding
and Palletizing 140
Molding 42
Coating and Lamination 16
Thermoforming 6
Calendering 4
Casting 3
Foaming 1
Cleaning and Finishing 29
Total Number of Processes . 241
Source: Compiled from EPA §308 Survey data from 158 plants in the Plastic
Molding and Forming Industry.
2-9
-------
processes, and faster, larger molding and forming equipment. These new
processes and the versatility and unique properties of plastics led to the
development of an array of new plastics products that penetrated major
consumer markets. The major markets include: transportation, electrical and
electronic products, furniture and furnishings, consumer and institutional
products, and industrial products and machinery. Currently, the largest
market for molded and formed plastic products is packaging (e.g., trash bags,
liners, wraps, lids, cushioning and strapping) which accounts for 36 percent
of plastic resin consumption. The second largest market is building and
construction products (e.g., pipes, fittings, and conduits) which account for
21 percent of plastic resin consumption.
2.4 Growth Rates in the Plastics Molding and Forming Industry
During and immediately after World War II, production of plastics grew at
a phenomenal rate. During this period, the United States had secure access
to ample and relatively inexpensive oil supplies, from which plastic
materials could be synthesized. Plastics products provided stiff cost
competition to products made out of traditional materials such as wood,
metal, paper, and glass.
Growth rates declined during the most recent decade. The compound growth
rate for the period 1956 to 1961 was 11.6 percent, and for the 1961 to 1966
period it was 15.4 percent. =/ However, the compound growth rate fell to
8.3 percent in the next five year period and has been around 6.5 percent
since 1971. The changes in the plastic industry's growth rate reflect its
increasing maturity. Some major product markets, such as phenolic adhesives
and coatings for building and construction products, are saturated.
The competition between products is intense. Not only do plastics
forming and molding companies compete with each other for the same markets,
but they compete with other industries producing highly differentiated
products for the same applications. For example, plastic products compete
with paper for packaging uses and with metal in transportation, industrial,
and building construction uses.
Some of the change in growth rate is attributable to recent economic
recessions. Two of the major markets for plastic products: (1) transpor-
tation; and (2) housing and construction, are very closely tied to national
business cycles. When these two sectors decline, the demand for the plastic
products by these sectors also declines. These factors, along with increas-
ing material prices and foreign competition contributed to decreases in the
PM&F industry's growth rate. Profitability also declined. For 1982, profits
after taxes were barely 3 percent of sales and return on net worth was only 7
percent.2/
.=/ These figures are based on production levels for plastic resins and
materials since comparable figures for molded and formed plastic products are
not available. Most of the plastics materials produced are used by the
plastic molding and forming industry, so they have grown at similar rates.
^/ The Society of the Plastics Industry, Inc., Financial and Operating
Ratios, New York, NY, 1983.
2-10
-------
2.5 Financial and Operating Ratios
Based on information provided by SPI,i/ plastics molding and forming
companies enjoyed the best performance of recent decades in 1974 and 1977.
Since 1978, profits after taxes have fallen even though sales have continued to
increase, except in 1982 when sales also decreased. Table 2-6 presents the
distribution of the PM&P industry sales dollar by major components for three
years (1978, 1980, and 1982). The largest expense component is material costs
(about 43 percent of sales), with factory overhead (about 27 percent) and
direct labor (about 13 percent) ranked as second and third. The average
after-tax income is about 2.9 percent of sales for the PM&F industry as a whole
and is higher for captive (3.3 percent) than for custom (2.6 percent) opera-
tions. Aside from showing decreasing profits, the figures of the table reveal
an upward trend in material costs and administrative expenses. Custom opera-
tions have higher direct labor and factory overhead than captive operations,
while selling expenses are higher for captive operations. A comparison of SPI
data on "taxes" and "after-taxes income" shows that the PM&F industry pays
about 36 percent of its income for taxes. 2/
The SPI also reports survey data by plant sales. Table 2-7 highlights some
statistics for plants with sales below $5 million and for plants with sales of
$5 million or more. Although "depreciation and other fixed expenses" data are
not complete, available figures indicate that fixed costs represent about 4 to
6 percent of sales. Depreciation data are historical costs and, therefore,
must be recapitalized for accurate interpretation. As a first approximation,
assume a 60 percent upward adjustment to account for inflation; this results in
fixed costs to sales ratios of about 7 to 10 percent. This indicates that the
industry is not capital intensive.
Production costs in Table 2-7 are the expenses shown as the first five
items in Table 2-6, except that freight out and warehousing, research and
development, and miscellaneous income and expenses, as defined by the SPI, are
subtracted. Table 2-7 shows that plants with sales of $5 million or more are
less costly to operate and are more profitable than plants with lower sales.
Return on equity varies between 5.1 and 10.5 percent with an industry- wide
average of 8.5 percent for plants with sales less than $5 million and 10.5
percent for plants with sales of $5 million or more. Overall, the captive
plants are more profitable than custom operations.
The Society of the Plastics Industry, Inc., Financial and Operating
Ratios, 1978, 1980, and 1982.
=/ Society of the Plastics Industry, Inc., Financial and Operating
Ratios, 1982.
2-11
-------
Table 2-6. Summary of Sales Dollar Distribution
Plastics Molding.and Forming Industry
1
1
Date I
1978
1
1980
1
1982
1
Average
1
1 Type of Operation
Item
Material Costs
Direct Labor
Factory Overhead
Selling Expenses
Administrative Expenses
Taxes
After Taxes Income
Material Costs
Direct Labor
Factory Overhead
Selling Expenses
Administrative Expenses
Taxes
After Taxes Income
Material Costs
Direct Labor
Factory Overhead
Selling Expenses
Administrative Expenses
Taxes
After Taxes Income
Material Costs
Direct Labor
Factory Overhead
Selling Expenses
Administrative Expenses
Taxes
After Taxes Income
1 Industry 1
f as a Whole)
42.3
13.4
26.8
4.2
7.6
1.7
4.0
1 1
43.5
13.3
26.9
4.7
7.7
1.9
2.1
1 1
44.1
12.1
26.6
4.7
8.7
1.3
2.5
1 1
43.3
12.9
26.8
4.5
8.0
1.6
i 2.9 .
1 1
1
Captive -i/ |
42.4
12.8
23.5
6.9
7.2
2.5
4.7
1
44.4
10.8
26.9
5.0
7.1
1.9
2.1
1
43.0
10.4
27.1
5.0
9.5
1.9
3.1
1
43.3
11.3
25.8
6.2
7.9
2.1
3.3 .
1
Custom
41.4
14.6
27.2
4.1
7.9
1.7
3.4
42.9
13.4
27.7
4.4
8.0
1.7
2.4
44.3
13.2
26.3
4.4
8.7
1.1
2.0
42.9
13.7
27.1
4.1
8.2
1.5
2.6
i/ Called proprietary by SPI.
Source:
The Society of the Plastics
Industry, Inc.,
Financial and
Operating
Ratios, 1978, 1980, and 1982.
2-12
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2.6 Balance of Trade
In terms of exports and imports of plastics materials,J/ the balance of
trade surplus that has characterized the industry is shrinking as imports
increase at 17 percent per year while exports rise at a rate of 13 percent
per year. 2/ jn 1931, the value of exports of plastics materials and
resins was $2.5 billion, while the value of imports was $285 million. 2/
The United States share of total world production has declined from 41
percent of total production in 1965 to 34 percent in 1980, although it
remains the world's largest producer. Imports of plastic molded and formed
products have risen significantly over the past decade, due in part to
improved industrial technology in foreign countries and low costs of labor
overseas. A large portion of the plastic product imports are coming from
Japan, where a relatively new plastics industry benefits from modern and
efficient plant equipment and operations.i/ Furthermore, increased plastic
product imports from Japan accompanies their market advancements in products
in which plastics are essential components (e.g., automobiles, appliances,
televisions, computers). American automotive and business machine products
appear to face the greatest foreign competition, followed by bags, sheeting,
appliances, and medical equipment.
2.7 Markets and Growth ForecastsBase Case
As discussed earlier in this section, the plastic molding and forming
industry has leveled off from its enormous expansion during the 1950's and
1960's. Many current markets such as certain kinds of packaging, plus areas
of phenolics, building and construction, are saturated, and expansion in new
ones is proceeding at slower rates. The cost advantage of plastics has
diminished, as raw material and production costs have increased and thus the
industry is more susceptible to price competition from other materials (e.g.,
corrugated paper and wood for packaging). There is also intense competition
within the plastics industry itself, such as between the relatively new
polyurethane foams and the older molded forms.
Export values are not available for specific plastic products.
Therefore, exports and imports levels for plastic resins and materials are
presented instead as an indicator of the overall position and trends of the
U.S. in the production of plastics since all plastic material eventually
becomes plastic products.
=/ C.H. Kline, 1982. Kline Guide to the Plastics Industry. Fairfield,
NJ.
I/ U.S. Industrial Outlook, 1982.
y Plastics World, January 1982.
2-14
-------
In the past, the plastics industry has been influenced by a variety of
market and financial forces, including materials prices and availability,
inflation rates, inter- and intra-raarket competition, and buyers' behavior.
