United States
Environmental Protection
Agency
Economic and Benefits Analysis
for the Final Section 316(b)
Phase III Existing Facilities Rule
June 1,2006
US EPA He ?.dqi:?.rters Library
Waj.'v.
' i ' '.'.U'-ruU
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U.S. Environmental Protection Agency
Office of Water (4303T)
1200 Pennsylvania Avenue, NW
Washington, DC 20460
EPA-821-R-06-001
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ACKNOWLEDGMENTS AND DISCLAIMER
This document was prepared by the Office of Water staff. The following contractors provided assistance and
support in performing the underlying analysis supporting the conclusions detailed in this document.
Abt Associates Inc. (Parts A, C, D, and E)
Eastern Research Group, Inc. (Part B)
and
ICF Consulting
Science Applications International Corporation
Stratus Consulting Inc.
Tetra Tech, Inc.
The Office of Water has reviewed and approved this document for publication. The Office of Science and
Technology directed, managed, and reviewed the work of the contractors in preparing this document. Neither the
United States Government nor any of its employees, contractors, subcontractors, or their employees makes any
warranty, expressed or implied, or assumes any legal liability or responsibility for any third party's use of or the
results of such use of any information, apparatus, product, or process discussed in this document, or represents
that its use by such party would not infringe on privately owned rights.
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§ 316(b) Final Rule: Phase III - Economic Analysis
Table of Contents
Table of Contents
PART A: BACKGROUND INFORMATION
CH AFTER Al: INTRODUCTION
Introduction Al-1
Al-1 Overview of Potentially Regulated Sectors and Facilities Al-1
Al-1.1 New Offshore Oil and Gas Extraction Facilities Al-1
Al-1.2 Existing Phase III Facilities and Sectors Al-2
Al-2 Summary of the Final Rule Al-10
Al-2.1 New Offshore Oil and Gas Extraction Facilities Al-10
Al-2.2 Existing Facilities A1-I1
Al-3 Summary of Economic Analysis Results Al-11
Al-4 Organization of the EA Report Al-19
References Al-21
CHAPTER A2: CONSIDERATIONS IN ASSESSING THE NEED FOR PHASE III REGULATION
Introduction A2-1
A2-1 Description of Environmental Impacts from CWIS A2-1
A2-2 Levels of Protection at Phase III Facilities A2-2
A2-2.1 Phase III New Facilities A2-2
A2-2.2 Potential Phase III Existing Facilities A2-3
A2-3 Addressing Market Imperfections A2-3
References A2-4
PART B: ECONOMIC ANALYSIS FOR PHASE III NEW OFFSHORE OIL AND GAS
EXTRACTION FACILITIES
CHAPTER Bl: SUMMARY OF COST CATEGORIES AND KEY ANALYSIS ELEMENTS FOR NEW OFFSHORE
OIL AND GAS EXTRACTION FACILITIES
Introduction Bl-1
Bl-1 Cost Categories Bl-1
Bl-1.1 Cost of Installing and Operating Compliance Technology Bl-2
Bl-1.2 Administrative Costs for Complying Facilities Bl-3
Bl-2 Key Elements of the Economic Analysis For New Offshore Oil and Gas Extraction Facilities Bl-7
Bl-2.1 Compliance Schedule Bl-8
Bl-2.2 Adjusting Monetary Values to a Common Time Period of Analysis Bl-8
Bl-2.3 Discounting and Annualization - Costs to Society or Social Costs Bl-9
Bl-2.4 Discounting and Annualization - Costs to Complying Facilities Bl-11
References Bl-13
CHAPTER B2: PROFILE OF THE OFFSHORE OIL AND GAS EXTRACTION INDUSTRY
Introduction B2-1
B2-1 Mobile Offshore Drilling Units (MODUs) B2-2
B2-1.1 Overview B2-2
B2-1.2 Existing MODUs and Their Associated Firms B2-3
B2-1.3 Existing MODUs with Intake Rates Meeting Proposed Rule Criteria B2-10
B2-2 Oil and Gas Production Platforms B2-12
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§ 316(b) Final Rule: Phase 111 - Economic Analysis Table of Contents
B2-2.1 Overview B2-12
B2-2.2 Existing Platforms/Structures and Their Associated Firms B2-13
B2-2.3 Existing Platforms/Structures with Intake Rates Meeting Proposed Rule Criteria B2-19
B2-3 Total New Oil and Gas Operations B2-23
References B2-24
CHAPTER B3: ECONOMIC IMPACT ANALYSIS FOR THE OFFSHORE OIL AND GAS EXTRACTION
INDUSTRY
Introduction B3-1
B3-1 MODU Analyses B3-2
B3-1.1 Aggregate National After-tax Compliance Cost Analysis B3-2
B3-1.2 Vessel-Level Compliance Costs B3-3
B3-1.3 Impact Analysis B3-4
B3-2 Economic Impact Analysis for Oil and Gas Production Platforms B3-9
B3-2.1 Aggregate National After-tax Compliance Costs B3-10
B3-2.2 Platform-Level Compliance Costs B3-11
B3-2.3 Impact Analysis B3-12
B3-3 Total Costs and Impacts Among All Affected Oil and Gas Industry Entities B3-16
B3-4 Total Costs to Government Entities and Social Costs of the 316(b) Phase III Rulemaking B3-16
B3-4.1 Total Costs to Government Entities B3-16
B3-4.2 Total Social Costs B3-17
References B3-18
PART C: ECONOMIC ANALYSIS FOR PHASE III EXISTING FACILITIES
CHAPTER Cl: SUMMARY OF COST CATEGORIES AND KEY ANALYSIS ELEMENTS
Introduction. Cl-1
Cl-1 Cost Categories Cl-1
C 1-1.1 Costs of Installing and Operating Compliance Technology Cl-1
Cl-1.2 Net Income Loss from Installation Downtime Cl-2
Cl-1.3 Administrative Costs for Complying Facilities Cl-3
Cl-1.4 Administrative Costs for Permitting Authorities and the Federal Government Cl-9
Cl-2 Key Elements of the Economic Analysis For Phase III Existing Facilities Cl-10
C 1-2.1 Compliance Schedule Cl-10
Cl-2.2 Adjusting Monetary Values to a Common Time Period of Analysis Cl-11
Cl-2.3 Discounting and Annualization - Costs to Society or Social Costs Cl-12
C 1-2.4 Discounting and Annualization - Costs to Complying Facilities Cl-14
References Cl-17
CHAPTER C2: PROFILE OF MANUFACTURERS
Introduction C2-1
CHAPTER C2A: PAPER AND ALLIED PRODUCTS (SIC 26)
Introduction C2A-I
C2A-1 Summary Insights from this Profile C2A-3
C2A-2 Domestic Production C2A-4
C2A-2.1 Output C2A-5
C2A-2.2 Prices C2A-8
C2A-2.3 Number of facilities and firms C2A-9
C2A-2.4 Employment and productivity C2A-11
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C2A-2.5 Capital expenditures C2A-13
C2A-2.6 Capacity utilization C2A-14
C2A-3 Structure and Competitiveness C2A-15
C2A-3.1 Firm size C2A-16
C2A-3.2 Concentration ratios C2A-16
C2A-3.3 Foreign trade C2A-18
C2A-4 Financial Condition and Performance C2A-21
C2A-5 Facilities Operating Cooling Water Intake Structures C2A-22
C2A-5.1 Waterbody and Cooling System Type C2A-23
C2A-5.2 Facility Size C2A-24
C2A-5.3 Firm Size C2A-26
References C2A-28
CHAPTER C2B: CHEMICALS AND ALLIED PRODUCTS (SIC 28)
Introduction C2B-1
C2B-1 Summary Insights from this Profile C2B-4
C2B-2 Domestic Production C2B-5
C2B-2.1 Output C2B-6
C2B-2.2 Prices C2B-8
C2B-2.3 Number of Facilities and Firms C2B-10
C2B-2.4 Employment and Productivity C2B-12
C2B-2.5 Capital Expenditures C2B-14
C2B-2.6 Capacity Utilization C2B-15
C2B-3 Structure and Competitiveness C2B-18
C2B-3.1 Firm Size C2B-18
C2B-3.2 Concentration Ratios C2B-19
C2B-3.3 Foreign Trade C2B-21
C2B-4 Financial Condition and Performance C2B-26
C2B-5 Facilities Operating Cooling Water Intake Structures C2B-28
C2B-5.1 Waterbody and Cooling System Type C2B-29
C2B-5.2 Facility Size C2B-31
C2B-5.3 Firm Size C2B-33
References C2B-36
CHAPTER C2C: PETROLEUM REFINING (SIC 2911)
Introduction C2C-1
C2C-1 Summary Insights from this Profile C2C-2
C2C-2 Domestic Production C2C-3
C2C-2.1 Output C2C-4
C2C-2.2 Prices C2C-7
C2C-2.3 Number of Facilities and Firms C2C-7
C2C-2.4 Employment and Productivity C2C-8
C2C-2.5 Capital Expenditures C2C-10
C2C-2.6 Capacity Utilization C2C-11
C2C-3 Structure and Competitiveness C2C-12
C2C-3.1 Firm Size C2C-13
C2C-3.2 Concentration Ratios C2C-13
C2C-3.3 Foreign Trade C2C-14
C2C-4 Financial Condition and Performance C2C-17
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C2C-5 Facilities Operating Cooling Water Intake Structures C2C-18
C2C-5.1 Waterbody and Cooling System Type C2C-19
C2C-5.2 Facility Size C2C-20
C2C-5.3 Firm Size C2C-22
References C2C-23
CHAPTER C2D: STEEL (SIC 331)
Introduction C2D-1
C2D-1 Summary Insights from this Profile C2D-3
C2D-2 Domestic Production C2D-4
C2D-2.1 Output C2D-5
C2D-2.2 Employment and Productivity C2D-11
C2D-2.3 Capital Expenditures C2D-13
C2D-2.4 Capacity Utilization C2D-14
C2D-3 Structure and Competitiveness C2D-15
C2D-3.1 Firm Size C2D-15
C2D-3.2 Concentration Ratios C2D-16
C2D-3.3 Foreign Trade C2D-17
C2D-4 Financial Condition and Performance C2D-19
C2D-5 Facilities Operating Cooling Water Intake Structures C2D-21
C2D-5.1 Waterbody and Cooling System Type C2D-22
C2D-5.2 Facility Size C2D-23
C2D-5.3 Firm Size C2D-25
References C2D-27
CHAPTER C2E: ALUMINUM (SIC 333/5)
Introduction C2E-1
C2E-1 Summary Insights from this Profile C2E-2
C2E-2 Domestic Production C2E-3
C2E-2.1 Output C2E-4
C2E-2.2 Prices C2E-7
C2E-2.3 Number of Facilities and Firms C2E-8
C2E-2.4 Employment and Productivity C2E-10
C2E-2.5 Capital Expenditures C2E-12
C2E-2.6 Capacity Utilization C2E-13
C2E-3 Structure and Competitiveness C2E-14
C2E-3.1 Firm Size C2E-14
C2E-3.2 Concentration Ratios C2E-15
C2E-3.3 Foreign Trade C2E-16
C2E-4 Financial Condition and Performance C2E-19
C2E-5 Facilities Operating Cooling Water Intake Structures C2E-21
C2E-5.1 Waterbody and Cooling System Type C2E-22
C2E-5.2 Facility Size C2E-23
C2E-5.3 Firm Size C2E-25
References C2E-27
CHAPTER C2F: FOOD AND KINDRED PRODUCTS (SIC 20)
Introduction C2F-1
C2F-1 Summary Insights from this Profile C2F-3
C2F-2 Domestic Production C2F-4
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C2F-2.1 Output C2F-4
C2F-2.2 Number of Facilities and Firms C2F-8
C2F -2.3 Employment and Productivity C2F-10
C2F-2.4 Capital Expenditures C2F-12
C2F-2.5 Capacity Utilization C2F-13
C2F-3 Structure and Competitiveness C2F-14
C2F-3.1 Firm and Facility Size C2F-15
C2F-3.2 Concentration Ratios C2F-16
C2F-3.3 Foreign trade C2F-17
C2F-4 Financial Condition and Performance C2F-19
C2F-5 Facilities Operating Cooling Water Intake Structures C2F-23
C2F-5.1 Waterbody and Cooling System Type C2F-24
C2F -5.2 Facility Size C2F-24
C2F-5.3 Firm Size C2F-26
References C2F-28
CHAPTER C2G: FACILITIES IN OTHER INDUSTRIES (VARIOUS SICs)
Introduction C2G-1
C2G-1 Facilities Operating Cooling Water Intake Structures C2G-2
C2G-1.1 Waterbody and Cooling System Types C2G-2
C2G-1.2 Facility Size C2G-3
C2G-1.3 Firm Size C2G-5
References C2G-6
CHAPTER C2 GLOSSARY C2GIos-i
CHAPTER C3: ECONOMIC IMPACT ANALYSIS FOR MANUFACTURERS
Introduction C3-1
C3-1 Data Sources C3-3
C3-2 Methodology C3-3
C3-2.1 Market-Level Impacts C3-5
C3-2.2 impact Measures C3-5
C3-3 Results C3-15
C3-3.1 Baseline Closures C3-I6
C3-3.2 Number of Facilities with Regulatory Requirements C3-16
C3-3.3 Post-Compliance Impacts C3-17
C3-3.4 Compliance Costs C3-17
C3-3.5 Summary of Facility Impacts C3-18
C3-3.6 Firm Impacts C3-19
Glossary C3-21
Abbreviations C3-22
References C3-23
Appendices to Chapter C3 C3-24
APPENDIX C3A1: SUMMARY or RESULTS FOR SUPPLEMENTAL OPTIONS
Introduction C3A1-1
C3A1-1 Number of Facilities with Regulatory Requirements C3A1-1
C3A1-2 Post-Compliance Closures C3A1-2
C3A1-3 Moderate Impacts C3A1-2
C3A1-4 After-Tax Compliance Costs C3A1-2
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C3A1-5 Overview of Impacts C3A1-3
C3A1-6 Firm Impacts C3A1-4
APPENDIX C3A2: CALCULATION OF INSTALLATION DOWNTIME COST
Introduction C3A2-1
C3A2-1 Estimated Shut-Down Period for Installing Compliance Equipment C3A2-1
C3A2-2 Calculating the Impact of Installation Downtime on Complying Facilities C3A2-2
C3A2-3 Calculating the Cost to Society of Installation Downtime C3A2-4
APPENDIX C3A3: COST PASS-THROUGH ANALYSIS
Introduction C3A3-1
C3A3-1 The Choice of Firm-Specific versus Sector-Specific CPT Coefficients C3A3-1
C3A3-2 Market Structure Analysis C3A3-3
C3A3-2.1 Industry Concentration C3A3-4
C3A3-2.2 Import Competition C3A3-6
C3A3-2.3 Export Competition C3A3-7
C3A3-2.4 Long-Term Industry Growth C3A3-8
C3A3-2.5 Conclusions C3A3-9
References C3A3-11
APPENDIX C3A4: ADJUSTING BASELINE FACILITY CASH FLOW
Introduction C3A4-1
C3A4-1 Background: Review of Overall Business Conditions C3A4-2
C3A4-2 Framing and Executing the Analysis C3A4-5
C3A4-2.1 Identifying the Financial Data Concept to Be Analyzed C3A4-5
C3A4-2.2 Selecting Appropriate Data C3A4-5
C3A4-2.3 Selecting Industry Groups and Firms for Use in the Analysis C3A4-7
C3A4-2.4 Structuring the Analysis C3A4-9
C3A4-3 Summary of Findings C3A4-11
C3A4-3.1 Comparison of Findings for Proposed and Final Rule Analysis C3A4-17
C3 A4-4 Developing an Adjustment Concept C3A4-18
References C3A4-21
APPENDIX C3A5: ESTIMATING CAPITAL OUTLAYS FOR SECTION 316(B) PHASE III MANUFACTURING
SECTORS DISCOUNTED CASH FLOW ANALYSES
C3A5-I Analytic Concepts Underlying Analysis of Capital Outlays C3A5-2
C3A5-2 Specifying Variables for the Analysis C3A5-4
C3A5-3 Selecting the Regression Analysis Dataset C3A5-7
C3A5-4 Specification of Models to be Tested C3A5-9
C3A5-5 Model Validation C3A5-13
Attachment C3A5.A: Bibliography of Literature Reviewed for this Analysis C3A5-21
Attachment C3A5.B: Historical Variables Contained in the Value Line Investment Survey Dataset C3A5-22
APPENDIX C3A6: SUMMARY OF MODERATE IMPACT THRESHOLD VALUES BY INDUSTRY
Introduction C3A6-1
C3A6-1 Developing Threshold Values for Pre-Tax Return on Assets (PTRA) C3A6-2
C3A6-2 Developing Threshold Values for Interest Coverage Ratio (ICR) C3A6-2
C3A6-3 Summary of Results C3A6-3
References C3A6-5
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§ 316(b) Final Rale: Phase III - Economic Analysis
Table of Contents
APPENDIX C3A7: ANALYSIS OF BASELINE CLOSURE RATES
Introduction C3A7-1
C3A7-1 Annual Establishment Closures C3A7-1
References C3A7-2
APPENDIX C3A8: ANALYSIS OF OTHER REGULATIONS
Introduction C3A8-1
C3A8-1 Methodology C3A8-3
C3A8-2 Results C3A8-6
References C3A8-7
PART D: ADDITIONAL ECONOMIC ANALYSES FOR EXISTING AND NEW FACILITIES
CHAPTER Dl: REGULATORY FLEXIBILITY ANALYSIS
Introduction Dl-1
Dl-1 Analysis of New Offshore Oil and Gas Extraction Facilities Dl-2
Dl-1.1 Small Entity Determination Dl-2
Dl-1.2 Percentage of Small Entities Regulated Dl-4
Dl-1.3 Sales Test for Small Entities Dl-4
Dl-2 Analysis of Manufacturers Dl-4
Dl-2.1 Small Entity Determination Dl-5
Dl-2.2 Percentage of Small Entities Regulated Dl-10
Dl-2.3 Sales Test for Small Entities Dl-10
Dl-3 Summary of Regulatory Flexibility Analysis Dl-10
References Dl-12
APPENDIX D1A: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Introduction D1A-1
DlA-1 Summary of Results.. D1A-1
CHAPTER D2: UMRA ANALYSIS
Introduction D2-1
D2-1 Analysis of Impacts on Government Entities D2-2
D2-1.1 Compliance Costs for Government-Owned Facilities D2-3
D2-1.2 Administrative Costs for New Offshore Oil and Gas Extraction Facilities D2-3
D2-1.3 Administrative Costs for Existing Facilities D2-5
D2-1.4 Impacts on Small Governments D2-10
D2-2 Compliance Costs for the Private Sector D2-10
D2-3 Summary of UMRA Analysis D2-10
References D2-12
APPENDIX D2A: SUMMARY RESULTS FOR SUPPLEMENTAL OPTIONS
Introduction D2A-1
D2A-1 Summary of Results D2A-1
CHAPTER D3: OTHER ADMINISTRATIVE REQUIREMENTS
Introduction D3-1
D3-1 Executive Order 12866: Regulatory Planning and Review D3-I
D3-2 Paperwork Reduction Act of 1995 D3-1
D3-3 Executive Order 13132: Federalism D3-2
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§ 3!6(b) Final Rule: Phase HI - Economic Analysis Table of Contents
D3-4 Executive Order 13175: Consultation and Coordination With Indian Tribal Governments D3-3
D3-5 Executive Order 13045: Protection of Children from Environmental Health Risks and
Safety Risks D3-4
D3-6 Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply,
Distribution, or Use D3-4
D3-6.1 Existing Manufacturing Facilities D3-5
D3-6.2 New Offshore Oil and Gas Extraction Facilities D3-5
D3-7 National Technology Transfer and Advancement Act of 1995 D3-6
D3-8 Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations
and Low-Income Populations D3-6
D3-9 Executive Order 13158: Marine Protected Areas D3-6
References D3-8
PART E: SOCIAL COSTS, BENEFITS, AND BENEFIT-COST ANALYSIS FOR EXISTING AND
NEW FACILITIES
CHAPTER El: SUMMARY OF SOCIAL COSTS
Introduction El-1
El-1 Costs of Compliance by Regulated Industry Segment El-2
El-2 State and Federal Administrative Costs El-4
El-3 Total Social Cost El-5
El-4 Limitations and Uncertainties El-10
Glossary El-11
References El-12
APPENDIX El A: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Introduction E1A-1
E1A-1 Costs of Compliance by Regulated Industry Segment E1A-1
El A-2 State and Federal Administrative Costs E1A-2
E1A-3 Total Social Cost E1A-3
CHAPTER E2: SUMMARY OF BENEFITS
Introduction E2-1
E2-1 Calculating Losses and Benefits E2-1
E2-2 Summary of Baseline Losses and Expected Reductions in I&E E2-1
E2-3 Time Profile of Benefits E2-3
E2-4 Total Annualized Monetary Value of Losses and Benefits E2-9
References E2-14
APPENDIX E2A: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Introduction E2A-1
E2A-1 Summary of Expected Reductions in I&E E2A-1
E2A-2 Time Profile of Benefits E2A-3
E2A-3 Total Annualized Monetary Value of Benefits E2A-12
CHAPTER E3: COMPARISON OF BENEFITS AND SOCIAL COSTS
Introduction E3-1
E3-1 Comparison of Benefits and Social Costs by Option E3-1
E3-2 Incremental Analysis of Benefits and Social Costs E3-6
E3-3 Break-Even Analysis of Potential Non-Use Benefits E3-7
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Glossary E3-11
References , E3-12
APPENDIX E3A: SUMMARY 01 RESULTS FOR SUPPLEMENTAL OPTIONS
Introduction E3A-1
E3A-1 Comparison of Benefits and Social Costs by Option E3A-2
E3A-2 Incremental Analysis of Benefits and Social Costs E3A-8
E3A-3 Break-Even Analysis of Potential Non-Use Benefits E3A-8
References E3A-14
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LIST or TABLES
CHAPTER Al: INTRODUCTION
Table Al-1: Performance Standards for the Regulatory Options Considered Al-4
Table Al-2: Cooling Water Intake by Sector Al-7
Table A1-3: Summary Economic Data for Major Industry Sectors Potentially Subject to §316(b) Regulation:
Facilities, Employment, Value of Shipments, and Payroll Al-7
Table Al-4: Estimated Cooling Water Intake by Sector and Analysis Option (Sample Weighted) - EPA SurveyAl-9
Table Al-5: Existing Manufacturers Facilities by Applicability Threshold and Waterbody Type Al-10
Table Al-6: Phase II! Existing Facility Counts, by Industry Segment and Option Al-12
Table Al-7: Summary of Small Entity Impact Ratio Ranges For New OOGE Facilities Al-14
Table Al-8: Summary of UMRA Costs (millions, $2004) Al-15
Table A1-9: Social Cost for New Facilities (annualized, millions, $2004) Al-16
Table Al-10: Social Cost for Existing Facilities (annualized, millions, $2004) Al-17
Table Al-11: Total Social Cost for New and Existing Facilities (annualized, millions, $2004) AI-18
Table Al-12: Summary of Benefits and Social Costs for Existing Facilities (millions, $2004) Al-19
CHAPTER Bl: SUMMARY OF COST CATEGORIES AND KEY ANALYSIS ELEMENTS FOR NEW OFFSHORE
OIL AND GAS EXTRACTION FACILITIES
Table Bl-1: Technologies for Implementing 316(b) Requirements for New Offshore Oil and Gas Extraction
Facilities Bl-2
Table Bl-2: Cost of Initial Post-Promulgation NPDES General Permit Application Activities Bl-5
Table Bl-3: Cost of Subsequent NPDES General Permit Application Activities (Per Facility, 2004$) Bl-6
Table B1-4: Cost of Monitoring Activities (Per Facility, 2004$) Bl-6
Table Bl-5: Construction Cost Index Bl-9
Table Bl-6: GDP Deflator Series Bl-9
CHAPTER B2: PROFILE OF THE OFFSHORE OIL AND GAS EXTRACTION INDUSTRY
Table B2-1: Owners of MODUs Currently Operating in GOM and Parent Company B2-4
Table B2-2: Number of Existing MODUs and Parent Firms B2-6
Table B2-3: NAICS Classification of MODU Parent Companies B2-7
Table B2-4: Financial Condition of MODU Parent Companies (2002-2005) B2-8
Table B2-5: GOM Deepwater Platforms Constructed between 2003-2005t B2-14
Table B2-6: Operators and Parent Companies of GOM Deepwater Structures B2-15
Table B2-7: Count of Firms by SIC and NAICS Code B2-16
Table B2-8: Financial Condition of Platform/Structure Parent Companies (2002 - 2005) B2-17
Table B2-9: Number of Existing and Future Offshore Oil and Gas Extraction Facilities Estimated or Assumed To
Meet Final Phase III Rule Criteria over a 20-Year Analysis Time Frame B2-23
CHAPTER B3: ECONOMIC IMPACT ANALYSIS FOR THE OFFSHORE OIL AND GAS EXTRACTION
INDUSTRY
Table B3-1: Total Aggregate National After-tax Compliance Costs for MODUs ($2004) B3-3
Table B3-2: Per-Vessel Annualized Pre-Tax Cost of Compliance ($2004) B3-4
Table B3-3: Revenue Test for MODU Owners B3-9
Table B3-4: Total National Aggregate After-tax Compliance Costs for Platforms ($2004) B3-11
Table B3-5: Per-Platform Annualized Pre-Tax Cost of Compliance ($2004) B3-12
Table B3-6: Revenue Test for Platform Owners B3-15
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Table B3-7: Total National Aggregate Annualized After-tax Compliance Costs and Impacts for the Oil and Gas
industry ($2004) B3-16
Table B3-8: Total Costs to Government Entities ($2004) B3-16
Table B3-9: Total Social Costs of the Final Rulemaking for Oil and Gas Industries B3-17
CHAPTER Cl: SUMMARY OF COST CATEGORIES AND KEY ANALYSIS ELEMENTS
Table Cl-l: Estimated Average Downtime for Technology Modules Cl-2
Table Cl-2: Cost of Initial Post-Promulgation NPDES Permit Application Activities ($2004) CI-6
Table C1-3: Cost of NPDES Repermit Application Activities' ($2004) Cl-8
TableCl-4: Cost of Annual Monitoring, Record Keeping, and Reporting Activities ($2004) Cl-9
Tabled-5: Construction Cost Index Cl-11
Tabled-6:GDP Deflator Series Cl-12
CHAPTER C2A: PAPER AND ALLIED PRODUCTS (SIC 26)
Table C2A-1: Phase III Facilities in the Paper and Allied Products Industry (SIC 26) C2A-2
Table C2A-2: Relationship between SIC and NAICS Codes for the Paper and Allied Products Industry (2002")
C2A-3
Table C2A-3: U.S. Pulp and Paper Industry Industrial Production Index (Annual Averages) C2A-8
Table C2A-4: Number of Facilities Owned by Firms in the Profiled Paper and Allied Products Segments.. C2A-10
Table C2A-5: Number of Firms in the Profiled Paper and Allied Products Segments C2A-11
Table C2A-6: Productivity Trends for Profiled Paper and Allied Products Segments ($2005) C2A-13
Table C2A-7: Capital Expenditures, for Profiled Paper and Allied Products Segments (millions, $2005) C2A-14
Table C2A-8: Number of Firms and Facilities by Size Category for Profiled Paper and Allied Products Segments
in 2003' C2A-16
Table C2A-9: Selected Ratios for Profiled Paper and Allied Products Segments, 1987, 1992, and 1997 C2A-17
Table C2A-10: Trade Statistics for Profiled Paper and Allied Products Segments (millions, $2005) C2A-19
Table C2A-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and
Cooling System for the Profiled Paper and Allied Products Segments C2A-23
Table C2A-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and
Cooling System for the Profiled Paper and Allied Products Segments C2A-24
Table C2A-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and
Cooling System for the Profiled Paper and Allied Products Segments C2A-24
Table C2A-14: Number of Facilities Estimated Subject to the 50 MGD All Option in Profiled Paper and Allied
Products Segments by Firm Size C2A-26
Table C2A-15: Number of Facilities Estimated Subject to the 200 MGD All Option in Profiled Paper and Allied
Products Segments by Firm Size C2A-27
Table C2A-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option in Profiled Paper and
Allied Products Segments by Firm Size C2A-27
CHAPTER C2B: CHEMICALS AND ALLIED PRODUCTS (SIC 28)
Table C2B-1: Phase III Facilities in the Chemicals and Allied Products Industry (SIC 28) C2B-2
Table C2B-2: Relationship between SIC and NAICS Codes for the Chemicals and Allied Products Industry
(2002) C2B-4
Table C2B-3: Chemicals Industry Industrial Production Index (Annual Averages) C2B-8
Table C2B-4: Number of Facilities for Profiled Chemical Segmentsa C2B-11
Table C2B-5: Number of Firms for Profiled Chemical Segmentsa C2B-12
Table C2B-6: Productivity Trends for Profiled Chemical Segments ($2005) C2B-14
Table C2B-7: Capital Expenditures for Profiled Chemical Segments (in millions, $2005) C2B-15
Table C2B-8: Number of Firms and Facilities by Firm Size Category for Profiled Chemical Segments, 2003a
C2B-19
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§ 316(b) Final Rule: Phase III - Economic Analysis
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Table C2B-9: Selected Ratios for SIC and NAICS Codes Within The Profiled Chemical Segments in 1987,1992,
and 1997a C2B-20
Table C2B-10: Trade Statistics for Profiled Chemical Segments C2B-23
Table C2B-11: Number of Facilities Estimated Subject to the 50 MOD All Option by Waterbody Type and
Cooling System for the Profiled Chemical Segments C2B-30
Table C2B-12: Number of Facilities Estimated Subject to the 200 MOD All Option by Waterbody Type and
Cooling System for the Profiled Chemical Segments C2B-30
Table C2B-13: Number of Facilities Estimated Subject to the 100 MOD CWB Option by Waterbody Type and
Cooling System for the Profiled Chemical Segments C2B-31
Table C2B-14: Number of Facilities Estimated Subject to the 50 MOD All Option by Firm Size for Profiled
Chemical Segments C2B-34
Table C2B-15: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for Profiled
Chemical Segments C2B-34
Table C2B-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for Profiled
Chemical Segments C2B-35
CHAPTER C2C: PETROLEUM REFINING (SIC 2911)
Table C2C-1: Phase III Facilities in the Petroleum Refining Industry (SIC 29) C2C-2
Table C2C-2: Relationship between SIC and NAICS Codes for the Petroleum Refining Industry (2002*) C2C-2
Table C2C-3: U.S. Petroleum Refinery Product Production (million barrels per day) C2C-5
Table C2C-4: Number of Firms and Facilities for Petroleum Refineries C2C-8
Table C2C-5: Productivity Trends for Petroleum Refineries ($2005) C2C-10
Table C2C-6: Capital Expenditures for Petroleum Refineries ($2005) C2C-11
Table C2C-7: Number of Firms and Establishments for Petroleum Refineries by Firm Employment Size Category,
2003 C2C-13
Table C2C-8: Selected Ratios for Petroleum Refineries C2C-14
Table C2C-9: Foreign Trade Statistics for Petroleum Refining ($2005) C2C-15
Table C2C-10: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type and
Cooling System for the Petroleum Refining Segment C2C-20
Table C2C-11: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type and
Cooling System for the Petroleum Refining Segment C2C-20
Table C2C-12: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type and
Cooling System for the Petroleum Refining Segment C2C-20
Table C2C-13: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Petroleum
Refinery Segment C2C-22
Table C2C-14: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the
Petroleum Refinery Segment C2C-22
Table C2C-15: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the
Petroleum Refinery Segment C2C-22
CHAPTER C2D: STEEL (SIC 331)
Table C2D-1: Phase III Facilities in the Steel Industry (SIC 331) C2D-2
Table C2D-2: Relationships between SIC and NAICS Codes for the Steel Industries (2002) C2D-3
Table C2D-3: U.S. Steel Production by Type of Producer C2D-6
Table C2D-4: Number of Facilities in the Profiled Steel Industry Segments C2D-10
Table C2D-5: Number of Firms in the Profiled Steel Industry Segments C2D-11
Table C2D-6: Productivity Trends for the Profiled Steel Industry Segments ($2005) C2D-13
Table C2D-7: Capital Expenditures for the Profiled Steel Industry Segments (millions, $2005) C2D-14
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§ 3l6(b) Final Rule: Phase 111 - Economic Analysis
Table of Contents
Table C2D-8: Number of Firms and Facilities by Employment Size Category in the Profiled Steel Industry
Segments, 2003" C2D-16
Table C2D-9: Selected Ratios for the Profiled Steel Industry Segments C2D-17
Table C2D-10: Import Penetration and Export Dependence: Steel Mill Products ($2005) C2D-19
Table C2D-11: Number of Facilities Estimated Subject to the 50 MOD All Option by Waterbody Type and
Cooling System for the Profiled Steel Industry Segments C2D-22
Table C2D-12: Number of Facilities Estimated Subject to the 200 MOD AH Option by Waterbody Type and
Cooling System for the Profiled Steel Industry Segments C2D-23
Table C2D-13: Number of Facilities Estimated Subject to the 100 MOD CWB Option by Waterbody Type and
Cooling System for the Profiled Steel Industry Segments C2D-23
Table C2D-14: Number of Facilities Estimated Subject to the 50 MOD All Option by Firm Size for the Profiled
Steel Segments C2D-25
Table C2D-15: Number ofFacilit.es Estimated Subject to the 200 MOD All Option by Firm Size for the Profiled
Steel Segments C2D-26
Table C2D-16: Number of Facilities Estimated Subject to the 100 MOD CWB Option by Firm Size for the
Profiled Steel Segments C2D-26
CHAPTER C2E: ALUMINUM (SIC 333/5)
Table C2E-1: Phase III Facilities in the Aluminum Industries (SIC 333/335) C2E-1
Table C2E-2: Relationships between SIC and NA1CS Codes for the Aluminum Industries (2002") C2E-2
Table C2E-3: U.S. Aluminum Production C2E-5
Table C2E-4: Primary Aluminum Production - Number of Companies and Plants C2E-8
Table C2E-5: Number of Facilities for Profiled Aluminum Industry Segments C2E-9
Table C2E-6: Number of Firms for Profiled Aluminum Industry Segments C2E-10
Table C2E-7: Productivity Trends for Profiled Aluminum Segments ($2005) C2E-12
Table C2E-8: Capital Expenditures for Profiled Aluminum Segments (millions, $2005) C2E-13
Table C2E-9: Number of Firms arid Facilities by Employment Size Category for the Profiled Aluminum Industry
Segments, 2003" C2E-15
Table C2E-10: Selected Ratios for the Profiled Aluminum Segments, 1987, 1992, and 1997 C2E-16
Table C2E-11: Import Share and Export Dependence for the Profiled Aluminum Segments ($2005) C2E-18
Table C2E-12: Trade Statistics for Aluminum and Semi-fabricated Aluminum Products C2E-19
Table C2E-13: Number of Facilities Estimated Subject to the 50 MOD All Option by Waterbody Type and
Cooling System for the Profiled Aluminum Segments C2E-22
Table C2E-14: Number of Facilities Estimated Subject to the 200 MOD All Option by Waterbody Type and
Cooling System for the Profiled Aluminum Segments C2E-23
Table C2E-15: Number of Facilities Estimated Subject to the 100 MOD CWB Option by Waterbody Type and
Cooling System for the Profiled Aluminum Segments C2E-23
Table C2E-16 Number of Facilities Estimated Subject to the 50 MOD All Option by Firm Size for the Profiled
Aluminum Segments C2E-25
Table C2E-17: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Profiled
Aluminum Segments C2E-25
Table C2E-18: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the
Profiled Aluminum Segments C2E-26
CHAPTER C2F: FOOD AND KINDRED PRODUCTS (SIC 20)
Table C2F-1: Phase HI Facilities in the Food and Kindred Products Industry (SIC 20) C2F-2
Table C2F-2: Relationship between SIC and NAICS Codes for the Food Manufacturing and Beverage
Manufacturing Segments (2002") C2F-3
Table C2F-3: U.S. Food and Beverage Manufacturing Industry Industrial Production Index C2F-7
June 1, 2006
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£ 3I6(b) Final Rule: Phase III - Economic Analysis Table of Contents
Table C2F-4: Number of Facilities Owned by Firms in the Food and Beverage Manufacturing Segments C2F-9
Table C2F-5: Number of Firms in the Food and Beverage Manufacturing Segments C2F-10
Table C2F-6: Productivity Trends for Food and Beverage Manufacturing Segments ($2005) C2F-12
Table C2F-7: Capital Expenditures for Food and Beverage Manufacturing Segments (millions, $2005) C2F-13
Table C2F-8: Number of Firms and Facilities by Size Category for Food and Beverage Manufacturing Segments,
2003" C2F-16
Table C2F-9: Selected Concentration Ratios for Food Manufacturing and Beverage Manufacturing Segments,
1997a C2F-17
Table C2F-10: Trade Statistics for Combined Food and Beverage Manufacturing Segments C2F-18
Table C2F-11: Number of Food and Kindred Products Facilities Estimated Subject to the 50 MOD All Option by
Waterbody Type and Cooling System C2F-24
Table C2F-12: Number of Food and Kindred Products Facilities Estimated Subject to the 200 MGD All Option by
Waterbody Type and Cooling System C2F-24
Table C2F-13: Number of Food and Kindred Products Facilities Estimated Subject to the 100 MGD CWB Option
by Waterbody Type and Cooling System C2F-24
Table C2F-14: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size for the Food and
Kindred Products Industry C2F-26
Table C2F-15: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the Food and
Kindred Products Industry C2F-26
Table C2F-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for the Food
and Kindred Products Industry C2F-26
CHAPTER C2G: FACILITIES IN OTHER INDUSTRIES (VARIOUS SICs)
Table C2G-1: Facilities in Other Industries by 2-digit SIC code Estimated Subject to Regulation Under the
Primary Analysis Options C2G-2
Table C2G-2: Other Industries Facilities Estimated Subject to the 50 MGD All Option by Water Body and
Cooling System Type C2G-3
Table C2G-3: Other Industries Facilities Estimated Subject to the 200 MGD All Option by Water Body and
Cooling System Type C2G-3
Table C2G-4: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by Water Body and
Cooling System Type C2G-3
Table C2G-5: Other Industries Facilities Estimated Subject to the 50 MGD All Option by Firm Size C2G-5
Table C2G-6: Other Industries Facilities Estimated Subject to the 200 MGD All Option by Firm Size C2G-5
Table C2G-7: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size C2G-5
CHAPTER C3: ECONOMIC IMPACT ANALYSIS FOR MANUFACTURERS
Table C3-1: Summary of Baseline Closures by Sector C3-16
Table C3-2: Number of Facilities with Regulatory Requirements by Sector and Option C3-17
Table C3-3: Total Annualized Facility Compliance Cost8 by Sector and Regulatory Option C3-18
Table C3-4: Regulatory Impacts for All Facilities by Option, National Estimates C3-19
Table C3-5: Firm-Level After-Tax Annual Compliance Costs as a Percentage of Annual Revenue C3-20
APPENDIX C3A1: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Table C3A1-1: Number of Facilities with Regulatory Requirements by Sector and Option C3A1-1
Table C3A1-2: Number of Facilities Estimated as Post-Compliance Closures by Option C3A1-2
Table C3A1-3: Number of Facilities Estimated as Moderate Impacts by Option C3A1-2
Table C3A1-4: Total Annualized Facility' After-Tax Compliance Cost by Option (millions, $2004) C3A1-2
Table C3A1-5: Regulatory Impacts for All Facilities by Option, National Estimates C3A1-3
Table C3AI-6: Firm-level After-Tax Annual Compliance Costs as a Percentage of Annual Revenue C3A1-4
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§ 3!6(b) Final Rule: Phase III - Econom ic Analysis
Table of Contents
APPENDIX C3A2: CALCULATION OF INSTALLATION DOWNTIME COST
Table C3A2-1: Estimated Average Cooling Water System Downtime by Technology Module C3A2-2
APPENDIX C3A3: COST PASS-THROUGH ANALYSIS
Table C3A3-1: Proportion of Value of Shipments Potentially Subject to Compliance-Related Costs Associated
with the Phase III Regulation ($2004) C3A3-3
Table C3A3-2: Herfindahl-Hirschman Index for Four-Digit SIC C3A3-5
Table C3A3-3: Herfindahl-Hirschman Index by Industry C3A3-6
Table C3A3-4: Import Penetration by Industry ($2004) C3A3-7
Table C3A3-5: Export Dependence by Industry ($2004) C3A3-8
Table C3A3-6: Average Annual Growth Rates by Industry C3A3-9
APPENDIX C3A4: ADJUSTING BASELINE FACILITY CASH FLOW
Table C3A4-1: Value Line Industry Groups Selected for Analysis C3A4-9
Table C3A4-2: Key Results from Analysis of After-Tax Cash Flow Trends by 316(b) Industry for 1992-2005
C3A4-12
Table C3A4-3: Estimated Relationship Between Actual ATCF at Survey Period and Trend Predicted Values at
Survey Period and End of Analysis Period C3A4-16
Table C3A4-4: Comparison of Key Results from Analyses for the Proposed and Final 316(b) Rule Analysis
Periods C3A4-18
Table C3A4-5: Using After-Tax Cash Flow Adjustment Factors in the Facility Closure Analysis C3A4-20
APPENDIX C3A5: ESTIMATING CAPITAL OUTLAYS FOR SECTION 316(e) PHASE III MANUFACTURING
SECTORS DISCOUNTED CASH FLOW ANALYSES
Table C3A5-1: Summary of Factors Influencing Capital Outlays C3A5-3
Table C3A5-2: Variables For Capital Expenditure Modeling Analysis C3A5-6
Table C3A5-3: Number of Firms by Industry Classifications C3A5-9
Table C3A5-4: Time Series, Cross-Sectional Model Results C3A5-12
Table C3A5-5: Estimation of Capital Outlays for Phase III Sample Facilities: Median Facilities Selected by
Revenue and ROA Percentiles C3A5-14
APPENDIX C3A6: SUMMARY OF MODERATE IMPACT THRESHOLD VALUES BY INDUSTRY
Table C3A6-1: Summary of Moderate Impact Thresholds by Industry C3A6-4
APPENDIX C3A7: ANALYSIS OF BASELINE CLOSURE RATES
Table C3A7-1: Predicted Baseline Closures and Annual Percentage of Closures for Primary Manufacturing
Industries (1990-2002) C3A7-1
APPENDIX C3A8: ANALYSIS OF OTHER REGULATIONS
Table C3A8-1: Regulations Potemially Affecting 316(b) Manufacturers C3A8-2
Table C3A8-2: Per Facility Cost of Regulations that Affect 316(b) Industries' C3A8-5
CHAPTER Dl: REGULATORY FLEXIBILITY ANALYSIS
Table Dl-l: NAICS Classification of MODU Parent Companies Dl-3
Table Dl-2: Unique 4-Digit Firm-Level SIC Codes and SBA Size Standards for Manufacturers* Dl-7
Table Dl-3: Number of Firms by Firm Sector and Size (assuming two different ownership cases) Dl-9
Table Dl-4: Summary of Small Entity Impact Ratio Ranges by Sector Dl-l 1
APPENDIX Dl A: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Table D1A-1: Summary of Small Entity Impact Ratio Ranges for Existing Facilities by Regulatory Segment
(Facilities with DIF of at least 2 MOD) Dl A-2
June 1, 2006
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§ 3l6(b) Final Rule: Phase /// - Economic Analysis
Table of Contents
CHAPTER D2: UMRA ANALYSIS
Table D2-1: Federal Government Costs for Permit Issuance Activities (Per Facility Permitted under General
Permits; $2004) D2-4
Table D2-2: Federal Government Costs for Annual Activities (Per Facility Permitted under General Permits;
$2004) D2-4
Table D2-3: - Annualized Government Administrative Costs (millions, $2004) D2-5
Table D2-4: Government Costs of Start-Up Activities (per Permitting Authority; $2004) D2-6
Table D2-5: Government Permitting Costs (per Permit; $2004) D2-7
Table D2-6: Government Costs of Verification Study Review (per Permit; $2004) D2-8
Table D2-7: Government Costs of Alternative Regulatory Requirements (per Permitting Authority; $2004).. D2-8
Table D2-8: Government Costs for Annual Activities (per Permit; $2004) D2-9
Table D2-9: Federal Government Permit Program Oversight Activities (per Permit; $2004) D2-9
Table D2-10: Summary of UMRA Costs (millions, $2004) D2-11
APPENDIX D2A: SUMMARY RESULTS FOR SUPPLEMENTAL OPTIONS
Table D2A-1: Summary of UMRA Costs for the I-only Everywhere option (millions, $2004) D2A-1
Table D2A-2: Summary of UMRA Costs for the I&E Like Phase II option (millions, $2004) D2A-2
Table D2A-3: Summary of UMRA Costs for the I&E Everywhere option (millions, $2004) D2A-2
CHAPTER El: SUMMARY OF SOCIAL COSTS
Table El-1: Summary of Annualized Direct Costs by Industry Segments (millions, $2004) El-4
Table El-2: Summary of Annualized Government Costs (mil lions, $2004) El-4
Table El-3: Summary of Annualized Government Costs (millions, $2004) El-5
Table El-4: Summary of Annualized Social Costs (millions, $2004) El-6
Table El-5: Summary of Annualized Social Costs (millions, $2004) El-6
Table El-6: Time Profile of Compliance Costs for the 50 MGD All Waterbodies Option for Existing Facilities
and the Final Rule for New OOGE Facilities (millions; $2004) El-7
Table El-7: Time Profile of Compliance Costs for the 200 MGD for All Waterbodies Option for Existing
Facilities and the Final Rule for New OOGE Facilities (millions; $2004) El-8