These market forces continue to direct and influence the growth of the
industry. Figure 2-2 illustrates the trends since 1970 in some of the major
markets for plastics products. For example, as car sales increase so do the
sales of plastic products used in cars. Based on a trend analysis of data
from the past decade, one analyst i/ predicts that the value of domestic
shipments will increase at a rate of 5.6 percent per year, reaching a level
of $165.8 billion in 1986. However, higher growth rates are predicted for
several of the plastic product markets (see Table 2-8).
Several developments should contribute to future increased growth of the
plastics molding and forming industry. One of the more important factors
will be the development of new molding and forming technologies which will
improve the efficiency and precision of production, and which, in turn, will
affect plastics product penetration of the market place through reduced
costs, and improved quality and new uses. Technological developments
include: (1) increased use of high speed, automated processing and forming,
plus on-line equipment automation in smaller plants; (2) new plastic blends
and copolymers, including the ability to blend materials as part of the
injection molding process; (3) advances in molding and forming processes,
such as improved blow film, blow molding and reaction injector molders
(RIM).2/ New product developments, contributing to sustained growth
include: (1) plastic products that are superior to other kinds of
insulation; (2) the use of plastic housings for computer terminals and
business machines; (3) plastic foams that replace metal components; (4) the
application of high density foam furniture parts; and (5) the use of the
plastic bottles as liquor and soft drink containers.
Following is a brief discussion of the potential growth for each major
plastics product market.
2.7.1 Plastic Packaging
The predicted growth rate per year for the 1981-1986 period is 4.6
percent, which is lower than the industry average of 7.0 percent because of
saturation of some of the major markets and price competition from wood and
paper. However, some packaging products will exhibit greater than average
growth. These include products used as cushioning and protective packaging,
merchandise bags, and beverage containers. Considerable improvements in
strength-to-weight ratios have enabled disposable packaging, such as plastic
produce and grocery bags, to remain competitive with traditional paper
C.H. Kline, 1982. Kline Guide to the Plastics Industry. Fairfield,
NJ.
^/ C.H. Kline, 1982. Kline Guide to the Plastics Industry. Fiarfield,
NJ, and Modern Plastics, April 1983.
2-15
-------
Figure 2-2. Major Economic Factors Affecting
Plastics Production 1970-1981
Plastics Sales
and Captive Use
(billions Ibs.J
35
30
25
20
15 1
50
45
250
200
150
Plastic Sales
'./ and Captive Use
1.5 -
1.0
1970
1975
1980
Source: The Kline Guide, 1982.
2-16
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materials. One analyst^/ states that a major driving force behind growth
in plastic packaging is the demand for protective packaging for electronic
instruments to reduce shipping damage and repair costs. It is estimated
that demand by the electronics industry for plastic packaging will increase
by 13 percent per year through 1987. However, cushioning is a relatively
small part of packaging. As discussed previously, a large growth potential
exists for plastic bottles because the recent approval of the use of PET
(polyethylene terephthalate) bottles as liquor containers. The 1.75 liter
bottle may penetrate the glass-dominated market by 10 to 15 percent by the
end of 1984 and 80 to 90 percent by 1987, assuming widespread consumer
aesthetic acceptance of this non-traditional use of plastics.2/
2.7.2 Plastic Building and Construction Products
The predicted growth rate per year for the 1981-1986 period is 9.4
percent. The use of plastics products in building and construction is very
closely tied to national business cycles, and thus the recent increase in
housing starts, and predicted increases in future years, are major factors
in the predicted sustained growth of the industry. However, plastics have
not deeply penetrated certain parts of this market because plastics products
generally cannot match wood and metal products in meeting heavy load
carrying demands. Therefore, the greatest growth markets exist for pipes,
fittings, and conduits since they are cheaper, more lighweight, and less
subject to corrosion than competing copper and other metal products.
However, questions concerning plastic pipe fire hazards may adversely affect
growth in this area. In addition, expansion into newer markets is expected
for insulation products and institutional equipment such as handrails.
2.7.3 Plastic Consumer and Institutional Products
The predicted annual growth rate for the 1981-1986 period is 6.9
percent. Many of the plastics products in this group are items which are
used daily (such as kitchenware, and toys) and thus growth in this market
will closely parallel that of the national economy. The major growth areas
of this segment are expected to be medical-related products (such as plastic
I.V.*s), reinforced dishes, containers for use in microwave ovens, and
recreational items.
2.7.4 Plastic Electrical and Electronics Products
The predicted annual growth rate for the 1981-1986 period is 11.2
percent. The high growth rate predicted for this sector is a function of
the changes in product design which favor plastics parts over other .
materials, such as metal and wood, in- products such as business machines and
I/ Plastics World, June 1983.
=/ Plastics World, January 1983.
2-18
-------
office equipment, communication equipment, and small appliances. One
analyst!/ expects that business machine use of plastics will grow 16
percent per year through 1988. This increase is primarily due to the
increasing demand for plastics housings in personal computers, printers,
typewriters, and photocopying machines.
2.7.5 Plastic Transportation Products
The predicted growth rate per year for the 1981-1986 period is 9.0
percent. Over 90 percent of the plastics molded and formed for the
transportation field are used in automobiles. Therefore, the growth of the
PM&F products for the transportation market is very closely tied to the
automobile industry which, in turn, closely follows the national economy.
The demand for smaller, lighter weight, more fuel-efficient cars has been a
major factor in plastics penetration of this once metal-dominated market,
and such demand will continue to significantly affect plastics application.
Currently, plastics are the leading choice for body panels and structural
components, because of their greater corrosion resistance and lower
manufacturing costs. Under-the-hood components include electrical housing
and wiring, battery cases, and fan shrouds. Plastics products will continue
to be preferred for interior uses such as seatbelts, cushioning and
dashboards.
2.7.6 Plastic Furniture and Furnishings Products
The predicted growth rate per year for the 1981-1986 period is 5.1
percent. The majority of plastics in this market are used as flexible foams
for cushioning, carpet backing, and bedding. Consumption of plastics in the
retail furniture market has shown no sustained growth since 1974.2/ This
is a result of the quality image of plastics and stiff competition from
wood. However, some growth is expected because of penetration into newer
markets such as outdoor furniture and institutional furniture for hospitals.
2.8 Baseline Projections
While for the past few years the plastic molding and forming industry
has not shown much growth, the industry studies reported above predict a
growth rate of about 7 percent between 1981 and 1986. (See Table 2-8)
Capacity utilization figures are not available, although the down-turn in
recent years has undoubtedly resulted in decreased capacity utilization. It
is assumed that the financial performance, in terms of profitability,
through 1986 will equal the median profitability for the 1973 to 1982 period
NJ.
Plastics World. June 1983.
C.H. Kline, 1982, Kline Guide to the Plastics Industry. Fairfield,
2-19
-------
and new sources will be built in order to meet the increasing demand for
plastics products.
These baseline projections of the. economic conditions that are likely to
exist in the PM&F industry markets through 1986 provide a benchmark against
which the impacts of the proposed PM&F regulation can be measured. The
projected profitability rates are incorporated into the economic impact
methodology presented in Section 3 of this analysis.
2-20
-------
Section 3
Economic Impact Methodology
3.1 Introduction
The economic impact methodology consists of a baseline estimate and a
subsequent impact analysis. The initial baseline values provide a basis
against which the impact of potential treatment costs can be assessed.
Baseline values are calculated for production costs, profitability, annual
plant investment, and salvage (or liquidation) value of equity assets.
The assessment of the impact of treatment costs on specific plants is
performed in a series of steps. The first of these is to estimate wastewater
treatment costs for each plant on the basis of its water use, treatment-in-
place, and subcategorization. The control options that include a recycle or
reuse of water reduce the requirement of water supplied from external
sources. The savings on water costs by these options are estimated and
subtracted from the wastewater treatment costs. For technology treatment
options that include recycling water, the quantity of water recycled or
reused is estimated and multiplied by $1.07/1,000 gal I/ to obtain the
value of water savings. For options other than 100 percent recycle or
contract hauling, monitoring costs are added to the treatment costs. The
monitoring costs are $6,000 per year for plants with water use equal to 100
gpm or more, and $600 per year for plants with water use less than 100 gpm.
EPA assumes that the cost per sample is $50 and that plants with water use of
100 gpm or more will monitor the effluent ten times per month and plants with
water use less than 100 gpm will monitor once every month. (In the following
discussion, unless otherwise specified, "treatment costs" refer to treatment
costs that include monitoring costs and the estimated water savings credit.)
Next, the increases to production costs and the profitability reduction due
to the treatment costs are determined. Treatment costs are compared to
pre-tax income to assess the impact on liquidity; then a closure analysis is
performed to predict plant or process line closure. This closure analysis
compares the current liquidation (or salvage) value of equity of the plant's
assets with the sum of the present values of cash flow over the life of the
plant (with treatment) plus the salvage value of the plant's assets at the
end of their useful life (terminal salvage value). From the projections of
closures and changes in production cost and prices, the effects of the
treatment costs on employment, foreign trade, production and small businesses
are assessed.
As discussed in the previous section, EPA estimates there are
approximately 10,260 plants in the PM&F industry. Of these, 1,898 are
estimated as wet process plants. The impacts of the proposed effluent
i/ National average of industry water supply costs from Office of Analysis
and Evaluation, U.S. Environmental Protection Agency, Analysis of Water Supply
and POTW Wastewater Treatment Charges, November 1983.
-------
limitations guidelines and standards are first analyzed on a plant-by-plant
basis for the $308 Survey plants included in the economic analysis. Then,
the results are extrapolated to the 501 direct dischargers and represent the
impacts on the PM&F industry as a whole.
It is wet process plants that will be regulated and the §308 Survey shows
that, among all wet processes in the industry, the process most frequently
used is extrusion. Therefore, SPI's financial and operating characteristics
of custom extruders were applied to the surveyed plants and the results
extrapolated to represent the entire industry impacted by this proposed
regulation.
To assess treatment cost impacts on new sources, the Agency developed a
low-and a high-flow "normal" plant for each of the subcategories using §308
Survey plant data and assuming no change in plant flow rates and wet pro-
cesses distribution. I/
3.2 Baseline Estimates
Production costs, profitability, and average annual investment, without
additional treatment costs, serve as a baseline against which the impacts of
the proposed regulatory action are determined. Baseline estimates are
derived by applying publicly available data to each plant. The Society of
the Plastics Industry, Inc. (SPI) reports financial and operating ratios of
plastics molding and forming companies. 2/ These ratios are the basic data
used for estimating production costs and profitability based on plant sales.
The Census of Manufactures provides information relating annual investment
for capacity expansion to plant sales. For better resolution, SPI divided
plants into two groups, with 5 million dollars annual sales as a point of
demarcation. This analysis applied SPI's financial ratios to the survey
plants according to plant sales.
3.2.1 Production Posts
Production costs included in the calculation are the expenditures for:
1. Direct Materials
2. Direct Labor
3. Indirect Labor
4. Utilities
5. Depreciation
i/ For details on the "normal plant" see Section XII of the Development
Document.
=/ The Society of the Plastics Industry, Inc., Financial and Operating
Ratios, Plastics Processing Companies, Survey No. 17, (1978), 19 (1980),
and 21 (1982) .
3-2
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6. Other Manufacturing Expenses
7. Net on Tool Transactions
8. Selling Expenses
9. Administrative Expenses
10. Interest
11. Engineering Expenses
12 Direct Packaging and Shipping Supplies
13. Lease Expenses
The SPI reports these line items regularly as percents of plant's sales, i/
The baseline data used in this analysis correspond to the "median" condition
between 1973 and 1982.
3.2.2 Profitability
Profitability is an obvious factor in determining economic impacts. It
provides a way to judge the ability of a plant to absorb treatment costs in
order to comply with the proposed effluent limitations guidelines and
standards. Plant level profit is estimated using ratios of profit to sales
that represent the baseline condition. This is equal to the "median"
condition between 1973-1982 based on the SPI's data. After-tax profits are
used.
3.2.3 Annual Investment
Annual plant investment is used to determine the impact of additional
treatment costs on the annual capital expenditures of a plant. Average
annual investment is estimated from data reported in the 1977 Census of
Manufactures at the four digit SIC level. The most appropriate group to use
is SIC 3079 (Miscellaneous Plastics Products). The ratio of average annual
investment to sales is obtained and has a value of 4.872 percent.
3.2.4 Discount Rate, Time Horizon, and Depreciation
This analysis assumes an 8 percent return on equity and a 13 percent in-
terest rate on borrowed capital. This return on equity is comparable to
observed values of return in this industry, and the interest rate for capital
is based on forecasts of industrial bond rates. According to FINSTAT
data,2/ the industry generally funds 30 percent of its capital expenditures
from loans and 70 percent from equity. Therefore, the appropriate interest
The Society of the Plastics Industry, Inc., Financial & Operating
Ratios, Survey No. 21, 1982.
^/ FINSTAT is a U.S. Small Business Administration (SBA) data base derived
from Dun & Bradstreet's Financial Profiles data base and compiled by Social
and Scientific Systems, Inc., a contractor to SBA.
3-3
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rate for capital expenditures is a weighted average of the two: (.3)(.13) +
(.7)(.08) = 0.095 or roughly 10 percent. The 10 percent cost of capital rate
is used to annualize capital treatment costs. A discount rate of 8 percent
(about equal to the return on equity) I/ is assumed in the present value
calculation for the closure analysis.' The time horizon (or planning period)
is 10 years in all calculations with one exception. The exception is that
four years is used for annualizing treatment costs for small plants when
liquidity impacts are being assessed. Four years is used to take into
account perceived higher risk, and more limited sources of funds available to
small plants. Waste treatment and recycle/reuse systems are depreciated
uniformly over 10 years.
3.3 Impact Projections
The addition of treatment costs affects the cost of production and has an
impact on profitability, liquidity, plant closures, employment and prices.
3.3.1 Plant Level Impacts
The analysis of plant level economic impacts utilizes plant specific
information obtained from the Agency's §308 Survey, such as current PM&F
process water use rate, treatment-in-place, discharge status and sales.
From the values of these variables, the projected impacts of treatment costs
of the proposed regulation are assessed. The methodology focuses on four
measures: changes in production costs, changes in profitability, stress on
cash flow (liquidity), and a comparison of wastewater treatment capital
investment with average annual investment for capacity expansion.
3.3.1.1 Changes in Production Costs
The increases in production costs are calculated for each plant and
summarized by industry group. The increase is calculated as the ratio of
annual treatment costs to production costs.
3.3.1.2 Comparison to Annual Investment
The capital investment portion of treatment costs is compared to the
average annual plant investment. It is calculated as the ratio of capital
treatment costs to annual investment for each plant and summarized by
industry group.
3.3.1.3 Profitability
Change in profitability due to treatment costs is calculated as the ratio
of annual treatment costs to plant profit. When no price change is assumed
i/ Based on SPI's survey of 1980 and 1982 Plastics Processing Companies.
3-4
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(i.e., zero cost pass through), the change in profitability represents the
maximum reduction in profits due to treatment. Plants with treatment costs
greater than 15 percent of profit are considered to have potentially signi-
ficant impacts. Profits after taxes are the focus; likewise treatment costs
estimates used here must include tax consequences. A 40 percent tax rate is
assumed. I/
3.3.1.4 Liquidity Impacts
The purpose of the liquidity analysis is to determine a plant's ability
to finance wastewater treatment from current income. The analysis estimates
pretax income before treatment costs and assumes that a pre-tax income
greater than treatment costs enables a plant to pay for annual treatment
costs out of current cash flow. A pre-tax income less than treatment costs
in a particular year does not necessarily mean a plant is unable to pay for
or to finance treatment costs. It is not uncommon for plants to have
negative pre-tax income years from time to time. But if the annual treatment
costs exceed a plant's current cash flow, that may be an indication of the
stress that the plant experiences from incurring treatment costs.
3.3.2 Closure Analysis
A decision to close a plant is extremely complex, involving an array of
factors, many of these subjective. Some of the more important factors to
consider are:
o Present and expected profitability of the plant;
o Current market or salvage value of the plant, i.e., the opportunity
costs of keeping the plant open;
o Required pollution control investment;
o Expected increase in annual costs due to pollution control
requirements;
o Expected product price, production costs, and profitability of the
plant after pollution control equipment is installed and operating;
and
o Other major economic developments expected for the plant (i.e.,
change in the competitive position, increase/decrease in market
growth) .
The Society of the Plastics Industry, Inc., Financial and Operating
Ratios, Survey No. 21, 1982. SPI's data shows a PM&F tax rate of about 36%.
In the economic analysis to estimate after tax profits conservatively, we have
used a 40% tax rate.
3-5
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Each of these factors is addressed to some extent in this plant closure
analysis. Our efforts at this stage are aimed at identifying the plants that
may close under the proposed regulatory options.
In general a plant owner faced with pollution control requirements must
decide whether to make the additional investment in pollution control or to
sell the plant. A rational owner would decide to keep the plant if the
before-and-after pollution control cash flows are greater than the salvage
value of the plant's assets. If the expected cash flows are less than the
salvage value of the plant's assets, the owner would be better off selling
the plant. Since the plant will remain open for many years if the investment
is made in pollution control, the analysis takes into account the cash flow
expected over the life of the plant and equipment plus the salvage value at
the end of the last period. The present value of future cash flows is
calculated discounting the expected income stream by the current return on
equity. The plant will remain open if the present value of the expected cash
flows less the costs of investing in pollution control exceeds the expected
salvage value. If the expected cash flows are less, the owner will sell the
plant.
For salvage value estimation, the Small Business Administration's FINSTAT
data are used to obtain two ratios for the industry in SIC 3079: total
assets to sales; and total liabilities to total assets. The ratios are
ranked from smallest to largest. The ratio at the 75th percentile (with a
value of .685) is used to represent the industry-wide assets to sales ratio.
The value at the 75fch percentile is chosen so as to overestimate a plant's
assets and hence give a conservative (high) estimate of salvage value. The
median of the total liabilities to assets ratio (with a value of .292) is
used as the industry-wide value. The median is chosen to insure that assets
are not underestimated.