Table El-8: Time Profile of Compliance Costs for the 100 MGD for Certain Waterbodies Option for Existing
Facilities and the Final Rule for New OOGE Facilities (millions; $2004) El-9
APPENDIX El A: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Table El A-l: Summary of Annualized Direct Costs by Regulated Industry Segments El A-2
Table El A-2: Summary of Annualized Government Costs for Existing Facilities at 3% Discount Rate E1A-2
Table El A-3: Summary of Annualized Government Costs for Existing Facilities at 7% Discount Rate El A-3
Table E1A-4: Summary of Annualized Social Costs for Existing Facilities at 3% Discount Rate El A-3
Table El A-5: Summary of Annualized Social Costs for Existing Facilities at 7% Discount Rate E1A-4
Table El A-6: Time Profile of Compliance Costs for Existing Electric Generators with DIF of 2 to 50 MGD Under
the I-only Everywhere Option (millions, $2004) El A-5
Table El A-7: Time Profile of Compliance Costs for Existing Electric Generators with DIF of 2 to 50 MGD Under
the I&E Like Phase II Option (millions, $2004) E1A-6
Table El A-8: Time Profile of Compliance Costs for Existing Electric Generators with DIF of 2 to 50 MGD Under
the I&E Everywhere Option (millions, $2004) El A-7
Table El A-9: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 2 to 50 MGD Under the
I-only Everywhere Option (millions, $2004) E1A-8
Table El A-10: Time Profile of Compliance Costs for Existing Manufacturers with DIF of 2 to 50 MGD Under
the I&E Like Phase II Option (millions, $2004) El A-9
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June I, 2006
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§ 3l6(b) Final Rule: Phase III - Economic Analysis
Table of Contents
Table El A-l 1: Time Profile of Compliance Costs for Existing Manufacturers with DIP of 2 to 50 MOD Under
the I&E Everywhere Option (millions, $2004) El A-10
Table E1A-12: Time Profile of Compliance Costs for Existing Manufacturers with DIP of 50 MOD or Greater
Under the I-Only Everywhere Option (millions, $2004) El A-l 1
Table E1A-13: Time Profile of Compliance Costs for Existing Manufacturers with DJF of 50 MGD or Greater
Under the I&E Everywhere Option (millions, $2004) E1A-13
CHAPTER E2: SUMMARY OF BENEFITS
Table E2-1: Total Annual Baseline I&E Losses for Potential Phase III Existing Facilities by Region (thousands)
E2-2
Table E2-2: Expected Reduction in I&E for Phase III Existing Facilities by Option and Region E2-3
Table E2-3: Time Profile of Mean Monetary Value of Total Baseline I&E Losses (thousands; $2004) E2-5
Table E2-4: Time Profile of Mean Total Use Benefits - Phase III Final Regulation (thousands; $2004) E2-6
Table E2-5: Time Profile of Mean Total Use Benefits - 200 MGD All Option (thousands; $2004) E2-7
Table E2-6: Time Profile of Mean Total Use Benefits - 100 MGD CWB Option (thousands; $2004) E2-8
Table E2-7: Summary of Monetary Values of Baseline I&E Losses (thousands; $2004) E2-IO
Table E2-8: Summary of Monetized Benefits by Option (thousands; $2004; discounted at 3%) E2-I2
Table E2-9: Summary of Monetized Benefits by Option (thousands; $2004; discounted at 7%) E2-13
APPENDIX E2A: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Table E2A-1: Expected Reductions in I&E for Existing Phase III Facilities by Option E2A-1
Table E2A-2: Time Profile of Mean Total Use Benefits - "Electric Generators 2-50 MGD I-only Everywhere"
Option (thousands; 2004$)' E2A-4
Table E2A-3: Time Profile of Mean Total Use Benefits - "Electric Generators 2-50 MGD I&E like Phase II"
Option (thousands; 2004$)' E2A-5
Table E2A-4: Time Profile of Mean Total Use Benefits - "Electric Generators 2-50 MGD I&E Everywhere"
Option (thousands; 2004$)' E2A-6
Table E2A-5: Time Profile of Mean Total Use Benefits - "Manufacturers 2-50 MGD I-only Everywhere" Option
(thousands; 2004$)* E2A-7
Table E2A-6: Time Profile of Mean Total Use Benefits - "Manufacturers 2-50 MGD I&E like Phase II" Option
(thousands; 2004$)" E2A-8
Table E2A-7: Time Profile of Mean Total Use Benefits - "Manufacturers 2-50 MGD I&E Everywhere" Option
(thousands; 2004$)* E2A-9
Table E2A-8: Time Profile of Mean Total Use Benefits - "Manufacturers 50+ MGD I-only Everywhere" Option
(thousands; 2004$)" E2A-10
Table E2A-9: Time Profile of Mean Total Use Benefits - "Manufacturers 50+ MGD I&E Everywhere" Option
(thousands; 2004$)' E2A-11
Table E2A-10: Summary of Monetized Benefits for Existing Phase III Facilities8 E2A-12
Table E2A-11: Summary of Monetized Benefits for Existing Phase III Facilities" E2A-14
CHAPTER E3: COMPARISON OF BENEFITS AND SOCIAL COSTS
Table E3-1: Number of Existing Phase III Facilities by Compliance Action" E3-1
Table E3-2: Total Benefits, Social Costs, and Cost-Benefit Ratios for Existing Phase 111 Facilities by Option
(millions; $2004) E3-3
Table E3-3: Cost-Benefit Ratios for Existing Phase III Facilities by Option and Region (discounted at 3%).... E3-4
Table E3-4: Cost-Benefit Ratios for Existing Phase III Facilities by Option and Region (discounted at 7%).... E3-4
Table E3-5: Time Profile of Benefits and Social Costs for Existing Phase III Facilities (millions; $2004) E3-5
Table E-6: Comparison of Break-Even Analysis by Regions for 316(b) Phase II and Phase III Regulations (2004$,
discounted at 3%)"'b E3-6
Table E3-7: Incremental Benefit-Cost Analysis for Existing Phase III Facilities (millions; $2004) E3-7
June I, 2006
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£ 316(b) Final Rule: Phase III - Economic Analysis Table of Contents
Table E3-8: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Costs for
Existing Phase III Facilities - Break-Even Analysis ($2004) E3-8
Table E3-9: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Costs for
Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 3%) E3-9
Table E3-10: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Costs for
Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 7%) E3-10
APPENDIX E3A: SUMMARY OF RESULTS FOR SUPPLEMENTAL OPTIONS
Table E3A-1: Number of Existing Phase III Facilities by Compliance Action' E3A-1
Table E3A-2: Total Benefits, Social Costs, and Net Benefits for Existing Phase III Facilities E3A-2
Table E3A-3: Total Net Benefits for Existing Phase III Facilities by Option and Region E3A-3
Table E3A-4: Total Net Benefits for Existing Phase III Facilities by Option and Region E3A-4
Table E3A-5: Time Profile of Benefits and Costs for Existing Phase III Electric Generator 2-50 MOD Facilities
(millions; 2004$) E3A-5
Table E3A-6: Time Profile of Benefits and Costs for Existing Phase III Manufacturer 2-50 MGD Facilities
(millions; 2004$) E3A-6
Table E3A-7: Time Profile of Benefits and Costs for Existing Phase III Manufacturer 50+ MGD Facilities
(millions; 2004$) E3A-7
Table E3A-8: Incremental Benefit-Cost Analysis for Existing Phase III Facilities (millions; 2004$) E3A-8
Table E3A-9: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Cost for
Existing Phase III Facilities - Break-Even Analysis (2004$, discounted at 3%) E3A-9
Table E3A-10: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Cost for
Existing Phase III Facilities - Break-Even Analysis (2004$, discounted at 7%) E3A-9
Table E3A-11: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Costs for
Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 3%) E3A-10
Table E3A-12: Estimated Value of Non-Use Benefits Required for Total Benefits to Equal Total Social Costs for
Existing Phase III Facilities - Break-Even Analysis by Regions (2004$, discounted at 7%) E3A-12
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§ 316(l>) Final Rule: Phase HI - Economic Analysis
Table of Contents
LIST OF FIGURES
CHAPTER C2A: PAPER AND ALLIED PRODUCTS (SIC 26)
Figure C2A-1: Value of Shipments and Value Added for Profiled Paper and Allied Products Segments (millions,
$2005) C2A-7
Figure C2A-2: Producer Price Indexes for Profiled Paper and Allied Products Segments C2A-9
Figure C2A-3: Employment for Profiled Paper and Allied Products Segments C2A-12
Figure C2A-4: Capacity Utilization Rate (Fourth Quarter) for Pulp and Paper Industry C2A-15
Figure C2A-5: Value of Imports :ind Exports for Profiled Paper and Allied Products Segments C2A-20
Figure C2A-6: Net Profit Margin and Return on Capital for Pulp and Paper Mills C2A-22
Figure C2A-7: Number of Facilities Estimated Subject to the 50 MOD All Option by Employment Size for
Profiled Paper and Allied Products Segments C2A-25
Figure C2A-8: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for
Profiled Paper and Allied Products Segments C2A-25
Figure C2A-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for
Profiled Paper and Allied Products Segments C2A-26
CHAPTER C2B: CHEMICALS AND ALLIED PRODUCTS (SIC 28)
Figure C2B-1: Value of Shipments and Value Added for Profiled Chemicals Industry Segments C2B-7
Figure C2B-2: Producer Price Indexes for Profiled Chemicals Industry Segments C2B-10
Figure C2B-3: Employment for Profiled Chemical Segments (OOOs) C2B-13
Figure C2B-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Chemical Segments C2B-17
Figure C2B-5: Value of Imports and Exports for Profiled Chemicals Industry Segments C2B-25
Figure C2B-6: Net Profit Margin and Return in Total Capital for the Chemical Industry C2B-28
Figure C2B-7: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for
Profiled Chemicals Industry Segments C2B-32
Figure C2B-8: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for
Profiled Chemicals Industry Segments C2B-32
Figure C2B-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for
Profiled Chemicals Industry Segments C2B-33
CHAPTER C2C: PETROLEUM REFINING (SIC 2911)
Figure C2C-1: Value of Shipments and Value Added for Petroleum Refineries (millions, $2005) C2C-6
Figure C2C-2: Producer Price Index for Petroleum Refineries C2C-7
Figure C2C-3: Employment for Petroleum Refineries C2C-9
Figure C2C-4: Capacity Utilization Rates (Fourth Quarter) for Petroleum Refineries C2C-12
Figure C2C-5: Value of Imports and Exports for Petroleum Refining (millions, $2005) C2C-16
Figure C2C-6: Net Profit Margin and Return on Total Capital for Petroleum Refining C2C-18
Figure C2C-7: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the
Petroleum Refinery Segment C2C-21
Figure C2C-8: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the
Petroleum Refinery Segment C2C-21
Figure C2C-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for the
Petroleum Refinery Segment C2C-22
CHAPTER C2D: STEEL (SIC 331)
Figure C2D-1: Value of Shipments and Value Added for Profiled Steel industry Segments C2D-8
Figure C2D-2: Producer Price Index for Profiled Steel Industry Segments C2D-9
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£ 316(b) Final Rule: Phase III - Economic Analysis Table of Contents
Figure C2D-3: Employment for Profiled Steel Industry Segments C2D-12
Figure C2D-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Steel Industry Segments C2D-15
Figure C2D-5: Net Profit Margin and Return on Total Capital for the Iron and Steel Industry C2D-21
Figure C2D-6: Number of Facilities Estimated Subject to the 50 MOD All Option by Employment Size for
Profiled Steel Industry Segments C2D-24
Figure C2D-7: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for
Profiled Steel Industry Segments C2D-24
Figure C2D-8: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for
Profiled Steel Industry Segments C2D-25
CHAPTER C2E: ALUMINUM (SIC 333/5)
Figure C2E-1: Value of Shipments and Value Added for Profiled Aluminum Industry Segments (millions, $2005)C2E-6
Figure C2E-2: Producer Price Indexes for Profiled Aluminum Industry Segments C2E-8
Figure C2E-3: Employment for Profiled Aluminum Industry Segments C2E-11
Figure C2E-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Aluminum Segments C2E-14
Figure C2E-5: Net Profit Margin and Return on Total Capital for the Aluminum Industry C2E-21
Figure C2E-6: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the
Profiled Aluminum Segments C2E-24
Figure C2E-7: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for the
Profiled Aluminum Segments C2E-24
Figure C2E-8: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for the
Profiled Aluminum Segments C2E-25
CHAPTER C2F: FOOD AND KINDRED PRODUCTS (SIC 20)
Figure C2F-1: Value of Shipments for Food Manufacturing and Beverage Manufacturing Segments (millions,
$2005) C2F-5
Figure C2F-2: Value Added for Food Manufacturing and Beverage Manufacturing Segments (millions, $2005)....
C2F-6
Figure C2F-3: Producer Price Indexes for Food Manufacturing and Beverage Manufacturing Segments C2F-8
Figure C2F-4: Employment for Food Manufacturing and Beverage Manufacturing Segments C2F-11
Figure C2F-5: Capacity Utilization for Food Manufacturing and Beverage and Tobacco Manufacturing*..,.C2F-14
Figure C2F-6: Value of Imports and Exports for Food Manufacturing and Beverage Manufacturing Segments
(millions, $2005) C2F-19
Figure C2F-7: Net Profit Margin for Food and Beverage Manufacturers C2F-21
Figure C2F-8: Return on Total Capital for Food and Beverage Manufacturers C2F-22
Figure C2F-9: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment Size for the
Profiled Food Manufacturing and Beverage Segments C2F-25
Figure C2F-10: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment Size for the
Profiled Food Manufacturing and Beverage Segments C2F-25
Figure C2F-11: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size for
the Profiled Food Manufacturing and Beverage Segments C2F-26
CHAPTER C2G: FACILITIES IN OTHER INDUSTRIES (VARIOUS SICs)
Figure C2G-1: Other Industries Facilities Estimated Subject to the 50 MGD All Option by Employment Size
C2G-4
Figure C2G-2: Other Industries Facilities Estimated Subject to the 200 MGD All Option by Employment Size
C2G-4
Figure C2G-3: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by Employment Size..
C2G-5
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§ 316(b) Final Rule: Phase III - Econorric Analysis
Table of Contents
APPENDIX C3A4: ADJUSTING BASELINE FACILITY CASH FLOW
Figure C3A4-1: Growth in Real Domestic Product, 1985-2005 C3A4-3
Figure C3A4-2: Capacity Utilization in Manufacturing Industries, 1985-2005 C3A4-4
Figure C3A4-3: Growth in Industrial Production, 1985-2005 C3A4-4
Figure C3A4-4: ATCF Index vs. Trend C3A4-12
APPENDIX C3A5: ESTIMATING CAPITAL OUTLAYS FOR SECTION 316(e) PHASE III MANUFACTURING
SECTORS DISCOUNTED CASH FLOW ANALYSES
Figure C3A5-1: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase HI Survey
Facilities in the Paper and Allied Products Sector C3A5-16
Figure C3A5-2: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase HI Survey
Facilities in the Chemicals and Allied Products Sector C3A5-17
Figure C3A5-3: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase III Survey
Facilities in the Petroleum and Coal Products Sector C3A5-18
Figure C3A5-4: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase III Survey
Facilities in the Primary Metal Industries Sector C3A5-19
Figure C3A5-5: Comparison of Estimated Capital Outlays to Reported Depreciation for Phase III Survey
Facilities in the Food and Kindred Products Sector C3A5-20
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£ 3l6(b) Final Rule: Phase HI - Economic Analysis Table of Contents
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§ 3I6(b) Final Rule: Phase III - EA, Part A: Background Information
Chapter Al: Introduction
Chapter Al: Introduction
INTRODUCTION
CHAPTER CONTENTS
Introduction A1-1
Al-1 Overview of Potentially Regulated Sectors and
Facilities Al-1
Al-1.1 New Offshore Oil and Gas Extraction
Facilities Al-1
Al-1.2 Existing Phase III Facilities and Sectors
Al-2
Al-2 Summary of the Final Rule Al-10
A1-2.1 New Offshore Oil and Gas Extraction
Facilities Al-10
Al-2.2 Existing Facilities Al-11
A1-3 Summary of Economic Analysis Results Al-11
Al-4 Organization of the E A Report Al-19
References A1-21
EPA is promulgating regulations implementing section
316(b) of the Clean Water Act (CWA). This regulation is
the third in a series of rulemaking actions under CWA
section 316(b), addressing the environmental impacts of
cooling water intake structures (CWIS). The Final Section
316(b) Regulation for Phase III Facilities establishes
national performance requirements for the location, design,
construction, and capacity of CWIS for new offshore oil
and gas extraction facilities. Although several regulatory
options were considered for promulgation for existing
manufacturing facilities, EPA has decided that Phase III
existing facilities should continue to have section 316(b)
limits established on a case-by-case, best professional
judgment basis.
This Economic and Benefits Analysis for the Final Section
316(b) Phase III Existing Facilities Rule report (hereinafter
"Economic Analysis" or "EA") presents the economic analysis of the final regulation, as it applies to new oil and
gas extraction facilities, as well as several regulatory alternatives that EPA considered in the development of a
potential regulation for existing Phase III manufacturing facilities.
Al-1 OVERVIEW OF POTENTIALLY REGULATED SECTORS AND FACILITIES
Setting aside those facilities covered by the Phase II Final Regulation, the facilities potentially subject to
regulation under Phase III consisted of facilities that employ a cooling water intake structure and are designed to
withdraw two million gallons per day or more from waters of the United States and that fall in two general
categories:
1. New Offshore Oil and Gas Extraction Facilities', and
2. Existing Facilities, which include Electric Power Producing Facilities with DIP of less than 50 MOD,
Manufacturing and Other Industries Facilities ("Manufacturers").
In the documents for the Phase [II proposed regulation, these facilities were collectively described as the
"potential Phase 111 facilities."
Al-1.1
New Offshore Oil and Gas Extraction Facilities
In developing the Final Section 316(b) Regulation for Phase III Facilities, EPA analyzed the proposed
regulations' applicability to new offshore oil and gas extraction facilities (abbreviated as "new OOGE facilities"),
seafood processing vessels, and offshore liquid natural gas (LNG) terminals. EPA's analysis of these facilities is
discussed in Part C: Economic Analysis for Phase III New Offshore Oil and Gas Extraction Facilities of this EA
and in the Technical Development Document for the Final Section 316(b) Phase HI Existing Facilities Rule (U.S.
EPA, 2006b).
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Al-l
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§ 3l6(b) Final Rule: Phase III - EA, Part A: Background Information
Chapter A I: Introduction
The Phase HI final regulation applies to only the new offshore oil and gas extraction facilities category of these
additional categories listed above. EPA estimates that 124 new offshore oil and gas extraction facilities will be
subject to the final regulation. All of these facilities will be located off the coast of California, Alaska, or the Gulf
of Mexico, henceforth referred to as "Coastal Waterbodies."
Al-1.2 Existing Phase III Facilities and Sectors
Al-1.2.1 Regulatory Options Considered
EPA considered requirements for Phase HI existing facilities to meet performance standards similar to those
required in the final Phase II rule, including an 80-95% reduction in impingement mortality and a 60-90%
reduction in entrainment. In the final Phase III rule, however, EPA determined that uniform national standards are
not the most effective way to address cooling water intake structures at existing Phase III facilities. Phase III
existing facilities continue to be subject to permit conditions implementing section 316(b) of the Clean Water Act
set by the permit director on a case-by-case basis, using BPJ.
The performance standards presented at proposal were intended to reflect the best technology available for
minimizing adverse environmental impacts determined on a national categorical basis. The type of performance
standard applicable to a particular facility (i.e., reductions in impingement only or impingement and entrainment)
would have varied based on several factors, including the facility's location (i.e., source waterbody) and the
proportion of the waterbody withdrawn. Impingement reductions were required at all facilities subject to the
performance standards. Entrainment reductions are required at facilities 1) located on an estuary, tidal river,
ocean, or one of the Great Lakes, or 2) located on a freshwater river and withdrawing greater than 5% of the mean
annual flow of the waterbody. At proposal, facilities located on lakes or reservoirs may not disrupt the thermal
stratification of the waterbody, except in cases where the disruption is beneficial to the management of fisheries.
EPA proposed three possible options for defining which existing Manufacturing Facilities would be subject to
uniform national requirements, based on design intake flow threshold and source waterbody type: The facility has
a total design intake flow of 50 million gallons per day (MGD) or more, and withdraws from any waterbody; the
facility has a total design intake flow of 200 MGD or more, and withdraws from any waterbody; or the facility has
a total design intake flow of 100 MGD or more and withdraws water specifically from an ocean, estuary, tidal
river, or one of the Great Lakes. These are Options 5, 9, and 8 respectively in Table Al-1, below.
In addition, EPA considered a number of options (specifically Options 2, 3,4, and 7 below) that would have
established different performance standards for certain groups or subcategories of Phase III existing facilities.
Under these options, EPA would have applied the proposed performance standards and compliance alternatives
(i.e., the Phase II requirements) to the higher threshold facilities, apply the less-stringent requirements as specified
below to the middle flow threshold category, and would apply BPJ below the lower threshold.
The regulatory options as well as other options considered are described in detail below:
Option 1: Facilities with a design intake flow of 20 MGD or greater would be subject to the performance
standards discussed above. Under this option, section 316(b) permit conditions for Phase III facilities with a
design intake flow of less than 20 MGD would be established on a case-by-case, BPJ, basis.
Option 2: Facilities with a design intake flow of 50 MGD or greater, as well as facilities with a design intake
flow between 20 and 50 MGD (20 MGD inclusive), when located on estuaries, oceans, or the Great Lakes would
be subject to the performance standards. Facilities with a design intake flow between 20 and 50 MGD (20 MGD
inclusive) that withdraw from freshwater rivers and lakes would have to meet the performance standards for
impingement mortality only and not for entrainment. Under this option, section 316(b) requirements for Phase III
facilities with a design intake flow of less than 20 MGD would be established on a case-by-case, BPJ, basis.
A1-2
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§ 316(b) Final Rule: Phase HI - EA. Part A: Background Information
Chapter A I: Introduction
Option 3: Facilities with a design intake flow of 50 MOD or greater would be subject to the performance
standards. Facilities with a design intake flow between 20 and 50 MOD (20 MGD inclusive) would have to meet
the performance standards for impingement mortality only and not for entrainment. Under this option, section
316(b) requirements for Phase III facilities with a design intake flow of less than 20 MGD would be established
on a case-by-case, BPJ, basis.
Option 4: Facilities with a design intake flow of 50 MGD or greater, as well as facilities with a D1F between 20
and 50 MGD (20 MGD inclusive), when located on estuaries, oceans, or the Great Lakes would be subject to the
performance standards. Facilities that withdraw from freshwater rivers and lakes and all facilities with a design
intake flow of less than 20 MGD would have requirements established on a case-by-case, BPJ, basis.
Option 5: Facilities with a design intake flow of 50 MGD or greater would be subject to the performance
standards. Under this option, section 316(b) requirements for Phase III facilities with a design intake flow of less
than 50 MGD would be established on a case-by-case, BPJ, basis.
Option 6: Facilities with a design intake flow of greater than 2 MGD would be subject to the performance
standards. Under this option, section 316(b) requirements for Phase HI facilities with a design intake flow of 2
MGD or less would be established on a case-by-case, BPJ, basis.
Option 7: Facilities with a design intake flow of 50 MGD or greater would be subject to the performance
standards. Facilities with a design intake flow between 30 and 50 MGD (30 MGD inclusive) would have to meet
the performance standards for impingement mortality only and not for entrainment. Under this option, section
316(b) requirements for Phase HI facilities with a design intake flow of less than 30 MGD would be established
on a case-by-case, BPJ, basis.
Option 8: Facilities with a design intake flow of 200 MGD or greater would be subject to the performance
standards. Under this option, section 316(b) requirements for Phase III facilities with a design intake flow of less
than 200 MGD would be established on a case-by-case, BPJ, basis.
Option 9: Facilities with a design intake flow of 100 MGD or greater and located on oceans, estuaries, and the
Great Lakes would be subject to ":he performance standards. Under this regulatory option, section 316(b)
requirements for Phase III facilities with a design intake flow of less than 100 MGD would be established on a
case-by-case, BPJ, basis.
Table Al-1 summarizes the application of performance standards under each of the proposed options considered
for Phase III existing facilities (Options 5, 8, and 9) as well as the other options considered:
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§ 3l6(b) Final Rule: Phase IIl-EA, Part A: Background Information
Chapter Al: Introduction
Table Al-1: Performance
Option
1
2
3
4
5
6
7
8
9
Standards for the Regulatory Options Considered
Minimum Design Intake Flow Defining Facilities as Existing Phase HI Facilities
>2MGD
BPJ
BPJ
BPJ
BPJ
20MGD
30MGD
SO MGD 100 MGD
I&E
Freshwater rivers and lakes: I only
All other waterbodies: l&E
[only
Estuaries, oceans, Great Lakes: I&E
All other waterbodies: BPJ
BPJ
200 MGD
I&E
I&E
I&E
I&E
I&E
BPJ
I only
I&E
BPJ
I&E
Estuaries, oceans, Great Lakes: I&E
Dr J
All other waterbodies: BPJ
Key:
BPJ - Best Professional Judgment
I&E - 80-95% reduction in impingement mortality and a 60-90% reduction in entrainment, where applicable
I only - 80-95% reduction in impingement mortality
Estuaries - includes tidal rivers and streams
Lakes - includes lakes and reservoirs
None of the regulatory options for Phase III existing facilities (Options 5, 8, and 9) that were presented at
proposal would have covered electric generators not already covered by the Phase II rule, as that rule addresses
electric power generators with DIP of 50 MGD or more. Therefore, EPA focused its analysis for the final
regulation for Existing Facilities on the Manufacturers segment and did not give further consideration to electric
generators. As a result, in presenting analyses for the Existing Facilities, this document focuses on the
Manufacturing and Other Industries {"Manufacturers") category of existing facilities.
The EA, including the discussion in the remainder of this section, does present information on the more
comprehensive set of potential Phase III existing facilities and the regulatory options that would have applied to
them. However, the information for existing facilities below the 50 MGD applicability threshold is considerably
more limited in scope than the information for facilities with a DIF of at least 50 MGD since the smaller flow
facilities do not fall within the applicability thresholds for the regulatory options that were presented at proposal.
The discussions for existing facilities in the remainder of this document focus on the three regulatory options
comprising the regulatory proposal (i.e., Options 5, 8, and 9). In the remainder of this document, these three
options are referred to as follows:
1. Option 5, which would have applied to existing Manufacturers segment facilities with a total design
intake flow of 50 MGD or more and located on any source water body type is referred to as the "50
MGD All Option".
2. Option 8, which would applied to existing Manufacturers segment facilities with a total design intake
flow of 200 MGD or more and located on any source waterbody type is referred to as the "200 MGD
All Option".
3. Option 9, which would applied to existing Manufacturers segment facilities with a total design intake
flow of 100 MGD or more and located on certain source waterbody types (i.e., an ocean, estuary, tidal
Al-4
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§ 3l6(b) Final Rule: Phase HI - EA, Pan A: Background Information
Chapter Al: Introduction
river/stream or one of the Great Lakes) is referred to as the "100 MGD Certain Water Bodies Option"
or "100 MGD CWB Option".
In addition to these three regulatory analysis options, this document also presents information on the other options
that EPA analyzed in development of the Phase III proposal and the final regulation (i.e., Options 2, 3, 4 and 7,
also referred to as the "Supplemental Options"). The information for the supplemental options is presented in
appendices to the relevant chapters in this EA report. EPA also proposed not to promulgate a national categorical
rule, and instead continue to rely on case-by-case, best professional judgment to establish 316(b) limits for Phase
III facilities.
The remainder of this section provides an overview of the existing Phase III sectors and facilities that were
analyzed for this rulemaking. Chapter C2: Profile of Manufacturers presents more detailed information on these
Manufacturers sectors and facilities.1
A1-1.2.2 Sector Information
Based on past section 316(b) rulemakings, EPA's effluent guidelines program, and the 1982 Census of
Manufactures, EPA identified two major industry segments of existing facilities for analysis in developing this
regulation: (1) steam electric generators; and (2) manufacturing industries with substantial cooling water use.
Steam electric generators are the largest industrial users of cooling water. The condensers that support the steam
turbines in these facilities require substantial amounts of cooling water. EPA estimates that steam electric utility
power producers (SIC Codes 49 \ I and 4931) and steam electric nonutility power producers (SIC Major Group
49) account for approximately 92.5% of total cooling water intake in the United States (U.S. EPA, 2001).
Beyond steam electric generators, facilities in other industry segments use cooling water in their production
processes (e.g., to cool equipment, for heat quenching, etc.). As described in the EA for the Phase III Proposed
Regulation, EPA used information from the 1982 Census of Manufactures to identify four major manufacturing
sectors showing substantial cooling water use: (1) Paper and Allied Products (SIC Major Group 26); (2)
Chemicals and Allied Products (SIC Major Group 28); (3) Petroleum and Coal Products (SIC Major Group 29);
(4) Primary Metals Industries (SIC Major Group 33). For its analyses in support of the proposed rule, EPA later
divided the Primary Metal Industries (SIC 33) into a Steel sector (SIC 331) and an Aluminum sector (SIC
333/335), based on the business and other operational differences in these two major industries. EPA referred to
these five industries - Paper, Chemicals, Petroleum, Aluminum, and Steel - as the "Primary Manufacturing
Industries" in the documentation for the proposed regulation. As shown in Table A1-2, following page, together
with electric power producers, these industries account for approximately 99% of the total cooling water intake in
the United States. EPA focused its initial data gathering and regulation development analyses for the
manufacturers segment of the 316(b) Phase III regulation on these industries.
A key data source for EPA's analysis for the 316(b) Phase III regulation is the detailed questionnaire issued to a
sample of facilities potentially subject to regulation under Phase III. Based on responses to a screener survey,
EPA targeted the detailed questionnaire to facilities believed to be in the electric power industry and the Primary
Manufacturing Industries. As discussed in the EA for the proposed Phase HI regulation and further elaborated on
in the November 2005 Notice of Data Availability (NODA), EPA received survey questionnaires from facilities
with business operations in industries other than the Primary Manufacturing Industries. EPA originally believed
these facilities to be non-utility electric power generators; however, inspection of their responses indicated that the
facilities were better understood as cooling water-dependent facilities whose principal operations lie in businesses
other than the electric power industry or the Primary Manufacturing Industries listed above. These surveys
' The EA for the proposed regulation includes a detailed profile for Electric Power Producers. For the reasons just stated,
this profile was not updated for the EA for the final Phase III regulation.
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§ 3l6(b) Final Rule: Phase 11I-EA, Part A: Background Information Chapter AS: Introduction
included 12 questionnaires from facilities in the Food and Kindred Products industry and 10 additional
questionnaires from facilities in a range of other manufacturing and non-manufacturing industries. In the EA for
the proposed Phase 111 regulation, EPA referred to these additional industries as the "Other Industries" and the
facilities as the "Other Industries facilities."
Because the questionnaire responses for these Other Industries facilities were not received through the structured
sample framework, EPA did not apply sample weights to these facilities in the analyses for the proposed
regulation, and treated them as "additional known facility" observations with a sample weight of one. Although
EPA's analyses for these Other Industries facilities were less precise than the analyses undertaken for the Primary
Manufacturing Industries, EPA concluded that its analysis for the Other Industries group provided a sufficient
basis for regulation development. In particular, EPA's review of the engineering characteristics of cooling water
intake and use in the Other Industries group indicated that cooling water intake and use in these industries do not
differ materially from cooling water intake and use in the electric power industry and the Primary Manufacturing
Industries. In addition, EPA specifically analyzed the economic impacts of evaluated options on the sample
facilities in the Other Industries group. Finally, because the statistically valid survey group of six industries (i.e.,
for the five Primary Manufacturing Industries and Electric Generators) reflects 99% of total cooling water
withdrawals, EPA concluded that few additional facilities in the Other Industries group would be potentially
subject to Phase III regulation. Based on these considerations, EPA concluded at Proposal that the Phase III
regulation could be extended to all industries and without imposing material economic/financial impact in
industries beyond those on which EPA initially focused in developing the Phase III regulation. In the Federal
Register notice for the proposed Phase III regulation, EPA sought comment on the analytic treatment and
regulatory findings for these facilities.
Following proposal, EPA undertook additional analyses of these facilities, and of the Food and Kindred Products
industry, in particular, to confirm its regulatory analytic findings for the Other Industries facilities. These
analyses, which are documented in the EA and in the public record for the final regulation, included: (1)
comparative analysis of cooling water use and compliance costs between the original set of Primary
Manufacturing Industries and the 22 facilities in the Other Industries facilities set; (2) preparation of a detailed
industry profile and assessment of business conditions and outlook for the Food and Kindred Products industry;
and (3) development of a cooling water usage-based multiplier for extrapolating results from its analysis of the
Food and Kindred Products industry questionnaire facilities to the broader population of facilities in the industry.
EPA sought comment on these analyses in the NODA.
Based on the findings from these analyses, EPA made the following changes in its analysis for the Manufacturers
category of facilities. First, EPA now groups the Food and Kindred Products industry within the previously
defined Primary Manufacturing Industries set of industries. As previously described, EPA received over half (12)
of the 22 Other Industries questionnaires from facilities in this industry and it is also the next largest user of
cooling water, after the electric power industry and the original Primary Manufacturing Industries, as reported in
the Census of Manufacturers reports of cooling water usage. The Primary Manufacturing Industries thus include
the following industries: Paper, Chemicals, Petroleum, Aluminum, Steel, and Food and Kindred Products.
Second, EPA used the cooling water usage-based multiplier of 3.11, as documented at NODA, for estimating the
industry-level costs and impacts of Phase III regulatory compliance for the Food and Kindred Products industry.
Third, EPA includes a detailed industry profile for the Food and Kindred Products industry in this EA.
Table A1-2, below, documents the estimated cooling water usage in the electric power industry, the redefined
Primary Manufacturing Industries (including Food and Kindred Products), and the remaining cooling water-
reliant industry sectors ("Other Industries"). Together, the electric power industry and the Primary Manufacturing
Industries account for approximately 99.6% of total estimated cooling water usage. This document refers to the
Primary Manufacturing Industries and the remaining Other Industries collectively as "Manufacturers."
A1-6 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June I, 2006
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£ 3I6(b) Final Rule; Phase HI - EA, Part A: Background Information
Chapter AI: Introduction
Table Al-2: Cooling Water
Sector1 (SIC Code)
Steam Electric Utility Power Producers (49)
Steam Electric Nonutility Power Producers (49)
Chemicals and Allied Products (28)
Primary Metals Industries (33)
Petroleum and Coal Products (29)
Paper and Allied Products (26)
Food and Kindred Products (20)
Additional 14 Categories'
Intake by Sector
Cooling Water Intake Flow*
Billion Gal./Yr. Percent of Total Cumulative Percent
70,000
1,172
2,797
1,312
590
534
272
335
90.9%
1.5%
3.6%
1.7%
0.8%
0.7%
0.4%
0.4%
90.9%
92,4%
96.0%
97.8%
98.5%
99.2%
99.6%
100.0%
* The table is based on reported primary SIC codes.
b Data on cooling water use (ire from the 1982 Census of Manufactures, except for traditional steam electric utilities,
which are from the Form EIA-767 database, and the steam electric nonutilily power producers, which are from the Form
EIA-867 database. 1982 was the last year in which the Census of Manufactures reported cooling water use.
c 14 additional major industrial categories (major SIC codes) with effluent guidelines.
Source: U.S. DOC, 1986; U.S. DOE. 1995; U.S. DOE, 1996.