Using these values, the plant specific salvage values are calculated in
the following manner:
e
where:
S
L
and:
in which:
.685
.292
S - L
salvage value of equity
salvage value of the plant's assets
total liabilities of the plant
(.685 x sales) x .60
(.685 x sales) x .292
industry-wide assets to sales ratio
industry-wide total liabilities to assets ratio
3-6
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.60 * scale factor to reflect the fact that any plant is probably
only 60 percent convertible to another use.I/
The present value (PV) of cash flow plus the terminal salvage value is
the sum of the cash flow over the life of the plant (with treatment) and the
after-tax discounted liquidation value at the end of the plant's useful
life. It is calculated as follows:
n CF Se. (1-t)
PV (CF) - SUM r +
i=l (1+r)1 d+r)n
where n is the life of the investment, CF is the cash flow of the plant with
treatment, and r is the rate of return on the investment. It is assumed that
the terminal salvage value is equal to Se. The life of the investment, n,
is assumed to be 10 years. An eight percent value is used for r. Parameter
t denotes the tax rate charged to the terminal salvage value. It is assumed
that the terminal salvage value will be treated as a long term capital gain
in which case an appropriate tax rate of 0.25 is used in the calculation.
For a valid comparison, Se on the left-hand side must also consider tax
consequences. The cash flow with treatment is approximated as CF = profits
after income taxes -0.6 x (annual treatment costs), in which the factor 0.6
reflects the 40 percent tax rate and shows the treatment costs actually born
by the plant after income tax consideration.
The baseline value of the ratio of salvage value to the present value of
cash flow without treatment is 0.45 for plants with sales of $5 million and
over and 0.51 for plants with sales of less than $5 million.
3.3.3 Industry-wide Impact of Closure Analysis
the results of the plant-by-plant economic impact analysis performed on
the S308 Survey plants is extrapolated to the 501 direct discharging plants
to represent the impact on the entire PM&F industry. Using the $308 Survey
plants included in the Economic Analysis as an accurate representation of the
direct discharging plants in the PM&F industry, the changes in production
costs, profitability, and the comparison of capital treatment costs to annual
plant investment for the industry, are taken to be proportional to the
impacts calculated for the survey plants. The ratio of the total number of
direct discharging plants in each of the three industry groups of PM&F plants
to the number of plants from the 5308 Survey is taken to obtain appropriate
extrapolation factors for the industry. A summary of the number of plants by
industry group for both- the entire industry and the survey is presented in
Table 3-1.
Taken from EPA's Industrial Economic Impact Guidance, Draft November
13, 1981, page 18.
3-7
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Table 3-1. PM&F Plants in the §308 Survey
Included in the Economic Analysis and Overall Industry Estimates
Industry Group
Discharge
Status
I Plants with Contact
(Cooling and Heating
I (only)
Plants with Plants in
Cleaning & Finishing Both
(only) Subcategories
Total
Survey Plants
Direct
Indirect only
Zero only
Indirect/zero
85
120
104
8
9
27
6
1
7
13
1
3
101
160
111
12
Total
Industry
Direct
Indirect only
Zero only
Indirect/zero
Total
317
418
590
511
39
1,558
43
39
118
27
4
188
24
44
83
6
19
152
384
501
791
544
62
1,898
Source: Compiled by EPA from §308 Survey data and extrapolated to the
industry.
3-8
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Using the extrapolation factors developed above, the impacts on the plastics
molding and forming industry are assessed. Process line closures are assumed
to occur if plastic employment is less than 50 percent of total plant
employment. Otherwise the entire plant is assumed to close.
3.4 Price Increases
Price increases are estimated for each industry group as the ratio of
annual treatment cost to plastics product sales. This analysis assumes a
full cost pass through so the result is the maximum expected price increase.
3.5 Employment
Unemployment resulting from plant or process line closures is estimated
directly from the plant closure analysis. Estimates of the employment loss
resulting from price increases and the subsequent production decreases are
beyond the scope of the economic analysis; and in the case of the proposed
PM&F regulation, where price and production changes are expected to be
minimal, it is the Agency's judgment such employment losses are
insignificant.
3.6 Community Impacts
Community impacts result primarily from employment and earnings losses.
For example, the economic conditions of a geographic area would be
potentially affected if this proposed regulation were to close a PM&F plant
that employed a large percentage of a community's work force. If employment
and earnings losses are important, their secondary effects are assessed
relative to a community's total employment and earnings using data on
community employment and earnings available through the Bureau of the Census
and the Bureau of Labor Statistics.
3.7 Balance-of-Trade Impacts
The regulation may adversely affect the balance-of-trade depending on
1) the extent the product price increases, and 2) the extent to which the
domestic production losses are replaced by imports. If the changes in these
variables are minimal, then import substitution for domestic products are
small, export losses are also minimal, and balance-of-trade impacts are
insignificant.
3.8 Small Business Analysis
The Regulatory Flexibility Act (RFA) (PL 96-354) requires Federal
regulatory agencies to consider small businesses throughout the regulatory
process. A small business analysis of the plastics molding and forming
3-9
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industry is performed to determine if small plants are significantly impacted
by the effluent regulations and to ascertain if a regulatory flexibility
analysis is needed for this industry. The economic impact analysis of this
proposed regulation included both small and large PM&F plants and found the
impact on small plants is not significant. Therefore, a formal Regulatory
Flexibility for small PM&F plants is not necessary.
3.9 New Sources
The impact of the NSPS regulation on new direct discharge sources is
analyzed by examining the effects of the expected treatment costs on a set of
normal plants. A "normal" plant is a theoretical plant developed by EPA to
represent the anticipated characteristics of typical plants constructed in
the baseline period (i.e., 1986). A low-and a high-flow normal plant are
examined for each of the two subcategories. The sales and flow values for
the four normal plants are the median values observed in the §308 Survey
plants for the four groups presented in Table 3-2..1/
Data on the "More Profitable Plants" as reported by the SPI 2/ are
adapted for the normal plants with the following adjustment. It is assumed
that replacement costs are higher than the aging assets at an existing plant;
hence, the depreciation costs of a new plant are more than that of published
data pertaining to existing plants whose median construction date is 1976
(based on §308 Survey plant data). Assuming new construction starting in
1982 for baseline plants, the GNP deflator is used to update the depreciation
costs from 1976 to 1982. This upward adjustment of depreciation costs is
subtracted from the profits. The resulting financial and operating ratios
for these model plants are presented in Tables 3-3 and 3-4.
The control options identified for new sources are the same as those for
existing plants. Treatment costs for new sources are estimated in the same
manner as for existing sources by industry group and water use but assume no
treatment-in-place or water supply cost savings. The impacts, including
production cost increases and profitability reduction, are calculated to
determine possible barriers to new plants entering the market and/or to major
modifications to existing plants.
= See the Section XII of the Development Document for details on the
"normal" plant.
£/ The Society of the Plastics Industry, Inc., Financial & Operating
Ratios, Survey NO. 21, 1982.
3-10
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Table 3-2. Normal Plant Flow Size
Characteristics by Subcategory
1
Industry Group I
Plants with Contact
Cooling and Heating
Plants with Cleaning and
Finishing Only
Flow
(gpm)
5.00
61.20
0.82
16.90
1 1
1 Employment I
51
99
23
104
Sales
($1,000)
2,785
7,148
1,256
7,509
Source: §308 Survey and Section XII of Development Document.
Table 3-3. Baseline Financial and Operating Ratios
(as Percent of Sales) - Existing Sources
Ratio
I
I
I Less Than 5 Million
I Dollars
Plant Category
(Annual Plastics Sales)
I 5 Million Dollars
I or More
Production Costs
Profits Before Taxes
Profits After Taxes
93.2'
5.5
3.5
90.0
6.2
4.1
Annual Capital
Investment
I
4.872
I
4.872
Sources: The Society of the Plastics Industry, Inc., Financial and Operating
Ratios, Survey No. 21, 1982; and U.S. Department of Commerce, Bureau of the
Census, 1977 Census of Manufacturers.
3-11
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Table 3-4. Financial and Operating Ratios
(as Peccents of Sales)- New Sources
Plant Category
(Annual Plastics Sales)
1
Ratio |
Production Oasts
Profits Before Taxes
Profits After Taxes .
Source: The Society of
Less Than 5 Million
Dollars
92.5
7.0
5.3
the Plastics Industry,
1 5 Million Dollars
1 or More
91.2
6.1
, 3-8
Inc., Financial and Operating
Ratios, Survey No. 21, 1982.
3-12
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Section 4
Effluent Limitations Options and Compliance Costs
4.1 Introduction
Hie Federal Water Pollution Control Act Amendments of 1972 established a
comprehensive program to "restore and maintain the chemical, physical, and
biological integrity of the Nation's waters" (Section 101(a)). To implement
the Act, EPA was to issue effluent limitations guidelines, pretreatment
standards, and new source performance standards for industrial dischargers.
The Act included a timetable for issuing these standards. However, EPA was
unable to meet many of the deadlines and, as a result, in 1976, was sued by
several environmental groups. In settling this lawsuit, EPA and the
plaintiffs executed a court approved "Settlement Agreement" which required
EPA to develop a program and to adhere to a schedule in promulgating effluent
limitations guidelines, new source performance standards, and pretreatment
standards for 65 "priority" or toxic pollutants and classes of pollutants for
21 major industries (See, Natural Resources Defense Council, Inc. v. Train, 8
ERG 2120 (D.D.C. 1976), modified, 12 ERC 1833 (D.D.C. 1979), modified by
orders dated October 26, 1982; August 2, 1983 and January 6, 1984).