The six Primary Manufacturing facility sectors analyzed for the Phase III rulemaking comprise a substantial
portion of all U.S. industries. As shown in Table Al-3, the six sectors combined account for over 64,000
facilities, over 3.6 million employees, more than $1.8 trillion in value of shipments and almost $155 billion in
payroll. They also account for over 42% of total U.S. manufacturing value of shipments and 27% of
manufacturing employment. As shown in Table Al-4 (see page 9), however, only a subset of facilities in these
industry sectors would be subject to regulation under Phase III based on the applicability thresholds under each of
the regulatory analysis options.
Table Al-3: Summary Economic Data for Major Industry Sectors
Regulation:; Facilities, Employment,
Sector (SIC)'
Paper & Allied Products (26)
Chemicals & Allied Products (28)
Petroleum & Coal Products (29)
Steel (331)
Aluminum (333,335)
Food & Kindred Products (20)
All §316(b) Sectors
Total U.S. Manufacturing (NAICS 31-33)
§316(b) Manufacturing Sectors as a Percent of
Total U.S. Manufacturing
Number of
Facilities'1
561
29,005
2,262
1,069
590
30,823
64,310
350,828
18.3%
Potentially Subject to §316(b)
Value of Shipments, and Payroll
Employment
137,044
1,651,237
96,673
154,364
63,538
1,571,096
3,673,952
13,404,292
27.4%
Value of
Shipments
(millions, $2004)
70,505
710,762
312,885
92,693
31,471
584,908
1,803,224
4,265,784
42.3%
Payroll
(millions, S2004)
8,121
75,785
7,017
8,773
2,943
52,152
154,791
569,414
27.2%
* Data from 2004 Annual Survey o:" Manufactures is available by NAICS code. Therefore, the following proxies were used to gather
data: Paper & Allied Products (26) = VAICS 3221; Chemicals & Allied Products (28) = NAICS 325 and 326; Petroleum & Coal
Products (29) = NAICS 3241; Steel (331) = NAICS 3311 and 3312; Aluminum (333,5) = NAICS 3313; Food & Kindred Products (20)
= NAICS 31 land 3121.
b Number of facilities is not available in the Annual Survey of Manufactures; data were collected from the 2002 Economic Census.
Source: U.S. DOC, 2005; U.S. DOC. 2002.
June I, 2006
Internal Draft - Deliberative, Predecisional - Do not Quote. Cite, or Distribute
A1-1
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§ 316(b) Final Rule: Phase III - EA, Part A: Background Information Chapter A I: Introduction
Al-1.2.3 Facilities and Cooling Water Usage
EPA's 2000 Section 316(b) Industry Survey collected cooling water information for 656 power producers
{hereafter referred to as "Electric Generators"), 211 facilities in Primary Manufacturing Industries, and 13
additional known facilities in Other Industries determined to be potentially subject to regulation under Section
316(b). Industry-wide, these facilities represent 671 power producers, 575 facilities in Primary Manufacturing
Industries, and 17 facilities in Other Industries. Details of cooling water usage and other information on these
facilities follows:
> The 671 Electric Generators withdraw 79,000 billion gallons of cooling water per year. Of the 671 power
producers, 554 were covered under the final Phase II rule. These 554 facilities accounted for 90.9% of
total cooling water flow for Phase II and potential Phase III Electric Generators and Manufacturers (see
Table Al-4). The remaining 117 facilities were considered for potential regulation in Phase III. Based on
the survey, the 117 potential Phase III facilities account for approximately 392 billion gallons of cooling
water per year, or 0.5% of the estimated total flow for Phase II and potential Phase III Electric Generators
and Manufacturers.
> The 575 facilities in Primary Manufacturing Industries potentially subject to the final regulation withdraw
7,600 billion gallons of cooling water per year. The 17 additional known facilities in Other Industries
withdraw 200 billion gallons of cooling water per year. Overall, the Manufacturing facilities potentially
subject to Phase III regulation account for approximately 9.0% of total flow for Phase II and potential
Phase III Electric Generators and Manufacturers.
Table Al-4 presents summary information about the number of facilities and water intake for existing facilities
by sector and analysis option.
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A1-8 Internal Draft - Deliberative, Predecisionai - Do not Quote, Cite, or Distribute June 1, 2006
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§ 3l6(b) Final Rule: Phase III-EA, Part A: Background Information Chapter Al: Introduction
Two of the primary parameters considered by EPA in developing the Phase III regulation are the design intake
flow (DIP) of the facilities and the type of waterbody from which a facility withdraws cooling water. As
previously described, EPA presented three options at Proposal based on 50 MOD, 100 MGD, and 200 MOD
applicability thresholds. The two main types of waterbody are (1) "sensitive waterbodies," which are generally
considered of higher biological productivity and more sensitive to adverse environmental impact (including
estuaries/tidal rivers, and oceans and Great Lakes); and (2) "inland waterbodies" (including freshwater
rivers/streams and lakes/reservoirs). Of the three regulatory options presented at Proposal, EPA further
differentiated the 100 MGD or greater facilities based on waterbody type.
Table A1-5 shows, by waterbody type and industry segment, the number of Manufacturers facilities potentially
subject to national requirements under the three DIP applicability thresholds presented at Proposal, and the total
of facilities potentially subject to a Phase HI regulation - that is, with DIP of at least 2 MGD. EPA estimates that
as many as 592 existing facilities in the Manufacturers segment (including 575 facilities in the Primary
Manufacturing Industries and 17 known facilities in Other Industries), were potentially subject to regulation under
Phase HI, based on a 2 MGD DIP applicability threshold. EPA estimates that 161 of these facilities would be
subject to regulation under the 50 MGD option. Of these 161 facilities, 49 are located on Sensitive Waterbodies
and 112 are located on Inland Waterbodies. For the 100 MGD or greater facilities, 27 are located on Sensitive
waterbodies. Under the 100 MGD option, only the 27 facilities on Sensitive Waterbodies would be subject to
regulation. Lastly, under the 200 MGD option, EPA estimates that 33 facilities would be subject to regulation, of
which, 16 are located on Sensitive Waterbodies and 17 are located on Inland Waterbodies.
Table Al-5: Existing Manufacturers Facilities by Applicability Threshold
Industry Segment
and Waterbody Type
Subject to National Requirements with D1F Applicability
Threshold of Greater than or Equal to
2 MGD 50 MGD 100
MGD
200 MGD
All Waterbodies
Primary Manufacturing industries
Other Industries
Total
575
17
592
/55
7
161
73
4
77
3!
2
33
Sensitive Waterbodies (Coastal Waterbodies and Great Lakes)
Primary Manufacturing Industries
Other Industries
Total
92
5
97
45
4
49
24
3
27
14
2
16
Inland Waterbodies
Primary Manufacturing Industries
Other Industries
Total
482
12
494
109
3
112
49
1
SO
17
0
17
Source: U.S. EPA, 2000; U.S. EPA Analysis. 2006.
Al-2 SUMMARY OF THE FINAL RULE
A 1-2.1 New Offshore Oil and Gas Extraction Facilities
The Phase III final regulation applies to new offshore oil and gas extraction facilities. Under the final rule, EPA
is promulgating the regulatory requirements presented at proposal: new offshore oil and gas extraction facilities
that withdraw 2 MGD or more and meet other applicability criteria are subject to requirements similar to those
applicable to other new facilities in the Phase I (new facility) 316(b) regulation. These requirements address
intake flow velocity, proportional flow restrictions, specific impact concerns (e.g., threatened or endangered
Al-10 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June 1, 2006
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§316(b) Final Rule: Phase 111 - EA, Part A: Background Information
Chapter Al: Introduction
species; critical habitat; or migratory, sport, or commercial species), and information submission, monitoring, and
recordkeeping. As described at proposal, available information indicates that it is not feasible for offshore oil and
gas extraction facilities to employ closed-cycle recirculating cooling systems to reduce cooling water flow levels
because such facilities have neither the physical space nor the technical capacity to install technologies such as
cooling towers or other closed-cycle systems. Thus, the final regulation does not require new offshore oil and gas
extraction facilities to reduce intake flow to a level commensurate with a closed-cycle recirculating cooling
system or to use close-cycle recirculating cooling as a baseline for performance standards.
A 1-2.2 Existing Facilities
EPA has chosen not to promulgate any of the regulatory options considered for the Phase HI regulation for
existing facilities. Instead, EPA has decided that Phase III existing facilities should continue to have section
316(b) limits established on a case-by-case, best professional judgment basis.
Al-3
SUMMARY OF ECONOMIC ANALYSIS RESULTS
This section presents a brief summary of the main results of EPA's economic analyses for the final rule. This
summary includes results for the regulation of new oil and gas extraction facilities, and the results of the analysis
of the regulatory analysis options for existing facilities. More detail on each analysis, including methodology and
results, is provided in later chapters of this EA.
a. Number of Facilities Subject to National Categorical Requirements
> New Facilities
For today's final rule, EPA is promulgating a 2 MOD flow threshold for new offshore oil and gas extraction
facilities, the same flow threshold applicable to other new facilities under Phase I. EPA's analysis of new
offshore oil and gas extraction facilities includes oil and gas production platforms/structures and mobile offshore
drilling units (MODUs). EPA estimated the number and characteristics of new offshore oil and gas extraction
facilities based on data on existing offshore oil and gas extraction facilities collected through EPA's 316(b)
survey of offshore oil and gas extraction facilities and from other sources of publicly available information, such
as the Minerals Management Service.
EPA estimates that 21 new offshore oil and gas extraction platforms and 103 new MODUs would be subject to
the national requirements of the final rule, assuming a 20-year period of construction from 2007 (the assumed
effective date of the rule) to 202(3.
<* Existing Facilities
EPA evaluated three regulatory options for existing facilities: 50 MOD or greater for All Waterbodies, 200 MOD
for All Waterbodies, and 100 MOD for Certain Waterbodies. These three options had the same national
categorical requirements, but they differed with respect to the number of existing facilities that would be subject
to these requirements. Specifically, the number of regulated facilities differs as a result of (1) the design intake
flow (DIP) applicability thresholds of the regulatory analysis options; and (2) the type of waterbodies to which the
options would apply.
Table A1-6 on the following page presents, by industry segment and regulatory analysis option, (1) the number of
existing facilities potentially subject to regulation under Phase III, (2) the estimated number of baseline closures,
(3) the number of existing manufacturing facilities estimated to be subject to national categorical requirements
under the three regulatory analysis options, and (4) the number of facilities estimated to install a technology to
comply with each analysis option. Facilities that are not baseline closures and would not be subject to the
June I. 2006
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
AI-II
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§ 3l6(b) Final Rule: Phase /// - EA. Part A: Background Information
Chapter AI: Introduction
requirements under the regulatory analysis options would be ("Potentially Subject to Regulation" minus "Baseline
Closure" minus "Subject to National Requirements - Total") subject to permitting on a case-by-case, best
professional judgment basis.
As shown in Table A1-6, EPA estimates that as many as 592 Manufacturers facilities (including 575 facilities in
the Primary Manufacturing Industries and 17 Other Industries facilities) were potentially subject to the Phase III
final regulation for existing facilities, based on the 2 MOD DIP cutoff. Of these, EPA estimates that 77
Manufacturers would be baseline closures - i.e., they would be in severe financial distress independent of
regulation. As a result, EPA estimates that 515 Manufacturers financially viable facilities were potentially within
the scope of a Phase III final regulation.
Under the 50 MOD applicability threshold, EPA estimates that 146 existing Manufacturers facilities would be
subject to regulation under this option.2 Of these, 111 are estimated to install a technology to comply with the
potential regulation requirements. The 100 MOD and 200 MOD options would apply to smaller sets of facilities.
The 200 MGD All option would apply to 31 facilities in the Manufacturers segment, with 27 facilities estimated
to install a technology. The 100 MGD CWB option would apply to the smallest number of manufacturing
facilities (23), with 22 of these facilities estimated to install a technology.
Table Al-6: Phase III Existing Facility Counts, by Industry Segment and Option
Industry
Primary
Manufacturing
Industries
Other Industries
Totaf
Potentially
Subject to
Regulation
575
17
592
Baseline
Closure
75
2
77
Subject to National Requirements, Excluding Baseline Closures
50 MGD All Option
T t 1 W'
Technology
140 105
6 6
146 111
200 MGD All Option
Total
30
1
31
w/
Technology
26
1
100 MGD CWB
Option
Total _ ,W/.
Technology
21 20
2 2
27 . 23 22
* Individual numbers may not sum to totals due to independent rounding.
Source: U.S. EPA Analysis, 2006.
b.
Economic Impacts
# New Facilities
EPA conducted several types of economic impact analysis for the new offshore oil and gas extraction industry
segment. These analyses include three analyses for platforms/structures (facility-level production value and
closure analysis, facility-level barrier-to-entry analysis, and firm-level cost-to-revenue analysis) and three
analyses for MODUs (facility-level closure analysis, facility-level barrier-to-entry analysis, and firm-level cost-to-
revenue analysis). These analyses found no economic impact on any new offshore oil and gas extraction facility
that would be subject to regulation under the final Phase III rule or any firm projected to build a new offshore oil
and gas extraction facility that would be subject to regulation under Phase III.
For a detailed discussion of EPA's economic impact analyses for new facilities, see Chapter B3: Economic
Impact Analysis for the Offshore Oil and Gas Extraction Industry.
2 This number of existing facilities (146 facilities) estimated to be subject to the Phase HI final regulation differs from the
value(161 facilities) reported in Table A1-4 and Table A1-5 because it excludes baseline closures.
AI-12
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
June t. 2006
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1316(b) Final Rule: Phase III - EA, Part A: Background Information
Chapter A!: Introduction
> Existing Facilities
EPA identified a facility as a regulatory closure if it would have operated under baseline conditions but would fall
below an acceptable financial performance level under the proposed regulatory requirements. EPA's analysis of
regulatory closures is based on the estimated change in facility after-tax cash flow (cash flow) as a result of the
regulation and specifically examines whether the change in cash flow would be sufficient to cause the facility's
going concern business value to become negative. EPA calculated the going concern value of each facility using
a discounted cash flow framework in which cash flow is discounted at an estimated cost of capital. The definition
of cash flow used in these analyses is after-tax free cash flow available to all capital - equity and debt.
Correspondingly, the cost of capital reflects the combined cost, after-tax, of equity and debt capital. For its
analysis of economic/financial impacts, EPA used 7% as a real, after-tax cost of capital.
EPA also identified facilities that would likely incur moderate financial impacts, but that would not be expected to
close, under each of the regulatory analysis options. EPA established thresholds for two measures of financial
performance and condition - interest coverage ratio and pre-tax return on assets - and compared the facilities'
performance before and after compliance under each option with these thresholds. EPA attributed incremental
moderate impacts to the options if both financial ratios exceeded threshold values in the baseline (i.e., there were
no moderate impacts in the baseline), but at least one financial ratio fell below the threshold value in the post-
compliance case.
EPA estimated that none of the facilities estimated to be subject to regulation under each option would close or
incur employment losses as a result of implementation of the three options. EPA also found that none of these
facilities would incur a moderate economic impact as a result of the regulatory analysis options.
EPA also assessed whether firms owning regulated facilities might incur a material adverse impact, based in
particular on the possibility of owning more than one regulated facility. This analysis, which relied on a firm-
level cost-to-revenue test, found that no firms owning Manufacturing facilities would be materially affected under
the options considered for existing facilities.
For a detailed discussion of EPA's economic impact analyses for existing facilities, see Chapter C3: Economic
Impact Analysis for Manufacturers.
c.
Regulatory Flexibility Analysis
«J* New Facilities
The Regulatory Flexibility Act (RFA) requires EPA to consider the economic impact that the final rule would
have on small entities. In the new offshore oil and gas extraction industry segment, EPA estimates that one small
entity, a new offshore oil and gas extraction platform, would be subject to the national requirements of the final
rule. EPA estimates that this entity would incur annualized, after-tax compliance costs of less than 0.1% of
annual revenue. Table AI-7 outlines the total number of small entities in the new offshore oil and gas extraction
industry segment, the number of small entities potentially subject to final regulation under Phase III, and the
estimated cost-to-revenue ratio that small entities would incur in complying with the final regulation. For a
detailed discussion of these analyses, see Chapter Dl: Regulatory Flexibility Analysis.
June I, 2006
Internal Draft - Deliberative. Predecisional - Do not Quote. Cite, or Distribute
A1-I3
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§ 3l6(b) Final Rule: Phase III - EA, Part A: Background Information Chapter Al: Introduction
Table Al-7: Summary of Small Entity Impact Ratio Ranges For New OOGE Facilities
Number of Small . , Compliance Cost/Annual
. . _ . Percentage of r
T . . ,. . , Entities Owning " Revenues
, . Total Number of *.-. Small Entities
Industry Small Entities p . F "'« Subject to
Potentially Subject atjon «.,% ,.3% >3%
to Regulation
New OOGE Facilities 24 I 4.2% I
Source:
U.S. EPA Analysis, 2006.
> Existing Facilities
EPA estimates that no existing small entities in the Manufacturers industry segments would be subject to national
categorical requirements under each analysis option.
d. UMRA Analysis
* New Facilities
Under section 202 of the Unfunded Mandates Reform Act (UMRA), EPA generally must prepare a written
statement, including a cost-benefit analysis, for proposed and final rules with "Federal mandates" that might result
in expenditures by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million
or more in any one year. EPA's UMRA analysis for the final rule found the following:
> Final rule for new offshore oil and gas extraction facilities: EPA estimates the total annualized after-
tax costs of compliance for the Final Regulation to be $1.9 million ($2004). All of these direct facility
costs are incurred by the private sector (including 124 new offshore oil and gas extraction facilities). No
facility owned by State and local governments is subject to the national requirements under the final rule.
Additionally, State and local permitting authorities will not incur costs to administer the rule for new
offshore oil and gas extraction facilities because these facilities are not under State jurisdiction. EPA
estimates that the highest undiscounted after-tax cost incurred by the private sector in any one year is
approximately $1.5 million in 2013.
t* Existing Facilities
EPA also conducted the UMRA analysis for the three options for existing facilities. The results of these analyses
combined with the actual costs of the final rule are presented below:
> SO MGDfor All Waterbodtes option for existing facilities and final rule for new offshore oil and gas
extraction facilities: EPA estimates the total annualized after-tax costs of compliance for this option to be
$32.8 million ($2004). All of these direct facility costs are incurred by the private sector (including 146
manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by
State and local governments is subject to the national requirements under the final rule. Additionally,
State and local permitting authorities are estimated to incur $0.6 million annually to administer the rule
under this option, including labor costs to write permits and to conduct compliance monitoring and
enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private
sector in any one year is approximately $132.1 million in 2011.
> 200 MGDfor All Waterbodies option for existing facilities and final rule for new offshore oil and gas
extraction facilities: EPA estimates the total annualized after-tax costs of compliance for this option to be
$17.9 million ($2004). All of these direct facility costs are incurred by the private sector (including 31
manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by
Al-14 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June 1, 2006
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f 3l6(b) Final Rule: Phase III - EA, Part A: Background Information
Chapter AI: Introduction
State and local governments is subject to the national requirements under this evaluated option.
Additionally, State and local permitting authorities are estimated to incur $0.2 million annually to
administer this option, including labor costs to write permits and to conduct compliance monitoring and
enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private
sector in any one year is approximately $78 million in 2010.
> 100 MOD for Certain Waterbodies option for existing facilities and final rule for new offshore oil and
gas extraction facilities: EPA estimates the total annualized after-tax costs of compliance for this option
to be $13.0 million ($2004). All of these direct facility costs are incurred by the private sector (including
23 manufacturing facilities and 124 new offshore oil and gas extraction facilities). No facility owned by
State and local governments is subject to the national requirements under this evaluated option.
Additionally, State and local permitting authorities are estimated to incur $0.2 million annually to
administer this option, including labor costs to write permits and to conduct compliance monitoring and
enforcement activities. EPA estimates that the highest undiscounted after-tax cost incurred by the private
sector in any one year is approximately $79 million in 2011.
Table Al-8 summarizes the total annualized cost and maximum one-year cost, by facility and government costs,
for the final rule and regulatory analysis options. For a detailed discussion of these analyses, see Chapter D2:
UMRA Analysis.
Table Al-8: Summary of UMRA Costs (millions, $2004)
Sector
Total Annualized Cost
Facility Government
Compliance Implementation Total
Costs Costs
Maximum One-Year Cost
Facility
Compliance
Costs
Government
Implementation
Costs
Total
Final Rule for New Facilities
Government Sector
(excl. Federal)
Private Sector
n/a
$1.9
n/a
n/a
n/a
$1.9
n/a
$1.5
n/a
n/a
n/a
$1.5
50 MOD All Option for Existing Facilities / Final Rule for New Facilities
Government Sector
(excl. Federal)
Private Sector
$0.0
$32.8
$0.6
n/a
$0.6
$32.8
$0.0
$132.1
$2.3
n/a
$2.3
$132.1
200 MGD All Option for Existing Facilities / Final Rule for New Facilities
Government Sector
(excl. Federal)
Private Sector
$0.0
$17.9
$0.2
n/a
$0.2
$17.9
$0.0
$77.9
$0.8
a/a
$0.8
$77.9
100 MGD CWBfor Existing Facilities / Final Rule for New Facilities
Government Sector
(excl. Federal)
Private Sector
$0.0
$13.0
$0.2
n/a
$0.2
$13.0
$0.0
$79.5
$1.1
n/a
$1.1
$79.5
Source: U.S. EPA Analysis, 2006.
e. Energy Effects
Executive Order 13211, ("Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution,
or Use" (66 FR 28355, May 22,2001)) requires EPA to prepare a Statement of Energy Effects when undertaking
regulatory actions identified as "significant energy actions." This rule is not a "significant energy action" as
Jane 1, 2006
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
Al-15
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§ 316(b) Final Rule: Phase lll-EA, Part A: Background Information Chapter At: Introduction
defined in Executive Order 13211 because it is not likely to have a significant adverse effect on the supply,
distribution, or use of energy.
EPA analyzed the potential for energy effects of the final rule for new offshore oil and gas extraction facilities as
well as the potential effects of the options considered for existing facilities and found that it would not lead to
adverse outcomes. From these analyses, EPA concludes that this rule would have minimal energy effects at a
national and regional level. As a result, EPA did not prepare a Statement of Energy Effects. For more detail on
the potential energy effects of the final regulation, see Chapter D3: Other Administrative Requirements, Section
D3-7,
t. Social Costs
* New Facilities
EPA calculated the social cost for regulated new offshore oil and gas extraction facilities also using 3% and 7%
discount rates. EPA estimated total annualized social costs of $3.8 million at a 3% rate and $3.2 million at a 7%
rate. The largest component of social cost is the pre-tax cost of regulatory compliance incurred by complying
facilities; these costs include pilot study costs, one-time technology costs of complying with the rule, one-time
costs of installation downtime, annual operating and maintenance costs, and permitting costs (initial permit costs,
annual monitoring costs, and permit reissuance costs). Social cost also includes implementation costs incurred by
the Federal government. States are not involved in administering the permits for new offshore oil and gas
extraction facilities since the offshore oil and gas industry is permitted under General Permits at the Regional
EPA level (which is part of the Federal government).
Table A1-9 presents the total social cost for new facilities under the final regulation by type of cost, using 3% and
7% discount rates.
Table Al-9: Social Cost for New Facilities (annualized, millions, $2004)
Direct Compliance Cost:
MODUs
Platforms/Structures
Total Direct Compliance Cost*
Federal Administrative Cosl
Total Social Cost for New Facilities'
3% Discount Rate
$1.9
$1.5
$3.4
$0.4
$3.8
7% Discount Rate
$1.7
$1.2
$2.8
$0.3
$3.2
* Individual numbers may not sum to totals due to independent rounding.
Source: U.S. EPA Analysis. 2006.
*! Existing Facilities
EPA also calculated the social cost of the regulatory analysis options for existing manufacturers using two
discount rate values: 3% and 7%. At a 3% rate, EPA estimated total annualized social costs of $38.2 million for
the 50 MOD All option, $19.5 million for the 200 MOD All option, and $14.6 million for the 100 MOD CWB
option (all dollar values in $2004). At a 7% rate, these values are $39.0 million, $20.2 million, and $14.1 million,
respectively. The largest component of social cost is the pre-tax cost of regulatory compliance incurred by
complying facilities; these costs include pilot study costs, one-time technology costs of complying with the rule,
one-time costs of installation downtime, annual operating and maintenance costs, and permitting costs (initial
permit costs, annual monitoring costs, and permit reissuance costs). Social cost also includes implementation
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§ 316(i>) Final Rule: Phase III- EA, Pan A: Background Information
Chapter Al: Introduction
costs incurred by Federal and State governments. As described above, EPA's social cost estimates exclude the
cost of facilities estimated to be baseline closures.
Table AI-10 presents the total social cost for existing facilities under the regulatory analysis options by type of
cost, using 3% and 7% discount rates. As shown in the table, direct compliance cost in the manufacturers
segment accounts for the substantial majority of total social cost for existing facilities for each of the regulatory
analysis options. EPA's estimate of Federal and State government costs for administering each option is
comparatively minor in relation to the estimated direct cost of regulatory compliance.
Table Al-10: Social Cost for Existing Facilities (annualized, millions, $2004)
Direct Compliance Cost:
Manufacturers*
Primary Manufacturing Industries
Other Industries
Total Direct Compliance Cost"
State and Federal Administrative Cost
Total Social Cost for Existing Facilities'
SO MGD Ail Option 200 MGD All Option
3%
$37.6
$36.3
$1.3
$37.6
$0.6
$38.2
7% 3%
$38.3 $19.3
$37.1 $18.8
$1.2 $0.5
$38.3 $19.3
$0.6 $0.2
$39.0 $19.5
7%
$20.0
$19.5
$0.4
$19.9
$0.2
$20.2
100 MGD CWB
Option
3% 7%
$14.4 $13.9
$13.7 $13.3
$0.7 $0.7
$14.4 $13.9
$0.2 $0.2
$14.6 $14.1
Individual numbers may not sum to totals due to independent rounding.
Source: U.S. EPA Analysis, 2006.
*t« New and Existing Facilities
Although EPA is promulgating final Phase III regulations only for new offshore oil and gas extraction facilities,
EPA also considered the total social cost of including each regulatory analysis option for existing facilities in the
final rule. Under the 50 MGD All option for existing facilities and the final regulation for new offshore oil and
gas extraction facilities, total annualized social costs are $42.2 million and $42.3 million, using 3% and 7%
discount rates, respectively. Under the 200 MGD All option for existing facilities and final rule for new offshore
oil and gas extraction facilities, total annualized social costs are $23.4 million under both the 3% and 7% discount
rates. Under the 100 MGD CWB option for existing facilities and the final rule for new offshore oil and gas
extraction facilities, total annualized social costs are $18.5 million under the 3% discount rate, and $17.4 million
under the 7% discount rate.
Table A1-11 summarizes the total social costs for new and existing facilities under the final rule and each
regulatory analysis option. For details of EPA's social cost analyses, see Chapter El: Summary of Social Costs.
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§ 316(b) Final Rule: Phase III - EA, Part A: Background Information
Chapter Al: Introduction
Table Al-l 1; Total Social Cost for New and Existing Facilities (annualized, millions, $2004)
Direct Compliance Cost:
Existing Facilities
New Facilities
Total Direct Compliance Cost1
State and Federal Administrative Cost:
Existing Facilities
New Facilities
Total State and Federal Administrative
Cost'
Total Social Cost*
2 MGD New/
50 MGD AM Existing
2 MGD New/
200 MGD All Existing
3% 7% , 3%
$37.6 $38.3
$3.5 $2.9
$41.1 $41.2
$0.6 $0.6
$0.4 $0.3
$1.1 $1.0
$42.2 $42.3
$19.3
$3.5
$22.8
$0.2
$0.4
$0.6
$23.4
7%
$20.0
$2.9
$22.9
$0,2
$0.3
$0.5
$23.4
2 MGD New/
100 MGD CWB Existing
3% 7%
$14.4 $13.9
$3.5 $2.9
$17.9 $16.8
$0.2 $0.2
$0.4 $0.3
$0.6 $0.5
$18.5 $17.4
" Individual numbers may not sum to totals due to independent rounding.
Source: U.S. EPA Analvsis. 2006.
g. Benefit-Cost Analysis
J* Existing Facilities
The benefit-cost analysis compares total annualized use benefits to total annualized pre-tax costs (social costs) for
facilities that remain open in the baseline. Benefits and costs were discounted using both a 3% and 7% discount
rate. The cost estimates include costs of compliance to facilities subject to regulation under the regulatory
analysis options considered for the Phase III rule for existing facilties, as well as administrative costs incurred by
State and local governments and by the Federal government. The benefits estimates include monetized benefits to
commercial and recreational fishing. Total monetizable benefits include only use benefits because non-use
benefits were evaluated qualitatively.
Table A1-12 summarizes the number of facilities potentially subject to regulation under the regulatory analysis
options, the number of facilities estimated to install I&E technologies, total annualized benefits, total annualized
costs, and net benefits. Because EPA was unable to estimate benefits for the new offshore oil and gas extraction
industry segment3, the benefit-cost analysis only includes existing facilities. As reported in Table Al-12,
estimated costs exceed estimated use benefits under all three options for existing facilities. Under the 50 MGD
All option, 146 facilities are estimated to be subject to the national categorical requirements. Of those facilities,
111 are estimated to install technologies to reduce impingement and entrainment. Using a 3% discount rate, total
costs would exceed total use benefits by $36.0 million; using a 7% discount rate, total costs would exceed total
use benefits by $37.2 million. Under the 200 MGD All option, 31 facilities would be subject to the national
categorical requirements, with 27 facilities estimated to require new technologies. This option yields total social
costs in excess of total benefits of $18.0 million and $19.0 million, discounted at 3% and 7%, respectively. Under
the 100 MGD CWB option, 23 facilities would be subject to the national categorical requirements, and 22 are
estimated to install technologies. Total social costs would exceed total use benefits by $12.7 million using a 3%
discount rate, and $12.6 million using a 7% discount rate. For further discussion of the benefit-cost analysis, see
Chapter E3: Comparison of Benefits and Social Costs.
3 EPA was unable to do so because this would require an estimation of where these new facilities would be built, since
these are new facilities, such estimation was not feasible.
AI-18
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f 316(b) Final Rule: Phase III - EA, Part A: Background Information
Chapter A I: Introduction
Table Al-12: Summary of Benefits
Option
Number of
Facilities Subject
to Option
and Social Costs for Existing Facilities
Number of
Facilities Installing
Technology
(millions,
Annualized Use
... ,₯ . _ Total
Value of I&E
_ , . Annualized
Reductions _
... ., Costs
(Mean)*
$2004)
Cost-Benefit
Ratio
3% Discount Rate
50 MGD All option
200 MGD All Option
100 MGD CWB Option
146
31
23
111
27
22
$2.3
SI.5
$1.9
$38.2
$19.5
$14.6
17.0
13.0
7.8
7% Discount Rate
50 MGD All option
200 MGD All Option
100 MGD CWB Option
146
31
23
111
27
22
SI .8
$1.2
$1.5
$39.0
$20.2
$14.1
21.7
16.9
9.5
* The total monetizable value of l&E reductions includes use benefits only. EPA evaluated non-use benefits only qualitatively.
b Cost-benefit ratios are calculated by dividing total annualized costs by total annual use benefits. The ratios presented here are
based on the comparison of a substant ally complete measure of social costs with an incomplete measure of benefits.
Source: U.S. EPA Analysis, 2006.
Al-4
ORGANIZATION OF THE EA REPORT
The EA assesses the costs, economic impacts, and benefit-cost relationships of the final regulation and the other
regulatory options evaluated in its development. The EA consists of five parts, organized as follows:
Part A: Background Information
Chapter A1: Introduction provides a brief discussion of the regulated industry sectors and facilities, summarizes
the final rule and other evaluated options, and presents a summary of economic analysis results.
Chapter A2: Need for the Regulation discusses the environmental impacts from operating CWIS and explains the
need for this regulatory effort,
Part B: Economic Analysis for Phase III New Offshore Oil and Gas Extraction Facilities
Chapter Bl: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas
Extraction Facilities summarizes the cost categories included in the economic analyses for Phase 111 new
facilities and describes certain elements of the analytic framework of the economic analyses of new offshore oil
and gas extraction facilities.
Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry presents a profile of existing offshore oil
and gas production platforms and mobile offshore drilling units (MODUs) and characterizes new facilities subject
to the final Phase III requirements. The profile summarizes the existing facilities, their associated firms, and the
financial conditions of those firms. The profile also projects the number and type of new facilities estimated to
begin operation over a twenty-year period.
Chapter B3: Economic Impact Analysis for the Offshore Oil and Gas Extraction Industry presents an overview
of the methodology used to estimate the economic impacts potentially incurred by new offshore oil and gas
extraction facilities under the final Phase III regulation and provides the impact analysis results. The chapter
assesses the potential impacts on MODUs, platforms, and firms, including a cost-to-revenue analysis at the
facility and firm levels. The chapter also presents a barrier-to-entry analysis for new facilities.
Part C: Economic Analysis for Phase III Existing Facilities
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§ 3l6(b) Final Rule: Phase III-EA, Part A: Background Information Chapter AI: Introduction
Chapter Cl: Summary of Cost Categories and Key Analysis Elements for Existing Facilities summarizes the
cost categories included in the economic analyses for Phase III existing facilities and describes certain elements of
the analytic framework that are common to the economic analyses of Manufacturers and Electric Generators,
Chapter C2: Profile of Manufacturers presents profiles of the markets in which affected manufacturing facilities
operate (SIC codes 26, 28,29, 331, 333/335, and 20). Each manufacturing industry profile presents an outline of
domestic production, discusses market structure and competitiveness, summarizes industry-wide financial
performance and condition, and characterizes facilities potentially subject to regulation under Phase III.
Chapter C3: Economic Impact Analysis for Manufacturers presents an overview of the methodology used to
estimate the economic impacts incurred by Phase HI manufacturing facilities under the three options and provides
the impact analysis results. The chapter describes the analytic framework used to assess severe and moderate
facility-level impacts associated with the regulatory analysis options. The chapter also includes a discussion of
firm- and market-level impacts.
Part D: Additional Economic Analyses for New and Existing Facilities
Chapter Dl: Regulatory Flexibility Analysis presents EPA's estimates of small entity impacts from this final rule
and other evaluated options.
Chapter D2: UMRA Analysis outlines the requirements for analysis under the Unfunded Mandates Reform Act
and presents the results of the analysis for this final regulation and other evaluated options.
Chapter D3: Other Administrative Requirements presents additional analyses conducted in developing this final
rule and other evaluated options. These analyses address the requirements of Executive Orders and Acts
applicable to this proposal.
Part E: Social Costs, Benefits, and Benefit-Cost Analysis for New and Existing Facilities
Chapter El: Summary of Social Costs presents the social costs of the final rule and other evaluated options,
including time profiles of direct facility costs and administrative costs.
Chapter E2: Summary of Benefits provides an overview of the regional studies used to support the benefits
assessment and a summary of the analyses. The chapter also presents the results of each regional study for the
regulatory analysis options considered for Phase III existing facilities. Finally, the chapter outlines the
methodology used to extrapolate regional study results to develop national estimates of baseline losses from
impingement and entrainment at in-scope facilities and presents monetized benefits.
Chapter E3: Comparison of Benefits and Social Costs compares total benefits to total social costs at the national
and regional levels for the regulatory analysis options considered for Phase III existing facilities. This chapter
includes a discussion of net benefits, an incremental analysis of net benefits, cost/benefit ratio, and a break-even
analysis. Lets
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§ 3!6(b) Final Rule: Phase III - EA, Part A: Background Information
Chapter AJ: Introduction
REFERENCES
Clean Water Act (CWA). 33 U.S.C. 1251 et seq.
U.S. Department of Commerce (U.S. DOC). 2005. Statistics for Industry Groups and Industries: 2004. Annual
Survey of Manufactures. U.S. Census Bureau. December 2005.
U.S. Department of Commerce (U.S. DOC). 2002. 2002 Economic Census. U.S. Census Bureau.
U.S. Department of Commerce (U.S. DOC). 1986. 1982 Census of Manufactures. Subject Series: Water Use in
Manufacturing. Bureau of the Census. March 1986.
U.S. Department of Energy (U.S. DOE). 1996. Form EIA-867 (1996). Annual Nonutility Power Producer
Report.
U.S. Department of Energy (U.S. DOE). 1995. Form ElA-767 (1995). Steam-Electric Plant Operation and
Design Report.
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Economic and Benefits Analysis for the Final
Section 316(b) Phase III Existing Facilities Rule. EPA-821-R-06-001. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final
Section 316(b) Phase III Existing Facilities Rule. EPA-821-R-06-003. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2001. Economic Analysis of the Final Regulations
Addressing Cooling Water Intake Structures for New Facilities. EPA-821-R-01-035. November 2001.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Section 316(b) Industry Survey. Detailed Industry
Questionnaire: Phase II Cooling Water Intake Structures and Industry Short Technical Questionnaire: Phase II
Cooling Water Intake Structures, January, 2000 (OMB Control Number 2040-0213). Industry Screener
Questionnaire: Phase I Cooling Water Intake Structures, January, 1999 (OMB Control Number 2040-0203).
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£ 3I6(b) Final Rule: Phase III - EA, Part A: Background Information Chapter Al: Introduction
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£ 316(b) Final Rule: Phase 111 - EA, Pan A: Background Information
Chapter A2: Need for the Regulation
Chapter A2: Considerations in Assessing the
Need for Phase III Regulation
CHAPTER CONTENTS
Introduction A2-1
A2-1 Description of Environmental Impacts from
CWIS A2-1
A2-2 Levels of Protection at Phase III Facilities A2-2
A2-2.1 Phase HI New Facilities A2-2
A2-2.2 Potential Phase III Existing FacilitiesA2-3
A2-3 Addressing Market Imperfections A2-3
References A2-4
INTRODUCTION
Many cooling water intake structures (CWIS) have been
constructed on sensitive aquatic systems with capacities
and designs that have potential to cause damage to the
waterbodies from which they withdraw water. In fact, of
the 709 existing facilities that were considered potentially
within the scope of the 316(b) Phase III regulation, only 67
indicated on EPA's 2000 Section 316(b) Industry Survey
that they have ever performed an impingement and
entrainment (I&E) study (U.S. EPA, 2000).' In addition,
EPA and the Bureau of Land Management's Minerals
Management Service (MMS) could only identify one case where the potential environmental impacts of the
CWIS of a new oil and gas extraction facility were considered (U.S. DOI, 2001). In a subsequent literature
review, MMS did not find any information related to potential environmental impacts or I&E controls for any
existing oil and gas extraction facilities (U.S. DOI, 2004).
This chapter presents information that documents how EPA addressed the question of the need for regulation.
A2-1 DESCRIPTION OF ENVIRONMENTAL IMPACTS FROM CWIS
The withdrawal of cooling water by Phase III existing facilities removes tens of billions of aquatic organisms
from waters of the United States each year, including plankton (small aquatic animals, including fish eggs and
larvae), fish, crustaceans, shellfish, sea turtles, marine mammals, and many other forms of aquatic life. Most
impacts are to early life stages offish and shellfish. Aquatic organisms drawn into CWIS are either impinged on
components of the intake structure or entrained in the cooling water system (CWS) itself.
Rates of I&E depend on species characteristics, the environmental setting in which a facility is located, and the
location, design, and capacity of the facility's CWIS.
In addition to direct losses of aquatic organisms from I&E, a number of indirect, ecosystem-level effects may also
occur, including (1) disruption of aquatic food webs resulting from the loss of impinged and entrained organisms
that provide food for other species, (2) disruption of nutrient cycling and other biochemical processes, (3)
alteration of species composition and overall levels of biodiversity, and (4) degradation of the overall aquatic
environment. In addition to the impacts of a single CWIS on currents and other local habitat features,
environmental degradation can result from the cumulative impact of multiple intake structures operating in the
same watershed or intakes located within an area where intake effects interact with other environmental stressors.
1 This number is sample-weighted and includes manufacturing facilities and electric generators only. Facilities estimated
to be baseline closures are excluded from this count and all analyses presented in this chapter. See Chapter C3 for additional
information on EPA's baseline closure analyses.
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§ 316(b) Final Rule: Phase HI-EA, Part A: Background Information Chapter A2: Needfor the Regulation
A2-2 LEVELS OF PROTECTION AT PHASE III FACILITIES
Facilities subject to the Phase III final regulation use a wide variety of cooling water intake technologies to
maximize cooling system efficiency, minimize damage to their operating systems, and to reduce environmental
impacts. The following subsections present data on technologies that have been identified as effective in
protecting aquatic organisms from I&E. The first subsection presents information for the Phase III new facilities;
the second subsection presents information for Phase III existing facilities.
A2-2.1 Phase HI New Facilities
In general, oil and gas extraction facilities have not considered the potential environmental impacts of their
CWISs. EPA and the Bureau of Land Management's Minerals Management Service (MMS) could only identify
one case where the environmental impacts of a fixed offshore oil and gas extraction facility's CWIS were
considered (U.S. DOE, 2001). Although plans for the Liberty Island Project in Beaufort Sea, Alaska, were put on
hold in January 2002 (FR, 2002), BP Exploration (Alaska) Inc. (BPXA) had plans to locate a vertical intake pipe
for a seawater-treatment plant on the south side of Liberty Island, Beaufort Sea, Alaska. The project would have
had the following specifications:
* a vertical pipe with an opening of 8 feet by 5.67 feet, located approximately 7.5 feet below the mean low-
water level;
* a continuous flush system discharge that pumps the seawater through the process-water system to prevent
ice formation and blockage;
> recirculation pipes located just inside the opening to help keep large fish, other animals, and debris out of
the intake;
> two vertically parallel screens (6 inches apart), located in the intake pipe above the intake opening, with a
mesh size of 1 inch by 1/4 inch;
* maximum water velocity of 0.29 feet per second at the first screen and 0.33 feet per second at the second
screen (maximum velocities only during a few hours each week while testing the fire-control water
system - at other times, considerably lower velocities); and
> periodical removal, cleaning, and replacement of the screens.
MMS stated in the Liberty Draft Environmental Impact Statement (which was prepared prior to BP's decision to
hold development plans) that the proposed seawater-intake structure would likely harm or kill some young-of-the-
year arctic cisco during the summer migration period and some eggs and fry of other species in the immediate
vicinity of the intake. However, MMS estimated that less than 1% of the arctic cisco in the Liberty area would
likely be harmed or killed by the intake structure. Further, MMS concluded that the intake structure (1) would not
have a measurable effect on young-of-the-year arctic cisco in the migration corridor and (2) would not have a
measurable effect on other fish populations because of the wide distribution/low density of their eggs and fry.
In general, the importance of controlling I&E at offshore oil and gas extraction facilities is highlighted by the tact
that these structures provide an important fish habitat. For example, oil and gas platforms and artificial reefs
undoubtedly serve as red snapper habitat, and they may serve as an important (but not obligate) link in the life
history of both juvenile and adult red snapper (Gulf of Mexico Fishery Management Council, 1996). In general,
five to 100 times more fish can be concentrated near offshore platforms than in the soft mud and clay habitats
elsewhere in the Gulf of Mexico (Fury, 2002). As a result, 70% of all fishing trips in the Gulf of Mexico head for
oil and natural gas platforms. Likewise, 30% of the 15 million fish caught by recreational fishermen every year
off the coasts of Texas and Louisiana come from the waters around platforms.
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§ 3l6(b) Final Rule: Phase 111- EA, Pan A: Background Information
Chapter A2: Need for the Regulation
A2-2.2 Potential Phase III Existing Facilities
EPA used information from its 2000 Section 316(b) Industry Survey to characterize the 709 existing facilities
potentially subject to Phase III regulation (i.e., with DIP of at least 2 MOD) with respect to their CWS
configuration, their CWIS technologies, and their cooling system location. These estimated 709 facilities include
592 Manufacturers facilities and 117 Electric Power Producers. Closed-cycle cooling systems (e.g., systems
employing cooling towers) are the most effective means of protecting organisms from I&E. Discussions with
NPDES permitting authorities and utility officials identified fine mesh screens as an effective technology for
minimizing entrainment. They can, however, increase impingement. Another effective approach for minimizing
Adverse Environmental Impact (AEI) associated with CWIS is to locate the intake structures in areas with low
abundance of aquatic life, and to design the structures so that they do not provide attractive habitat for aquatic
communities. However, this approach is of little utility for existing facilities where options for relocating intake
structures are infeasible.
A2-3 ADDRESSING MARKET IMPERFECTIONS
Facilities withdraw cooling water from U.S. waters to support production activities, and, in the process impinge
and entrain organisms without accounting for the consequences of these actions on the ecosystem or other parties
who do not directly participate in the production process. The actions of these facilities impose harm or costs on
the environment and on other parties (sometimes referred to as third parties). These costs, however, are not
recognized by the responsible emities in the conventional market-based accounting framework. Because the
responsible entities do not account for these costs to the ecosystem and society, they are external to the market
framework and the consequent production and pricing decisions of the responsible entities. In addition, because
no party is reimbursed for the adverse consequences of I&E, the externality is uncompemated.
Business decisions will yield a less than optimal allocation of economic resources to production activities, and, as
a result, a less than optimal mix and quantity of goods and services, when external costs are not accounted for in
the production and pricing decisions of the section 316(b) industries. In particular, the quantity of AEI caused by
the business activities of the responsible business entities will exceed optimal levels and society will not
maximize total possible welfare. Adverse distributional effects may be an additional consequence of the
uncompensated environmental externalities. If the distribution of I&E and ensuing AEI is not random among the
U.S. population but instead is concentrated among certain population subgroups based on socio-economic or other
demographic characteristics, then the uncompensated environmental externalities may produce undesirable
transfers of economic welfare among subgroups of the population.
Market imperfections are often trie reason that governments consider regulatory actions against a business or
group of businesses. Depending on the nature of the AEI and potential costs for control technologies,
governments may decide to address the market imperfection through a wide-ranging regulation or on a case-by-
case basis.
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§ 3l6(b) Final Rule: Phase HI - EA, Part A: Background Information Chapter A2: Need for the Regulation
REFERENCES
Federal Register (FR). 2002. Volume 67, number 99, pages 36020-26022. May 22,2002.
Fury, Sandra. ChevronTexaco. Statements before U.S. Commission on Ocean Policy. March 8, 2002.
Gulf of Mexico Fishery Management Council. 1996. Reef Fish Stock Assessment Panel - Review of 1996
Analysis by Galloway and Gazey. Pursuant to National Oceanic and Atmospheric Administration Award No.
NA67FC0002.
U.S. Department of Interior (U.S. DOI). 2004. Minerals Management Service. Marine and Coastal Fishes
Subject to Impingement by Cooling-Water Intake Systems in the Northern Gulf of Mexico: An Annotated
Bibliography, OCS Study, MMS 2003-040. August 2003.
U.S. Department of Interior (U.S. DOI). 2001. Minerals Management Service. Liberty Development and
Production Plan Draft Environmental Impact Statement, OCS EIS/EA, MMS 2001-001. January 2001.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Section 316(b) Industry Survey. Detailed Industry
Questionnaire: Phase II Cooling Water Intake Structures and Industry Short Technical Questionnaire: Phase II
Cooling Water Intake Structures, January, 2000 (OMB Control Number 2040-0213). Industry Screener
Questionnaire: Phase I Cooling Water Intake Structures, January, 1999 (OMB Control Number 2040-0203).
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13l6(b) Final Rule: Phase HI - EA, Par; B: Economic Analysis for New OOGE Facilities
Bl: Summary of Costs
Chapter Bl: Summary of Cost Categories
and Key Analysis Elements for New Offshore
Oil and Gas Extraction Facilities
INTRODUCTION
This chapter presents an overview of the cost categories
and certain elements of the analytic framework that are
common to the economic analyses of the two major
industry segments covered by the final standards for new
Offshore Oil and Gas Extraction facilities: mobile offshore
drilling units (MODUs) and oil and gas production
platforms or structures.
Bl-1 COST CATEGORIES
In its analyses of the costs and economic impacts of the
final rule on new oil and gas extraction facilities, EPA
considered three categories of costs:
> costs of installing and operating compliance
technology,
> administrative costs incurred by complying
facilities, and
» administrative costs incurred by permitting
authorities.
In contrast to the analysis conducted for the Manufacturing industry segment (see also Chapter Bl), EPA assumed
that no downtime is associated with installing or maintaining CWIS technologies for new offshore oil and gas
extraction facilities, for two reasons. First, new facilities do not have to retrofit equipment; the equipment is built
to specification and installed before the facility begins operations. Second, even the maintenance of CWISs
should not result in downtime in the oil and gas industry. MODUs are hauled out on a regular basis for other
types of maintenance activities, and production platforms are shut in one to two times per year for other
maintenance, making incremental downtime due to CWIS maintenance unlikely (see the Technical Development
Document for the Final Section 316(b) Phase III Rule (hereafter referred to as the "Phase III Technical
Development Document":, U.S. EPA, 2006b).
Subsection B 1-1.1 provides an overview of the three cost categories included in the analysis for new offshore oil
and gas extraction facilities, addressing those aspects of each category that are relevant to the oil and gas industry.
Table Bl-1 summarizes the type of new offshore oil and gas extraction facility assumed to be subject to Phase HI
regulation and the compliance technologies considered for each facility type. Subsection Bl-1.2 presents
information on administrative costs incurred by new oil and gas facilities. Additional detail on the costs of
installing and operating compliance technology is provided in the Phase III Technical Development Document.
CHAPTER CONTENTS
Introduction Bl-1
Bl-l Cost Categories Bl-1
BI -1.1 Cost of Installing and Operating
Compliance Technology Bl-2
BI -1.2 Administrative Costs for Complying
Facilities Bl-3
B1 -2 Key Elements of the Economic Analysis For
New Offshore Oil and Gas Extraction Facilities
Bl-7
Bl-2.1 Compliance Schedule Bl-8
B1 -2.2 Adjusting Monetary Values to a Common
Time Period of Analysis Bl-8
B1 -2.3 Discounting and Annualization - Costs to
Society or Social Costs Bl-9
B1 -2.4 Discounting and Annualization - Costs to
Complying Facilities Bl-11
References Bl-13
June 1. 2006
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Bl-1
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£ 3I6(b) Final Rule: Phase HI- EA, Part B: Economic Analysis for New OOGE Facilities
Bl: Summary of Costs
Bl-1.1 Cost of Installing and Operating Compliance Technology
Oil and gas drilling and production facilities will need to implement technologies to reduce impingement
mortality and/or entrainment. The choice of technology varies depending on CWIS diameter and flow rate or
diameter, or type of CWIS (e.g., sea chest or simple pipe). Note that for new MODUs, which EPA assumes will
use sea chests, only impingement requirements will apply. EPA determined that entrainment controls on sea
chests are not technically practicable (U.S. EPA, 2006b).
Table Bl-1: Technologies for Implementing 316(b) Requirements for New Offshore Oil and Gas
Extraction Facilities
Category
CWIS Type
Technology Description
Platform
Platform
Platform
Platform
Platform
Jackup
Jackup
Jackup"
Jackup"
Jackup
Submersibles, Semi-
Submersibles and Drill Ships*
Submersibles, Semi-
submersibles and Drill Ships8
Drill Barges
Drill Barges
Simple Pipe or Caisson
Simple Pipe or Caisson
Simple Pipe or Caisson
Simple Pipe or Caisson
Simple Pipe or Caisson
Simple Pipe or Caisson
Simple Pipe or Caisson
Sea Chest
Sea Chest
Submersible Pumps
Sea Chests
Sea Chests
Simple Pipes
Simple Pipes
Stainless steel wedge wire screen - no air sparge cleaning
Stainless steel wedge wire screen - with air sparge
cleaning
CuNi wedge wire screen - no air sparge cleaning
CuNi wedge wire screen - with air sparge cleaning
Stainless steel and CuNi velocity caps
Cylindrical wedge wire screen over tower inlet
Horizontal Flow Modifier
Flat panel wedge wire screen over sea chest opening
Horizontal Flow Diverter for Side Sea Chests
Cylindrical wedge wire screen over suction pipe inlet
Flat panel wedge wire screen over sea chest
Horizontal flow diverter over side sea chest
Cylindrical wedge wire screen over simple pipes
Velocity Cap on the CWIS
* All semi-submersibles and drill ships and most jackups in EPA's technical database use sea chests. EPA determined that
entrainment controls on sea chests are not technically practicable. New MODUs, which are represented by typical existing MODUs, are
assumed to use sea chests (see U.S. EPA, 2006b).
Source: U.S. EPA, 20061).
EPA developed technology cost estimates for the final rule based on the impingement mortality and entrainment
reduction technologies (as appropriate) projected for each new oil and gas facility. Technology costs include
capital costs and operating and maintenance (O&M) costs. The technology costs developed for the final rule
analysis are engineering cost estimates, expressed in July 2002 dollars. These costs were converted to mid-year
2004 values for most applications (see Section B 1-2.2 below for a discussion of adjusting monetary values to a
common time period of analysis).
More detailed information on the compliance technologies considered by EPA, on technology costs, and on
EPA's characterization of baseline technologies already in-place at new offshore oil and gas extraction facilities,
is available in the Phase III Technical Development Document. In addition, Chapter B3: Economic Impact
Analysis for the Offshore Oil and Gas Extraction Industry provides more detail on the engineering costs assumed
for each of the different types of oil and gas facilities analyzed in this report.
EPA received no substantive comments on compliance costs or costing methodologies, so no changes have been
made to these, other than to inflate costs for the 2003 values presented at proposal to 2004 values in this final
economic analysis report.
Bl-2
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§ 316(b) Final Rule: Phase III - EA, Pan B: Economic Analysis for New OOGE Facilities
BI: Summary of Costs
BJ-1.2 Administrative Costs for Complying Facilities
Compliance with the standards of the final rule requires new offshore oil and gas extraction facilities to carry out
certain administrative functions. For Phase III existing facilities, these administrative functions, which help them
determine their compliance requirements and provide the documentation needed for issuance of their new
National Pollution Discharge Elimination System (NPDES) permits, fall on each facility individually. For new
oil and gas facilities, however, General Permits apply.
There are three General Permits (GPs) that will apply to new offshore oil and gas extraction facilities subject to
Phase III regulation. The Region 6 General Permit applies to the relatively active Western Gulf of Mexico
(GOM) region; the Region 4 General Permit applies to the currently relatively inactive Eastern GOM region, and
the Region 10 General Permit (Cook Inlet permit) applies to Cook Inlet, Alaska. The GPs are expected to be
rewritten to accommodate the requirements of section 316(b) following promulgation of the final rule and as each
GP comes up for renewal at the end of its 5-year cycle.
The current Region 6 permit was effective as of 2002, expired in 2003, and was renewed in 2004. This renewal is
for 3 years only, to allow for information from a produced water study to be incorporated more expeditiously.
The next rounds of permitting, therefore, are assumed to 2007 and 2012. The Region 4 permit expired in 2003
and was renewed in 2004. The probable post-promulgation GP renewal schedule is considered to be 2009 and
2014. The proposed permit for Cook Inlet is currently in comment period. The likely renewal is therefore mid to
late 2006. However, the permit expired in 2004. Assuming the 5-year schedule will still apply, regardless of this
delay, the likely post-promulgation renewal schedule for the Cook Inlet permit is 2009 and 2014.
The 316(b) Phase III final rule is scheduled to be promulgated in 2006, with the effective date assumed to be the
beginning of 2007. Three years of environmental studies are assumed to be required prior to permitting under the
section 316(b) rule. Thus, the first possible compliance date after the 2007 effective date would be 2010.
However, the general permits may not be able to incorporate section 316(b) requirements during the 2007-2009
repermitting cycles. Therefore, EPA assumed that the oil and gas industries will be required to comply starting in
2012 (or 2014 in the case of Region 4 and 10 permits).
Because the rule becomes effective in 2007, however, EPA is assuming, for both simplicity and to be
conservative, that starting in 2007, new offshore oil and gas extraction facilities will have installed and will be
operating relevant CWIS controls, since they will be relatively inexpensive to install during construction. The
pre-permitting studies are assumed to start in 2007 {for both Region 6 and Region 4), but other permitting tasks
will not begin until the year prior to when the GPs renewals are finalized (2012 or 2014), or the year prior to when
the facility is assumed to come on line or be launched, whichever is later. Monitoring will begin only in the year
the renewals are finalized or the year in which the facility comes on line or is launched, again, whichever is later.
The timing assumptions for Region 6 and Region 4 permits may overstate costs, since costs are moved several
years earlier in the analysis time frame than they would be if EPA assumed only those facilities constructed in
2012 or later incur compliance costs. The costs of compliance in this industry, however, are relatively small
overall, so the numerical significance of any overestimation would be small. More specific details of the timing
assumptions of costs incurred are provided in a memorandum to the Rulemaking record (ERG, 2004).
Because new offshore oil and gas extraction facilities will be subject to Phase III regulation under these GPs, EPA
assumes that certain administrative functions can be shared among new facilities. All MODUs and platforms
expected to be built in the first five years before the revised Region 6 General Permit is issued (2012) are
expected to share the initial costs of certain biological characterization studies that will be required by section
316(b) under the Region 6 GP. They are also assumed to share the cost of monitoring studies, which must be
performed at a minimum for the first two years of the permit and then at least once per year for each repermitting
cycle. Only MODUs are assumed to share the costs of permitting studies under the Region 4 GP. Permitting
June 1, 2006
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§ 3l6(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities BI: Summary of Costs
costs for platforms are assumed to be those incurred under the Region 6 permit. Should platforms with affected
CWISs be constructed in Region 4 locations, permitting costs will be similar to Region 6 permitting costs. Since
it is not known which MODUs might operate in the Eastern GOM, all MODUs constructed in 2007 and beyond
are assumed to incur permitting costs under a Region 4 GP. This roughly doubles the permitting costs assigned to
MODUs. The assumption may overstate total costs, since not all MODUs might operate in the Eastern Gulf.
Furthermore, there might be significant costs savings once a Region 6 permit application is completed, since
much of the information required for both permits would most likely be identical.
Only one Alaska project is anticipated, at most, over the period of analysis (see Chapter B2: Profile of the
Offshore Oil and Gas Extraction Industry), so this project is expected to incur the entire cost of facility
permitting. This project is assumed to go on line in the year the Region 10 permit is finalized (2014). For this
project, EPA assumes that the 3-year studies are performed in the three years prior to start-up (2011-2013).
The administrative functions associated with incorporating the 316(b) requirements into the applicable General
Permits are either one-time requirements (compilation of information for the initial post-promulgation General
Permits) or recurring requirements (compilation of information for subsequent General Permit renewals; and
monitoring, record keeping, and reporting). More detailed information on the derivation of permitting activities
and costs can be seen in U.S. EPA (2006a).
EPA received no substantive comments on the administrative costs of permitting activities, nor on the timing or
cost sharing assumptions. All costs and methodologies are the same as those at proposal, although costs have
been updated from the 2003 values used at proposal to the 2004 values in this final economic analysis report.
Bl-1.2.1 Initial Post-promulgation General Permit Application
EPA assumes that the final rule will encourage firms to pool their resources. Therefore, those firms that are
planning to construct new platforms or MODUs to operate in the GOM within the first 5 years before the
applicable General Permit is reissued with 316(b) requirements in place are assumed to share certain pre-
permitting costs. EPA expects that these firms will hire a consultant to perform the more general information
gathering tasks required of industry before facilities can be permitted under a GP and also to perform the two
years of monitoring studies required in the first two years of the permit (monitoring costs are assumed shared by
the number facilities permitted in the first or second year of the first permit cycle). Other activities are specific to
each facility and it is assumed each facility will incur the cost of these activities individually. Some of the
permitting activities, however, will not be incremental to existing requirements. Minerals Management Service
(MMS) has finalized a rule (August 2005) that requires some of the same information (Federal Register, 2005).
(The MMS rule is, however, not applicable to Cook Inlet.) All information submitted will be consistent with
Phase I, Track 1 requirements.
Activities and costs associated with the initial permit renewal application include:
> Start-up activities: reading and understanding the rule; mobilizing and planning; and training staff. This
is a facility-specific activity.
> Permit application activities: identifying source water physical data, velocity information, and cooling
water intake structure data, including description of CWIS operations, flow distribution and water balance
diagram, and drawings and maps to support CWIS descriptions, and maintaining copies of these records.
These activities are assumed facility-specific, but several of the activities duplicate activities required by
MMS. There are no incremental costs associated with duplicate activities.
> Source waterbody flow and CWIS velocity flow information: Information used to demonstrate that the
facility's CWIS meets the proportional flow requirements. The CWIS velocity flow information and
demonstration is assumed to be facility-specific, but none of these activities is incremental to MMS
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§ 316(b) Final Rule: Phase III - EA, Par; B: Economic Analysis for New OOCE Facilities
BI: Summary of Costs
requirements. The waterbody flow calculation activities are only those associated with compiling site-
specific information. Other waterbody characterization activities that can be shared are included in the
biologic characterization study activities.
> Design and construction technology plan: delineation of the hydrologic zone of influence for the CWIS,
description of technologies to be implemented; the basis for technology selection; expected performance
of the technology; and design calculations, drawings and estimates to support the technology description
and performance. These activities are assumed facility-specific. Development of the narrative
description of technologies is considered an MMS requirement, so no costs are assumed incurred for this
activity.
> Source water baseline biological characterization data: characterization of the biological community in
the region and operation of CWISs; list of species in region; identification and evaluation of primary
period of reproduction, larval recruitment, and period of peak meroplankton abundance for relevant taxa;
and description of the likely impact of CWISs on the biological community due to impingement and
entrainment. This is considered a regional study to be conducted over a 3-year period by a contractor;
costs are assumed to be shared among affected facilities, since the entire monitoring program is assumed
to apply region-wide.
Table Bl-2 below lists the estimated costs per facility of each of the initial post-promulgation General Permit
activities described above (permit costs for MODUs in the Eastern GOM are lower in some cases, since MODUs
are assumed to use sea chests and are not required to meet entrainment requirements, eliminating any costs
associated with entrainment studies).
Table Bl-2: Cost of Initial Post-Promulgation NPDES General Permit Application Activities
(Per Facility, 2004$)
Activity
Start-up activities*
Permit application activities'*
Source waterbody flow information*
CWIS velocity flow information'
Design and construction technology planb
Biological characterization study"
Total Initial Post-Promulgation NPDES General
Permit Application Cost*
Region 6
$2,291
S959
$1,470
$0
$1,334
$64,574
$70,627
Region 4
$2,291
$959
$1,470
$0
$1,185
$40,407
$46,311
Region 10
$2,291
$959
$1,470
$0
$1,334
$297,695
$303,748
The costs for these activities are incurred in 2007 for facilities built in 2007 to 2011 in both Eastern and Western Gulf. For Alaska,
they occur in 2011.
b The costs for these activities are incurred in 2011 for facilities built in 2007 to 2012 for both Eastern and Western Gulf. For Alaska,
they occur in 2013.
c The costs for these activities are incurred during 2007-2009 in the Eastern and Western Gulf and are shared costs. For Alaska, these
costs are incurred during 2011-2013,
4 Individual numbers may not add to total due to independent rounding.
* Shared study costs.
f Measured as incremental to MMS requirements.
Source: U.S. EPA, 2006a. See also SRC, 2004 and DCN 9-4000.
Bl-1.2.2 Subsequent NPDES General Permit Renewals
Subsequent General Permit renewals will require collecting and submitting the same type of information required
for the initial permit renewal application. EPA expects that both the facility and the contractor can use some of
the information from the initial studies. Building upon existing information is expected to require less effort than
June I, 2006
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§ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities
Bl: Summary of Costs
developing the data the first time, especially in situations where conditions have not changed. The shared
recurring permit costs are assumed to be shared by all new offshore oil and gas extraction facilities built in the
first 5-year cycle plus all new facilities built in the next 5-year cycle, etc., so as time goes on, shared costs are
shared by more and more facilities (except Alaska, where only one project is assumed during the time frame of
the analysis). As facilities go off line or are retired (after 30 years), fewer projects share in these studies.
Table Bl-3 lists the estimated costs of each of the NPDES General Permit renewal activities subsequent to the
first round. Since these numbers change slightly as facilities come on or offline, the costs shown are for the first
repermitting cycle following the initial GP renewal.
Table Bl-3: Cost of Subsequent NPDES General Permit Application Activities (Per Facility, 2004$)
Activity
Start-up activities*
Permit application activities*
Source waterbody flow information*
CW1S velocity flow information*
Design and construction technology plan"
Biologic characterization study*
Total Recurring NPDES Permit Application Costd
Region 6
$732
$194
$416
$0
$834
$12,162
$14,338
Region 4
$732
$194
$416
$0
$720
$7594
$9,656
Region 10
$732
$194
$416
$0
$834
$193,324
$195,501
* The costs for these activities are incurred during the year of the General Permit renewal. Shared costs shown are for the first permit
renewal period after the initial permit (e.g., 2017); these costs change as the number of permitted facilities change. For simplicity, all
costs for repermitting are assumed to be incurred in one year, rather than spread over several years as was assumed for the initial round
of permitting.
Source: U.S. EPA, 2006a. See also ERG, 2004 and DCN 9-4000.
Bl-1.2.3 Annual monitoring, record keeping, and reporting
Annual monitoring, record keeping, and reporting activities and costs include:
> Biologic monitoring for impingement
* Biologic monitoring for entramment
* Velocity monitoring
* Preparing and maintaining a yearly status report
Table B1-4 on the following page outlines the associated costs of these activities.
Table Bl-4: Cost of Monitoring Activities (Per Facility, 2004S)
Activity
Biologic monitoring for impingement
Biologic monitoring for entrainment
Velocity monitoring"
Preparing and maintaining yearly status report
Total Monitoring Cost
; Region 6
$4,320
$2,699
$1,037
$1,861
$9,917
Region 4
$1,949
$0
$468
$840
$3,257
Region 10
$0
$45,723
$6,393
$11,474
$63,661
* The costs for these activities are incurred during the first two years of the initial General Permit renewal (i.e., 2012 or 2014) and are
shared. These costs are incurred for one year in each subsequent permit renewal cycle. Shared costs shown are for the first permit cycle
only (2012 or 2014); these costs change as the number of permitted facilities changes over time.
Source: U.S. EPA, 2006a. See also ERG 2004.
BI-6
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§ 3l6(b) Final Rule: Phase 111 - EA, Part B: Economic Analysis for New OOGE Facilities
BI: Summary of Costs
Bl-1.2.4 Administrative Costs for Permitting Authorities
In addition, permitting authorities have to review the information provided by new offshore oil and gas extraction
facilities and have to issue new general permits that reflect the requirements of the final rule. These activities
impose costs on the responsible governmental units. For more details on the specific costs and timing
assumptions for federal administiation of new offshore oil and gas extraction facilities, see Chapter D2: UMRA
Analysis. These costs and assumptions are summarized briefly below.
The requirements of section 316(b) are implemented through the National Pollutant Discharge Elimination
System (NPDES) permit program. In the case of the oil and gas industry, NPDES permitting is consolidated
under several General Permits, which are administered at the EPA regional level. Unlike the Phase III existing
facilities discussed in Chapter Cl: Summary of Cost Categories and Key Analysis Elements for Existing
Facilities, no states are involved in these permitting activities. Thus, three Regions (Region 6, Region 4, and
Region 10) are expected to be the only entities responsible for permitting. Because states are not involved in
permitting, there are no costs associated with Federal oversight as there are for state-administered NPDES
permits. The three Regions will incur three types of costs associated with implementing the requirements of the
final rule on a per-facility basis, i.e., for each facility permitted under a GP: (1) start-up activities (considered not
incremental to existing activities; $0 cost), (2) activities associated with the initial General Permit containing the
new section 316(b) requirements ($12,677 in each region) and subsequent permit renewals ($4,743 in each
region), and (3) annual activities ($1,471 in each region).
The start up activities apply only once to each Region, but the remaining activities are incurred on a per-facility
basis.
For a detailed discussion of administrative costs for permitting authorities, see Chapter D2: UMRA Analysis,
section D2-1.2.
Bl-2 KEY ELEMENTS OF THE ECONOMIC ANALYSIS FOR NEW OFFSHORE OIL AND GAS
EXTRACTION FACILITIES
The economic analysis of regulation of new offshore oil and gas extraction facilities addresses the cost to, and
impact on, the affected industry segments and society generally. Although these analyses differ in important
respects for the individual industry segments - particularly in terms of the analytic models and methods for
assessing the economic/financial impact of the final rule on complying parties within the segments - several
elements of the analysis have features common to all new offshore oil and gas extraction facilities. This section
reviews the following key common elements:
> Compliance Schedule
> Adjusting Monetary Values to a Common Time Period of Analysis
* Discounting and Annual ization: Costs to Society or Social Costs
* Discounting and Annualization: Costs to Complying Facilities
EPA received no substantive comments on these timing or discounting assumptions. All such methodologies are
the same as those at proposal, although inflation factors have been changed to compute 2004 values in this final
economic analysis report.
The costs associated with implementing the requirements for new offshore oil and gas extraction facilities are
documented in EPA's Information Collection Request (U.S. EPA, 2004a).
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§ 3l6(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities Bl: Summary of Costs
Bl-2.1 Compliance Schedule
For its analysis of the cost and impacts of the final rule, EPA developed a profile of the expected compliance year
(year in which the new MODU or platform is launched or comes on line) for each of the types of facilities
considered in the economic analysis. Unlike the analysis for the Phase III existing facilities, the compliance year
is not necessarily the same year as the year in which the facility must comply with the General Permit, since EPA
is assuming that C WIS controls are installed and are operating in new MODUs and platforms starting in 2007,
even though the first General Permit is assumed to be reissued with 316(b) requirements in 2012. Developing an
explicit profile of compliance years for new offshore oil and gas extraction facilities is important because the
schedule of compliance years determines the timing of outlays by facilities and society in complying with the
regulation, both for the initial outlays and for the ongoing profile of outlays in maintaining compliance with the
regulation. This information is important in properly assessing the present value of the regulation's costs to
society.
For the analysis, EPA initially assumed that firms planning to build facilities in the first permit cycle (Region 6
General Permit) (2012-2016) would contract to perform the studies necessary for these facilities to be permitted
starting in 2007. The Region 4 permit is assumed not to incorporate 316(b) requirements until 2014, but studies
are started in 2007 as well. Starting in 2014, any new MODUs are assumed to incur the costs of the Region 4
permit as well as the Region 6 permit. No platforms/structures are assumed to incur costs of the Region 4 permit
(they will incur the costs of one permit only, assumed to be issued under the Region 6 General Permit). The next
group of facilities to be launched or come on line in the next permit cycle (2017 or 2019) will need to be involved
only in repermitting activities for the shared studies, and thus, for the shared costs, would share repermitting costs
with each other as well as with operations begun in the first 5-year cycle. These new operations will, however,
incur initial permitting costs among those activities that are facility specific. The years in which facilities are
expected to be completed are specifically spelled out, given the number of facilities expected to be completed in
each year (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry). More information on
specific timing assumptions can be seen in ERG (2004) and the 316(b) Oil and Gas Compliance Cost Model for
the Final Rule (DCN 9-4000).
BI-2.2 Adjusting Monetary Values to a Common Time Period of Analysis
The various economic information used in the cost and impact analyses was initially provided or estimated in
dollars of different years. For example, facility financial data obtained in the 316(b) survey for the oil and gas
industry are for the years 2000, 2001, and 2002, while the technology costs of regulatory compliance were
estimated in dollars of the year 2002. To support a consistent analysis using these data that were initially
developed in dollars of different years, EPA needed to bring the dollar values to a common analysis year.
Generally, for this analysis, EPA adjusted all dollar values to constant dollars of the year 2004 (mid-year) using
an appropriate inflation adjustment index. For adjusting compliance costs, EPA used the Construction Cost Index
(CCI) published by the Engineering News-Record. Administrative costs were updated as described in U.S. EPA
(2006a).
Bl-2.2.1 CCI
EPA used the CCI to adjust compliance cost estimates from 2002 to mid-year 2004. EPA judges the CCI as
generally reflective of the cost of installing and operating process and treatment equipment such as will be
required for compliance with Phase III regulation. Table Bl-5, below, shows CCI values for 2002, 2003, and
2004.
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Bl: Summary of Costs
Table Bl-5:
Year
2002
2003
2004
Construction
Value
6605
6694
7115
Cost Index
% Change
1.3%
6.3%
Source: ENK, 2006.
B 1-2.2.2 GDP Deflator
EPA used the GDP Deflator to adjust 316(b) survey financial data from 2000,2001, and 2002 to 2003, but did not
further adjust survey data to 2004. Financial survey data in 2003 dollars were used with engineering and
permitting costs in 2003 dollars to compute vessel-level and platform-level impacts at proposal. Costs have not
been changed since proposal (except to account for values in 2004 dollars), so impact results were not updated
and are considered final for the pjrposes of this economic analysis of the final regulation. The deflators for
adjusting the survey data are shown below in Table B1-6.
Table Bl-6: GDP Deflator Series
Year
Value
% Change
2000
2001
2002
2003
100.0
102.4
103.9
105.7
2.4%
1.5%
1.7%
Source: U.S. BEA, 2004.
Bl-2.3 Discounting and Annuitization - Costs to Society or Social Costs
Discounting refers to the economic conversion of future costs (and benefits) to their present values, accounting for
the fact that society tends to value future costs or benefits less than comparable near-term costs or benefits.
Discounting is important when the values of costs or benefits occur over a multiple year period and may vary
from year to year. Discounting is also important when the time profiles of costs and benefits are not the same -
which is the case for the regulatory analysis of new oil and facilities. Discounting enables the accumulation of the
cost and benefit values from multiple years at a specified point in time, accounting for the difference in how
society values those costs and benefits depending on the year in which the values are estimated to occur.
For its analysis of the costs to society, or the social costs, of the final rule for new offshore oil and gas extraction
facilities, EPA first developed a profile of the costs expected to be incurred as a result of the regulation over the
period of analysis. EPA defined the analysis period as follows. The analysis period begins in 2007 (5 years
before the first of the General Permits is reissued with 316(b) requirements) and includes facilities constructed
over the next 20 years - i.e., to 2026 -plus a period of 30 years in which each newly constructed facility is
assumed to continue compliance. Thus, for the social cost analysis for Phase III new offshore oil and gas
extraction facilities, the analysis period extends to 2055 (see the 316(b) Oil and Gas Compliance Cost Model for
the Final Rule, DCN 9-4000). In developing the time profile of costs, EPA assigned costs according to the
following schedule:
Bl-2.3.1 Direct Costs of Regulatory Compliance
> Capital Costs of Compliance Technology: This cost is first incurred in the year that the facility begins
operation. However, the equipment for complying with the regulation is expected to have a useful life of
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£ 316(b) Final Rule: Phase HI - EA, Part B: Economic Analysis for New OOGE Facilities Bl: Summary of Costs
10 years, or a period shorter than the 30 years of compliance. Accordingly, following the first
installation, facilities are assumed to reinstall, and re-incur the cost of, the compliance equipment at year
11 and year 21 of the facility-specific compliance period.
> Compliance Technology Operation and Maintenance: This cost is assumed to occur in each year of a
facility's 30-year compliance year period.
B 1-2.3.2 Administrative Costs Incurred by Complying Facilities
> Biological Characterization Study: This is a three-year study required for all facilities, which is assumed
to be shared by the affected facilities. The cost of this study is incurred over the years immediately
following the effective date of the final rule or the years preceding the first post-promulgation GP (2007-
2009 for Eastern and Western Gulf, and 2011-2013 for Alaska).
> Initial Permitting Cost. In addition to incurring a share of the cost of characterization studies, complying
facilities will also incur an initial permitting cost, which is assigned to the year preceding the first year of
a facility's 30-year compliance period, or in 2007 for facilities launched or coming on line in 2007
through 2011.
> Repermitting Costs: As explained above, General Permits are renewed each five years during the period
of compliance. Repermitting costs, both shared and facility-specific, are assumed to recur at years 5, 10,
15, 20, and 25 of the General Permit cycles. For new offshore oil and gas extraction facilities, EPA
assumes that 30 years is the reasonable maximum lifetime of these facilities; thus, no repermitting cost is
incurred in the 30* year of facility operation.
* Annual Monitoring, Record Keeping, and Reporting Activities: These costs are assumed to occur in the
first two years of the initial permit and in each year of the permit renewal year. These costs begin in 2012
or 2014, depending on permit.
Bl-2.3.3 Administrative Costs Incurred by Permitting Authorities
* One-time Start-up Costs: These costs are assumed to be nonincremental to existing costs of permitting in
the three regions.
* Permit Processing Costs: These costs are assigned to the years in which facilities apply for initial permits
or renewal permits during the compliance period.
* Annual Permit Administration Activities: The cost of these activities is assumed to occur in parallel with
the annual permit-related activities by complying facilities and thus occurs in each year of a facility's
compliance period.
EPA assigned costs by facility and governmental unit according to this framework and then summed these costs
on a year-by-year basis over the total time period of analysis. For the social cost analysis, these costs were tallied
on a pre-tax basis, which differs from the treatment of costs for the facility impact analysis as described below.
These profiles of costs by year were then discounted to the assumed date the final rule would take effect,
beginning of year 2007, at two values of the social discount rate, 3% and 7%. These discount rate values reflect
guidance from the Office of Management and Budget regulatory analysis guidance document, Circular A-4
(OMB, 2003).2
See Chapter El: Summary of Social Costs, for further discussion of the framework for analyzing the social costs of the
316(b) Phase HI regulation.
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§ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities
Bl: Summary of Costs
For more detailed information sec ERG (2004) and the 316 (b) Oil and Gas Compliance Cost Model for the Final
Rule (DCN 9-4000).
EPA used the following formula -;o calculate the present value of the time stream of costs as of the beginning of
2007:3
Present Value =
°
n+ry
-2oo7
(Bl-1)
where:
Cost,
r
t
Costs in year t
Social discount rate (3% and 7%)
Year in which cost is incurred (2007 to 2055)
After calculating the present value of these cost streams, EPA calculated their constant annual equivalent value
(annualized value) using the annualization formula presented below, again using the two values of the social
discount rate, 3% and 7%. Although the analysis period extends from 2007 through 2055, a period of 49 years,
inclusive, EPA annualized costs over 30 years, since 30 years is the assumed period of compliance. This same
annualization concept and period of annualization were also followed in the analysis of benefits, although for
benefits the time horizon of analysis for calculating the present value is longer than for costs. Using a 30-year
annualization period for both social costs and benefits allows comparison of constant annual equivalent values of
costs and benefits that have been calculated on a mathematically consistent basis. The annualization formula is as
follows:
Annualized Cost = PV of Cost x-
(Bl-2)
where:
Social discount rate (3% and 7%)
Annualization period, 30 years for the social cost analysis
Bl-2.4 Discounting and Annualization - Costs to Complying Facilities
In general, EPA followed similar concepts and procedures in the discounting and annualization required for the
analysis of costs to, and impacts on, complying facilities as those followed for the analysis of social costs.
However, the analysis of costs to complying facilities differs from that for costs to society in several important
ways, which are described below.
> Consideration of taxes. For understanding the impact of the regulation on complying facilities, the costs
incurred by complying facilities are adjusted for taxes, as relevant, and calculated on an after-tax basis.
The tax treatment of compliance outlays and income effects (e.g., from installation) shifts part of these
costs to the tax-paying public and reduces the actual cost to private, tax-paying businesses. For this
reason, the after-tax costs of compliance are a more meaningful measure than the pre-tax costs of the
Calculation of the present value assumes that the cost is incurred at the beginning of the year.
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§ 316(b) Final Rule: Phase III - EA, Part B; Economic Analysis for New OOGE Facilities Bl: Summary of Costs
financial burden on complying facilities. In analyzing and reporting the impact of compliance costs on
private facilities, annualized costs are therefore calculated on an after-tax basis. Since most companies
that operate MODUs or platforms are headquartered in states without corporate income taxes, EPA
assumes a state tax rate of 0%. On the Federal level, EPA assumes that the highest marginal corporate tax
rate applies. This rate is 35% (IRS, 2005), so post-tax costs will be 65% of the pre-tax costs. EPA does
this because all platform and MODU owners that are likely to operate in Alaska or the Gulf of Mexico are
large corporations by SBA standards and/or all have earnings in most years that place them in the highest
corporate tax bracket.
Calculation of present value and annualization of costs at the year of compliance. In the social cost
analysis, costs were summed on a present value basis at the beginning of 2007, the assumed date the final
regulation would take effect. For the analysis of costs to complying facilities, costs were calculated on a
present value basis and annualized at the first year of compliance for each facility (assumed to be the year
the facility is brought on line or launched). The calculation of annualized costs at the first year of
compliance provides more accurate and meaningful insight for assessing financial impact in relation to
the baseline financial performance and conditions of the complying facility than would be achieved if, for
example, costs were further discounted - and reduced numerically - by bringing them to the year the rule
will take effect. The aggregates of annualized cost over facilities for purposes of reporting total cost to
complying facilities and total financial burden are likewise the sum of costs at the initial year of
compliance for each facility, even though those years differ across facilities. These costs are annualized
and used to report the aggregate costs to industry. The costs used to determine impacts are derived
somewhat differently and the method used to incorporate them into the impact analysis varies by type of
facility (MODU or platform) as explained in Chapter B3: Economic Impact Analysis for the Offshore Oil
and Gas Extraction Industry.