Many of the basic elements of this Settlement Agreement program were
incorporated into the Clean Water Act of 1977. Under the Act, the EPA is
required to consider several effluent limitations guidelines and standards.
The following is a brief summary:
4.1.1 Best Practicable Control Technology Currently Available (BPT)
HPT applies to existing direct dischargers. The effluent limitations
guidelines are generally based on the average of the best existing
performance at plants of various sizes, ages and unit processes.
4.1.2 Best Available Technology Economically Achievable (BAT)
BAT also applies to existing direct dischargers. These effluent
limitations guidelines, in general, represent the best existing performance
in the industrial sub-category or category.
4.1.3 Best Conventional Pollutant Control Technology (BCT)
BCT is not an additional limitation, but replaces BAT for the control of
conventional pollutants (BOD5, TSS, oil and grease, and pH). EPA must find
that limitations are reasonable under a two part "cost-reasonableness" test
before establishing them as BCT.
-------
4.1.4 New Source Performance Standards (NSPS)
NSPS apply to new facilities that discharge directly into the navigable
waters and are based on the best available demonstrated technology.
4.1.5 Pretreatment Standards for Existing Sources (PSES) and New
Sources (PSNS)
PSES and PSNS control the discharge of pollutant to publicly-owned
treatment works (POTW) which pass-through, interfere with, or are otherwise
incompatible with the operation of a POTW. These limitations are to be
technology-based, with PSES analogous to BAT and PSNS analogous to NSPS. For
the plastics molding and forming industry, the Agency is not proposing to
establish PSES or PSNS for the reasons discussed in the preamble to the
proposed rule (49 FR 5862; Feb. 15, 1984). Even though the Agency is not
proposing to establish categorical pretreatment standards for the PM&F
industry, indirect dischargers must comply with the General Pretreatment
Regulations (40 CFR part 403).
4.2 Treatment Technology Options
This report analyzes the economic impact of wastewater treatment costs on
plants in the plastics molding and forming industry. For regulatory
purposes, the PM&F industry is divided into two subcategories: (1) those
plants with processes that use contact cooling and heating water; and (2)
those plants with processes that use cleaning and finishing water. This
impact analysis divides wet PM&F plants into three industry groups based on
the regulatory subcategories: 1) plants with processes only in the contact
cooling and heating water subcategory; 2) plants with processes only in the
cleaning and finishing water subcategory; and 3) plants with processes in
both subcategories. I/
EPA identified and considered three options for each subcategory for BPT,
BAT and NSPS. They are summarized below.
Contact Cooling and Heating Water Subcategory
Option 1: All Flow 2/
Sedimentation which consists of a tank in which the velocity
of the wastewater is reduced so that solid material can
i/ For purposes of brevity throughout the econoic analysis, these
three PM&F industry groups are referred to as 1) plants with contact
cooling and heating only; 2) plants with cleaning and finishing only; and
3) plants with both subcategories.
2/ "Flow" refers to a plant's average process water usage flow rate
in gallons per minute (gpm). The term "average process water usage flow
rate" is defined by the proposed regulation in §463.11.
4-2
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settle. This option was rejected early in the development of
the proposed rule because this technology did not effectively
control dissolved pollutants. Therefore, no costs were
developed.
Option 2: Flows 15 gpm or less
Zero discharge by 100 percent recycle of the process water
using either a tank or a chiller.
Plows greater than 15 gpm
Recycle through a cooling tower and treatment of recycle unit
discharge in a package activated sludge treatment system that
includes an equalization tank.
Option 3: Plows 15 gpm or less
Zero discharge by 100 percent recycle through either a tank
or chiller.
Plows greater than 15 gpm
Recycle through a cooling tower and zero discharge by
contract hauling of the discharge from the recycle unit.
Cleaning and Finishing Water Subcategory
Option 1: All flows
pH adjustment and sedimentation in a tank which reduces the
velocity of the wastewater so that solid material can settle.
Option 2: All flows I/
Recycle through a sedimentation tank and treatment of the
discharge from the recycle unit in a package activated sludge
system that includes flow equalization and pH adjustment.
Option 3: All flows
Recycle through a sedimentation tank and contract haul of the
discharge from the recycle unit.
A more comprehensive description of these treatment technology options
and associated compliance costs is contained in the Development Document.
4.3 Current Treatment and Treatment Costs
4.3.1 Current Treatment
Of the §308 Survey plants used in the economic analysis, 101 are direct
dischargers. Of the 101 plants, 30, or approximately 30 percent, currently
For purposes of costing Option 2, plants with flows up to 2 gpm are
assumed to recycle and contract haul the discharge from the recycle unit
because it would cost less than an activated sludge system.
4-3
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have some degree of recycle/reuse systerns-in-place. Table 4-1 gives a summary
of the systems presently in place. Some direct dischargers also have waste-
water treatment-in-place as shown in Table 4-2. Those plants with activated
sludge systems are large integrated plants and PM&F process wastewater is
co-treated with wastes from other industrial processes.
Table 4-1. Summary of Recycle/Reuse Systems in Place
in §308 Survey
Industry Group
No
Controls
A Greater
Than 80
Percent
Recycle
System
A Recycle
System of
From 60 to
80 Percent
Capacity
A Less Than
60 Percent
Recycle System
Plants with Contact Cool-
ing and Heating only 57
Plants with Cleaning
and Finishing only 9
Plants with Both Sub-
20
0
3
0
5
0
Categories
Total
5_
i 71 i
1
21 i
1
4 1
0
5
Source: Compilation based on the §308 Survey data.
Table 4-2. Number of Plants With Wastewater
Treatment-in-Place in §308 Survey
Industry Group
I pH | Sedimen-
I Adjustment I tation
Activated I
Sludge I Lagoon-^
Plants with Contact Cool-
ing and Heating only
Plants with Cleaning
and Finishing only
Plants with Both Sub-
categories
Total .
1
3
2
2
7
5
2
2
. 9
1
3
2
2
7
1
1
0
0
. 1
1
I/ A lagoon is a large settling pond where evaporation and some biological
breakdown takes place.
Source: Compilation based on the §308 Survey data.
4.3.2 Treatment Costing
The control costs used in the impact assessment consist of three parts:
recycle/reuse and wastewater treatment costs, monitoring costs, and savings
4-4
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in water supply costs. The recycle/reuse wastewater treatment costs are
based on EPA engineering estimates of model systems costs for each regulatory
option. These model systems are specified by standardized flow range of
water usage. These model systems and their costs were developed by EPA's
Effluent Guidelines Division (EGD) and reported in Section IX of the Develop-
ment Document.
By comparing water use rates at a plant with these standardized flow
ranges, the wastewater treatment costs by option are estimated. For costing
recycling/reusing water options, the quantity of water reused is estimated
and multiplied by $1.07/1,000 gal !/ (latest industrial water supply costs;
national average) to obtain the value of water savings. For options other
than 100% recycle or contract hauling, monitoring costs were added to treat-
ment costs. Plants with high effluent flow rates are expected to monitor
their waste streams more frequently than plants with low effluent flow
rates. EPA's Effluent Guidelines Division estimates that plants with water
use equal to 100 gpm or more would monitor their waste streams ten times per
month at a cost of $6,000/yr and plants with lower water use rates would
monitor once every month at a cost of $600/yr. The total annual costs are
the sum of the amortized capital costs and the operation and maintenance
costs (O&M). Capital costs are amortized assuming cost of capital of 10
percent and an equipment life of ten years for reasons discussed in Section 3.
4.3.2.1 Plant-Specific Costs
The analysis of potential economic impacts uses plant-specific treatment
costs developed by EPA's Effluent Guidelines Division (EGD) for each of the
101 direct discharging plants from the §308 Survey used in the economic
analysis. Treatment costs for the range standardized flow are assigned to
the plant according to the flow range in which the plant falls. Treatment
costs for plants in both the contact cooling and heating, and the cleaning
and finishing subcategories, were also estimated by EGD. Estimated
investment costs for the treatment options are reduced for those plants with
appropriate treatment-in-place (see Tables 4-1 and 4-2). However, the
estimated operation and maintenance (O&M) costs are for each plant's entire
PM&F effluent treatment system and include O&M for treatment-in-place.
Plants with current recycle rates greater than 80 percent are assumed to be
able to achieve a model costing recycle ratio of 99.6 percent for contact
cooling and heating or 98.3 percent for cleaning and finishing without any
additional capital expenditures. This assumption is based on the premise
that most recycle systems can absorb a maximum 20 percent increase of recycle
rate without any need to increase the capacity of the recycle equipment.
Plants with current recycle rates between 60 to 80 percent are assumed to
incur retrofit capital costs equal to 60 percent of the capital expenditure
required of plants with similar flow rates and with no current recycle. The
Office of Analysis and Evaluation, U.S. EPA, Analysis of Water Supply
ajid POTW Wastewater Treatment Charges, November 1983.