Use of discount rates in present value and annualization calculations. The discounting and
annualization calculations for the complying facility cost calculations use the same formulas as used for
the social cost calculations. However, the discount rate used in the facility cost calculations generally has
a different interpretation than the rate used for the social cost calculation (even though the numerical
value of the rate may be the same). Instead of being a social discount rate, the discount rate used for the
present value and annualization calculations for complying facility costs represents a cost of capital to the
individual complying facility, which may reasonably differ from the concept of the social discount rate.
The social discount rate may be derived on several bases, including as an opportunity cost of capital to
society or as a societal inter-temporal preference or indifference rate - i.e., the required rate of change
over time in a value of consumption or outlay at which society would be indifferent to the time period in
which the consumption or outlay occurs. The social discount rates based on these society-level concepts
may reasonably differ from the cost of capital used for assessing costs and financial impacts to the
complying firm.
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§ 3l6(b) Final Rule: Phase III - EA, Par'. B: Economic Analysis for New OOGE Facilities
Bl: Summary of Costs
REFERENCES
Engineering News-Record (ENR). 2006. Construction Cost Index. Available at: http://enr.ecnext.com/free-
scripts/comsite2.pl?page=enr_document&article=fecosu0603-constIndexHist. (Historical data requires
subscription or purchase.)
ERG. 2004. Cost Timing and Cost Sharing Assumptions for Industry Compliance Costs. Memorandum to the
316(b) Phase HI Rulemaking Record. October 15, 2004.
Federal Register. 2005. Vol. 70, No. 167, pi 51477-51519, August 30.
Office of Management and Budget (OMB). 2003. Executive Office of the President. Circular A-4, To the Heads
of Executive Agencies and Establishments; Subject: Regulatory Analys is. September 17, 2003.
U.S. Bureau of Economic Analysis (U.S. BEA). 2004. Gross Domestic Product. Table J.I.9: Implicit Price
Deflators for Gross Domestic Product (GDP). Last Revised on February 27, 2004. Available at:
http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asptfMid
U.S. Department of the Treasury. 2005. Internal Revenue Service (IRS). 2005 Instructions for Forms 1120 &
1120-A. pg. 16 (Federal tax rates).
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Information Collection Request for Cooling Water
Intake Structures at Phase III Facilities (Final Rule). ICR Number 2169.01. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final
Section 316(b) Phase III Existing Facilities Rule. EPA-821-R-06-003. June 2006.
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13l6(b) Final Rule: Phase HI - EA, Par: B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
Chapter B2: Profile of the Offshore Oil and
Gas Extraction Industry
INTRODUCTION
EPA's final 316(b) cooling water intake rulemaking will
affect new construction among offshore components of the
oil and gas industry. The rule will affect new offshore oil
and gas extraction facilities only, because EPA will not be
regulating existing oil and gas facilities. This profile
compiles and analyzes economic and financial data for
several sectors of the offshore oil and gas extraction
industry that may be affected by certain of the Phase I
316(b) requirements for new facilities that will be a part of
requirements for new offshore oil and gas extraction
facilities under Phase III. The profile characterizes the
firms and facilities that currently exist to provide
information on the characteristics; of facilities that might be
constructed in the future and the firms that are most likely
to construct such facilities.
CHAPTER CONTENTS
Introduction B2-1
B2-1 Mobile Offshore Drilling Units (MODUs) B2-2
B2-1.1 Overview B2-2
B2-1.2 Existing MODUs and Their Associated
Firms B2-3
B2-1.3 Existing MODUs with Intake Rates
Meeting Proposed Rule Criteria B2-10
B2-2 Oil and Gas Production Platforms B2-12
B2-2.1 Overview B2-12
B2-2.2 Existing Platforms/Structures and Their
Associated Firms B2-13
B2-2.3 Existing Platforms/Structures with Intake
Rates Meeting Proposed Rule Criteria
B2-19
B2-3 Total New Oil and Gas Operations B2-23
References B2-24
Two key industry sectors are primarily associated with
offshore oil and gas drilling and production, both of which
might intake ambient cooling water from the surrounding
oceans or navigable waterways for a wide variety of cooling needs.
The two major offshore oil and gas extraction industry users of CWIS are:
> mobile offshore drilling units (MODUs)
* offshore oil and gas production platforms
EPA also investigated the liquid natural gas (LNG) re-gasification industry, but determined that only one new
LNG facility recently completed has (or would have) cooling water intakes meeting the 316(b) requirement that
25% or more of total design intake flow be used for cooling water purposes (U.S. EPA, 2006). EPA proposes to
apply Best Professional Judgment (BPJ) to this industry. This industry, therefore, is not discussed further in this
report. See U.S. EPA (2006), however, for profile information on this industry (including some economic
information) and a more complete discussion of EPA's rationale for covering this industry using BPJ.
The following sections provide a profile for MODUs and production platforms (Sections B2-1 and B2-2). Within
each profile, a brief overview of the industry is provided, including a look at existing facilities and their
associated firms, and the financial conditions of those firms (where firm financial data are publicly available).
The existing facilities are then discussed in more detail to provide information for the financial modeling of new
facilities. Also discussed are factors affecting the future of each of these two groups of CWIS users. Finally,
EPA projects the numbers of new MODUs or platforms that might be constructed with CWIS flow rates greater
than 2 MGD, greater than 20 MOD, and greater than 50 MGD during the construction portion of the time frame
of this economic analysis (construction spans the years 2007 to 2026).
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§ 3l6(b) Final Rule: Phase HI - EA, Part B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
Section C2-3 concludes this chapter with a summary of the estimated total number of new facilities in the
offshore oil and gas extraction industry with at least 2 MOD intake rates by MGD flow rate category.
B2-1 MOBILE OFFSHORE DRILLING UNITS (MODUs)
B2-1.1 Overview
Offshore drilling operations often use MODUs, which are vessels or other sea-going rigs that are used to transport
drilling equipment to the offshore site and from which drilling operations can be undertaken. The MODUs of
interest are active primarily in the State offshore waters of the Gulf of Mexico (GOM). MODUs operating close
to shore in State waters tend to be small barges and submersibles that do not use cooling water at the rates of
concern (significantly less than 2 MGD) (U.S. EPA, 2006).
MODUs provide nearly all of the exploration and delineation drilling in the offshore development of oil and gas
resources. MODUs also provide developmental drilling services. In exploratory drilling, drilling is undertaken to
determine whether oil and gas resources are available near existing fields or in areas where no resources have
been previously found (wildcats). Once an exploratory well has identified the presence of potentially recoverable
oil and gas resources, delineation drilling is undertaken. Delineation entails the drilling of additional wells to
determine the extent and nature of the new field. These two types of drilling often occur at a distance from
existing platforms and thus are usually conducted from a mobile rig.
Drilling of development wells can be done from either a platform or a MODU. The same types of mobile rigs
used to drill exploratory and delineation wells can also be used to drill developmental wells. Once a field has
been delineated and a decision is made to develop the field, a platform is typically constructed and developmental
drilling is initiated to construct wells for producing the field. A discussion of platform-based drilling is presented
below in Section C2-2.
MODUs encompass a variety of vessel or rig types. The two basic groups of MODUs are bottom-supported units
and floating units. Bottom-supported units include submersibles and jackups. Floating units include inland
barge rigs, drill ships, ship-shaped barges, and semi-submersibles.
Bottom-supported drilling units are typically used when drilling occurs in shallow waters. Types of bottom-
supported units include:
> Submersibles-barge-mounted drilling rigs that are towed to the drill site and sunk to the bottom. These
rigs may be either posted barge or bottle type. A posted barge rig consists of a barge hull that rests on the
bottom, with steel posts that rise from the top of the hull and a deck built on top of the posts well above
the water line. These are used in water depths no more than 30 to 35 feet. A bottle type submersible
consists of several steel cylinders or bottles. When the bottles are flooded, the rig submerges and sinks to
the bottom, and when water is removed, they rise to the surface. These rigs can be used in water depths
up to 100 feet.
> Jackup rigs-barge-mounted rigs with extendable legs that are retracted during transport. At the drill site,
the legs are extended to the seafloor. As the legs continue to extend, the barge hull is lifted above the
water. Jackup rigs, which can be used in waters up to 300 feet deep, can be categorized by their leg type:
columnar leg and open-truss leg.
Floating drilling units are typically used when drilling occurs in deep waters and at locations far from shore.
Types of floating units include:
> Semi-submersible-a type of floating drill unit that can withstand rough seas with minimal rolling and
pitching tendencies, thus they are used for drilling projects in ultra-deep water Gulf regions. They are
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§ 3l6(b) Final Rule: Phase HI - EA, Par' B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
hull-mounted and float on the surface of the water when empty. At the drilling site, the hulls are flooded
and sunk to a certain deplh below the surface of the water. When the hulls are fully submerged, the unit
is stable and not susceptible to wave motion due to its low center of gravity. The unit is moored with
anchors to the seafloor. The two types of semi-submersible rigs are bottle-type (similar in concept to the
bottle-type submersible) and column-stabilized.
> Drill ships and ship-shaped barges-vessels that float on the surface of the water equipped with drilling
rigs. These vessels maintain position above the drill site by anchors on the seafloor or the use of
propellers mounted fore, aft, and on both sides of the vessel (dynamic positioning). Drill ships are the
other major drilling rig used in ultra-deep Gulf waters. In these locations, drill ships typically operate
using dynamic positioning. Drill ships and ship-shaped barges are susceptible to wave motion since they
float on the surface of the: water, and thus are not suitable for use in heavy seas.
Of the five basic types of MODUS (submersibles, jackups, semi-submersibles, drill ships, and drill barges), the
drill ships, semi-submersibles, and jackups are the three types that typically intake over 2 MGD of cooling water,
with drill ships having the highest intake rates. Among drill ships with known intake rates above 2 MGD, all
intake more than 50 MGD. Jackups and semi-submersibles do not generally appear to intake more than 20 MGD,
but many intake more than 2 MGD. Submersibles and drill barges generally have cooling water intake below the
2 MGD cutoff. Drilling operations use cooling water for purposes such as cooling engines, compressors,
winches, and pumps (U.S. EPA, 2006).
B2-1.2 Existing MODUs and Their Associated Firms
The final rule will not cover existing MODUs. However, EPA has updated the profile presented in the economic
analysis report for the proposal (U.S. EPA, 2004) to provide the broadest illustration of the types of firms that
might construct MODUs. Later in this chapter, only those firms considered the likeliest to build new MODUs
with CWISs that will be regulated by the 316(b) Phase III rulemaking will be profiled, but this section presents
information that will be used in the small business analysis in Chapter Dl. EPA received no comments
concerning the MODU profile presented at proposal, nor any substantive comments on EPA's assessment of
which types of MODUs, the numbers of MODUs, or the specific firms considered likely to be affected by the
rulemaking.
Table B2-1 presents a listing of all firms operating in the Gulf of Mexico (either active, with stacked rigs, with
ready rigs, or with rigs under construction) as compiled by Rigzone (2006a), along with the parent company of
the owner. These affiliations were determined primarily on the basis of Security and Exchange Commission
(SEC) data. SEC maintains an online database (the Edgar Database), on which all filings of publicly held firms
are available. The 1 OK annual reports and 8K reports are used the most to collect this information. The 1 OK
annual reports to SEC generally list significant subsidiaries and are the source of income statement and balance
sheet information for characterizing financial conditions at a firm. Subsidiary lists are used to confirm ownership
relationships. The 8-K forms, in which significant changes to the firm must be announced, are often the source of
information on mergers and acquisitions.
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§ 3l6(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
Table B2-1: Owners of MODUs Currently Operating in COM and Parent Company
Listed Owner
Aban Lloyd
Atwood Oceanics
Axxis Drilling
Blake Offshore
CNSPC
Coastal Drilling
Conoco
Delta Seaboard
Devon Energy
Diamond Offshore
ENSCO
GlobalSantaFe
Helmerich & Payne
Hercules Offshore
Nabors Offshore
Noble Drilling
Parker Drilling
Perforadora Central
Pride International
Rowan
Scorpion Offshore.
Songa Drilling AS.
Tetra Applied Technology
Todco
Transocean
Parent Company
Aban Group
Atwood Oceanics
Axxis Drilling
Blake Offshore
China National Star Petroleum Co.
Coastal Drilling Company
ConocoPhillips
American International Industries
Devon Energy Corp.
Diamond Offshore
ENSCO International, Inc.
GlobalSantaFe
Helmerich & Payne
Parker Drilling
Nabors Industries
Noble Corp.
Parker Drilling
Perforadora Central
Pride International
Rowan Companies
Scorpion Offshore
Songa Offshore
Tetra Technologies
Todco
Transocean, Inc
Source: Rigzone, 2006a; SEC, 2006.
The difference between this list and the list compiled for the proposal is that a number of small entities no longer
appear on the list of operators. Five small or presumed small (those not filing with SEC) firms no longer appear
to be operating in the GOM. These include Blue Dolphin, BSI drilling, Energy Equipment Resources, Newfield
Exploration Co., and NR Marine. Only Blake Drilling and Workover (apparently affiliated with Blake Offshore,
which is the name that appears currently) remain on the list as an assumed small firm for lack of financial data.
Additionally, four foreign firms no longer appear on the list. These are Caspian Drilling Co., Ocean Rig Asa,
Cyprus Company, and Worships BV. New firms on the list in Table B2-1 include five foreign firms, Aban
Group, China National Star Petroleum Co., Perforadora Central, Scorpion Offshore, and Songa Drilling AS; five
large firms, Todco, ConocoPhillips, Helmerich & Payne, American International Industries, and Devon Energy;
and two presumed small firms, Axxis Drilling and Coastal Drilling Company (for more information on how these
size categories are defined, see below). Overall, more large and foreign firms and fewer small firms are now
operating in the GOM.
Table B2-2 presents a listing of the existing MODUs' owners and the number of rigs they are currently operating
in the GOM (as of 2006). These include MODUs that may have CWIS intake rates that do not exceed 2 MOD
and include all types of MODUs regardless of whether they are likely types to have CWISs of this size. The table
also shows the number of semi-submersibles, jackups, or drill ships owned. As discussed in the economic
analysis for the proposal (U.S. EPA, 2004), these were noted to be the likeliest MODU types to have CWIS that
exceed 2 MGD intake rates.
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£ 316(b) Final Rule: Phase HI - EA, Part B: Economic Analysis for New OOGE Facilities Chapter R2: Profile of the OOGE Industry
Once firms that do not operate the key MODU types are removed from the analysis, only one small firm
remainsBlake Offshore, which operates four jackups.
The firms that own MODUs generally work as contractors to the oil and gas exploration and production industry.
The provision of drilling and related services to U.S. and/or foreign offshore regions is the major focus of their
business.
Just a few firms hold most MODUs. At proposal, GlobalSantaFe, Transocean, Rowan Companies, Noble Corp.
Parker Drilling, Pride International, ENSCO International, and Diamond Offshore operated 326 MODUs, 85% of
the total MODUs in the analysis at that time. Currently, the leading MODU owners are again, GlobalSantaFe,
Rowan Companies, Parker Drilling, Pride International, ENSCO, with Nabors Industries and Todco also coming
in as top MODU owners. This group of firms owns 75 percent of the total MODUs listed, and 76 percent of the
relevant types of MODUs.
Compared to the number of rigs at proposal, the current count of rigs in the GOM has dropped from 384 to 298, a
22 percent decrease (see U.S. EPA, 2004). Although higher oil and gas prices in the last few years have increased
interest in drilling in the GOM, MODUs are mobile, and interest in drilling has increased worldwide. The market
for MODU services is worldwide, and foreign operations can outbid the U.S., due to greater production
expectations in more productive areas of the world. Rig utilization, is not, however, at 100 percent capacity, so
the fewer numbers of rigs in the GOM generally would not have constrained drilling. However, MMS has offered
extensions to leasing agreements following the extensive damage to GOM platforms due to Hurricanes Katrina
and Rita to ensure any potential for delayed drilling do not interfere with lease development (MMS, 2006a).'
1 Lease activity automatically grants extensions to leases, but if activity is delayed due to rig unavailability or other
circumstances beyond the lessee's control, extensions can be otherwise granted.
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§ 316(b) Final Rule: Phase III - EA. Part B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
Table B2-2: Number of Existing MODUs and Parent Firms
Company
Aban Group
American International Industries
Atwood Oceanics
Axxis Drilling
Blake Drilling & Workover
China National Star Petroleum Co.
Coastal Drilling
ConocoPhillips
Devon Energy
Diamond Offshore
ENSCO International Inc
GlobalSantaFe
Helmerich & Payne
Nabors Industries
Noble Corp.
Parker Drilling
Perforadora Central
Pride International
Rowan Companies Inc
Scorpion Offshore
Songa Drilling AS
Tetra Technologies
Todco
Transocean Inc.
Total Number of Rigs
Number of Rigs
1
4
2
4
4
1
3
1
1
24
19
15
12
49
12
28
1
23
17
5
5
8
48
11
298
Number of Rigs of Types
Associated with CWIS Intake
Rates > 2 MGD
I
0
1
0
4
1
0
0
0
24
18
15
0
10
9
7
1
12
17
5
5
0
18
11
159
Source: Rigzone. 2006a; Table B2-1.
The identification of corporate parent is critical to determining which firms should be defined as small under SBA
standards. SBA defines the size of the firm to be that of the firm at the highest level of organization. Generally,
EPA characterized a firm at the higher level of organization if it was majority owned by the larger entity. This
approach is consistent with SBA's definition of affiliation. Small firms that are affiliated (e.g., 51% owned) by
firms defined as large by SBA's standards (13CFR Part 121) are not considered small for the purposes of
regulatory flexibility analysis (see Section DI for more details). Affiliated firms can also be firms owned by the
same owners or that have the same corporate officers as another firm.
Another key piece of information needed for classifying firms as small or large is what industry the firm belongs
to. SBA defines small businesses differently for different types of industry and currently uses NAICS to classify
industries. SEC still requires companies to report their SIC code, not the NAICS code. Crosswalks between
NAICS and SIC, however, are available from Bureau of the Census (2006).
Once the parent firms were identified as above and the proper NAICS identified based on the reported SIC code
in the 10K reports and the NAICS crosswalk information, the revenue and employment (or other criteria, as
appropriate) for these parent firms were determined and compared to the SBA definition of small based on their
NAICS classification. Table B2-3 shows the SBA definitions for the industries identified.
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§ 3I6(h) Final Rule: Phase III- EA, Part B: Economic Analysis for New OOGE Facilities Chapter 52. Profile of the OOGE Industry
It is assumed that all domestic firms that could not be identified as large are small businesses. Also, for the
purposes of this analysis, MODU operators owned by foreign firms are assumed to be large, even when data on
employment could not be found, because SB A defines a small business as one "with a place of business in the
United States, and which operates; primarily in the United States or which makes a significant contribution to the
economy" (13 CFR Part 121). Only large businesses in this industry would meet the latter criteria, and few, if
any, foreign firms operate primarily in the United States.
Table B2-3 presents the number of MODU parent companies that operate the MODUs of concern by NAICS and
SIC code, where that information is available. Eight firms do not appear in these counts. Five foreign firms and
three other firms, presumed small, had no information available on the SEC website. Note that no firms are
positively identified as small out of the 24 total firms operating existing MODUs.
The key firms of concern, howevsr, constitute a smaller group of firms. The remainder of this profile focuses
only on firms that currently operate types of MODUs that have been identified as likely to have CWIS intake rates
> 2MGD. The firms dropped from further analysis include two presumed small firms, Coastal Drilling, and Axxis
Drilling, and five large firms, ConocoPhillips, Devon Energy, Helmerich & Payne, American International
Industries, and Tetra Technologies.
Table B2-3: NAICS Classification of MODI' Parent Companies
SIC code
1311
2911
2810
1381
1389
6799
NAICS code
211111
324110
325110
213111
213112
Several NAICS
NAICS Description
Crude Petroleum and Natural
Gas Extraction
Petroleum Refineries
Industrial Chemical Mfgs.
Drilling Oil and Gas Wells
Support Activities for Oil and
Gas Operations
Various, related to misc.
investment firms
SBA Definition of Small
500 employees
1,500
l,000b
500 employees
$6.5 million in revenues
$6.5 million in revenues0
Total Number of
Firms"
Small Large
0 1
0 1
0 1
0 11
0 1
0 1
* Does not include five foreign firm:; and three potentially small, unknown firm for which NAICS or SIC codes could not be located
in publicly available data.
b Specific NAICS not listed in SBA definitions; largest employment definition from NAICS 325 used here.
c All three NAICS matched to SIC 6799 are listed $6.5 million in revenues.
Source: SEC, 2006; 13 CFR Part 121, Census, 2006
Table B2-4 presents the financial conditions at the parent firms listed in Table B2-2 with MODUs likely to have
CWISs with intake rates >2MGD. A number of parent companies are privately held or are foreign and do not
have financial information available on the SEC database, so information is not presented for these firms. The
financial data shown are from 2002 through 2005. Data for 2004 represent the base year for the new offshore oil
and gas extraction facility firm-level analysis in Chapter B3. In 2004, the total assets of the MODU parent
companies ranged from $498 million to $10.8 billion. The revenues ranged from $163 million to $2.6 billion.
The three financial ratios calculated in the table are the return on assets, return on equity, and the profit margin.
Each of these ratios calculates the net income as a ratio over the total assets, stockholder's equity, and total
revenues respectively, and is commonly used measures of financial health in the oil and gas industry. The return
on assets percentages ranged from -6.48% to 5.16%, and the profit margin ranges from -12.50% to 13.70%. In
2004, five firms with financial data had negative net income. Note that 2005 was a much better year for most of
the firms in this analysis, with only one firm reporting negative net income.
June 1, 2006
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
B2-7
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§ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
B2-1.3 Existing MODUs with Intake Rates Meeting Proposed Rule Criteria
B2-1.3.1 Overview of Existing MODUs as Models for New MODUs
The following information remains unchanged from proposal. EPA received no comments that questioned EPA's
approach in applying information on existing MODUs to model new MODUs, including the number of MODUs
likely to be built over the period of analysis that are expected to be affected by the final rule.
To provide information on whether new MODUs might be subject to Phase III regulation, EPA investigated
information obtained from a survey of MODUs undertaken for the Phase III rulemaking decision. Not all of the
MODUs owned by the firms listed above meet the applicability standard (at least 2 MOD design intake flow) and
other criteria of the proposed rule. EPA used a multi-step process to estimate the total number of existing MODUs
that would be regulated under the proposed rule if they were newly constructed (i.e., CWISs with total design
flow of at least 2 MOD or more or less than 25% of intake volume used for cooling water purposes).2 The
sampling frame used 384 MODUs as shown in Table B2-1). Among these 384 MODUs in this universe, EPA
sampled 30 MODUs in the survey. The survey weights for all MODUs are thus 384 divided by 30, or 12.8.
The following is the status of the economic survey respondents:
* 23 respondents returned surveys
> 8 respondents were determined to have CWISs that meet proposed rule criteria.
> 15 respondents were determined to have CWISs that do not meet proposed rule criteria or were not
operating in U.S. waters
> 4 surveys were not returned from among a group of MODUs whose C WIS intake rates were known
(based on voluntary data submitted during the 316(b) Phase I rulemaking)
* 3 surveys were not returned among a group of MODUs whose CWIS intake rates were unknown.
Based on the ratio of respondents whose intake rates meet Phase III rule criteria to total respondents (8/23), EPA
assumed that among the three MODUs with unknown intake rates, one will have intake rates meeting the
proposed rule's criteria and two will have intake rates not meeting these criteria. Thus, the total number of
MODUs in the economic survey sample whose intake rates are assumed to meet proposed rule criteria was
estimated to be 13. Multiplying this number by the survey weight of 12.8 yielded an estimate of a total of 166
MODUs with intake rates meeting proposed rule criteria. Another six MODUs, originally thought to have intake
rates of less than 2 MOD were determined to have intake rates greater than 2 MOD, and these were added to the
estimate of MODUs with CWISs meeting Phase III rule criteria, for a total of 172 MODUs meeting the Phase III
rule's criteria - roughly half of the existing MODUs operating in U.S. waters (331 MODUs or about 52 %). EPA
therefore assumed that approximately half of new MODUs built might meet Phase III rule criteria. Of the 172
MODUs meeting proposed rule criteria, EPA estimated that all new semi-submersibles and jackups will have
CWIS flow rates below 20 MOD, based on all surveyed semi-submersibles and jackups having rates below 20
MOD. EPA also estimated that all new drill ships will have rates above 50 MGD, based on all surveyed drill
ships having intake rates of this size. For more information on the estimate of existing MODUs that might meet
proposed rule criteria, see ERG, 2004a.
For simplicity, the text refers to operations that meet either of these criteria as not meeting Phase HI rule criteria, even
though the proposed rule does not apply to existing facilities..
B2-IO Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June 1, 2006
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1316(b) Final Rule: Phase HI - EA, Par; B: Economic Analysis for New OOGE Facilities
B2: Profile of the OOGE Industry
B2-1.3.2 Current Drilling Activity and Trends
Offshore drilling rigs are extremely capital intensive. Therefore, once a company has invested in a rig, it is in
their best interest to keep the rig in operation. Currently, the utilization of all rigs worldwide stands at about 95%,
which is up significantly from 72% in 2003(Rigzone, 2006b; Drilling Contractor, 2003a). The Bureau of Land
Management's Minerals Management Service (MMS) predicted that oil production in the Gulf of Mexico would
be between 1.5 and 2.0 million barrels per day (bpd) by the end of 2005 and gas production would be between 11
and 17 billion cubic feet per day (bcfd) by the same time period. (Drilling Contractor, Nov/Dec 2001). However,
actual figures for 2005 indicate that total oil production averaged about 1.1 million bpd and total gas production
averaged about 7.6 bcfd, down from 1.6 million bpd and 12.4 bcfd in 2002 (MMS, 2006b). The lower than
expected production figures are due in part to the significant production losses associated with Hurricanes Katrina
and Rita. Deepwater exploration and deep exploration in the shallow waters of the GOM continued to grow.
MMS notes that the deepwater GOM is "the driving force in Gulf production and potential growth (MMS, 2006c).
MMS recently announced 10 new discoveries in the deepwater Gulf ad also noted that 42 rigs were operating in
this region in mid-March 2006 (MMS, 2006c).2
B2-1.3.3 Estimates of New MODUs To Be Constructed
At proposal, EPA noted that the progress report published by Offshore magazine showed that the majority of
offshore production investment in 2003 is in the refurbishment of old rigs, however some new rigs are being built.
In 2003, the majority of new offshore construction comprised jackup rigs. Surveys indicated that 14 jackups were
completed in 2003, and that eighl additional jackups were to be completed by 2005. Of the eight jackups to be
completed, three were being built with a new Rowan Companies design specifically introduced for deep shelf
drilling in the shallow water of the Gulf of Mexico (Offshore, July 2003). The outlook of the offshore industry
showed increased growth in deepwater drilling. Three companies were reported as having deepwater semi-
submersibles completed by 2004 The projections predicted that up to 67% of oil production and 27% of gas
production will come from deepwater drilling by 2005. (Drilling Contractor, Nov/Dec 2001).
EPA's economic analysis report for the proposal (U.S. EPA, 2004) noted that jackups and semi-submersibles
were among the most frequent MODUs to have CWIS intake rates that would meet Phase III rule criteria.
Therefore, EPA focused on these as an indication of how many MODUs might be built with CWIS intake rates of
concern (U.S. EPA, 2004). Given that 22 jackups were expected to be completed over the time period of2003-
2005 (three years) (Drilling Contractor, 2003b), EPA assumed at proposal that seven jackups might be built each
year during the time frame of the economic analysis; of this group (based on the assumption that half of all new
MODUs would meet Phase III rule criteria, discussed above) EPA assumed four of these would be affected by the
316(b) requirements. EPA further assumed that about one semi-submersible will be built per year. To be
conservative, EPA assumed each of these semi-submersibles would meet Phase HI rule criteria. Drill ships may
also be constructed during the time frame of the analysis, but there were very few drill ships operating in the
GOM at proposal (six are currently operating in the GOM [Rigzone, 2006a]). Only 12 out of a total 384 MODUs
operating in the GOM (3%) at proposal were drill ships. EPA conservatively assumes three drill ships might be
constructed over the entire 20-year time frame of the analysis, all of which are assumed to meet final rule criteria.
The other two types of MODUs (submersibles and barges) are seldom associated with CWIS intake rates meeting
proposed rule criteria (U.S. EPA, 2004). EPA assumed no submersibles or barges with total design intake rates
meeting proposed rule criteria will be built during the time frame of the analysis. EPA assumed that half the
jackups and semi-submersibles would be built with proposed technologies in place to control intake of aquatic
species under a two MGD cutoff. The drill ships were assumed to be built with 50 MOD or greater intake rates,
2 Not all discoveries are developed, and many of these will most likely be developed as undersea completions. The vast
majority of deepwater projects are undersea completions (MMS, 2006d)
June 1. 2006
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B2-1I
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f 3l6(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
and the jackups and semi-submersibles were assumed to be built with intakes having a total intake rate of less
than 20 MOD, based on the intake rates of existing MODUs of these types in the survey.
Since proposal, EPA has not changed the estimate of how many MODUs subject to the rulemaking will be
constructed over the time frame of the analysis. EPA notes that more current information (Rigzone, 2006a)
indicates that 12 jackups slated for GOM operation are currently under construction. No semi-submersibles or
drill ships are currently listed as under construction in the GOM listing. Given that not all jackups currently under
construction will be launched this year and given that no substantive comments were received that disputed these
estimates, EPA is continuing to assume that these numbers of jackups, semi-submersibles, and drill ships
estimated to be built during the time frame of the analysis are reasonable. Should new MODUs constructed for
foreign use be reconsidered for use in the GOM, costs for retrofitting will be the same as those estimated for new
MODUs, since engineering cost estimates were based on retrofit costs (U.S. EPA, 2006) EPA did not estimate
aggregate costs under this scenario, but impacts from such costs, should they be incurred, would be negligible,
given the results of impact analyses. Firms owning foreign-based MODUs are either the same ones analyzed in
Chapter B3 or are likely to be similar firms, and foreign-based vessels are similar to those analyzed in Chapter
B3. EPA believes that, given the decline in numbers of MODUs operating in the GOM from 2002 to 2006
despite increased interest in drilling in the GOM sparked by high oil and gas prices, that significant numbers of
new MODUs constructed for operation in foreign locations will not be affected.
At proposal, the firms with the largest numbers of MODUs of the type considered likely to have CWISs with
intake rates >2 MOD were considered the likeliest to build new MODUs. For this analysis of the final rule, two
additional firms have been added to the group analyzed in Chapter B3, since these firms (Nabors and Atwood
Oceanics) were noted to have jackups under construction for Gulf drilling purposes.
B2-2 OIL AND GAS PRODUCTION PLATFORMS
B2-2.1 Overview
Oil and gas production operations generally take place on platforms or other structures. The primary areas of
offshore oil and gas production activity are the GOM, California, and Alaska. In shallow offshore waters,
platforms are the typical structure used to support the resource extraction activities. These activities may involve
drilling wells, producing oil and gas from wells, separating production streams, gathering and compressing gas,
and working over older wells to increase production. Platforms often support buildings for crews, including in
some cases, long-term living quarters.
There are several different types of platforms, and non-platform structures used in the GOM. Seven major types
of production systems are used in offshore oil and gas production.
> The fixed platform is the most commonly used for shallow-water drilling. It is anchored directly into the
seabed with a deck to support living quarters etc. While it is primarily used for shallow water drilling, it
is economically feasible for depths up to 1,650 ft.
> The compliant tower is a flexible tower and piled foundation with a conventional deck. The compliant
tower differs from the fixed platform in that it can withstand large lateral forces. Therefore, it is effective
at greater depths and is typically used in water depths between 1,500 and 3,000 ft.
» The Seastar platform is a floating mini-tension leg platform used for smaller deepwater reserves. It is
used in water depths from 600 to 3,500 ft.
» A floating production system (FPS) is a semi-submersible with drilling and production equipment. The
FPS can be dynamically positioned using rotating thrusters. The FPS is used at depths from 600 to 6,000
ft.
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§ 316(b) Final Rule: Phase HI - EA, Par! B: Economic Analysis for New OOGE facilities
B2: Profile of the OOGE Industry
* Another type of offshore platform is the Tension Leg platform (TLP). It is connected to he sea floor with
tension tendons. TLPs are used up to depths of 6,000 ft.
» The Spar platform consists of a large diameter cylinder supporting a deck and is used in water depths up
to 3,000 ft.
> The Subsea system can produce single or multiple wells using manifold pipeline systems. The Subsea
system is used for production at depths greater than 7,000 ft. (U.S. EPA, 2000). In this system, all well
completions are at the seafloor level, with piping leading to production platforms in shallower water or
nearby deepwater structures.
B2-2.2 Existing Platforms/Structures and Their Associated Firms
Because EPA determined that so few existing platforms would be likely to have CWISs with intake rates >2MGD
at proposal (U.S. EPA, 2004) and because EPA received no substantive data indicating other key areas where new
platforms that might install CWISs that meet the final rule criteria, EPA continues to determine that the deepwater
Gulf and Alaska are the primary focus of analysis.3 This profile of existing platforms and associated firms,
therefore, focuses only on those two areas and on what structures have been constructed since proposal. Other
areas with offshore oil and gas operations, i.e., shallow water Gulf and California, either have not been identified
as likely to be sites where structures with CWISs affected by the final rule are located or are areas where no new
construction is occurring (U.S. EPA, 2004). Furthermore, if any platforms were to be built in shallow waters with
CWISs of the regulated size, the size and scope of the operation that would drive the need for a CWIS this size
would indicate a very expensive operation similar to the scope and size of deepwater operations. The firms likely
to be involved in such an operation would be similar to those that operate in the deepwater GOM. Because EPA
located no information that indicated that such shallow water operations were being built, and commenters did not
provide data indicating that such operations are being or will be built, no costs were estimated for such operations.
Therefore, the shallow water GOM and California regions are not discussed further.
B2-2.2.1 Structures/Platforms/Structures in the Deepwater GOM
At proposal, EPA profiled all operations in the Federal GOM. Since the vast majority of shallow water projects
were determined at that time to be highly unlikely to install CWISs that would meet final rule criteria, this extent
of profiling is not continued in this final economic analysis report. The discussion here focuses entirely on the
deepwater GOM.
Since proposal, a number of new structures have been built in the deepwater GOM. This new construction also
brought in a number of new firms into the area. At proposal, 24 deepwater structures either had CWISs with
intakes >2MGD or their intake rates were unknown. Between 2003 and 2006, a total of 11 new structures have
been installed. The intake rates of CWISs on these structures are unknown. As Table B2-5 shows, four structures
were installed in 2003, seven structures were installed in 2004, and no structures were installed in 2005, for an
average of three to four structures per year installed. This average corresponds well to EPA's estimate, at
proposal, that about three structures would be added per year in the deepwater GOM.
3 One commenter indicated thai deep gas operation could be affected by the final rule, but provided EPA with no
examples of any deep gas operations in shallow water where CWIS intake rates currently or are expected to exceed 2 MGD.
June I, 2006
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B2-13
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§ 316(b) Final Rule; Phase /// - EA, Part B; Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
Table B2-S: COM Deepwater Platforms Constructed between 2003-20051
Platform Name
Gunnison
Magnolia
Red Hawk
Front Runner
Marco Polo
Holstein
Mad Dog
Matterhorn
Nakika
Medusa
Devils Tower
Year of Construction
2003
2004
2004
2004
2004
2004
2004
2003
2003
2003
2004
Owner Firm
Kerr-McGee Oil & Gas Corp.
ConocoPhillips Co.
Kerr-McGee Oil & Gas Corp.
Murphy Exploration & Production Co. -USA
Anadarko Petroleum Corp.
BP Exploration & Production, Inc.
BP Exploration & Production, Inc.
Total E&P USA, Inc.
BP Exploration & Production, Inc
Murphy Exploration & Production Co.-USA
Dominion Exploration & Production, Inc.
Source: MMS, 2006d
These platforms are operated by a number of firms of different sizes and types. The potentially affected firms can
be divided into two basic categories. The first category consists of the major integrated oil companies, which are
characterized by a high degree of vertical integration (i.e., their activities encompass both "upstream" activities
oil exploration, development, and productionand "downstream" activitiestransportation, refining, and
marketing). The second category of affected firms consists of independents engaged primarily in exploration,
development, and production of oil and gas and not typically involved in downstream activities. Some
independents are strictly producers of oil and gas, while others maintain some service operations, such as contract
drilling and well servicing.
The major integrated oil companies are generally larger than the independents. As a group, the majors typically
produce more oil and gas, earn significantly more revenue and income, and have considerably more assets and
greater financial resources than most independents. Furthermore, majors tend to be relatively homogeneous in
terms of size and corporate structure. All majors are considered large firms under the Regulatory Flexibility Act
(RFA) guidelines and generally are C corporations (i.e., the corporation pays income taxes). Independents can
vary greatly by size and corporate structure. Larger independents tend to be C corporations; small firms might
also pay corporate taxes, but they also can be organized as S corporations (which elect to be taxed at the
shareholder level rather than the corporate level under subchapter S of the Internal Revenue Code). Small firms
also might be organized as limited partnerships, sole proprietorships, etc., whose owners, not the firms, pay taxes.
One change of note since proposal is the effect of the 2005 Hurricanes Katrina and Rita on some of the deepwater
structures. One deepwater structure is listed as destroyed by Hurricane Rita -Typhoon, owned by Chevron
(CWIS intake rate unknown) (MMS, 2006e; ERG, 2004a). Chevron reports in their 2005 10-K report that they
are assessing damage and weighing options for restarting operations (SEC, 2006). Katrina damaged four other
structures in the deepwater GOM. These include Cognac, Matterhorn, Mars, and Virgo (MMS, 2006e).
Matterhorn (Total) is a new structure since proposal, with CWIS intake rate unknown. Cognac (Shell Offshore)
was known to have CWIS intake rates <2 MGD, and Virgo (Total) has unknown rates (ERG, 2004a). Mars, the
structure with the largest share of production of any such structure in the GOM, is known to have CWIS intake
rates exceeding 2 MGD (ERG, 2004a). This structure is expected to be back in production in the latter half of
2006 (New York Times, 2006).-
The proportions of majors and independents operating in the deepwater GOM have not changed significantly
since proposal, and the platforms/structures existing at the time of proposal have not changed hands in the interim.
02-14
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June I, 2006
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§ 316(b) Final Rule: Phase I!! - EA, Part B: Economic Analysis for New OOGE Facilities
82: Profile of the OOGE Industry
At proposal, the active firms in the deepwater included ExxonMobil, Agip (now a subsidiary of Eni), El Paso
Production, Shell Offshore, ConocoPhillips, Chevron, BP, and Total E&P (majors or integrated utilities) and
Kerr-McGee and Amerada Hess (independents). The newest structures have added Murphy E&P, Anadarko
Petroleum, and Dominion E&P to the firms operating in the deepwater. These new firms comprise one
independent (Anadarko) and one gas/electric utility firm (Dominion), adding to the two independents (Kerr-
McGee and Amerada Hess) and one utility (El Paso) covered at proposal. All the remaining firms are considered
majors, including the new deepwater operator, Murphy Oil.
Table B2-6 summarizes the information, listing the firms operating in the deepwater GOM and their parent
company.
Table B2-6: Operators and Parent Companies of GOM Deepwater Structures
Operator Company
Parent Company
Amerada Hess Corporation
Anadarko Petroleum Corp.
BP Exploration & Production Inc
Chevron USA Inc
ConocoPhillips Co.
Dominion Exploration & Production, Inc.
Et Paso Production GOM Inc
Eni US Operating Co., Inc.
Exxon Mobil Corporation
Kerr-McGee Oil & Gas Corporation
Murphy Exploration & Production Company - USA
Shell Ofishore Inc
Total E&P USA Inc
Amerada Hess Corporation
Anadarko Petroleum Corp.
BPPLC
Chevron Corp.
ConocoPhillips Co.
Dominion Resources, Inc.
El Paso Corp.
Eni SpA
Exxon Mobil Corporation
Kerr-McGee Corporation
Murphy Oil Corporation
Royal Dutch Shell pic
Total SA
Source: MMS, 20Q6d; SEC. 2006.
It is important to note that companies may share ownership of a platform. In general, the company listed as the
operator in the MMS databases is the 100 percent owner or largest shareholder of the platform, but this is not
always the case. The economic analyses in this report, however, make the simplifying assumption that only one
firm owns a platform. In reality, several firms might share the impacts from regulatory costs to a platform.
The same methodology used to identify small firms in the MODU profile (Section B2-1) is used for this profile.
Table B2-7 lists the numbers of firms in the GOM by their NAICS definition.4 Also listed is the SIC code, which
is the identifier used in the 10K reports. In the table, NAICS and SICs are mapped in the key industry sectors
represented by firms operating in the GOM.
The North American Industry Classification System (NAICS) supercedes the Standard Industrial Classification (SIC)
codes, however, the transition to the new system is still in progress.
June 1, 2006
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
B2-15
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§ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities Chapter B2: Profile of the OOGE Industry
Table B2-7: Count of Firms by SIC and NAICS Code
SIC code NAICS code NAICS Title
1311 211111
2911 324110
4911 221 1 12
4922 486210
Crude Petroleum and Natural
Gas Extraction
Petroleum Refineries
Fossil Fuel Electric Power
Generation
Pipeline Transportation of
Natural Gas
SBA Size Standard
500 employees
1,500 employees
4.0 million megawatt hours
$6.5million in revenues
COM Number of Firms
Small Large
0
0
0
0
6
5
1
1
Note: Include 4 foreign firms for which NAICS or SIC codes were available on the SEC website.,
Source: SEC, 2006, 13 CFR Part 121. Census, 2006
As Table B2-7 shows, the predominant firm types operating in the COM are those in the oil and gas extraction
NAICS and the refineries NAICS. No firms were identified as small. All four foreign firms are also large.
Table B2-8 shows the firms considered potentially affected firms operating in the deepwater COM and their
relevant financial data spanning 2002 (the year of data used at proposal) through 2005, along with 2004 data,
which is used to compare to compliance costs in 2004 dollars in Chapter B3. These data include number of
employees, assets, liabilities, and revenues, along with several ratios that provide a general indication of financial
health, where data are available in 10-K or 20-F reports in U.S. dollars.
The ratios used to establish company financial status are profitability ratios, namely: return on assets, return on
equity, and profit margin. As described earlier, these three financial indicators are calculated as the ratio of the
net income to the total assets, stockholders' equity, and net sales respectively. While individually these ratios
only tell a part of the financial stability of a company, when analyzed together, they give a much clearer picture of
a company's financial health.
Table B2-8 also presents summary financial ratios. Among firms with data available in dollars, median return on
assets for the group in 2004 is 8.31%, median return on equity is 19.77%, and median profit margin (net
income/revenues) is 8.50%, according to 2004 financial data. Among these 13 firms, all reported positive net
income for 2004. Most firms had sizeable increases in revenue between 2004 and 2005.
B2-16 Internal Draft - Deliberative, Predecisionai - Do not Quote, Cite, or Distribute June 1, 2006
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§ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities
B2: Profile of the OOGE Industry
B2-2.2.2 Alaska Operations
There are two major regions of oil and gas production in Alaska. The first, the North Slope region, operates
generally from onshore locations or on gravel islands. Platforms are not used here.
The second region, Cook Inlet, Alaska, is divided into two regions: Upper Cook Inlet, which is in State waters and
is governed by the Coastal Oil and Gas effluent guidelines; and Lower Cook Inlet, which is considered Federal
OCS waters and is governed by the Offshore Oil and Gas Effluent Guidelines. This section refers primarily to
Upper Cook Inlet.
There are 16 platforms and 3 onshore production facilities in Cook Inlet, Alaska, of which two platforms have
ceased operation and two platforms have suspended operation. Five companies own the platforms: Forest Oil
Corporation, Marathon Oil Corp., ConocoPhillips, XTO Energy, and Unocal Corp. Marathon owns the two out-
of-operation platforms and is not considered a potentially affected firm in Alaska. Unocal Corp. operates the
majority of platforms in the Cook: Inlet region, with 10 platforms and 2 onshore treatment facilities. Only one
company operating in Cook Inlet waters, Forest Oil, is an independent and considered a small business. XTO is
also an independent, but is a large business. The remaining operators are all listed as majors, as is the operator
(BP) of the Duck Island structure in the Beaufort Sea (North Slope) (not discussed further here). One firm in
Alaska is listed under NAICS 324110 (SIC 2911), Petroleum Refineries, and the three additional firms are listed
as NAICS 211111 (SIC 1311), Crude Petroleum and Natural Gas Extraction. Financial data for these firms are
also presented in Table B2-8.
The Department of Fish and Game in Alaska developed a standard lease requirement for all water intake pumps to
be fitted with a screened enclosure. The requirement further States that the water intake at the surface of the
screen enclosure should not exceed 0.1 feet per second. For the purposes of the regulatory analysis, therefore, any
new platforms in the Cook Inlet or the North Slope regions are considered to be potentially affected by the 316(b)
requirements for entrainment, but not impingement, since the Alaska requirement meets or exceeds 316(b) Phase
III impingement standards.
B2-2.3 Existing Platforms/Structures with Intake Rates Meeting Proposed Rule Criteria
B2-2.3.1 Overview of Existing Platforms/Structures as Model for New Platforms/Structures Subject to
Phase III Regulation
The following information is unchanged from proposal. EPA received no comments pertaining to the use of
existing platforms and models for new platforms subject to Phase III regulations.
Very few existing platforms appear to have CWISs with intake rates that meet the proposed rule's criteria. Most
of the existing platforms with CWISs of this size are located in the deep waters of GOM and in California and
Alaska waters (Cook Inlet). Using the same approach as outlined for determining existing MODUs with C WIS
intake rates meeting proposed rule criteria, EPA makes the following estimates, using the survey conducted for
the oil and gas sectors to suppor: this rulemaking and voluntary data submitted by industry. See also ERG
(2004b).
At proposal, EPA stratified the survey in the GOM into three strata: deepwater, shallow large (20+ slot
platforms), and shallow small (fewer than 20 slots).
The survey universe of deepwater structures was 24 (two structures were removed from the universe prior to the
survey because their CWIS intake rates were known to be less than 2 MGD). For the survey, EPA sampled four
facilities. There were no non-respondents. Only one of the four reported data showing them to have CWIS intake
rates meeting proposed rule criteria. Thus EPA estimated that six deepwater structures would have CWIS intake
Jane 1, 2006
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rates meeting proposed rule criteria (24 divided by 4 is a weight of 6; with one respondent reporting an intake rate
of 2 MOD or more, this produces an estimate of six total new structures meeting proposed rule criteria).
However, earlier data (see ERG, 2004a) indicate that eight structures in the deepwater have CWIS intake rates
meeting proposed rule criteria. EPA used the higher number of structures to estimate the proportion of existing
structures with CWISs meeting the proposed rule criteria to total structures in the deepwater. Given eight
structures meeting proposed rule criteria and 24 total structures, EPA believes that about 1/3 of deepwater
structures to be built will be equipped with intakes meeting the Phase III rule's criteria. Only one existing
deepwater structure had a total intake rate of over 20 MGD, and none had a total rate of over 50 MOD. All firms
currently operating multi-well structures in the deepwater GOM with CWIS rates that meet criteria are large.
For shallow water large platforms, EPA determined that 206 existing platforms were either known to have CWISs
with intake rates meeting Phase III rule criteria or their intake rates were unknown (an additional 3 platforms were
known to have CWIS intake rates less than 2 MGD and were dropped from the sampling frame). EPA sampled 33
platforms among the large platform group. Three of these were nonrespondents. No additional platforms with
intake rates meeting Phase III rule criteria were detected using the survey. The nonrespondents were thus
assumed also to have CWIS intake rates not meeting proposed rule criteria. Four platforms, however, were known
to have CWISs meeting proposed rule criteria based on earlier data (see ERG, 2004a). None of these were
sampled. EPA therefore assumes only these four platforms have intake rates meeting proposed rule criteria.
These platforms were owned by large firms (ExxonMobil and Marathon). Thus, EPA assumes that if any large
platforms with CWIS intake rates meeting proposed rule criteria were to be built, large firms would build them.
For shallow-water, small platforms, EPA determined that 2,194 platforms were in the universe of platforms in the
Federal GOM at the time of proposal (U.S. EPA, 2004). The vast majority of these platforms had unknown
CWIS intake rates. Four such platforms were identified prior to EPA's Phase III Survey as having CWIS intake
rates exceeding 2 MGD (ERG, 2004a). None of these was sampled. A total of 18 platforms with unknown CWIS
intake rates were sampled (all responded), but EPA determined that none of the sampled platforms had total
design flow rates meeting proposed rule criteria. Although this is a very small sample, this finding is bolstered by
EPA's observations that platforms in State waters are unlikely to have CWIS with intake rates totaling 2 MGD or
more (ERG, 2004a). Platforms in State waters and small platforms in Federal waters are generally similar
structures. EPA therefore assumed that only four small platforms located in the shallow water GOM have CWIS
intakes meeting proposed rule criteria. These four platforms were owned by ExxonMobil and BP, thus no small
firms were estimated likely to build platforms with greater than 2 MGD intake rates in shallow water.
In the GOM, therefore, EPA estimated that a total of 16 existing platforms had CWIS intake rates meeting Phase
III rule criteria. All were owned by large firms, and most operated in the deepwater regions (U.S. EPA, 2004).
In California, EPA determined that 20 platforms either have CWIS intake rates totaling 2 MGD or more or their
CWIS intake rates were unknown (13 platforms with known intake rates were eliminated from the sampling
frame because their total intake was less than 2 MGD). EPA sampled 3 of these 20 platforms. Only one was
found to have an intake rate meeting proposed rule criteria. EPA thus assumed seven existing platforms in
California had total intake rates meeting proposed rule criteria (20 divided by 3 is a weight of 6.7, which yields 7
platforms weighted). A total of six platforms were known from earlier data (see ERG, 2004a) to have intakes rates
meeting Phase III rule criteria, including the surveyed platform. Three had intake rates greater than 20 MGD but
less than 50 MGD. Of the six platforms with flow data showing rates meeting Phase III rule criteria, three of
these were owned by small businesses (Plains Exploration and Production/Arguello). The rest were owned by
large businesses (Aera Energy, a joint venture between Shell and ExxonMobil, and ExxonMobil).
In Alaska, EPA determined that 19 platforms/production facilities were in the survey universe (one platform was
known to have a total CWIS intake rate of less than 2 MGD and was dropped from the sampling frame). EPA
sampled two platforms, but only one was determined to have a CWIS intake rate meeting Phase 111 rule criteria.
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EPA therefore estimated that there were 10 platforms in Alaska with intakes that met Phase III rule criteria (19/2
is a weight of 9.5). Five of these (all located in Cook Inlet) had CWIS data showing them to have CWISs meeting
Phase III rule criteria (ERG, 2004a). Of these structures with known CWISs of this size, all were platforms
owned by Unocal. Based on this, EPA might have assumed no small businesses currently operating would be
affected in Alaska. However, a small firm constructed the most recently built platform in Cook Inlet, Osprey
(Osprey's CWIS intake rates are unknown). To be conservative, EPA assumed that a small firm, much like Forest
Oil (Osprey's owner), might be the type of firm to build a new structure in Alaska and such a structure might have
CWIS intake rates meeting Phase III criteria. However, it is also entirely likely that no such structures will be
built within the time frame of the analysis.
In summary, EPA identified 16 platforms in the COM, 7 platforms in California, and 10 platforms in Alaska, for a
total of 33 existing platforms thai met Phase III rule criteria. Of these, three platforms or structures (one in the
deepwater and two in California) had CWIS intake rates greater than 20 MOD, and one platform (California) had
an intake rate greater than 30 MOD. No platforms had CWIS intake rates exceeding 50 MOD (U.S. EPA, 2004).
B2-2.3.2 Current Oil and Gas Production Levels and Trends
In 2002, 567 million bbls of total oil and 4.5 million MMcf of total gas were produced in the GOM, while in
2005,440 million bbls and 3.0 million MMcf were produced. Sixty one percent of all oil production and 28
percent of all gas production in the GOM came from deepwater wells in 2002, while in 2005, 70 percent of oil
and 39 percent of gas came from deepwater wells, continuing the trend of deepwater regions providing a growing
share of GOM production (MMS, 2006b). MMS has been using incentives such as royalty relief to promote
drilling of deep gas wells in GOM for many years, adding a new royalty relief system for deep gas wells drilled
from existing platforms to extend the life of platforms in the GOM (Federal Register, Vol. 69, No. 16, pg. 3492-
3514, January 26,2004). In recent years, the drilling of such wells has increased and trends show a continuation
of deep gas drilling and exploration in GOM. As technology advances and more deep gas wells are drilled,
reserve estimates are being revised, as more gas is presumed recoverable. Deep gas wells in the GOM consist of
deepwater drilling and deep shelf drilling in shallow waters. At proposal, deep shelf gas production had increased
by 137 Bcf from 2000 to 2002. Approximately 20% of all GOM exploration drilling was at well depths greater
than 15,000 ft. at the end of 2003 (Drilling Contractor, Jan./Feb. 2004). In 2004, MMS predicted that deep gas
resources might total as much as 55 trillion cubic feet (Tcf) in the GOM (MMS, 2006f).
Standard & Poor's annual Report Card of the Oil and Gas industry in 2003 predicted that oil prices would average
approximately $19 per barrel, and that natural gas prices would average $3 per million Btu (MMBtu) (S&P,
2003). Prices have ballooned in recent years, with current oil futures hovering around $67/bbl and current gas
futures at nearly $7/MMBtu (Bloomberg.com, 2006). DOE, in their most recent projection, however, predicts
some moderation of these prices in the future. DOE expects that oil prices will drop to $46.90/bbl in 2014, and
then rise to $46.90/bbl by 2030 (2004 dollars). Gas prices are expected to follow a similar trend, dropping to
$4.46/Mcf in 2016, and then rising to $5.92/Mcf by 2030 (2004 dollars) (DOE, 2006).4 The economic analysis of
deepwater platforms employs long run wellhead oil and gas prices used by 316(b) survey respondents to project
future platform financials. These prices are considerably lower than either current prices or future projections, so
can be considered a very conservative estimate of prices and thus of revenues at deepwater platforms.
According to DOE, demand for both oil and natural gas is projected to increase over time. U.S. demand for oil is
expected to rise from about 20 million bpd in 2004 to about 30 million bpd in 2030, while demand for gas is
expected to rise from 22.4 Tcf (total annual demand in 2004) to 26.9 Tcf (2030). The Gulf of Mexico is expected
to continue to be a major source of both oil and gas. DOE projects that oil production will decline in the shallow
water Gulf, going from 0.4 million bpd (2004) to 0.3 million bpd (2030), but deepwater oil will increase from 1.0
4 1 Mcf ~ 1 MMBtu.
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§ 3l6(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities B2: Profile of the OOGE Industry
million bpd (2004) to 2.2 million bpd (2016), then declining to 1.7 million bpd by 2030, for a total of 1.6 million
bpd in 2004 rising to 2.0 million bpd by 2030 (DOE, 2006). Gas production follows this same pattern in the Gulf.
Shallow water Gulf production is expected to decline, going from 2.4 Tcf to 1.8 Tcf between 2004 and 2030,
while deepwater Gulf production is expected to increase, going from 1.8 Tcf in 2004 to 3.2 Tcf in 2014, then
declining to 2.1 Tcf in 2030 (DOE, 2006).
B2-2.3.3 Estimate of Platforms/Structures To Be Built That May Be Affected by the Proposal
In the deepwater region, EPA determined at proposal, based on MMS data, that approximately 2 to 4 structures
are built each year (see MMS, 2003; U.S. EPA 2004). EPA assumed that an average of three such deepwater
structures are completed each year. EPA noted that out of 24 total structures in the deepwater as of 2003, 8 were
estimated to meet Phase III rule criteria, or about a third of the total. EPA thus assumed that one structure per
year out of the three installed annually might have intakes meeting Phase III rule criteria. Because only one
structure at proposal was identified as having a CWIS intake rate of greater than 20 MOD (and none had a CWIS
intake rate of more than 30 MGD), EPA assumed that only one structure out of 10 would be built having a CWIS
intake rate of 20 MGD or more. This would mean that EPA estimated two structures would be built with these
intake rates over the 20-year construction time frame.
AH of these structures are assumed to be constructed by large firms. To date (2006), only large firms have built
structures in the deepwater GOM, except for a few subsea completions, which have not been identified as
associated with intake rates meeting Phase III rule criteria. This scenario is likely to continue, given the resources
required to construct deepwater structures, the cost of which sometimes exceed $1 billion dollars (U.S. EPA,
2000).
Among large (20+ slot) platforms, EPA determined that few, if any, such platforms might be built during the time
frame of the analysis. In the EA for the proposal, EPA noted that no platforms of this size had been installed
since 1998 (U.S. EPA, 2004). A recent download of MMS data (MMS, 2006g) indicates that no additional
platforms of this size had been installed in the 2003-2005 time frame. Given that so few of the existing platforms
appear to resemble a new regulated project, EPA continues to assume no new platforms of this size and with
CWIS meeting final rule criteria would be constructed.
Among smaller platforms, EPA determined at proposal that they are unlikely to install CWIS of the size
considered to meet proposed rule criteria. EPA continues to assume no new smaller platforms constructed in
shallow water would be affected by the rulemaking.
In Cook Inlet, Alaska, only one new platform has been constructed in recent years. Most new exploration and
development in this region takes place from existing infrastructure or from onshore locations using directional
drilling, in which wells are drilled both vertically and horizontally to reach potential reserves, sometimes
thousands of feet from the top-hole locations. No definitive plans appear to be in place for any new platforms in
State waters. In Federal waters, lower Cook Inlet is a source of potential activity, since MMS completed a lease
bid in April 2004. No activity in this region was noted since that time, however. Given the long lead times
between lease bid to operation, it may be relatively unlikely that this lease bid will result in new platforms during
the time frame of the analysis in either location. To be conservative, however, EPA assumes one such platform
might be constructed in Upper Cook Inlet (State waters) and begins operation during the time frame of analysis.
In other Federal areas in the Alaska region, little new activity is underway BP has dropped plans for its Liberty
project in the Beaufort Sea area (Federal Register, Vol. 67, No. 99 pp. 36020-36022). The only other activity that
has taken place in recent years in Federal waters is an exploratory well drilled in the Beaufort Sea in 2003. No
further activity has been noted since that time (MMS, 2006h). MMS has completed lease sales in the Beaufort Sea
in 2003 and 2005 (MMS 2006i), but the time frame for development, if any is undertaken, could be beyond the
time frame of this analysis.
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B2-3 TOTAL NEW OIL AND GAS OPERATIONS
Table B2-9 summarizes the number of existing MODUs and platforms that are estimated to meet the proposed
rule's criteria, had EPA decided to regulate existing oil and gas facilities, as well as new MODUs and platforms
expected to be built over the 20-year analytical period that might be required to install control technologies. Also
presented is an assessment of the number of firms involved that might be small businesses.
Table B2-9: Number of Existing and Future Offshore Oil and Gas Extraction Facilities Estimated or Assumed To Meet Final
Phase III Rule Criteria over a 20-Year Analysis Time Frame
Type of Oil and
Gas Facility
MODUs
Deepwater
Platfoims (COM)
20+ Slot
Platforms (COM)
Other GOM
Platforms
California
Platforms
Alaska Platforms
Total
Existing Facilities
No. with
>2MGD
flows
172
8
4
4
7
10
205
No. with
>20 MGD
flows
12
1
0
0
3
0
16
No. with
>50MGD
flows
12
0
0
0
0
0
12
No. of
Small
Firms
Potentially
Involved
6
0
0
0
1
1
g
New Facilities
No. Built
in 20- Year
Period >2
MGD
103
20
0
0
0
1
124
No. Built
in 20-Year
Period >20
MGD
3
2
0
0
0
0
5
No. Built
in 20-Year
Period
>50 MGD
3
0
0
0
0
0
3
No. of
Small
Firms
Potentially
Involved
0
0
0
0
0
1
1
Source. U.S. EPA Analysis, 2006.
2004b.
See the 3l6(b) Oil and Gas Compliance Cost Mode!for the Final Rule, DCN 9-4000 and ERG,
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REFERENCES
Bloomberg.com. 2006. Energy Prices. Downloaded April 9.
Bureau of Census 2006. 1997 NAICS United States Structure, Including Relationship to 1987 U.S. SIC
http://www.census.gov/epcd/www/naics.html.
Drilling Contractor. 2003a. Deepwater success results in higher drilling activity. November/December
Drilling Contractor. 2003b. Large jackups are most notable ofnewbuilt rigs. November/December.
Drilling Contractor. 2001. MMS: COM deepwater activity, production to grow. November/December
ERG. 2004a. Non-CBI In-Scope Facility Database. Spreadsheet Submitted to the 316(b) Phase III Rulemaking
Record. DCN 7-3505.
ERG 2004b. Calculation of Weights for Engineering Cost Estimates. Memorandum to the 316(b) Phase III
Rulemaking Record. September 24, 2004.
ERG. 2004c. Expanded Universe of MODUs and Platforms. Spreadsheet Submitted to the 316(b) Phase III
Rulemaking Record. DCN 7-4022.
MMS. 2003. Deepwater production summary by year.
www.gomr.mms.gov/homepg/offshore/deepwatr/summary.asp downloaded 10/10/2003.
MMS. 2006a. Notice to Lessees and Operators of Federal Oil and Gas Leases in the Outer Continental Shelf,
Gulf of Mexico OCS Region. NIL. No. 2006-G02. February 10.
MMS. 2006b. Production Data by Year. Downloaded from MMS.gov, April 4.
MMS. 2006c. Deepwater Keeps Gulf Strong. News Release. Release No. 3482. March 21, 2006.
MMS. 2006d. Gulf of Mexico Permanent Deepwater Structures. Downloaded from MMS.gov, March 1.
MMS. 2006e. Table 1Platforms Destroyed by Hurricane Katrina; Table 2Platforms Damaged by Hurricane
Katrina; Table 4Platforms Destroyed by Hurricane Rita; Table 5Platforms Damaged by Hurricane Rita.
Downloaded from MMS.gov, April 4.
MMS. 2006f. Secretary Norton Unveils New Incentives to Boost Domestic Natural Gas Production, Save
Americans $570 Million a Year. The News Room. Release #3022, dated January 23, 2004. Downloaded from
MMS.gov, April 4.
MMS. 2006g. Structures date_sort.xls. From Platform Structures file. Downloaded at
http://www.gomr.mins.gov/homepe/pubinfo/freeasci/platform/freeplat.html. April 4.
MMS. 2006h. Alaska OCS RegionMinerals Management Service: Beaufort Sea Exploration Wells.
Downloaded from MMS.gov, April 4.
MMS. 20061. List of Alaska Region Lease Sales. Downloaded from MMS.gov. April 4.
New York Times. 2006. Fixing Up Offshore U.S. Oil Rigs. March 1.
Offshore. 2003. Upgrades target deep gas and deepwater. Offshore Magazine. July 2003.
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£ 3l6(b) Final Rule: Phase 111 - EA, Parr B: Economic Analysis for New OOGE Facilities
B2: Profile of the OOGE Industry
Rigzone. 2006a. Offshore Rig Search Results. Region N. AmericaU.S. GOM. Downloaded from
Rigzone.com, April 4.
Rigzone. 2006b. Worldwide Offshore Rig Utilization. Downloaded from Rigzone.com, April 4.
SEC. 2006. Security and Exchange Commission Edgar Database of Corporate Filings.
http://www.sec.gov/edgar/searchedgar/companysearch.html.
S&P (Standard and Poors). 2003. Industry Report Card: Oil and Gas. January, 17,2003.
U.S. Department of Energy (DOE). 2006. Annual Energy Outlook, 2006. Energy Information Administration.
U.S. Environmental Protection Agency (U.S. EPA) 2000. Economic Analysis of Final Effluent Limitations
Guidelines and Standards for Synthetic-Based Drilling Fluids and Other Non-Aqueous Drilling Fluids in the Oil
and Gas Extraction Point Source Category. EPA-821-B-98-020. December 2000.
U.S. Environmental Protection Agency (U.S. EPA). 2004. Economic Analysis for Proposed Phase III Facilities.
EPA-821-R-04-016. November.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final
Section 316(b) Phase 111 Existing Facilities Rule. EPA-821-R-06-003. June 2006.
June I, 2006
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§ 3l6(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities K3: Economic Impact for the OOGE Industry
Chapter B3: Economic Impact Analysis for
the Offshore Oil and Gas Extraction
Industry
B3-1.2
B3-1.3
B3-2
B3-2.2
B3-2.3
B3-3
B3-4
INTRODUCTION
The Final Section 316(b) Rule for Phase III Facilities will
potentially affect any new MODUs and oil and gas
production structures that use CWISs with daily design
combined intakes totaling at least 2 MGD (and at least 25%
of water used for cooling water purposes). This regulatory
structure is the similar to that applied to new facilities
under the Section 316(b) Phase I regulation.
This economic impact analysis is divided into four sections.
Section B3-1 presents the analysis of the 316(b) rulemaking
on MODUs, Section B3-2 presents the analysis of offshore
oil and gas production platforms, Section B3-3 summarizes
the costs and impacts on both MODUs and platforms and
provides totals for the combined industry subgroups, and
Section B3-4 presents costs to the Federal government and
total social costs. The first two sections each discuss the
aggregate national after-tax compliance cost estimates for
new MODUs and platforms (as well as briefly summarizing
what these costs would be had existing MODUs and
platforms been covered by the final rule). These sections
also present vessel-level or platform-level pre- and after-tax
compliance costs, and discuss impacts, both at the
vessel/platform level and at the firm level. The
vessel/platform level impacts are assessed using two
approaches. The first approach uses the existing facilities
that might represent new facilities and applies a cash-flow/net income-based analysis. The second approach is a
standard barrier-to-entry analysis that investigates the present value of initial permitting costs (discounted to the
assumed year of compliance) plus initial one-time capital/installation costs as a percentage of the cost to construct
a new MODU or platform. The firm-level analysis uses firm revenues at firms that are the likeliest to construct
new facilities. EPA applies a pre-tax and after-tax annualized cost of compliance (incorporating permitting,
monitoring, capital/installation, and O&M costs) for each MODU/platform the firm is expected to build over the
period of analysis. For the comparison of annualized costs of compliance with annual revenue, EPA assumed that
all of a firm's new MODUs or platforms/structures would be constructed in one year. This assumption maximizes
the potential impact of compliance cost in relation to revenue. If EPA instead assumed a firm would spread
construction over more than one year, the ratio of compliance cost to revenue would be less in any single year and
the likelihood of finding economic impacts would diminish. In this way, the assumption that all compliance costs
are incurred in the same year is highly conservative. With no firm-level impacts found under this conservative
assumption, then there will also be no impacts under other, possibly more likely, scenarios in which costs are
CHAPTER CONTENTS
Introduction B3-1
B3-1 MODU Analyses B3-2
B3-1.1 Aggregate National After-tax Compliance
Cost Analysis B3-2
Vessel-Level Compliance Costs B3-3
Impact Analysis B3-4
Economic Impact Analysis for Oil and Gas
Production Platforms B3-9
B3-2.1 Aggregate National After-tax Compliance
Costs B3-10
Platform-Level Compliance Costs.. B3-11
Impact Analysis B3-I2
Total Costs and Impacts Among All Affected
Oil and Gas Industry Entities
B3-I6
Total Costs to Government Entities and Social
Costs of the 316(b) Phase III Rulemaking
B3-16
B3-4.1 Total Costs to Government Entities
B3-16
B3-4.2 Total Social Costs B3-17
References B3-18
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/ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities B3: Economic Impact for the OOGE Industry
incurred over several years. The ratio of these costs to revenues is then calculated and assessed as to whether this
ratio might indicate the potential for firm-level impacts.
The methodologies used in each analysis are presented first in each section, followed by a discussion of the
analytic results.
No substantive comments were received on the costs or impacts estimated at proposal. Costs, therefore, have
only been updated to reflect 2004 values. Impacts on individual platforms and vessels were not rerun, since these
impacts are based on survey data that were updated to reflect 2003 dollar values at proposal for comparison with
engineering and permitting costs that reflect the same year dollars. Since these costs remain the same in 2003
dollars, impacts remain unchanged from proposal and are considered final for the purposes of this economic
analysis report.
B3-1 MODU ANALYSES
B3-1.1 Aggregate National After-tax Compliance Cost Analysis
A number of costs must be considered in calculating the aggregate national after-tax compliance costs, each with
distinct timing considerations. Permitting costs are incurred by facilities, but these costs are incurred by facilities
to come under one of three General Permits. EPA assumes costs of studies needed to incorporate permit
requirements under the General Permits can be shared. EPA further assumes that all permitting costs would be
grouped into three general permit regions. These regions are Eastern Gulf of Mexico, Western Gulf of Mexico,
and Alaska. Other permit activities are facility-specific and will fall on each facility affected. The timing of
permitting costs is complex and was discussed in Chapter Bl: Summary of Cost Categories and Key Analysis
Elements for New Offshore Oil and Gas Extraction Facilities. More information can also be found in U.S. EPA
(2006a) and ERG (2004a).
EPA assumes that four jackups and 1 semi-submersible will be built each year over the time frame of the analysis.
EPA also assumes that three drill ships will be built, launched in 2012, 2017, and 2022 for a total of 103 MODUs
over the 20-year period of construction. Permitting costs, therefore, apply to 80 jackups, 20 semi-submersibles
and 3 drill ships. See Chapter B2; Profile of the Offshore Oil and Gas Extraction Industry.
Pre-tax costs of installing and operating control technologies and for various permitting activities are input to a
spreadsheet in the year in which they are assumed to be incurred. Capital costs are assumed to be incurred every
10 years, and repermitting costs occur every 5 years. Each MODU is assumed to operate over a 30-year
compliance period1. Costs are discounted to the year of compliance, assumed to be the year the MODU is
launched, and summed to produce the present value of costs in the year of compliance. These costs are then
annualized over 30 years. See Chapter Bl: Summary of Cost Categories and Key Analysis Elements for New
Offshore Oil and Gas Extraction Facilities for more details on the cost discounting methodology.
To create after-tax costs, EPA assumes that the highest marginal corporate tax rate applies. This rate is 35% (IRS,
2005), so after-tax costs would be 65% of the pre-tax costs. EPA does this because all MODU owners that are
likely to build MODUs are large corporations by SBA standards and all have earnings in most years that place
them in the highest corporate tax bracket.
Table B3-1 summarizes the national aggregate after-tax compliance costs for MODUs. As the table shows, these
costs are $1.9 million per year over the time frame of the analysis in 2004 dollars. See ERG (2004a) for a
detailed description of how these costs were calculated (note, however, the costs shown in this reference are the
1 The 30 year compliance period does not reflect the anticipated operational life of the MODU, rather it is the period of
analysis for assessing long-term costs and benefits.
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§ 3l6(b) Final Rule: Phase III- EA, Par; B: Economic Analysis for New OOGE Facilities B3: Economic impact for the OOGE Industry
2003 dollar values). See also the 316(b) Oil and Gas Compliance Cost Model for the Final Rulemaking, DCN 9-
4000 (hereinafter, Compliance Cost Model for Final.
Had existing MODUs been covered by the final rule, the total national cost of the rule would have included an
additional $3.6 million per year in 2003 dollars (ERG, 2004b).
Table B3-1: Total Aggregate National After-tax Compliance Costs for MODUs
(S2004)
Type of Cost
Permitting
Capital/Installation
Semi-submersible;
Jackups
Drill ships
Total
Monitoring
O&M
Total
Present Value
(year of compliance)
$7,270,132
$634,915
115,277,346
$813,165
$16,725.426
$1,370,001
$0
$25,365,559
Annualized Cost of
Compliance
$547,546
$47,818
$1,150,604
$61,243
$1,259,665
$103,181
$0
$1,910^92
Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final. DCN 9-4000.
B3-1.2 Vessel-Level Compliance Costs
This section addresses costs to each of the three types of new vessels. Again, permitting and monitoring costs are
from U.S. EPA (2006a), and cap.tal/installation costs are from U.S. EPA (2006b). Weighted average costs
reported in the TDD (U.S. EPA, 2006b) and derived for existing facilities are calculated and applied to new
facilities as presented in a spreadsheet located in the rulemaking record (DCN 7-4030) and in the Compliance
Cost Model for Final, DCN 9-4000. Pre-tax costs per vessel are used in the firm-level analysis. After-tax per
facility costs are also presented. After-tax costs are used for comparison to pre-tax costs and are used in the firm-
level analysis, but are not used directly as shown in the vessel impact analysis. Additional details on how these
costs are calculated are presented in ERG (2004a).
B3-1.2.1 Pre-Tax Cost of Compliance for Representative Vessels
The costs shown in Table B3-2 reflect the costs assigned to each vessel, by type of vessel. The representative
vessels are those launched in 2007 (jackups and semi-submersibles) and 2012 (drill ship) for the purposes of
timing assumptions. All costs are discounted to the year of compliance, which is the same as the assumed year of
launching. This date may be prior to the date actual compliance is required for some vessels. Those constructed
in 2007-2012 or 2014 (depending on location) are assumed to install and operate compliance equipment
immediately when they are constructed, even though permit requirements may not be in place at that time (see
Chapter Bl: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas Extraction
Facilities for more details). The; present value costs are calculated by inputting each cost into the year that it is
In the impact analysis, after-tax costs are applied to existing MODUs, but these are calculated in a more exact way,
since the existing MODUs have known marginal tax rates, and a depreciation schedule is used to more precisely calculate the
after-tax cost impact on cash flow; see Section B3-1 below and ERG, 2004c). Also note that neither survey data nor
compliance costs were updated from 2003 to 2004 for the impact modeling, since the costs did not change from proposal
except for adjusting for inflation. All vessel-level modeling results from proposal, therefore, are considered final.
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assumed to be incurred, which includes additional capital costs in years 11 and 21 after initial construction,
repermitting costs every 5 years, and monitoring costs in the appropriate years. The costs are taken out over 30
years, discounted to the year of compliance at the recommended OMB discount rate of 7%, and then summed.
The present value cost is then annualized using a 30-year time frame assumption and 7% discount rate. Chapter
Bl: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas Extraction Facilities
also discusses this process, as does ERG (2004a).
Table B3-2 presents the costs of compliance on an annual basis for the three types of MODUs. As the table
shows, these costs range from $15,307 to $39,106 per year depending on type of vessel. These costs are small in
comparison to revenues associated with drilling even one exploration well in the deepwater COM. The
construction of these types of wells cost oil and gas production companies at least $25 million to $30 million per
well (U.S. EPA, 2000). A large portion of this outlay is paid to the operator of the MODU that drills the well.
These costs are also small in comparison to typical MODU day rates, which can range from $50,000 to $180,000
per day (Rigzone, 2006a).
Table B3-2: Per-Vessel Annualized Pre-Tax Cost of Compliance ($2004)
Type of Cost
Permitting
Semi-submersibles
Jackups
Drill ships
Capital/Installation
Semi-submersibles
Jackups
Drill ships
Monitoring
Semi-submersibles
Jackups
Drill ships
O&M
Total
Semi-submersibles
Jackups
Drill ships
Present Value
(year of compliance)
$129,990
$129,990
$68,188
$48,840
$293,795
$417,008
$24,405
$24,405
$34,046
$0
$203,235
$448,191
$519,242
Annualized Cost of
Compliance
$9,790
$9,790
$5,136
$3,678
$22,127
$31,407
$1,838
$1,838
$2,564
$0
$15,307
$33,755
$39,106
Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.
B3-1.2.2 After-tax Costs
After-tax costs are presented here for comparison purposes. After-tax costs are assumed to be lower than the pre-
tax costs by the top marginal corporate tax rate of 35%. Thus the costs calculated are 65% of the pre-tax costs in
Table B3-2 above. The annual after-tax, annualized, per-vessel compliance costs are $9,949 for semi-
submersibles, $21,941 for jackups, and $25,419 for drill ships, based on the pre-tax costs presented above.
B3-1.3 Impact Analysis
EPA has not rerun the impact analysis at the vessel level from proposal. Other than for inflation, all costs remain
the same as those at proposal. EPA considers the impact results from proposal, therefore, to be final.
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The impact analysis is conducted at two levels: vessel-level and firm-level. Although the financial condition of
new vessels cannot be known, the financial conditions of a few, representative existing vessels are reflected in
EPA's 316(b) survey of MODUs, EPA received eight economic surveys from three semi-submersibles, three
jackups, and two drill ships. The financial information from these representative vessels is used for a general
assessment of how well these vessels would do financially if costs of the final regulation applied. The
representative vessels are thus a proxy for new sources subject to Phase III regulation. This analysis provides an
alternative assessment of the potential for barrier to entry.
The second vessel-level analysis is a more typical barrier-to-entry analysis conducted by EPA for new entities,
which looks at the present value of the initial permitting costs (including those associated with start-up activities,
pre-permitting studies and initial permit application activities), discounted to the applicable compliance year, plus
the initial one-time capital/installation costs of required control equipment and compares these costs to the
baseline construction costs for each type of MODU. EPA uses an initial permit cost stream represented by
MODUs expected to be constructed in 2007 (jackups and semi-submersibles) or 2012 (drill ships). See the
Compliance Cost Model (DCN 7-4018) that was prepared at proposal.
The firm-level analysis is a revenue test, comparing the revenues of firms likely to construct MODUs with the
annualized compliance costs for representative new vessels, assuming each firm identified as potentially affected
builds a share of the new MODUs expected to be constructed over the time frame of the analysis. For the
comparison of annualized costs of compliance with annual revenue, EPA assumed that all of a firm's new
MODUs would be constructed in one year. This assumption maximizes the potential impact of compliance cost
in relation to revenue. If EPA instead assumed a firm would spread construction over more than one year, the
ratio of compliance cost to revenue would be less in any single year and the likelihood of finding economic
impacts would diminish. In this way, the assumption that all compliance costs are incurred in the same year is
highly conservative. With no firm-level impacts found under this conservative assumption, then there will also be
no impacts under other, possibly more likely, scenarios in which costs are incurred over several years. EPA uses
the annualized cost stream for MODUs constructed in 2007 (or the cost stream for a drill ship constructed in
2012, the first year post-compliance in which a drill ship is assumed to be constructed) to represent the annualized
costs to each potentially affected firm. EPA uses both the pre-tax and after-tax compliance costs for comparison
with revenues.
B3-1.3.1 Vessel Impact Analysis Using Survey Vessels
To calculate the impact of today's rule on new MODUs, EPA used two models - a cash flow/net income model,
which computes the estimated present value of after tax cash flow/net income for representative MODUs (based
on survey data) over a 30-year operating period for each new facility, and a post-tax cost calculation model, which
estimates the present value after tax costs of compliance using engineering and permitting cost inputs. These two
models are used to analyze the effect of after-tax costs on after-tax vessel cash flow or net income. For additional
details on these models, see ERG (2004c) and DCN 7-4020.
Using data provided by surveyed MODU operators, EPA used both the reported after-tax net income and a
calculated cash flow figure for each survey MODU. EPA calculated cash flow using after-tax net income and
adding depreciation, depletion, and amortization (DD&A) back into net income, since DD&A are not cash
expenses. EPA used cash flow as an upper bound estimate of available cash and after-tax net income as a lower
bound estimate. EPA was only able to undertake financial analysis for those MODUs with a positive net income
or cash flow for the three years of financial information provided in the survey. EPA assumes that any MODU
whose cash flow or net income is negative over the three years of financial data availability is unlikely to be a
viable operation in the baseline and cannot be analyzed with respect to compliance costs.
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EPA used the cash flow/net income over the three years of data collected to create a moving cycle of cash
flow/net income over the period of analysis. The years of data collected were 2000, 2001, and 2002, with 2002
generally being a poorer year for the industry as a whole. In this way, EPA was able to represent industry
fmancials in both good and bad years. The 3-year cycle provides a means for projecting the volatile oil and gas
business over each facility's 30-year operating period, which is expected to include major swings in the prices of
oil and gas, the driving force behind the level of operations, pricing, and thus the financial performance of newly
constructed vessels. EPA assumed that cash flow/net income will be flat on average over the 30 years of analysis
and thus does not apply any factors to increase or decrease cash flow or net income over the years of analysis
within those cyclical movements. The cash flow/net income figures from the survey, therefore, repeat every three
years for 30 years. EPA then computes the present value of that stream of cash flow/net income figures and
compares it to the present value of after-tax compliance costs for the preferred option.
EPA used the capital, O&M, and permitting costs to calculate the present value of the after-tax annualized cost of
compliance with the regulatory requirements. Each cost is accounted for in the year in which it is assumed to be
incurred. EPA made the simplifying assumption that the existing MODUs would represent new MODUs that are
launched in 2007. Since EPA assumes MODUs launched in this year install and operate compliance equipment at
that time (even though they do not become permitted for compliance with 316(b) requirements until the date of
the first applicable General Permit renewal), EPA considers the date of launching the "compliance year."
The first costs to be incurred are the Region 6 and Region 4 pre-permitting costs (the shared study costs) and the
capital costs of installation and incremental O&M costs (O&M costs are estimated to be $0 for all MODUs).
Costs for permit application activities occur in 2011 for the Region 6 permit and in 2013 for the Region 4 permit.