4-5
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plants with current recycle rates less than 60 percent are assumed to require
entirely new recycle systems, and will incur the same capital costs as
processes of similar size with no recycle. For further details see Section
IX of the Development Document-^ .
The estimated treatment costs for plants in the §308 Survey used in the
economic analysis have been extrapolated for each industry group to estimate
the costs for the entire industry in the manner described in Section 3.
These costs are shown in Table 4-3 for §308 Survey plants and in Table 4-4
for all direct dischargers in the PM&F industry. Water cost savings are
substantial and result in a positive return for some options.
4.3.2.2 Treatment Costs for New Sources
Treatment costs for the four new source "normal" plants are obtained
using the costs for range standardized flows in the same manner as for
existing plants. However/ existing source costs are adjusted to reflect the
fact that new sources do not have treatment-in-place or water savings. New
source treatment costs are summarized in Table 4-5.
i/ Section IX of The Development Document for Proposed Effluent
Limitations Guidelines, New Source Performance Standards, and Pretreatment
Standards for the Plastics Molding and Forming Industry, Point Source
Category. EPA, Effluent Guidelines Division, February 1984.
4-6
-------
Table 4-3. Treatment Costs (in 1982 $1,000) for
101 Direct Discharge Plants in §308 Survey
Industry 1
Group I
Plants with
Contact Cool-
ing and Heat-
ing only
Plants with
Cleaning and
Finishing only
Plants with
Both Subcate-
gories
Totals
1
1
Option I
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
1
Capital
Cost
NA
2,656.73
1,609.45
178.91
265.74
199.10
91.70
472.91
279.29
270.61
3,395.38
2,087.84
1 O&M |
I Cost |
NA
1,332.15
7,589.91
122.19
183.16
1,086.99
41.95
120.77
540.64
164.14
1,636.08
9,217.54
I 1
Annual 1
Cost I
NA
1,764.40
7,851.77
151.30
226.40
1,119.38
56.87
197.71
586.08
208.17
2,188.51
9,557.23
1
Water
Savings
NA
1,206.73
1,206.73
170.44
170.44
170.44
20.90
210.79
210.79
191.34
1,587.96
1,587.96
|Net Annual
1 Cost
NA
557.67
6,645.04
-19.15
55.95
948.94
35.97
-13.07
375.30
16.82
600.55
7,969.28
1
NA - Not applicable.
Source: EPA estimates.
4-7
-------
Table 4-4. Treatment Costs (in 1982 $1,000) for
Direct Discharge Plants in PM&F Industry
Industry 1
Group |
Plants with
Contact Cool-
ing and Heat-
ing only
Plants with
Cleaning and
Finishing only
Plants with
Both Subcate-
gories
Totals!/
1
1
Option 1
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
1
Capital
Cost
NA
13,057.4
7,910.2
782.2
1,161.8
870.5
580.8
2995.1
1,768.8
1,363.0
17,214.3
10,549.5
1 O&M
I Cost
NA
6,547.3
37,303.1
534.2
800.8
4,752.4
265.7
764.9
3,424.1
799.9
8,113.0
45,479.6
1
1 Annual
1 Cost
NA
8,671.7
38,590.1
661.5
989.9
4,894.0
360.2
1,252.2
3,711.8
1,021.7
10,913.8
47,195.9
1
1 Water
1 Savings
NA
5,930.9
5,930.9
745.2
745.2
745.2
132.4
1,335.0
1,335.0
877.6
8,011.1
8,011.1
1
|Net Annual
1 Cost
NA
2,740.9
32,659.2
-83.7
244.6
4,148.9
227.8
-82.8
2,376.9
144.1
2,902.7
39,185.0
1
i/ Totals assumed all plants to use same option. Total industry costs
were not estimated for all combinations of possible options among the three
industry groups.
NA = Not applicable
Source: EPA estimates.
4-8
-------
Table 4-4a. Treatment Costs by Subcategory
(in 1982 $1,000)
Subcategory
Contact
Cooling and
Heating
Cleaning
and
Finishing
Option
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
Capital
Cost
NA
15,182.2
9,338.3
1,363.0
2,032.1
1,211.2
O&M
Cost
NA
6,978.0
39,651.3
799.9
1,135.0
5,828.3
Annual
Cost
NA
9,448.1
41,170.6
1,021.7
1,465.7
6,025.3
Water
Savings
NA
7,133.5
7,133.5
877.6
877.6
877.6
Net Annual
Cost
NA
2,314.7
34,037.1
144.1
588.0
5,147.9
NA= Not Applicable.
Source: EPA estimates.
4-9
-------
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-------
Section 5
Results of Analysis
5.1 Introduction
The economic impacts of the effluent limitations guidelines and standards
for the plastics molding and forming industry were analyzed using the
methodology described in Section 3 above. The results of this analysis as
presented here include price changes, liquidity impacts, plant and process
line closures/ and impacts on employment, communities, foreign trade, small
businesses, and new sources.
5.2 Impacts on §308 Survey Plants
The impact of treatment costs at the plant level on 101 direct
discharging plants is measured by production cost changes, profitability
changes, and a comparison of treatment investment costs to current average
annual plant investment.
5.2.1 Production Post Changes
The changes in production costs due to the addition of annual treatment
costs, for each of the three industry groups are shown in Table 5-1 for each
control option. Production cost changes are generally small. Plants with
the cleaning and finishing only are affected the most with cost changes
ranging from a decrease of 0.051 percent under Option 1 to an increase of
2.53 percent under Option 3. Production cost decreases (negative signs in
Table 5-1) occur in cases where the water cost savings (due to recycling)
are greater than the annual treatment cost before water cost savings are
considered, for that option.
5.2.2 Profitability
The results of the profitability analysis are presented in Table 5-2 for
each option and each industry group, assuming no pass-through of treatment
costs to consumers. The median profitability reduction for each type of PM&F
plant group was selected for presentation as an indication of the expected
profitability impacts on the plants by type under each option. The median
of plant profitability reduction due to the addition of treatment costs is
larger for all three industry groups under Option 3, and for plants with
cleaning and finishing only; the greatest median profitability reduction is
11.5 percent for plants in this group under Option 3. On an individual plant
basis, the changes in profitability range from a reduction of 152 percent, to
an increase of 48 percent. Some options result in profitability increases
due to the large water savings from recycling associated with this regulation.
-------
Table 5-1. Industry Production Cost Changes by Control Option
1
Industry Group 1
Plants with Contact Cool-
ing & Heating only
Plants with Cleaning &
Finishing only
Plants with Both Subcategories.
Production
Option 1 1
NA
-0.051
0.018
Costs Changes
Option 2
0.039
0.149
-0.007
1
1
(percent)
Option 3
0.461
2.53
0.188
NA = Not applicable.
Source: EPA estimates.
Table 5-2. Profitability Change by Control Option !/
I Median Profitability Change (percent)
Industry Group I Option 1 I Option 2 | Option 3
Plants with Contact Cool- NA -0.37 -3.22
ing & Heating only
Plants with Cleaning & -1.22 -2.41 -11.5
Finishing only
Plants with Both Subcategories +0.94 -0.51 -10.6
i No treatment cost pass-through asssumed
NA = not applicable.
Source: EPA estimates.
5-2
-------
5.2.3 Treatment Investment Posts Compared to Current Annual Plant
Investment
The ratio of the sum of the capital investment portion of treatment costs
to the sum of the current average annual plant investment is shown in
Table 5-3 for each industry group and each option. These ratios show that of
the dollars plants now spend annually on capital equipment, the treatment
technology options require investing as much as 13.2 percent for the plants
with cleaning and finishing only. Smaller percentages are required of the
other industry groups.
5.3 Price Changes
The results of the maximum price changes possible under the technology
options are shown in Table 5-4. As this table illustrates, the price changes
are small even under this worst case analysis, the highest increase being 2.3
percent for plants with cleaning and finishing only under Option 3. Again,
the price decreases (negative signs in Table 5-4) resulting from some options
are due to the large associated water savings from recycling.
5.4 Impact on Liquidity
The median ratio of the treatment cost to plant pre-tax income for each
type of plant and each option is shown in Table 5-5. The highest median
ratio is 14.43 percent for plants with cleaning and finishing only under
Option 3. On an individual plant basis, the annual treatment cost never
exceeds the plant's income for all three industry groups under either Option
1 or Option 2 (i.e., the ratio is less than 100 percent for all plants). For
Option 3, two plants in the §308 Survey have a value greater than 100 percent.
Table 5-3. Treatment Investment Costs Compared
to Current Average Annual Plant Investment
I Treatment Investment Costs Compared to Current Average
I Annual Plant Investment (percent)
Industry Group I Option 1 | Option 2 | Option 3
Plants with Contact Cool- NA 3.41 2.07
ing and Heating Only
Plants with Cleaning 8.91 13.2 9.91
and Finishing Only
Plant with Both
Subcategories . 0.85 , 4.39 . 2.59
NA = not applicable.
Source: EPA estimates.
5-3
-------
Table 5-4. Price Changes by Plant Type (percent)
Industry Group | Option 1 | Option 2 | Option 3
Plants with Contact Cool-
ing and Heating Only
Plants with Cleaning
NA
-0.001
0.035
0.136
0.416
2.30
and Finishing Only
Plants with Both
Subcategories . -0.069 . -0.006 . 0.170
NA = not applicable.