Only MODUs are assumed to be permitted under the Region 4 permit, since relatively little production activity is
currently underway in the Eastern Gulf.2 Monitoring costs begin to be incurred in 2012. Repermitting costs enter
in 2017, and every 5 years thereafter. EPA estimated capital costs for each MODU for which a financial survey
response was received (with one exception), as well as many other MODUs for which financial data were not
obtained (all were used to calculate the average costs of compliance for new facilities). In this analysis, however,
only the costs for the eight MODUs with economic survey information were used for developing the costs for this
impact analysis.
EPA's post-tax compliance cost model determined the marginal tax rate of the owner company based on the
firm's average taxable earnings over the three years of survey data (which were put on a mid-year 2003 basis to
match the engineering costs, which were also set to 2003 dollars) and used the modified accelerated cost recovery
system (MACRS) to calculate depreciation on the capital outlay. Depreciation was then used to compute a "tax
shield" on the investment (for more information on EPA's post-tax cost calculation model, see ERG [2004cJ and
DCN 7-4020). The post-tax cost calculation model calculates the present value of after-tax compliance costs.
The present value output from the post-tax cost calculation model is then input to the cash flow/net income model
and used to compare with the present value of cash flow/net income of the vessel as discussed above. If the
present value of baseline after-tax cash flow or net income minus the present value of after-tax compliance costs
is greater than $0, EPA assumes that the MODU would be able to continue to operate post-compliance. If the
cash flow value becomes negative, EPA assumes the MODU would no longer continue to operate. If the net
income value becomes negative, EPA assumes the longer-term viability of the vessel is potentially jeopardized.
In either case, such a MODU would be counted as a potential ''regulatory closure." This analysis is considered an
alternative assessment of the potential for barrier to entry.
Permitting costs to platforms are assumed to be associated with the Western Gulf Permit; use of this assumption avoids
potentially understating the magnitude of shared costs to MODUs in Region 4.
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Although many of EPA's analyses investigate whether costs of compliance can be passed through to customers,
this analysis makes an assumption that costs cannot be passed through. Because existing MODUs will not have to
meet the requirements of the rulemaking, and new MODUs must compete with these existing MODUs, it is
unlikely that new MODUs would be able to pass through any compliance costs. Assuming zero cost pass-through
provides a realistic estimate of potential economic impacts to new MODUs.
Due to confidential business information (CBI) constraints, EPA is not able to provide detailed impact results on a
MODU-specific level. Detailed results are provided in the CBI portion of the Rulemaking Record (ERG, 2004c,
CBI version, and DCN 7-4020). The general findings of the closure analysis are that no new MODUs will be
regulatory closures, based on an assumption that finances for new MODUs might look like those for existing
MODUs, as a result of the incremental costs of compliance with the preferred option using either a cash flow or
net income approach.
B3-I.3.2 Barrier to Entry Analysis (Vessel-Level)
EPA used the incremental capital/installation costs and the net present value of permitting costs of compliance for
MODUs, as discussed above, using the cost streams associated with vessels launched in 2007 (jackups and semi-
submersibles) and 2012 (drill ships), discounted to the compliance year. The sum of these costs (capital and
permitting) was then compared to the costs of constructing new MODUs. If these compliance costs comprised a
small fraction of construction costs, EPA assumed that compliance costs would not have a major impact on future
MODUs and would not have an effect on a decision to build additional MODUs.
EPA estimated the incremental capital costs to install CWISs that meet the requirements of 316(b) Phase I, Track
1. These costs are $27,643 for semi-submersibles, $166,290 for jackups, and $236,028 for drill ships. The
present value of a share of the permit costs is $102,429 for each vessel except those for drill ships, which are
$25,673 (because they are assumed not be involved in the initial study cost sharing due to their much later
assumed launch dates). The total incremental initial investment costs, therefore, are $130,072 for semi-
submersibles, $268,718 for jackups, and $261,702 for drill ships). According to Rigzone (2006b), the cost of new
MODUs planned to be built in the next few years averages $385 million for semi-submersibles, $130 million for
jackups, and $525 million for drill ships. Incremental present value of permitting costs plus capital/installation
costs are therefore estimated to range from 0.03% to 0.21% of construction costs, regardless of type of MODU.
Because this is only a tiny fraction of total costs of construction (and a tiny fraction of contingency, which
typically ranges from 10% to 20% of capital/installation costs), EPA believes that these costs will not have a
material effect on decisions to build new MODUs.
One commenter was concerned about the potential for barriers to trade due to compliance costs. The results of the
barrier to entry analysis indicate that costs are minuscule relative to construction costs, so foreign companies
wishing to construct new MODUs that meet the requirements of the final rule will not be dissuaded from doing
so. Furthermore, should foreign firms wish to relocated MODUs built after the effective date of the rule to U.S.
waters, the costs to retrofit controls should not have an impact on this decision. The costs calculated in U.S. EPA
(2006b) and presented here are derived assuming controls must be retrofitted. The vessel-level and firm level
impact analyses indicate negligible impacts, as does this barrier to entry analysis. EPA, therefore, has determined
that no barriers to trade will exist as a result of the final 316(b) rulemaking.
B3-1.3.3 Firm-Level Analysis
To determine the impact of the final rule on firms, EPA uses a revenue test, which compares the annualized pre-
tax and after-tax costs of compliance (calculated for each representative MODU as discussed above), with 2004
revenues reported by all firms determined likely to build new MODUs meeting the final rule's criteria. Because
nearly all of these firms (other than foreign-owned) are publicly owned, EPA relied on the revenue data reported
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§ 3l6(b) Final Rule: Phase HI - EA, Part B: Economic Analysis for New OOGE Facilities B3: Economic Impact for the OOCE Industry
in Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry, which was compiled from corporate 10K
reports downloaded from SEC's Edgar Database. EPA determined the number of MODUs likely to be built by
each firm under the final rule. Only those firms that were identified as currently owning jackups, semi-
submersibles, and drill ships that will meet the final rule's criteria if newly constructed or those actively
constructing MODUs at this time are considered likely to construct the estimated 103 new MODUs that will be
affected by the final rulemaking (see also Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry). 2
EPA then assigned a number of potentially in-scope MODUs to be built by each of the firms and used the average
per-MODU compliance costs multiplied by the number of these potentially in-scope MODUs to calculate the total
compliance costs that might be faced by these firms.
To calculate costs to revenues, EPA uses the pre-tax and after-tax costs shown in Table B3-2 for the firms
identified as likely to construct new MODUs meeting the final rule's criteria. Each firm is assumed to build 9
jackups or semi-submersibles over the time frame of the analysis (about one every other year), except for
GlobalSantaFe and Transocean, which are assumed to build 18 jackups and one drill ship or two drill ships,
respectively.3 The total number of new MODUs estimated to be built is divided equally amongst the firms.
However, GlobalSantaFe and Transocean own a disproportionately large share of existing MODUs. So EPA
expects their share of new MODUs to be approximately twice that of the other firms. For the comparison of
annualized costs of compliance with annual revenue, EPA assumed that all of a firm's new MODUs estimated to
be constructed by these firms are launched in one year. This assumption maximizes the potential impact of
compliance cost in relation to revenue. If EPA instead assumed a firm would spread construction over more than
one year, the ratio of compliance cost to revenue would be less in any single year and the likelihood of finding
economic impacts would diminish. In this way, the assumption that all compliance costs are incurred in the same
year is highly conservative. With no firm-level impacts found under this conservative assumption, then there will
also be no impacts under other, possibly more likely, scenarios in which costs are incurred over several years.
EPA uses the higher cost of ajackup rig to represent the cost of compliance for both jackups and semi-
submersibles for simplicity.
Table B3-3 shows all of the MODU owners that are considered likely to build an in-scope MODU. As the table
shows, annualized pre-tax costs per firm range from $0.3 to $0.7 million. The ratio of pre-tax costs to revenues
ranges from 0.01% to 0.19% and after-tax costs to revenue range from 0.01% to 0.12%. Given that the highest
ratio seen is 0,19 percent, EPA concludes that firm-level impacts will be minimal. Furthermore, even if these
costs applied to other firms (among those that own jackups or semi-submersibles with unknown CWIS intake
rates that are considered unlikely to build new MODUs subject to Phase III regulation), impacts on any firm
would still be estimated to be much less than 1 percent.4
2 Two firms have been added to the list of likely MODU constructors since proposal, based on information showing that
they are in the process of constructing new MODUs. These are Nabors and Atwood Oceanics (Rigzone, 2006c). Nabors is
larger in revenues than the other firms, and Atwood Oceanics is smaller. Two other firms are currently building MODUs,
One, Perforadora Mexico, does not have financial data readily available, but is assumed to have revenues in the range of
those shown in Table B3-3. The other, Scorpion, is a new firm, organized in April of 2005. This foreign firm is currently
building 5 jackups and has no revenues to report at this time. With 5 MODUs in operation and assuming only 90 days per
year of operation for each MODU (that is, a 25 percent utilization rate when the average for the COM is currently at 85
percent [Rigzone, 2006d]) at an average $100,000/day, this would imply a revenue stream of about $45 million per year. !f it
is further assumed that this firm builds as many as 9 MODUs in one year, the impact of the final rule will still be less than 1
percent of revenues.
3 The number of MODUs per firm was changed from proposal to accommodate a higher number of firms identified as
constructing MODUs (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry).
4 At proposal, there were several firms owning jackups or semi-submersibles that did not submit voluntary technical data,
so EPA was not able to determine whether they own MODUs that might meet the final rule's criteria were they to be newly
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These costs reflect the assumption that all new jackups would be built with sea chests and, therefore, these vessels
will not be required to meet entrainment controls. However, jackups on rare occasions use straight pipes. If
jackups are not built with sea chests, the costs to comply with both impingement and entrainment controls would
result in the annualized per-vessel compliance costs to rise from $33,755 to about $40,800.5 Under this scenario,
the costs to revenue ratios shown in Table B3-3 would be at most 0.2 percent (see DCN 7-4030 and DCN 7-
4018).
Table B3-3: Revenue Test for MODU Owners
Name
Diamond Offshore
ENSCO
GlobalSantaFe
Noble
Pride
Rowan
Transocean
Nabors
Atwood Oceanics
Total/Avg.
No. of Likely In-
scope Rigs >2
MGD Built in One
Year
9
9
19
9
9
9
20
9
9
-103
2004
Revenues
(Smillions)
$815
$741
$1,724
$1,351
$1,712
$679
$2,614
$2,448
$163
$12,247
Annualized
Pre-Tax Costs
per Firm
(Smillions)
$0.3
$0.3
$0.6
$0.3
$0.3
Costs to
Revenues
0.04%
0.04%
0.04%
0.02%
0.02%
$0.3 0.04%
$0.7
$0.3
$0.3
$3.5
0.03%
0.01%
0.19%
0.03%
Annualized
After-tax
Costs per
Firm
(Smillions
2004)
$0.2
$0.2
$0.4
$0.2
$0.2
$0.2
$0.4
$0.2
$0.2
$2.2
Costs to
Revenues
0.02%
0.03%
0.02%
0.01%
0.01%
0.03%
0.02%
0.01%
0.12%
0.02%
Source: SEC, 2006; U.S. EPA Analysts, 2006. See Compliance Cost Model for Final, DCN 9-4000.
B3-2 ECONOMIC IMPACT ANALYSIS FOR OIL AND GAS PRODUCTION PLATFORMS
This section presents the aggregate national after-tax compliance costs for new oil and gas production platforms
that will be built in scope. It also presents platform-level compliance costs (in after-tax and pre-tax terms).
Impacts on platforms are then presented in two sections. The first section uses a model of a new platform to
determine the potential for any effect on production. The second section uses an approach for identifying barriers
to entry for all platforms likely 1o be built in scope and for assessing impacts on those platforms for which
information was not sufficient to create a detailed economic model. As discussed in Chapter B2: Profile of the
Offshore Oil and Gas Extraction Industry, only 20 in-scope deepwater platforms and one in-scope Alaska
constructed. These firms were Atwood Oceanics, Caspian Drilling Co., Energy Equipment Resources, Nabors Industries,
Newfield Exploration, Ocean Rig ASA, Parker Drilling, Tetra Technologies, and Workships BV (note that several of these
firms are no longer on Rigzone's list of current operators [Rigzone, 2006c]). Most of these firms, however, own only one or
two such MODUs and are considered far more likely to purchase MODUs from the firms included in this analysis than to
build their own (several of these MODUs have clearly been purchased from GlobalSantaFe, for example). As noted earlier,
however, Noble and Atwood Oceanics are constructing new MODUs and have been added to the analysis. Had others of
these firms been included in the analysis, however, EPA's findings would not have changed. Atwood Oceanics is considered
representative of the smaller (yet still large by SBA standards) MODU operators who might construct MODUs subject to the
rule.
5 Based on the average inflation factor for permits and construction costs of about 4.5% from 2003 to 2004 (per-vessel
compliance costs for jackups were estimated to rise from $32,295 in 2003 dollars to $33,755 in 2004 dollars, while costs for
jackups with entrainment controls were estimated to be $39,063 in 2003 dollars).
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platform are expected to be constructed over the 20 year construction time frame of the analysis under the final
rule.
B3-2.1 Aggregate National After-tax Compliance Costs
The methodology for calculating the aggregate national after-tax compliance costs are identical to that used for
calculating these same costs for MODUs, although the costs incurred are different. Costs are input in each year in
which they occur over the 30-year time frame of the analysis, including recurring capital replacement costs,
repermitting costs, and O&M. The costs in each year are discounted to the compliance year (assumed the year the
platform comes on line) and summed to calculate the present value of the cost stream. These present value costs
are then annualized. For more details on timing assumptions and annualized and present value cost calculations,
see Chapter Bl: Summary of Cost Categories and Key Analysis Elements for New Offshore Oil and Gas
Extraction Facilities and ERG (2004a).
To create after-tax costs, EPA assumes that the highest marginal corporate tax rate applies. This rate is 35 percent
(IRS, 2005), so after-tax costs will be 65 percent of the pre-tax costs. EPA does this because all platform owners
that are likely to build in-scope platforms are large corporations by SBA standards and/or have earnings that place
them in the highest corporate tax bracket (including the one small corporation considered likely to build an Alaska
platform).
Table B3-4 summarizes the national aggregate after-tax compliance costs for production platforms. As the table
shows, these costs are SI .3 million per year over the time frame of the analysis. See ERG (2004a) for a detailed
description of how these costs were calculated. Also see DCN 9-4000.
Had existing platforms been covered by the final rule, the total national cost of the rule would have included an
additional $4.5 million per year in 2003 dollars (ERG, 2004b).
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Table B3-4: Total National Aggregate After-tax Compliance Costs for Platforms
($2004)
Type of Cost
Permitting
Deepwater
Alaska
Total
Capital/Installation
Deepwater
Alaska
Total
Monitoring
Deepwater
Alaska
Total
O&M
Deepwater
Alaska
Total
Total Compliance Costs
Deepwater
Alaska
Total National Compliance Costs
Present Value (to year of
compliance)
$859.982
$483,126
$1,343,109
$5,556,764
$414,536
$5,971,300
$188,497
$191,478
$379,975
$8,187,952
$1,458,124
$9,646,076
$14,793,195
$2,547,264
$17,340,460
Annualized Cost of
Compliance
$64,769
$36,386
$101,155
$418,504
$31,221
$449,725
$14,197
$14,421
$28,618
$616,671
$109,818
$726,488
$1,114,141
$191,846
$1,305,986
Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final. DCN 9-4000.
B3-2.2 Platform-Level Compliance Costs
This section addresses costs to each of the two types of platforms (deepwater and Alaska). Again, permitting and
monitoring costs are from U.S. EPA (2006a), and capital/installation and O&M costs are from U.S. EPA (2006b),
with the weighted average of the capital and O&M costs applied to new platforms/structures as calculated in DCN
7-4030. Pre-tax costs per platform are used in the firm-level analysis, along with after-tax costs. After-tax costs
are used for comparison to pre-tax costs but are not used directly in the platform impact analysis. See ERG
(2004a) for more detail on how these costs were calculated. Also see DCN 9-4000.
B3-2.2.1 Pre-Tax Cost of Compliance for Representative Platforms
The costs shown in Table B3-5 reflect the estimated costs incurred by each platform, by type of platform. Costs
are derived as above for computing national aggregate costs, but these costs are for a representative deepwater
platform that comes on line in 2007 (year of compliance is assumed to be 2007) and the representative Cook Inlet
platform coming on line in 2014 (year of compliance). Costs (which are incurred over the full time frame of the
analysis, including recurring capital replacement and repermitting costs) are discounted to the applicable year of
compliance and annualized over 30 years at 7 percent.
In the impact analysis, cost; are input in the year in which they are assumed to be incurred, and the financial model
internally calculates the tax shield on these costs given depreciation schedules; see Section B3-2.3a below and ERG [2004d]).
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Table B3-5 presents the costs of compliance on an annual basis for the two types of platforms. As the table
shows, these costs are $87,141 or $295,147 depending on type of platform.
Table B3-S; Per-Platform Annualized Pre-Tax Cost of Compliance ($2004)
Type of Cost
Permitting share
Deepwater
Alaska
Capital/Installation
Deepwater
Alaska
Monitoring share
Deepwater
Alaska
O&M
Deepwater
Alaska
Total
Deepwater
Alaska
Present Value (Year of
Compliance)
$81,586
$743,271
$427,443
$637,748
$18,164
$294,582
$629,842
$2,243,267
$1,157,035
$3,918,868
Annualized Cost of
Compliance
$6,145
$55,979
$32,193
$48,032
$1,368
$22,186
$47,436
$168,950
$87,141
$295,147
Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final. DCN 9-4000.
B3-2.2.2 After-tax Costs for Representative Platforms
After-tax costs are presented here for comparison purposes. After-tax costs are assumed to be lower than the pre-
tax costs by the top marginal corporate tax rate of 35 percent (IRS, 2005). Thus the costs calculated are 65
percent of the pre tax costs in Table B3-5 above.
The annual after-tax per-piatform compliance costs are $56,642 for deepwater platforms and $191,846 for the
Alaska platform, based on the pre-tax costs shown above in Table B3-5.
B3-2.3 Impact Analysis
The impact analysis for oil and gas production platforms is divided into two types: platform-level and firm-level.
The platform-level analyses include two approaches to determining the potential for impacts. Because costs were
not changed from proposal, except to adjust for inflation, the impact analysis on platforms were not rerun. EPA
considers the results of the impact analysis at proposal as final.
Although the financial condition of new platforms cannot be known, the financial conditions of a few,
representative existing platforms are reflected in EPA's 316(b) survey of production platforms. EPA received
economic surveys from one deepwater platform and one Alaska platform with CWIS intake rates meeting the
final rule's requirements. The financial information from the deepwater platform is used for a general assessment
of how well new deepwater platforms would do financially if the final rule's costs applied. The Alaska platform
that was surveyed, however, is a very old structure and is at the end of its productive life, thus has a production
profile completely different from what would be expected of a new operation. Furthermore, new platforms
constructed in Cook Inlet are far likelier to look like the Osprey platform, which is a departure from the older
technology represented by the other Cook Inlet platforms. The Osprey platform was designed to operate as a
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§ 316(b) Final Rule: Phase III - EA, Fait B: Economic Analysis for A'ew OOGE Facilities 83: Economic Impact for the OOGE Industry
MODU until a productive reservoir was located, at which point the MODU was designed to convert to a
stationary production platform. This design allowed Osprey to be built at a significantly lower cost than the
traditional fixed platforms located in the inlet. EPA does not have sufficient financial information at this time to
model an Osprey-type platform. For these reasons, the potential for impact on a new Alaska platform is assessed
only in the second platform-level analysis, described below.
The second platform-level analysis is a more typical barrier-to-entry analysis used for new entities. It uses the
present value of initial permitting costs (discounted to the year of compliance) plus the capital/installation costs
and compares these costs to the construction costs for each type of platform. This is a typical barrier-to-entry
analysis, which assesses incremental start-up costs associated with compliance to baseline start-up costs.
The firm-level analysis is a revenue test, comparing the revenues of firms likely to construct platforms whose
CWISs meet the final rule's criteria with the annualized compliance costs for each platform, assuming each firm
considered likely to build a regulated platform in the deepwater builds four platforms/structures over the time
frame of the analysis. For the comparison of annualized costs of compliance with annual revenue, EPA assumed
that the firms bring all platforms on line in one year. This assumption maximizes the potential impact of
compliance cost in relation to revenue. If EPA instead assumed a firm would spread construction over more than
one year, the ratio of compliance cost to revenue would be less in any single year and the likelihood of finding
economic impacts would diminish. In this way, the assumption that all compliance costs are incurred in the same
year is highly conservative. With no firm-level impacts found under this conservative assumption, then there will
also be no impacts under other, possibly more likely, scenarios in which costs are incurred over several years.
One small firm is assumed the likeliest to build one platform in Alaska during the time frame of the analysis, and
this firm is assigned the cost of the one Alaska platform assumed to be constructed during the analysis period.
B3-2.3.1 Platform Impact Analysis Using Survey Platforms
Oil and gas production platforms are modeled somewhat differently than most other Phase III entities. Because
the surveyed deepwater platform was a relatively new structure in 2002 (the first year of survey data provided),
the model is built using survey data to represent new, later-built structures.
Generally, the model can show production extending as far out as 30 years. Calculations, such as the after-tax
costs of compliance that are computed outside of the model platform framework (presented earlier in this
Chapter), use a 5 or 10-year time frame over which to annual ize costs. The platform model operates somewhat
differently. Pre-tax costs are input into the model in the year in which they occur (including costs incurred in pre-
production years). The model calculates after-tax costs, which are then annualized over the modeled production
life, which could be shorter than 30 years. For this reason, repermitting costs are input into the model every five
years and capital costs for CWISs are input every 10 years, until the model shows the platform is uneconomical to
operate.
EPA has developed a model deepwater oil and gas production platform based on information obtained from
EPA's survey and from other sources of publicly available information, such as that from MMS. ERG (2004d;
non-CBI version) contains additional details on the methodology, non-CBI data, and assumptions on which the
model is based and how the model was constructed. EPA has used the same basic approach a number of times for
analyzing impacts of effluent guidelines on oil and gas facilities (see, for example, U.S. EPA, 2000). Usually, the
only differences are the input variables, such as production rates, that are used to model individual platforms. For
specific details on the values of variables defined by survey information and the detailed impact results, see ERG
(2004d; CBI version).
The model is based on both a cash flow and net income approach. The projected net revenues are compared to
operating costs at each year for each model project. Net revenues (after subtracting royalties and severance,
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§ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOGE Facilities 83: Economic Impact for the OOGE Industry
which are payments to the lease owner and a State, if relevant) are based on an assumed price of oil, current and
projected production of oil and gas, well production decline rates, and severance and royalty rates. Operating
costs are based on a calculated cost per barrel of oil equivalent (BOE) produced. The model runs for 30 years or
is assumed to shut in when operating costs exceed revenues. That is, the economic model can calculate differing
lifetimes according to project characteristics. The model then calculates the lifetime of the project, total
production and the net present value of the operation (net income of the operation over the life of the project in
terms of today's dollars), which includes the net operating earnings, taxes, expenditures on drilling, other capital
expenditures, etc. A positive net present value means that the project is a good investment. In this case the return
is greater than the discount rate, which represents the opportunity cost of capital. If the net present value is
negative, it means that money would have been better invested elsewhere.
The model is run twice-with and without the change due to the 316(b) Phase III requirements. The incremental
cost to retrofit I&E equipment is input into a capital expenditure line (which is used in both the cash flow and net
income calculations), and additional O&M and permitting costs are input to the cash flow section of the model.
The post-compliance results (including production, project life, and net present value of income) are compared to
those calculated under baseline assumptions.
There are two ways the increased costs can have an impact on a platform. First, any increase in operating costs
might raise total operating costs enough to cause the operating costs to exceed net revenues earlier than in the
baseline. If the platform life is reduced, there will be a concomitant loss of production. Second, any increase in
costs, whether operating, capital or permitting, could also drive the net present value of a marginal operation
negative. The decision in this case would be to not develop the project rather than build the project with I&E
controls in place, since the project would not be considered a good investment. If the platform has a positive net
present value under baseline conditions but a negative net present value in the post-compliance scenario, EPA
notes an impact on the platform and estimates the production lost as a result.
Due to issues with CBI, the detailed results of the platform-specific impacts are not reported here. See ERG
(2004d; CBI version) in the CBI portion of the Rulemaking Record for detailed information on impacts.
However, EPA determined that there will be no impacts on deepwater oil and gas development or production due
to the final rule's costs based on model results. Impacts on net present value of projects are expected to be very
small.
B3-2.3.2 Barrier to Entry Analysis (Platform Level)
EPA uses the incremental capital costs and present value of initial permitting costs for compliance for new
deepwater and Alaska platforms to compare to the costs of construction of new platforms, identical to the
approach used to measure impacts on MODU owners. If the initial investment costs of compliance are a small
fraction of baseline construction costs, EPA assumes that compliance costs would not have a major impact on
future platforms and would not have an effect on a decision to build additional oil and gas production platforms.
Costs for constructing deepwater platforms are estimated to range at least from $114 million to $2.3 billion (see
U.S. EPA, 2000). Forest Oil (Forest Oil, 2002) reports that the 2002 capital outlay for the Osprey platform in
Cook Inlet was $120 million (which does not include exploration, delineation, or additional costs to continue to
develop the platform). For deepwater platforms, EPA estimates that a platform coming on line in 2007 will incur
costs of $306,323 (deepwater) and $708,058 (Alaska) in capital/installation costs plus the present value cost of the
initial round of permitting costs. The ratio of incremental compliance costs to construction costs ranges from 0.01
percent to 0.3 percent for deepwater projects and 0.6 percent for an Alaska project.
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§ 316(b) Final Rule: Phase III - EA, Part B: Economic Analysis for A'ew OOGE Facilities B3: Economic Impact for the OOGE Industry
B3-2.3.3 Firm Level Impacts
The firms that are considered affected are those identified as currently having platforms or structures in the
deepwater that meet the final rule's criteria. In Alaska, Forest Oil is selected as the likeliest type of firm to build
an Alaska platform during the time frame of the analysis. All the firms considered likely to build a new
platform/structure subject to the final rule have publicly available data on 2005 revenues. Each firm is expected
to bring on line two affected platforms over the period of analysis, except for Forest Oil, in Alaska, where only
one structure is expected to be built over the period of analysis. The count of platforms per firm in the Gulf has
changed from proposal, since 6 additional firms were identified as having constructed deepwater platforms in the
intervening years (see Chapter B2: Profile of the Offshore Oil and Gas Extraction Industry). For the comparison
of annualized costs of compliance with annual revenue, EPA assumed both platforms are brought on line in the
same year. This assumption maximizes the potential impact of compliance cost in relation to revenue. If EPA
instead assumed a firm would spread construction over more than one year, the ratio of compliance cost to
revenue would be less in any single year and the likelihood of finding economic impacts would diminish. In this
way, the assumption that all compliance costs are incurred in the same year is highly conservative. With no firm-
level impacts found under this conservative assumption, then there will also be no impacts under other, possibly
more likely, scenarios in which costs are incurred over several years. The costs of compliance are calculated as
the cost stream over the compliance lifetime of a representative deepwater platform constructed in 2007 and an
Alaska platform constructed in 2014, discounted to the year of compliance and annualized (the same approach
used for judging impacts on MODI) owners). These costs are then compared to firm-level revenues in a revenue
test. Both pre-tax costs, reported in Table B3-5 above, and after-tax costs are used to compare to revenues.
Table B3-6 presents the affected firms in both regions of concern (deepwater and Alaska), their annual revenues,
their annualized pre-tax costs of compliance applied to all potentially affected structures they might construct, and
the ratio of their compliance costs to revenues. As the table shows, costs to revenues are 0.032 percent or less for
all affected firms.
Table B3-6: Revenue Test for Platform Owners
Name
Amerada Hess
BP
ChevronTexaco
ExxonMobil
Forest Oil
Royal Dutch/Shell
Murphy Oil
Kerr-McGee
Anadarko
Total S.A.
ConocoPhillips
Dominion
No. of
Platforms
2
2
2
2
1
2
2
2
2
2
2
2
2004 Revenues
(Smillions)
$16,733
$285,059
$150,865
$291,252
$913
$266,386
$8,299
$4,398
$6,079
$115,540'
$135,076
$13,991
Pre-Tax PV
Costs
(Smillions
$0.2
$0.2
$0.2
$0.2
$0.3
$0.2
$0.2
$0.2
$0.2
$0.2
$0.2
$0.2
Pre-Tax
Costs to
0.001%
<0.001%
<0.001%
<0.001%
0.032%
<0.001%
0.002%
0.004%
0.003%
<0.001%
<0.001%
0.001%
After-tax Initial
Investment
Costs (Smillions
$0.1
$0.1
$0.1
$0.1
$0.2
$0.1
$0.1
$0.1
$0.1
$0.1
$0.1
$0.1
After-tax
Costs to
Revenues
0.001%
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§ 316(b) Final Rule: Phase III- EA, Part B: Economic Analysis for New OOGE Facilities 83: Economic Impact for the OOGE Industry
B3-3 TOTAL COSTS AND IMPACTS AMONG ALL AFFECTED OIL AND GAS INDUSTRY
ENTITIES
Table B3-7 summarizes the total costs and impacts associated with the 316(b) Phase III Rulemaking on the oil
and gas industry.
As the table shows, impacts on new MODUs and platforms and their associated firms are expected to be minimal.
Aggregate national after-tax compliance costs are also shown in the table. These costs total $1.9 million per year
for MODUs and $1.3 million per year for platforms, which is $3.2 million per year over all affected new oil and
gas operations estimated to be constructed over the period of the analysis.
Table B3-7: Total National Aggregate Annualized After-tax Compliance Costs and Impacts for the Oil
and Gas Industry ($2004)
O&G Facility
MODUs
Platforms
Total"
Annualized After-tax Compliance Costs
(in Smillions, discounted to year of compliance)
$1.9
$1.3
$3.2
Facility Impacts
0
0
0
Firm Impacts
0
0
0
* Totals may not sum due to independent rounding.
Source: U.S. EPA Analysis, 2006. See the Compliance Cost Model for Final, DCN 9-4000.
B3-4 TOTAL COSTS TO GOVERNMENT ENTITIES AND SOCIAL COSTS OF THE 316(B) PHASE
III RULEMAKING
B3-4.1 Total Costs to Government Entities
The costs in Table B3-8 reflect those costs to Region 6, Region 4 and Region 10 to administer the costs of the
three General Permits as well as to maintain these permits over time as the number of permittees increases or
decreases. The details of individual cost items and timing assumptions can be seen in Chapter D2: UMRA
Analysis. Costs are arrayed over the time frame of the analysis and discounted at either 3% or 7% to 2007.
Table B3-8: Total Costs to Government Entities ($2004)
Government Entity
Present Value Cost (2007)
Annualized Cost
3% Discount Rate
EPA Region 6
EPA Region 4
EPA Region 10
Total government cost
$4,807,900
$3,903,492
$41,987
$8,753,379
$238,151
$193,353
$2,080
$433,583
7% Discount Rate
EPA Region 6
EPA Region 4
EPA Region 10
$2,465,458
$1,944,024
$23,272
$185,684
$146,413
$1,753
Total government cost
$4,432,755
$333,850
Source: U.S. EPA 2006a; U.S. EPA Analysis, 2006. See the Compliance Cost Mode! for Final, DCN 9-4000.
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§ 3I6(b) Final Rule: Phase 111 - EA, Pan B: Economic Analysis for New OOGE Facilities B3: Economic Impact for the OOGE Industry
B3-4.2 Total Social Costs
The total costs to government entities, plus the total pre-tax cost to industry are used as an approximation of total
social cost. There is no lost production of oil and gas calculated and no closures or firm failures are estimated.
Thus no social costs associated with employment dislocations are incurred. A small deadweight cost to society of
lost production due to forces other than supply and demand, such as taxes on monopolies, may occur, but this is
not calculated. Consumer and producer surplus losses are also not calculated, but they are captured in the total
pre-tax cost to industry.
Table B3-9 presents the total social costs associated with the 316(b) requirements under the final rule. The
annualized social costs of the rule associated with the affected oil and gas industries under the final rule is
approximately $3.8 million using the 3 percent social discount rate suggested by OMB and $3.2 million per year
using OMB's 7 percent discount rate.
Table B3-9: Total Social Costs of the Final Rulemaking for Oil and Gas Industries
(in millions, $2004)
Cost Item
Present Value Cost (2007)
Annualized Costs
3 % Discount Kate
MODU compliance costs
Platform compliance costs
Total pre-tax compliance costs
Government cost
Total social costs
$29.5
$68.8
$8.8
$77.6
$1.5
$3.4
$0.4
$3.8
7 % Discount Kate
MODU compliance costs $22.4
Platform compliance costs
Total pre-tax compliance costs
Government costs
Total social costs
$15.4
$37.8
$4.4
$42.3
$1.7
$1.2
$2.8
$0.3
$3.2
Note: Totals may not sum due to independent rounding.
Source: EPA Analysis, 2006. See the Compliance Cost Model for Final DCN 9-4000.
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§ 3l6(b) Final Rule: Phase III - EA, Part B: Economic Analysis for New OOCE Facilities B3: Economic Impact for the OOGE Industry
REFERENCES
ERG. 2004a, Cost Timing and Cost Sharing Assumptions for Industry Compliance Costs. Memorandum to the
3l6(b) Phase III Rulemaking Record. September 24,2004.
ERG. 2004b. Costs for Existing Oil and Gas Facilities Had These Been Regulated Under 316(b) Phase HI.
Memorandum to the 316(b) Phase III Rulemaking Record. September 24, 2004.
ERG. 2004c. MODU Cost and Impact Calculations. Memorandum to the 316(b) Phase III Rulemaking Record
(Non-CBI version) and CBI Rulemaking Record (CBI version). September 24, 2004.
ERG. 2004d. Detailed Methodology and Results for Oil and Gas Production Platforms. Memorandum to the
316(b) Phase III Rulemaking Record (Non-CBI version) and CBI Rulemaking Record (CBI version). October 7,
2004.
Forest Oil. 2002. Presentation on Forest Oil Corporation given at Bane of America Securities Energy and Power
Conference. June 2002 Available at
http://www.forestoil.com/downioads/presentation_bancofamericajun_2002.pdf.
Rigzone. 2006a. Offshore Rig Day Rates. Available at http/Avww.rigzone.com/data/dayrates. March 22.
Rigzone. 2006b. Weekly Offshore Rig Review: Build It and They Will Come. Available at
http://www.rigzone.come/news/article.asp?a_id=29334, February 6.
Rigzone. 2006c. Offshore Rig Search Results. Available at
http://www.rigzone.com/data/results.asp?sortField=0&sortDir=l&P=4&Rig_Name=&RWD_Max=-
1 &RWD_Min=-1&Region ID=2&Rig_Type ID=-1&Manager ID=-1 &Rig_Status ID=-1 &OperatorJD=-1.
March 17.
Rigzone. 2006d. Offshore Rig Utilization by Region. Available at
http://www.rigzone.com/data/utilization_region.asp. March 23.
SEC. 2006. Security and Exchange Commission Edgar Database of Corporate Filings.
http://www.sec.gov/edgar.shtml
U.S. Department of the Treasury. 2005. Internal Revenue Service (IRS). 2005 Instructions for Forms 1120 &
1120-A. pg. 16 (Federal tax rates).
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Information Collection Request for Cooling Water
Intake Structures at Phase HI Facilities (Final Rule). ICR Number 2169.01. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final
Section 316(b) Phase III Existing Facilities Rule. EPA-821-R-06-003. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Economic Analysis of Final Effluent Limitations
Guidelines and Standards for Synthetic-Based Drilling Fluids and Other Non-Aqueous Drilling Fluids in the Oil
andOas Extraction Point Source Category. EPA-821-B-00-012. December 2000.
XE.com. 2006. interactive Currency Table. Available at http://www.xe.com/Jct/. Downloaded May 12, 2005.
B3-18 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June 1, 2006
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§ 3l6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
CI: Summary of Costs
Chapter Cl: Summary of Cost Categories
and Key Analysis Elements for Existing
Facilities
INTRODUCTION
This chapter presents an overview of the cost categories
and certain elements of the analytic framework that are
common to the economic analyses of the industry segments
analyzed for existing facilities.
Cl-1 COST CATEGORIES
In its analyses of the costs and economic impacts of the
regulatory analysis options considered for the final rule for
Phase III existing facilities, EPA considered four categories
of costs:
1. Costs of installing and operating compliance
technology,
2. Net income loss from installation downtime,
3. Administrative costs incurred by complying
facilities, and
4. Administrative costs incurred by permitting
authorities.
CHAPTER CONTENTS
Introduction Cl-1
Cl-1 Cost Categories Cl-1
C1 -1.1 Costs of Installing and Operating
Compliance Technology Cl-1
CI-1.2 Net Income Loss from Installation
Downtime Cl-2
C1 -1.3 Administrative Costs for Complying
Facilities Cl-3
C1 -1.4 Administrative Costs for Permitting
Authorities and the Federal Government
Cl-9
C1 -2 Key Elements of the Economic Analysis For
Phase HI Existing Facilities Cl-10
Cl-2.1 Compliance Schedule Cl-10
C1 -2.2 Adjusting Monetary Values to a Common
Time Period of Analysis Cl-11
Cl-2.3 Discounting and Annualization - Costs to
Society or Social Costs Cl-12
C 1-2.4 Discounting and Annualization - Costs to
Complying Facilities Cl-14
References C1-I7
The following discussion provides an overview of each of
these cost categories. Additional detail on the costs of
installing and operating compliance technology and the net
income loss from installation downtime is provided in the
Technical Development Document for the Final Section 316(b) Phase III Existing Facilities Rule (hereafter
referred to as the "Phase III Technical Development Document"; U.S. EPA, 2006b) and Chapter C3: Economic
Impact Analysis for Manufacturer.
This chapter addresses cost components relevant for the regulatory analysis options as well as the supplementary
options analyzed for existing facilities. As a result, some of the concepts are not relevant to the three regulatory
analysis options for existing fac ilities, which do not regulate Electric Generators.
Cl-1.1 Costs of Installing and Operating Compliance Technology
Depending on the option under consideration, facilities with a DIP that meets or exceeds that option's respective
applicability threshold (i.e., 50 MGD, 100 MOD or 200 MGD) that are not currently in compliance with the
performance standards for Phase III existing facilities would need to implement technologies to reduce
impingement mortality and/or entrainment. The specific technologies projected by EPA for the analyzed facilities
depend on the performance standard each facility would need to meet (based on the waterbody type, design intake
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£ 316(b) Final Rule: Phase Hi - EA, Part C: Economic Analysis for Existing Facilities Cl: Summary of Costs
flow, and annual intake flow as a percent of source waterbody mean annual flow) and the facility's baseline
technologies in-place. A list of the technologies considered for this analysis is provided in Table C1-1 below.
EPA developed technology cost estimates for the regulatory analysis options based on the impingement mortality
and entrainment reduction technologies projected for each potential existing Phase III facility. Technology costs
include capital costs and operating and maintenance (O&M) costs. The annual O&M cost estimates used in the
cost modules are the net O&M costs, which are defined as the difference between the estimated baseline O&M
costs and the incremental compliance O&M costs. O&M costs are further differentiated into fixed and variable
O&M costs. Fixed O&M costs do not vary with the level of production (i.e., they are incurred even when a
business unit is periodically shut down). EPA assumes any periodic maintenance tasks (e.g., changing screens,
changing nets, or inspection/cleaning by divers) are performed regardless of plant operation, and therefore are
considered fixed costs. Variable O&M costs do vary with the level of production and are allocable based on
estimated intake operating time (e.g., annual labor estimates for passive screens include increased labor for
several weeks during high debris episodes). The actual fixed and variable portions of O&M costs for each facility
may vary depending on the mix of baseline and compliance technologies. The technology costs developed for the
regulatory analysis options are engineering cost estimates, expressed in mid-2004 dollars (see Section C 1-2.2
below for a discussion of adjusting monetary values to a common time period of analysis).
More detailed information on the compliance technologies considered by EPA, on technology costs, and on
EPA's characterization of baseline technologies already in-place at potential Phase III existing facilities is
available in the Phase III Technical Development Document (U.S. EPA, 2006b).
Cl-1.2 Net Income Loss from Installation Downtime
Installation of some of the compliance technologies considered for potential Phase III existing facilities would
require a one-time, temporary downtime of the facility's cooling water intake system. Table Cl-1, below, lists the
estimated durations of net system downtime, in weeks, for each of the compliance technology modules considered
for compliance with the final standards. The lower end of the range is used at lower flow rates. For a more
complete discussion of facility downtime estimates, see Chapter 5 of the Phase III Technical Development
Document (U.S. EPA, 2006b, DCN 9-0004).