Source: EPA estimates.
Table 5-5. Liquidity Impacts
I Median Ratio of Annual Treatment
I Posts to Plant Income (percent)
Industry Group I Option 1 I Option 2 I Option 3
Plants with Contact Cool- NA 0.50 3.86
ing and Heating Only
Plants with Cleaning 1.70 6.01 14.43
and Finishing Only
Plants with Both
Subcategories . -1.04 . 0.57 . 11.91
NA = not applicable.
Source: EPA estimates.
5.5 Closure Analysis
The baseline ratio of salvage value to the present value of cash flow is
0.45 for plants with sales of $5 million and over and 0.51 for plants with
sales of less than $5 million (i.e., there are no baseline closures). With
the addition of annual treatment costs under the regulatory options, nine of
the §308 Survey plants show a salvage value exceeding the present value of
cash flow, which indicates that these plants are closure candidates. Of
these nine, one is a plant with cleaning and finishing only under Option 2.
For this plant, less than 3 percent of its total employment is engaged in
plastic molding and forming. Thus, although the PM&F process line is a
likely closure candidate, the plant as a whole will not close. Of the eight
remaining closure candidates all occur under Option 3. Five are plants with
contact cooling and heating only and three are plants with cleaning and
finishing only. Since the majority of the employment in these five plants
5-4
-------
with contact cooling and heating only is in plastic molding and forming/ they
are considered to be plant closures. Of the three closure candidates among
plants with cleaning and finishing only, two have only a small number of
employees in PM&F and are, therefore, process line closures while one is a
plant closure. "She plant and process1 line closures are summarized in Table 5-6.
Table 5-6. Summary of Closure Analysis
for the §308 Survey Plants
| Number of Plant and Process Line Closures
IOption 1jOption 237jOption 3
Industry Group I Plant I Processl Plant I Process! Plant I Process
Plants with Contact Cool-
ing and Heating Only
Plants with Cleaning
and Finishing Only
Plants with Both
Subcategories
0
0
0
0
0
0
0
0
0
0
1
0
5
1
0
0
2
0
Totals
I/ Selected Option
Source: EPA estimates.
5.6 Employment
Employment impacts for the S308 Survey plants, estimated from the results
of the closure analysis and calculated as the sum of the PM&F or total
employment at these plants (depending on whether it is a process line or
total plant closure) are as follows:
o For plants with contact cooling and heating only the
employment loss is 210 under Option 3; and
o For plants with cleaning and finishing only, the loss is five
jobs under Option 2 and 288 jobs under Option 3.
*
No employment losses are predicted for plants in the third industry group,
those plants with both Subcategories.
5.7 Industry Impacts Including Closure, Employment, Community, and Foreign
Trade
Since the §308 Survey is assumed to be an accurate representation of the
PM&F industry, the industry-wide impacts of treatment costs on production
5-5
-------
costs, profitability, annual investment, prices, and liquidity are equal to
the impacts, expressed as percentages, calculated for the §308 Survey plants.
These results are presented in Tables 5-1 to 5-5. The industry-wide closure
of plants and process lines and employment impacts scaled up from the §308
Survey plant impacts are summarized in Tables 5-7 and 5-8.
The results of the industry-wide closure analysis show that 28 plants and
13 process lines exhibit a current liquidation value exceeding the present
value of the future benefits stream, as summarized in Table 5-7, and there-
fore are considered to be closure candidates. These include plastics molding
and forming process lines in four plants with cleaning and finishing only
that are expected to close under Option 2 and four plants and nine process
lines of this type of plant that are predicted to close under Option 3. The
24 remaining closure candidates are plants with contact cooling and heating
only impacted under Option 3.
Employment impacts resulting from the closure analysis show that for
plants with cleaning and finishing only the employment loss is 22 under
Option 2 and 1,259 under Option 3. For plants with contact cooling and
heating only, the loss is 1,032 jobs under Option 3. For plants in the third
industry group, no employment impacts are expected. Community impacts caused
by regulatory Options 1 and 2 are insignificant for all industry groups as
the estimated employment loss is small when compared to the total community
employment level; only a few jobs are lost in the cleaning and finishing only
subcategory. Even for Option 3, community impacts are very slight when the
job losses for plants with contact cooling and heating only and plants with
and cleaning and finishing only are compared to total community employment.
No foreign trade impacts are expected as a result of the treatment
costs. Since the estimated production losses and price increases are so
small, the impacts on imports, exports and the balance of trade would be
negligible.
5.8 New Sources
Since options considered for NSPS are the same as the options for exist-
ing sources, there are no barriers to entry caused by the proposed regulation.
The results of the analysis presented in Table 5-9 and discussed below are an
indication of how normal new plants would perform with the addition of treat-
ment costs under the three technology options. The performance of high and
low flow normal new plants with contact cooling and heating only and cleaning
and finishing only is shown.
For normal new low flow plants with contact cooling and heating only,
production cost increases are 0.15 percent, the reduction in after-tax
profitability is 2.6 percent and the ratio of treatment investment costs to
annual plant investment is 7.5 percent. For normal new high flow plants of
this type, production cost increases range from 0.30 to 0.87 percent,
profitability reductions range from 7.2 to 20.8 percent and the ratios of
investment costs range from 9.7 to 15.1 percent. For normal new low flow
5-6
-------
Table 5-7. Number of Plant and Process Line Closures
(Industry-wide)
| Number of Plant and Process Line Closures
I Option 1 I Option 2i/| Option 3
Industry Group I Plant I ProcesslPlant I ProcesslPlant I Process
Plants with Contact Cool-
ing and Heating Only
Plants with Cleaning and
Finishing Only
Plants with Both
Subcategories
Total .
0
0
0
_.
0 i
0
0
0
«^_^_
0
0
0
0
-
1 ° 1
0
4
0
_
4
24
4
0
-
i 28 i
0
9
0
_,
9
Source: EPA estimates
Table 5-8. Plastics Industry Employment Loss2/
(Industry-wide)
Industry Group
Plants with Contact Cool-
ing and Heating Only
Plants with Cleaning and
Finishing Only
Plants with Both Subcategories
Total
I Option 1
0
0
0
0
1 Option 2i/|
0
22
0
22
Option 3
1,032
1,259
0
2,291
I Selected Option.
I/ Employment losses include plastics molding and forming production workers
only when there are process line closures and total plant employment when there
are plant closures.
Source: EPA estimates.
5-7
-------
Table 5-9. Performance of New Sources
Industry
Group
Plants with
Contact
Cooling
and
Heating
Only
Pollution
Control
Option
Option 1
Option 2JL/
Option 3
Plant
Flow
(gpm)
5.0
61.2
5.0
61.2
5.0
61.2
Production
Cost
Increase
(Percent)
NA
NA
0.15
0.30
0.15
0.87
Treatment
Investment
Costs
Compared to
Annual Plan
Investment
(Percent)
NA
NA
7.5
15.1
7.5
9.7
Profitability
Reduction
(Percent)
NA
NA
2.6
7.2
2.6
20.8
Plants with
Cleaning
and
Finishing
Only
Option 1
Option 2l/
0.82
16.9
0.82
16.9
0.37
0.10
0.32
0.30
Selected Option
Source: EPA estimates.
19.1
0.49
6.7
15.1
6.4
2.5
5.6
7.2
Option 3
1
0.82
1 16'9 1
0.32
0.45 j
6.7
3.6
5.6
10.8
5-8
-------
plants with cleaning and finishing only production cost increases range from
0.32 to 0.37 percent, profitability reductions from 5.6 to 6.4 percent and
investment ratios from 6.7 to 19.1 percent. The corresponding ranges for
normal new high-flow plants of this type are: 0.10 to 0.45 percent; 2.5 to
10.8 percent; and 0.49 to 15.1 percent, respectively.
The smallest production cost increase and after-tax profitability reduc-
tion are exhibited by the normal new high-flow.plant with cleaning and
finishing only under Option 1 (0.10 percent and 2.5 percent, respectively),
while the largest such changes are shown for the normal new high-flow plant
with contact cooling and heating only under Option 3 (0.87 percent and 20.8
percent, respectively). The smallest investment ratio (0.49 percent) is also
demonstrated by the normal new high-flow plant with cleaning and finishing only
under Option 1, but the highest ratio (15.1 percent) is shown for the normal
new high-flow plant with contact cooling and heating only under Option 2 (15.1
percent) .
5.9 Small Business Analysis
Public Law 96-354, known as the Regulatory Flexibility Act, requires EPA
to determine if a significant impact on a substantial number of small busi-
nesses occurs as a result of proposed regulations. If there is a significant
impact, the act requires that alternative regulatory approaches that mitigate
or eliminate economic impacts on small businesses must be examined. This
section addresses these objectives by identifying whether or not small
businesses in the plastics molding and forming industry are significantly
impacted by the proposed regulation.
5.9.1 Definition of a Small Business
The Small Business Act, Section 3, defines a small business in the
following statement:
"... a small business concern shall be deemed to be one which
is independently owned and operated and which is not dominant in
its field of operation. In addition to the foregoing criteria,
the Administration (of the SBA), in making a detailed definition
may use these criteria, among others: Number of employees and
dollar volume of business."
The definition of a small business is not precise nor universal. The
Small Business Administration (SBA) definition of "small business" generally
means a specific number of employees for each manufacturing industry by
Standard Industry Classification (SIC). For service, wholesale, retail, and
other nonmanufacturing businesses, "small" is limited in SBA regulations by
dollar amount of gross sales. In this analysis, the number of employees per
plant is used to determine size.
5-9
-------
5PI uses $5 million of annual plant plastics sales as a dividing point
between small and large businesses for the purpose of reporting financial and
operating ratios for the plastics industry. Examining the same dividing
point here, the PM&F plant with $5 million of annual plastics sales typically
has 70 employees engaged in plastic molding and forming. The §308 Survey
data show that generally about one-half of the employees in the plants
surveyed are engaged in PM&F activities. So, assuming that plastic molding
and forming activities account for one-half the manufacturing activities at
an average integrated or captive plant, the PM&F activities at the captive
plant would be one-half of $10 million in total sales and one-half of a total
of 140 employees. The other half of sales would be due to non-PM&F products
and the other half of the employees would be engaged in the manufacture of
non-PM&F products.
The plants in this analysis have been ranked by total number of employees
and by number of employees engaged in plastics molding and forming. These
plant rankings are then compared with their corresponding measures of impacts
due to the regulation to determine whether a significant correlation exists
between size and the seriousness of the economic impacts.
5.9.2 Baseline Conditions
A comparison of plant size to financial and operating ratios shows that
small plants in the PM&F industry generally have a smaller profit to sales
ratio than larger plants. According to 8 years of plastics industry
statistics provided by SPI, plants with less than 5 million dollars in
plastics sales have a median profit after tax equal to 3.5 percent of
sales. I/ Plants with annual plastics products sales greater than $5
million have a median profit after tax equal to 4.1 percent of sales. These
are the baseline conditions assumed to hold for the PM&F industry through
1986 for the small business analysis. The impacts of the regulation are
defined as only the incremental impacts associated with the treatment costs
and are therefore independent of any adverse economic impacts caused by other
factors.
5.9.3 Economic Impacts On Small Businesses
Forty-six percent of the §308 Survey plants used in the economic impact
analysis have less than 140 employees. The comparison of impact measures
with plant size shows that for the impact measures used in Section 5.2, 5.3
and 5.4, such as changes in production prices and liquidity, smaller busi-
nesses are more adversely affected than larger businesses. For example, a
comparison of plant size with the change in profitability due to compliance
costs shows that for all three regulatory options, smaller plants generally
have larger profitability decreases than larger ones. Thus, for these kinds
i/ The Society of the Plastics Industry, Inc., Financial and Operating
Ratios, Survey No. 21, 1982.
5-10
-------
of impacts, smaller plants are more heavily impacted due to their generally
lower profits to sales levels, as mentioned above in the discussion of
baseline conditions.
In contrast, the closure analysis, presented in section 5.5, indicates
that no small business plant or process line closures in any of the three
industry groups would result from the treatment costs required by either
Option 1 or Option 2. Based on this analysis of the seriousness of the
economic impacts, small businesses in the three industry groups do not appear
to be significantly impacted by Options 1 and 2 and, therefore, a formal
regulatory flexibility analysis of the plastic molding and forming industry
is not required in these cases.
However, the closure analysis does indicate that under Option 3, 24
plants with contact cooling and heating only that have less than 140
employees would be closure candidates, while no larger plants in this
industry group would be so classified. Under this same option, four plants
and nine process lines of larger businesses with cleaning and finishing only
would be expected to close while no small plants would be affected. No
plants in the third industry group are closure candidates under Option 3.
Thus, Option 3 does appear to impact small businesses significantly and
differently than larger plants with contact cooling and heating only.
5-11
-------
Section 6
Limits of the Analysis
6.1 Introduction
The baseline analysis assumes compliance with existing environmental
regulations and OSHA requirements. This section discusses possible
limitations of the data and the methodology used in the analysis. It also
discusses the magnitude of these possible limitations using sensitivity
analysis.
6.2 Methodology Limitations
6.2.1 Post Pass-Through
The economic impact analysis assumes no treatment cost pass-through to
consumers in estimating profitability impacts and 100 percent cost
pass-through in assessing product price changes. While in reality the
pass-through levels in both cases are likely to be less than 100 percent,
estimation of the actual amount of pass-through requires the measurement of
the elasticity of supply and demand for the industry. By assuming the
extreme cases of pass-through, the analysis identifies the worst case
impacts. As shown in Section 5, both price increases and profitability
reductions are small; therefore, impacts calculated using improved estimates
of pass-through would also be insignificant.
6.2.2 Closure Analysis
The closure analysis is based on a comparison between the current
liquidation value of equity assets and the present value of the future time
stream of cash flow including treatment costs. The comparison assumes a
plant owner's decision to close is based upon the factors quantified in this
analysis. But in practice, there are many other reasons that a plant or
process line may close or change its operations. For example, if a more
profitable product or opportunity is developed in the future, plant
operations may be shifted to the new market.
6.3 Data Limitations and Evaluation
6.3.1 Profit Rate
The plant-level analysis assumes that the median performance condition
observed between 1973 and 1982 in the .industry is prevailing by the year
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1985-86. The 1985-86 time period is used for purposes of the economic
analysis to reflect the fact that pollution equipment can not be installed
immediately. Since there are no assurances that any particular plant will
perform as specified, some plants will be better off and others will
underperform; however, on an aggregate level, the assumption is appropriate
for most plants. To evaluate the consequences on the impact analysis of a
recurrence of the poor condition observed in 1982, a sensitivity analysis was
conducted. The performance in 1982 is 21 percent lower than the baseline
performance, as expressed in profits after tax.
6.3.2 Compliance Oasts
The economic impact analysis calculates compliance costs in three
components: wastewater treatment costs, water savings and monitoring costs.
Wastewater treatment and recycle/reuse costs are engineering estimates.
Their accuracy is normally within a 20 percent range.
EPA estimates that facilities covered under this regulation will monitor
their effluent for all treatment options other than 100 percent recycle or
contract hauling. Plants with effluent flow rates greater than 100 gpm are
expected to monitor their waste streams more frequently than plants with
effluent flows less than 100 gpm. Our analysis reflects EPA's Effluent
Guidelines Division's estimates of monitoring requirements. These estimates
assume plants with higher flows would monitor their wastewaters ten times a
month at a cost of $6,000 per year and plants with lower flows would monitor
their waste streams only once a month at a cost of $600 per year.
Local authorities and permit writers have discretion in specifying
monitoring frequencies. It is possible that the plants with flows less than
100 gpm would be required to monitor their effluent more often, thus
incurring higher costs than were estimated in the study. A sensitivity
analysis was conducted to determine the impacts of higher monitoring costs on
these plants. This analysis assumed that the plants with flows less than 100
gpm would have to monitor their waste streams at least ten times a month.
The analysis employs an industrial water supply value of $1.07 per 1,000
gallons. This unit value is the average observed in the nation. The actual
value, however, fluctuates according to region of the nation, water supply
source and system size. The implications of water value variation for the
estimated regulatory impacts are analyzed using a sensitivity test with a 30
percent reduction in unit water value (which decreases the value of water
recycling and so increases the net control treatment costs).
6.3.3 Annualization of Capital Posts
The impact analysis has assumed a cost of capital of 10 percent and 10
years to annualize the treatment investment costs. This cost of capital is
based on the assumption that the treatment costs are financed 70 percent by
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equity with an 8 percent return on investment and 30 percent by borrowed
capital with a nominal interest rate. If borrowed capital is used to finance
the whole, a 13 percent interest rate and 10 years must be used. The
consequences of this change is evaluated in the sensivitity analysis.
6.3.4 Salvage Value Estimates
The closure analysis estimates the current liquidation value of plant equity
and the plant salvage value at the end of the ten year project life. The
estimates are based on observed relationships among financial variables of
plastics processing companies. Based on available information, the terminal
salvage value is assumed to be equal to the current salvage value. This
assumption, as well as the salvage value estimates, involves uncertainties.
To evaluate the importance of these uncertainties to the closure analysis,
the salvage value is increased by 20 percent in the sensitivity analysis.
6.4 Sensitivity Analysis
The methodology and data limitations described above are evaluated by
sensitivity analysis. In the sensitivity analysis, each parameter is varied
independently. The results are compared to the estimated impacts for the
selected technology option as presented in Section 5 above.
For plants with contact cooling and heating water only, changes in
profitability, in wastewater treatment cost, in monitoring costs, or in
salvage value increase the number of plant closures. For the § 308 Survey
plants, the maximum number of plant closures predicted in the sensitivity
analysis is small, only one small plant, with less than 10 employees.
Extrapolating these results to the industry, only five plants would close.
These five plants represent only one percent of the total PM&F plants
potentially impacted by the proposed regulations. For plants with cleaning
and finishing only, four additional process line closures occur when
profitability is decreased 20 percent. The other variables are not
sensitive. The results of plants with contact cooling and heating only and
plants with cleaning and finishing only show that from the standpoint of
plant closures, the analysis is not very sensitive to any of the parameter
changes.
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