Table Cl-1; Estimated Average Downtime for Technology Modules
Description Net Downtime (Weeks)
Fish handling and return system 0
Fine mesh traveling screens with fish handling and return 0
New larger intake structure with fine mesh, handling and return 0-2
Passive fine mesh screens with 1,75 mm mesh size at shoreline 7-9
Fish barrier net 0
Relocate intake to submerged offshore with passive fine mesh screen with 1.75 mm mesh size 7-9
Velocity cap at inlet of offshore submerged 0
Passive fine mesh screen with 1.75 mm mesh size at inlet of offshore submerged 0
Double-entry, single-exit with fine mesh and fish handling and return 0
Passive fine mesh screens with 0.75 mm mesh size at shoreline 7-9
Relocate intake to submerged offshore with passive fine mesh screen with 0.75 mm mesh size 0
Passive fine mesh screen at inlet of offshore submerged with 0.75 mm mesh size 7-9
Source: U.S. EPA Analysis, 2006.
The "net" downtime duration accounts for any expected annual period of cooling water system downtime for
regular maintenance and repair - the net downtime is the number of weeks the cooling water system would need
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to be out of service above and beyond any regular maintenance downtime period. EPA assumed that facilities
would minimize the disruption to their operations by making the required technology upgrades during these
periods of scheduled maintenance. Scheduled maintenance periods can range from several weeks to several
months, depending on the type of facility and the specific maintenance requirements. Therefore, by scheduling
the technology upgrades during maintenance periods, facilities could minimize the net impact of their system
changes. For the purposes of analyzing the regulatory analysis options, the Agency assumed that the typical
scheduled annual maintenance downtime would be four weeks.
During the downtime period, the facility's cooling-water dependent operations would most likely be halted, with a
potential loss of revenue and income from those operations. Accordingly, a key element of the cost to facilities in
complying with the standards sel forth under each analysis option for Phase III existing facilities is the loss in
income from installation downtime. In the facility impact analyses, EPA accounted for the cost of installation
downtime as the loss in pre-tax income in the facility's affected business operations. The cost of installation
downtime is accounted for as a loss in revenue offset by a reduction in variable costs in the affected business
operation plus any increase in operating costs due to temporary removal of the cooling water intake system from
service.
The cost and impact analysis discussion for potentially regulated manufacturing industry segments provides
additional detail on the calculation of the cost of installation downtime (see Chapter C3).
Cl-1.3 Administrative Costs for Complying Facilities
Compliance with the standards set forth under each analysis option requires Phase HI existing facilities to carry
out certain administrative functions, which heip them determine their compliance requirements and provide the
documentation needed for issuance of their new National Pollution Discharge Elimination System (NPDES)
permits. These administrative functions are either one-time requirements (compilation of information for the
initial post-promulgation NPDES permit) or recurring requirements (compilation of information for subsequent
NPDES permit renewals; and monitoring, record keeping, and reporting).
a. Initial post-promulgation NPDES permit application
The regulatory analysis options require Phase III existing facilities to submit information regarding the location,
construction, design, and capacity of their existing or proposed cooling water intake structures, technologies, and
operational measures, as part of their initial post-promulgation NPDEiS permit applications. Some of these
activities would be required under the current case-by-case cooling water intake structure (CWIS) permitting
procedures, regardless of the potential standards for Phase III existing facilities, but are still included in EPA's
compliance cost estimate; therefore, the permitting costs presented in this economic analysis may be
overestimated. EPA took this approach, however, because there is no way to identify which of these requirements
may otherwise be required. Activities and costs associated with the initial permit renewal application include:
» Start-up activities: reading and understanding the rule; mobilizing and planning; and training staff.
> Permit application activities: developing a statement of the compliance option selected; developing
drawings that show the physical characteristics of the source water; developing a description of the CWIS
configuration and location; developing a facility water balance diagram; developing a narrative of CWIS
and cooling water system (CWS) operational characteristics; performing engineering calculations;
submitting materials for review by the Director; and keeping records.
For a discussion of scheduled maintenance outages, see the Phase III Technical Development Document.
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In addition, the initial permit renewal application would require some facilities to conduct a comprehensive
demonstration study. The comprehensive demonstration study is a broad set of activities meant to: (1)
characterize the source water baseline in the vicinity of the intake structure(s); (2) characterize operation of the
cooling water intake(s); and (3) confirm that the technology(ies), operational measures, and restoration measures
proposed and/or implemented at the CWIS meet the applicable performance standards. The following activities
are associated with the comprehensive demonstration study portion of the initial permit application:
> Proposal for collection of information for comprehensive demonstration study: describing historical
studies that would be used; describing the proposed and/or implemented technologies, operational
measures, and restoration measures to be evaluated; developing a source water sampling plan; submitting
data and the plan for review; revising the plan based on State review; and keeping records;
* Source waterbody flow information: gathering information to characterize flow (for freshwater
rivers/streams only); developing a description of the thermal stratification of the waterbody (for
lakes/reservoirs only); performing engineering calculations; submitting data for review; and keeping
records;
> Design and construction technology plan: delineating hydraulic zone of influence; developing narrative
descriptions of technologies; performing engineering calculations; submitting the plan for review; and
keeping records;
» Impingement mortality and/or entrapment characterization study: performing biological sampling;
performing impingement and entrainment monitoring; conducting laboratory analyses; profiling source
water biota; identifying critical species; developing a description of additional stresses; developing a
report based on study results; revising the report based on State review; and keeping records;
* Verification monitoring plan: developing a narrative description of the frequency of monitoring,
parameters to be monitored, and the basis for determining the parameters and frequency and duration of
monitoring; submitting data and a plan for review; revising the plan based on State review; and keeping
records.
Finally, Phase III existing facilities would have to submit a plan that describes the installation, operation, and
maintenance, of the technology(ies) proposed and/or implemented at the CWIS(s):
> Technology installation and operation plan: developing an installation and maintenance schedule;
describing the proposed monitoring parameters; listing the technology efficacy assessment activities;
developing a schedule and methodology for efficacy assessment activities; submitting plan for review;
and keeping records.
Table Cl-2, following pages, lists the estimated maximum costs of each of the initial post-promulgation NPDES
permit application activities described above. The specific activities that a facility would have to undertake
depend on the facility's source water body type, proportional flow thresholds, and its baseline technologies in-
place. Certain activities are expected to be more costly for marine facilities than for freshwater facilities. Some
activities would be required of all facilities, while other activities would be required only if the facility exceeds
the capacity utilization rate or proportional flow thresholds. Facility administrative cost estimates were developed
for the activities that facilities were expected to perform under the three regulatory analysis options considered.
Hourly burden estimates for each activity are based on the anticipated effort to perform these activities under
For more information on the Comprehensive Demonstration Study, please refer to EPA's Information Collection
Request (U.S. EPA, 2006a).
For permitting requirements, marine facilities include those withdrawing from the Great Lakes.
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normal conditions. For a more extensive discussion of the estimated administrative burden and costs associated
with the regulatory analysis options, see the supporting statement for the EPA ICR (DCN 9-2730).
The table shows that certain Phase HI existing facilities would only have to carry out a minimal set of permitting
requirements (i.e., start-up activities and permit application activities). Facilities with such minimal requirements
include (1) facilities that have recirculating systems in the baseline and (2) facilities that already have or are
required to install certain pre-approved technologies (including cylindrical wedgewire screens) and that only have
to comply with impingement requirements. Freshwater facilities that would have to meet both impingement and
entrainment standards and that already have or are required to install a pre-approved technology have to develop a
technology installation and operation plan and a verification monitoring plan in addition to the minimal activities.
The maximum initial permitting cost is estimated to be approximately $974,000 for a facility that would have to
meet both impingement and entrainment standards and that withdraws from a marine waterbody.
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Table Cl-2: Cost of Initial Post-Promulgation NPDES Permit Application Activities ($2004)
Activity
Start-up activities6
Permit application
activities"
Proposal for collection
of information for
comprehensive
demonstration studyb
Source waterbody flow
information"
Design and construction
technology plan*
Impingement mortality
and/or entrainment
characterization study"
Technology installation
and operation plan1
Verification monitoring
plan"
Total Initial Post-
Promulgation NPDES
Permit Application Costd
Estimated Cost per Permit
Minimal
Require-
ments
$2,000
$11,000
$0
$0
$0
$0
$0
$0
$13,000
Freshwater
Pre-
Appr.
with I&E
$2,000
$11,000
$0
$0
$0
$0
$3,000
$7,000
$22,000
l-only
$2,000
$11,000
$14,000
$4,000
$3,000
$350,000
$3,000
$7,000
$393,000
E-only
$2,000
$1 1,000
$14,000
$4,000
$3,000
$405,000
$3,000
$7,000
$448,000
Marine (incl. Great Lakes)
I&E
$2,000
$11,000
$14,000
$4,000
$4,000
$508,000
$3,000
$7,000
$552,000
l-only
$2,000
$11,000
$14,000
$0
$3,000
$631,000
$3,000
$7,000
$670,000
E-only
$2,000
$11,000
$14,000
$0
$3,000
$738,000
$3,000
$7,000
$777,000
I&E
$2,000
$1 1,000
$14,000
$0
$4,000
$933,000
$3,000
$7,000
$974,000
The costs for these activities are incurred during the year prior to the permit application.
b The costs for these activities are incurred during one year, three years prior to the permit application.
' The costs for these activities are incurred during the three years prior to the permit application.
d Individual numbers may not add to total due to independent rounding. __
Key to permitting types:
Minimal requirements: Has recirculating systems in the baseline; or already has or is required to install a pre-approved
technology and only has to comply with impingement requirements.
Pre-appr. with I&E: Already has or is required to install a pre-approved technology and has to comply with impingement and
entrainment requirements.
I-only: Only has to comply with impingement requirements.
E-only: Only has to comply with entrainment requirements.
l&E: Has to comply with both impingement and entrainment requirements.
Source: U.S. EPA. 2006a.
Another potential cost associated with the initial NPDES permit is pilot studies of compliance technologies.
Facilities carry out pilot studies to determine if the compliance technology would function properly when installed
and operated. EPA assumed that any facility with both I&E requirements would consider doing a pilot study,
except if (1) the technology is sufficiently inexpensive to install ($500,000 or less) or (2) the technology is such
that a scaled down version is infeasible. EPA further assumed that a pilot study would cost either $162,000 or
10% of technology installation costs, whichever is greater. Activities associated with pilot studies include:
> Deploying the pilot technology: installing an intake pipe separate from the facility's actual cooling water
system, but in the vicinity of the operating CWIS; installing the proposed technology to feed into the
separate intake pipe; and pumping water through the intake pipe under various pumping scenarios and
seasonal conditions;
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* Monitoring efforts: collecting five samples over a 24 hour period, every two weeks for six months;
> Evaluation of data: analyzing the data; summarizing the results; and using this information to evaluate
the effectiveness of the technology.
In addition to the activities described above, some facilities would be expected to conduct a site-specific
determination of Best Technology Available (BTA). Since activities associated with site-specific determinations
are voluntary and would only be conducted if the facilities expected them to be less expensive than complying
with the requirements for Phase 'II existing facilities, EPA did not include site-specific determination costs in its
compliance cost estimates.
b. Subsequent NPDES permit renewals
Each facility would have to apply for NPDES permit renewal every five years. Subsequent permit renewal
applications would require collecting and submitting the same type of information required for the initial permit
renewal application. EPA expects that facilities can use some of the information from the initial permit
application. Building upon existing information is expected to require less effort than developing the data the first
time, especially in situations where conditions have not changed.
Table Cl-3 lists the maximum estimated costs of each of the NPDES repermit application activities. The specific
activities that a facility would have to undertake depend on the facility's source water body type, proportional
flow thresholds, and its baseline technologies in-place. Certain activities are expected to be more costly for
marine facilities than for freshwater facilities. Some activities would be required of all facilities, while other
activities would be required only if the facility exceeds the capacity utilization rate or proportional flow
thresholds. The maximum repermitting cost is estimated to be approximately $331,000 for a facility that would
have to meet both impingement and entrainment standards and that withdraws from a marine waterbody.
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Table Cl-3: Cost of NPDES Repermit Application Activities' ($2004)
L
Estimated Cost per Permit
i ~
Freshwater
Activity ! M"»mal '""-
: Require- j rre-
! ments i APPr-
! with I&E
Start-up activities
Permit application
activities
Proposal for collection
of information for
comprehensive
demonstration study
Source waterbody flow
information
Design and construction
technology plan
Impingement mortality
and/or entrainment
characterization study
Technology installation
and operation plan
Total Initial Post-
Promulgation NPDES
$1,000
$7,000
$0
$0
$0
$0
$0
$8,000
Permit Application Costb :
$1,000
$7,000
$0
$0
$0
$0
$2,000
$9,000
I-only
$1,000
$7,000
$4,000
$1,000
$2,000
$137,000
$2,000
$153,000
E-only
$1,000
$7,000
$4,000
$1,000
$2,000
$168,000
$2,000
$184,000
Marine (incl. Great Lakes)
l&E
$1,000
$7,000
$4,000
$1,000
$2,000
$171,000
$2,000
$187,000
I-only
$1,000
$7,000
$4,000
$0
$2,000
$251,000
$2,000
$266,000
E-only
$1,000
$7,000
$4,000
$0
$2,000
$312,000
$2,000
$326,000
I&E
$1,000
$7,000
$4,000
$0
$2,000
$316,000
$2,000
$331,000
1 The costs for these activities are incurred during the year prior to the permit application.
* Individual numbers may not add to total due to independent rounding.
Key to permitting types:
Minimal requirements: Has recirculating systems in the baseline; or already has or is required to install a pre-approved technology
and only has to comply with impingement requirements.
Pre-appr. with I&E: Already has or is required to install a pre-approved technology and has to comply with impingement and
entrainment requirements.
I-only: Only has to comply with impingement requirements.
E-only: Only has to comply with entrainment requirements.
l&E: Has to comply with both impingement and entrainment requirements.
Source: U.S. EPA, 2006a.
c. Annual monitoring, record keeping, and reporting
Annual monitoring, record keeping, and reporting activities and costs include:
* Biological monitoring for impingement: collecting monthly samples for at least two years after the initial
permit issuance; analyzing samples; performing statistical analyses; and keeping records;
> Biological monitoring for entrainment: collecting biweekly samples during the primary period of
reproduction, larval recruitment, and peak abundance for at least two years after the initial permit
issuance; handling and preparing samples; conducting laboratory analyses; performing statistical
analyses, and keeping records;
* Bi-annual status report activities: reporting on inspection and maintenance activities; detailing biological
monitoring results; compiling and submitting the report; and keeping records; (these activities are
conducted every two years, instead of annually);
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> Verification study: conducting technology performance monitoring; performing statistical analyses;
submitting monitoring results and study analysis; and keeping records;
Table Cl-4 lists the estimated costs of each of the monitoring, record keeping, and reporting activities described
above. Certain activities would be more costly for marine facilities than for freshwater facilities. The maximum
annual cost is estimated to be approximately $82,000 for a facility that would have to meet both impingement and
entrainment standards and that withdraws from a marine waterbody.
Table Cl-4: Cost of Annual Monitoring, Record Keeping, and Reporting Activities ($2004)
Activity
Biological monitoring
for impingement
Biological monitoring
for entrainment
Bi-annual status report
activities*
Total Annual
Monitoring, Record
Keeping, and Reporting
Cost
Verification study*
Minimal
Require-
ments
SO
SO
$0
$0
$0
Estimated Cost
Freshwater
Pre-
Appr.
with I&E
$0
$39,000
$9,000
$48,000
$8,000
I-only
$19.000
$0
$9,000
$28,000
$8,000
E-only
$0
$39,000
$9,000
$48,000
$8,000
per Permit
Marine (incl. Great
I&E
$19,000
$39,000
$9,000
$67,000
1-only
$24,000
$0
$9,000
$33,000
S8.000 $8,000
E-only
$0
$49,000
$9,000
$58,000
$8,000
Lakes)
I&E
$24,000
$49,000
$9,000
$82,000
$8,000
1 This is a cost that is incurred once every two years. Therefore, only half of the total report cost of approximately $17,000 is
accounted for in this annual framework,
b This is a one-time cost incurred during the year of compliance.
Key to permitting types:
Minimal requirements: Has recirculating systems in the baseline; or already has or is required to install a pre-approved
technology and only has to comply with impingement requirements.
Pre-appr. with I&E: Already hiis or is required to install a pre-approved technology and has to comply with impingement and
entrainment requirements.
I-only: Only has to comply with impingement requirements.
E-only: Only has to comply with entrainment requirements.
I&E: Has to comply with both impingement and entrainment requirements.
Source: U.S. EPA, 2006a.
Cl-1.4 Administrative Costs for Permitting Authorities and the Federal Government
In addition, permitting authorities would have to review the information provided by Phase HI existing facilities
and would have to issue new NPDES permits that reflect the requirements of each potential option. These
activities would impose costs on the responsible governmental entity.
The requirements of section 316(b) are implemented through the National Pollutant Discharge Elimination
System {NPDES) permit program. Forty-five States and one Territory currently have NPDES permitting
authority under section 402(c) of the Clean Water Act (C WA). EPA estimates that States and Territories would
incur three types of costs associated with implementing the requirements of each potential option: (1) start-up
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activities, (2) permitting activities associated with the initial NPDES permit containing the new section 316(b)
requirements and subsequent permit renewals, and (3) annual activities.
Start-up costs would be incurred only once by each of the 46 permitting authorities. Permitting costs and annual
activities would be incurred for every permit. The incremental administrative burden on States would depend on
the extent of each State's current practices for regulating cooling water intake structures (CWIS). States that
currently require relatively modest analysis, monitoring, and reporting of impacts from CWIS in NPDES permits
may require more permitting resources to implement the standards for Phase III existing facilities than are
required under their current programs. Conversely, States that currently require very detailed analysis may
require fewer permitting resources to implement a potential rule than required under their current programs.
In addition to costs to permitting authorities, the Federal government would likely incur costs to review those
parts of NPDES permits associated with the compliance requirements of a potential rule and to ensure that the
permitting authorities implement a potential rule properly.
For a detailed discussion of administrative costs for permitting authorities and the Federal government see
Chapter D2: UMRA Analysis, section D2-1.2.
Cl-2 KEY ELEMENTS OF THE ECONOMIC ANALYSIS FOR PHASE III EXISTING FACILITIES
The economic analysis conducted in analyzing the potential requirements for Phase III existing facilities
addresses the cost to, and impact on, the affected industry segments and society generally. Although these
analyses differ in important respects for the individual industry segments - particularly in terms of the analytic
models and methods for assessing the economic/financial impact on complying parties within the segments -
several elements of the analysis have features common to all Phase III existing facilities. This section reviews the
following key common elements:
> Compliance Schedule
> Adjusting Monetary Values to a Common Time Period of Analysis
> Discounting and Annualization: Costs to Society or Social Costs
> Discounting and Annualization: Costs to Complying Facilities
C1-2.1 Compliance Schedule
For its analysis of the cost and impacts of the regulatory analysis options, EPA developed a profile of the
expected compliance year for each of the sample facilities considered in the economic analysis. The estimated
compliance years of facilities are important for two reasons:
> First, the compliance years determine the timing of outlays by facilities and society in complying with the
regulation, both for the initial outlays and for the ongoing profile of outlays in maintaining compliance
with the regulation. This information is important in properly assessing the present value of the
regulation's costs to society.
» Second, the profile of compliance is likewise important in understanding the time profile, and thus present
value, of benefits achieved by compliance with the regulation. Explicit analysis of the compliance
schedule is particularly important for the benefits analysis because the regulation's benefits are not
achieved instantly upon facilities' reaching compliance, but build up over a period of several years.
4 The costs associated with implementing the requirements for Phase III existing facilities are documented in EPA's
Information Collection Request (U.S. EPA, 2006a).
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Accordingly, EPA also used the compliance schedule developed for the cost and impact analysis in
developing the time profile of benefits.
EPA initially assumed that facilities would comply with each options respective requirements during the year
their first post-promulgation NPDES permit is issued (based on a 5-year permit cycle, this would be 2007 to
2011). However, since some of the permitting requirements need to be performed over a three-year period prior
to compliance, facilities that would be renewing NPDES permits within the first three years after promulgation of
the final Phase III rule (2007 to 2009) would not comply until their second post-promulgation NPDES permit is
issued (2012 to 2014). From these assumptions, EPA estimates that all facilities would come into compliance
between 2010 and 2014. Following research on when sample facilities' current NPDES permits would expire and
thus need to be renewed, EPA developed an explicit compliance schedule for all Phase III existing facilities in the
analysis.
CI-2.2 Adjusting Monetary Values to a Common Time Period of Analysis
The various economic information used in the cost and impact analyses was initially provided or estimated in
dollars of different years. For example, facility financial data obtained in the Detailed Questionnaire for
Manufacturers are for the years 1996, 1997, and 1998, while the technology costs of regulatory compliance were
estimated in dollars of the year 2002. To support a consistent analysis using these data that were initially
developed in dollars of different years, EPA needed to bring the dollar values to a common analysis year. For this
analysis, EPA adjusted all dollar values to constant dollars of the year 2004 (average or mid-year, depending on
data availability) using an appropriate inflation adjustment index. For adjusting compliance costs, EPA used the
Construction Cost Index (CCI) published by the Engineering News-Record. For financial statement
information, EPA used the Gross Domestic Product Implicit Price Deflator (GDP Deflator) to bring
dollar values to mid-year 2004. In some instances, EPA used the Producer Price Index series for a specific
industry to adjust values to a common analysis year.
a. CCI
EPA used the CCI to adjust compliance cost estimates from July 2002 to mid-year 2004. EPA judges the CCI as
generally reflective of the cost of installing and operating process and treatment equipment such as would be
required for compliance with the options considered for this regulation. Table C1 -5 shows CCI values for mid-
year 2002, 2003 and 2004.
Table Cl-S: Construction Cost Index
Year
Value
% Change
2002
2003
2004
6605
6694
7115
1.3%
6.3%
Source: ENR. 2006.
b.
GDP Deflator
EPA used the GDP Deflator to adjust 316(b) survey financial data from 1996-1998 to 2004. The GDP Deflator is
a quarterly series that measures the implicit change in prices, over time, of the bundle of goods and services
comprising gross domestic product. Table Cl-6 shows GDP Deflator values from 1996 to mid-year 2004. From
1998 to 2004, the total change in the deflator series was approximately 13.0% (109.0/96.5).
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Table C 1-6:
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004 Q2
Source: U.S. DOC,
GDP
Value
93.847
95.410
96.468
97.862
99.997
102.399
104.185
106.298
108.987
2006.
Deflator Series
% Change
1.7%
1.1%
1.4%
2.2%
2.4%
1.7%
2.0%
2.5%
C 1-2.3 Discounting and Annualization - Costs to Society or Social Costs
Discounting refers to the economic conversion of future costs (and benefits) to their present values, accounting for
the fact that society tends to value future costs or benefits less than comparable near-term costs or benefits.
Discounting is important when the values of costs or benefits occur over a multiple year period and may vary
from year to year. Discounting is also important when the time profiles of costs and benefits are not the same -
which is the case for the regulatory analysis of Phase III existing facilities. Discounting enables the accumulation
of the cost and benefit values from multiple years to a single point in time, accounting for the difference in how
society values those costs and benefits depending on the year in which the values are estimated to occur.
To estimate the social costs of options considered in developing potential requirements for Phase III existing
facilities, EPA first developed a profile, over the period of analysis, of the compliance costs associated with each
of the regulatory analysis options. EPA defined the period of analysis as starting with the assumed date that a rule
would take effect, beginning of year 2007, and extending through the latest year in which any affected facility is
assumed to reach compliance (2014)plus a period of 30 years in which facilities are assumed to continue
compliance. Thus, for the social cost analysis for Phase III existing facilities, the analysis period extends to 2043.
In developing the time profile of costs, EPA assigned costs according to the following schedule:
> Direct Costs of Regulatory Compliance
> Capital Costs of Compliance Technology: This cost is first incurred in the year that the facility's first
post-promulgation permit is issued. However, the equipment for complying with the regulation is
expected to have a useful life of 10 years, or a period shorter than the 30 years of compliance.
Accordingly, following the first installation, facilities are assumed to reinstall, and re-incur the cost of, the
compliance equipment at year 11 and year 21 of the facility-specific compliance period.
> Cost of Installation Downtime: This cost is incurred in the year that the facility installs the technology.
Although the compliance technology must be reinstalled at a 10-year interval over the analysis period, the
engineering analysis of compliance requirements indicates that facilities would not need to incur
additional installation downtime for reinstallation of the compliance technology equipment.
* Compliance Technology Operation and Maintenance: This cost is assumed to occur in each year of a
facility's 30-year compliance period.
* Pilot Study: Pilot study costs are incurred one year before the facility's first post-promulgation permit is
issued.
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£ 3I6(b) Final Rule: Phase III - EA, Pat t C: Economic Analysis for Existing Facilities
Cl: Summary of Costs
!» Administrative Costs Incurred by Complying Facilities
* Impingement Mortality and Entrainment Characterization Study: All facilities conduct this two- or
three-year study except those that already have recirculating systems in the baseline and those that already
have or are installing a pre-approved technology. The cost of this study is incurred over the years
immediately preceding the facility's first post-promulgation permit, but not including the first year of
compliance. Facilities withdrawing from a marine waterbody (including the Great Lakes) are required to
do a three-year study; facilities withdrawing from a freshwater body are required to do a two-year study.
* Initial Permitting Cost: In addition to incurring the cost of characterization studies, complying facilities
would also incur an initial permitting cost, which is assigned to the first year of a facility's 30-year
compliance period.
» Repermitting Costs: As explained above, facilities would need to renew their NPDES permits each five
years during the period of compliance. Repermitting costs are assumed to recur at years 5, 10, 15, 20, and
25 of a facility's 30-year compliance year period. If a facility were to continue compliance beyond the
assumed 30-year compliance period, it would incur an additional round of repermitting costs in year 30 of
the compliance period. However, these costs would be incurred to support compliance in years beyond
the 30th year of compliance, and were therefore not accounted for in this analysis.
> Annual Monitoring, Record Keeping, and Reporting Activities: This cost is assumed to occur in each
year of the 30-year compliance year period.
* Administrative Costs Incurred by Permitting Authorities
» One-time Start-up Costs: This cost is assigned to the year the rule would take effect (2007).
* Permit Processing Costs: These costs are assigned to the years in which facilities apply for initial permits
or renewal permits during the compliance period.
» Annual Permit Administration Activities: The cost of these activities is assumed to occur in parallel with
the annual permit-related activities by complying facilities and thus occurs in each year of a facility's
compliance period.
*5* Administrative Costs Incurred by the Federal Government
> Permit Review: The Federal government is assumed to review the first permit for each Phase III existing
facility that would include the new 316(b) requirements specified under each regulatory analysis option.
Federal administrative costs would therefore be incurred between 2010 and 2014.
For each option analyzed, EPA assigned costs by facility and governmental unit according to this framework and
then summed these costs on a year-by-year basis over the total time period of analysis. For the social cost
analysis, these costs were tallied on a pre-tax basis, which differs from the treatment of costs for the facility
impact analysis as described below. These profiles of costs by year were then discounted to the assumed date the
final rule would take effect, beginning of year 2007, at two values of the social discount rate, 3% and 7%. These
discount rate values reflect guidance from the Office of Management and Budget regulatory analysis guidance
document, Circular A-4 (OMB, 2003 ).5
See Chapter El: Summary of Social Costs, for further discussion of the framework for analyzing the social costs of the
316(b) Phase III regulation.
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Cl: Summary of Costs
EPA used the following formula to calculate the present value of the time stream of costs as of the beginning of
20076:
Present Value ^ °^7 (CM)
where:
Costt = Costs in year
r = Social discount rate (3% and 7%)
t = Year in which cost is incurred (2007 to 2043)
After calculating the present value (PV) of these cost streams, EPA calculated their constant annual equivalent
value (annualized value) using the annualization formula presented below, again using the two values of the social
discount rate, 3% and 7%. Although the analysis period extends from 2007 through 2043, a period of 37 years,
EPA annualized costs over 30 years, since 30 years is the assumed period of compliance. This same
annualization concept and period of annualization were also followed in the analysis of benefits, although for
benefits the time horizon of analysis for calculating the present value is longer than for costs because the
measurable benefits will not occur immediately after the control technologies are put into place. Using a 30-year
annualization period for both social costs and benefits allows comparison of constant annual equivalent values of
costs and benefits that have been calculated on a mathematically consistent basis. The annualization formula is as
follows:
Annualized Cost = PVof Cost x rx(1 + ^ (C 1 -2)
(1 + r) -1
where:
r = Social discount rate (3% and 7%)
n = Annualization period, 30 years for the social cost analysis
Cl-2.4 Discounting and Annualization - Costs to Complying Facilities
In general, EPA followed similar concepts and procedures in the discounting and annualization required for the
analysis of costs to, and impacts on, complying facilities as those followed for the analysis of social costs.
However, the analysis of costs to complying facilities differs from that for costs to society in several important
ways, which are described below.
> Consideration of taxes. For understanding the impact of the regulation on complying facilities, the costs
incurred by complying facilities are adjusted for taxes, as relevant, and calculated on an after-tax basis.
The tax treatment of compliance outlays and income effects (e.g., from installation downtime) shifts part
of these costs to the tax-paying public and reduces the actual cost to private, tax-paying businesses. For
this reason, the after-tax costs of compliance are a more meaningful measure of the financial burden on
complying facilities than the pre-tax costs. In analyzing and reporting the impact of compliance costs on
private facilities, annualized costs are therefore calculated on an after-tax basis.
Calculation of the present value assumes that the cost is incurred at the beginning of the year.
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CI: Summary of Costs
> Use of discount rates in present value and annualization calculations. The discount rate used in the
facility cost calculations generally has a different interpretation than the rate used for the social cost
calculation (even though, in some instances, the numerical value of the rate may be the same). Instead of
being a social discount rate, the discount rate used for the present value and annualization calculations for
complying facility costs represents a cost of capital to the individual complying facility, which may
reasonably differ from the concept of the social discount rate. The social discount rate may be derived on
several bases, including: (1) as an opportunity cost of capital to society or (2) as a societal inter-temporal
preference or indifference rate - i.e., the required rate of change over time in a value of consumption or
outlay, at which society would be indifferent to the time period in which the consumption or outlay
occurs. The discount rates based on these society-level concepts may reasonably differ from the cost of
capital used for assessing costs and financial impacts to the complying firm.
> Calculation of present value and annualization of costs at the year of compliance. In the social cost
analysis, costs incurred over 30 years were summed on a present value basis at the beginning of 2007, the
assumed date the potential regulation would take effect. The present value was then annualized over 30
years. The analysis of costs to complying facilities differs in two respects: (1) Costs were calculated on a
present value basis and annualized at the first year of compliance for each facility, rather than at the
beginning of 2007. The calculation of annualized costs at the first year of compliance provides more
accurate and meaningful insight for assessing financial impact in relation to the baseline financial
performance and conditions of the complying facility than would be achieved if, for example, costs were
further discounted - and reduced numerically - by bringing them to the year the rule would take effect.
(2) Each non-annually recurring cost component was only accounted for once, rather than repeated at
each occurrence over the 30-year period. EPA accounted for the recurring nature of these costs (e.g.,
technology costs are assumed to recur every 10 years) through the annualization period (see bullet below).
The resulting aggregates of annualized cost over facilities, for purposes of reporting total cost to
complying facilities and total financial burden, are the sum of costs at the initial year of compliance for
each facility, even though those years differ across facilities. EPA used the following formula to calculate
the present value of the time stream of costs as of the beginning of each facility's compliance year:7
Present Value =
*,'
if Compliance YearK
(Cl-3)
where:
Costx-, = Costs incurred by facility x in year t
r = Discount rate (7%)
t = Year in which cost is incurred (2007 to 2018)8
Compliance Year* = Estimated compliance year of facility x.
Annualization period. The present value estimates of the one-time or non-annually recurring costs were
then annualized over the relevant period for which the outlay is expected to produce compliance value.
The capital outlays for compliance equipment installation were annualized over the expected useful life of
the compliance equipment, 10 years. The income loss from installation downtime was annualized over
Calculation of the present value assumes that the cost is incurred at the beginning of the year.
g
The first compliance year is 2010. A facility with a 2010 compliance year and a 3-year study requirement would incur
its first costs in 2007. The last compliance year is 2014. A facility with a 2014 compliance year would incur the costs of its
last non-annual recurring cost component, reperraitting, five years after compliance, in 2018.
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities Ci: Summary of Costs
the facility's 30-year compliance period. Although compliance equipment would need to be reinstalled at
1 0-year intervals during the compliance period, the engineering analysis indicates that reinstallation
would not require additional downtime. Thus, the relevant period for annualization of the income loss
from installation downtime is the full 30 years of compliance assumed for this analysis. The pre-permit
study costs and other initial permitting costs were also annualized over the 30-year compliance period
while repermitting costs were annualized over 5 years, the interval at which these costs occur. All
annualized cost values, which were developed on a consistent discounting and annualization basis, can
then be summed with annually recurring costs (e.g., annual operating and maintenance expense) to yield a
total annualized cost to complying facilities. The annualization formula is as follows:
Annualized Cost = PV of Cost x - (Cl-4)
"
where:
r = Discount rate (7%)
n = Annualization period (10 years for compliance equipment; 30 years for installation downtime
and initial permitting costs; 5 years for repermitting costs)
See Chapter C3 for additional detail on the present value and annualization concepts and procedures used in the
specific analyses for existing manufacturing facilities.
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CI: Summary of Costs
REFERENCES
Engineering News-Record (ENR). 2006. Construction Cost Index. Available at: http://enr.ecnext.com/free-
scripts/comsite2.pl?page=enr_document«&article=fecosu0603-constIndexHist. (Historical data requires
subscription or purchase.)
Federation of Tax Administrator s (FTA). 2006. Range of State Corporate Income Tax Rates (for tax year 2005).
http://www.taxadmin.org/fta/rate/corp_inc.html, accessed January 20, 2006.
Office of Management and Budget (OMB). 2003. Executive Office of the President. Circular A-4, To the Heads
of Executive Agencies and Establishments; Subject: Regulatory Analysis. September 17, 2003.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of Economic Analysis (BEA). Gross Domestic
Product. Table 1.1.9: Implicit Price Deflators for Gross Domestic Product (GDP). Release December 12, 2005.
Available at: http://www.econstiits.com/gdp/gdp q4.htm.
U.S. Department of the Treasury. 2005. Internal Revenue Service (IRS). 2005 Instructions for Forms 1120 &
I120-A. pg. 16 (Federal tax rates).
U.S. Environmental Protection Agency (U.S. EPA). 2006a. Information Collection Request for Cooling Water
Intake Structures at Phase III Facilities (Final Rule). ICR Number 2169.01. June 2006.
U.S. Environmental Protection Agency (U.S. EPA). 2006b. Technical Development Document for the Final
Section 316(b) Phase III Existing Facilities Rule. EPA-821-R-06-003. June 2006.
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§ 3l6(b) Final Rule: Phase III - EA, Pan C: Economic Analysis for Existing Facilities
Chapter C2: Profile of Manufacturers
Chapter C2: Profile of Manufacturers
CHAPTER CONTENTS
C2A
C2B
C2C
C2D
C2E
C2F
C2G
Paper and Allied Products (SIC26) C2A-1
Chemicals and Allied Products (SIC 28) C2B-1
Petroleum Refining (SIC 2911) C2C-1
Steel (SIC 331) C2D-1
Aluminum (SIC 333/5) C2E-1
Food and Kindred Products (SIC 20) C2F-1
Other Industries C2G-1
Glossary C2Glos-l
INTRODUCTION
Using information from the 1982 Census of Manufactures,
effluent guideline development materials, and subsequent
research on industries since Proposal, EPA identified five
2-digit SIC-code manufacturing industries that would likely
be subject to regulation under section 316(b). After the
electric power industry, these industries - Paper and Allied
Products (SIC 26), Chemicals and Allied Products (SIC
28), Petroleum Refining (SIC 2911), Primary Metal
Industries (SIC 33), and Food and Kindred Products (SIC
20) - are most reliant on cooling water for their operations.
Facilities in other industries also use cooling water and could therefore be subject to section 316(b) regulations;
however, based on the 7952 Census of Manufactures data and engineering-based insight into industrial use of
cooling water, the cooling water intake flow of these remaining industries is small relative to that of the power
industry and the five selected industries. Therefore, this Profile of Manufacturers focuses on the manufacturing
groups listed above. In its review of these industries, EPA divided the Primary Metal Industries (SIC 33) into
Steel (SIC 331) and Aluminum (SIC 333/335) based on the business and other operational differences in these
two major segments. The resulting six manufacturing industries - (1) Paper and Allied Products, (2) Chemicals
and Allied Products, (3) Petroleum and Coal Products, (4) Steel, (5) Aluminum, and (6) Food and Kindred
Products - comprise the "Primary Manufacturing Industries," as referred to in this profile and elsewhere in this
Economic Analysis report.
A key data source for EPA's analysis for the 316(b) Phase III regulation is the detailed questionnaire issued to a
sample of facilities identified as potentially subject to the Phase III regulation. Based on responses to a screener
survey, EPA targeted the detailed questionnaire to facilities believed to be in the major cooling water-use
industries, including the electric power industry, listed above. EPA received a number of responses from facilities
with business operations in industries other than the manufacturing industries listed above. EPA originally
believed these facilities to be non-utility electric power generators; however, inspection of their responses
indicated that the facilities were better understood as cooling water-dependent facilities whose principal
operations lie in businesses other than the electric power industry or manufacturing industries listed above. This
profile includes information for these facilities, referred to as "Other Industries."
The remainder of this chapter is divided into seven sections:
* C2A: Paper and Allied Products (SIC 26),
» C2B: Chemicals and Allied Products (SIC 28),
> C2C: Petroleum and Coal Products (SIC 29),
> C2D: Steel (SIC 331),
> C2E: Aluminum (SIC 333/335),
» C2F: Food and Kindred Products (SIC 20), and
> C2G: Other Industries.
Each industry section, except for "Other Industries," is divided into the following five subsections: (1) summary
insights from this profile, (2) domestic production, (3) structure and competitiveness, (4) financial condition and
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§ 3!6(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Existing Facilities Chapter C2: Profile of Manufacturers
performance, and (5) facilities potentially subject to the Phase III regulation. The "Other Industries" section
contains only summary information for those facilities for which questionnaire responses were received; this
section does not include the industry specific discussions since the "Other Industry" facilities are in a variety of
different industries, which, as noted above, rely to a much less substantial degree on cooling water to support their
operations.
This profile uses the Standard Industrial Classification (SIC) system as the primary framework for analyzing and
reporting information about the industries analyzed for the section 316(b) Phase III regulation. However, the
more recent data were often reported in the North American Industry Classification System (NAICS), which the
U.S. Census Bureau adopted in 1997 for economic reporting. Where necessary, EPA converted information
reported in the NAICS framework to the SIC framework using the 1997 Economic Census Bridge Between
NAICS and SIC. In most instances, these translations are straightforward; however, for some segments, the
translation may introduce inconsistencies in data series at the point of changeover from the SIC to the NAICS
frameworks.
U.S. EPAHrj.dT1"-;*ei.Lib
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£ 3l6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
Chapter C2A: Paper and Allied Products
(SIC 26)
INTRODUCTION
EPA's Detailed Industry Questionnaire, hereafter referred
to as DQ, identified five 4-digit SIC codes in the Paper and
Allied Products industry (SIC 26) with at least one existing
facility that operates a CWIS, holds a NPDES permit, and
withdraws equal to or greater than two million gallons per
day (MOD) from a water of the United States, and uses at
least 25 percent of its intake flow for cooling purposes.
(Facilities with these characteristics are hereafter referred
to as facilities potentially subject to the Phase III regulation
or "potential Phase III facilities")
For each of the five SIC codes, Table C2A-1, following
page, provides a description of the industry segment, a list
of primary products manufactured, the total number of
detailed questionnaire respondents (weighted to represent a
national total of facilities that hold a NPDES permit and
operate cooling water intake structures), the number of
facilities estimated to be potentially subject to Phase III
regulation based on the minimum withdrawal threshold of 2
MOD, and the number of facilities estimated to be subject
to regulation under each analysis option.
CHAPTER CONTENTS:
Introduction C2A-1
C2A-1 Summary Insights from this Profile C2A-3
C2A-2 Domestic Production C2A-4
C2A-2.I Output C2A-5
C2A-2.2 Prices C2A-8
C2A-2.3 Number of facilities and firms C2A-9
C2A-2.4 Employment and productivity C2A-11
C2A-2.5 Capital expenditures C2A-13
C2A-2.6 Capacity utilization C2A-14
C2A-3 Structure and Competitiveness C2A-15
C2A-3.1 Firm size C2A-16
C2A-3.2 Concentration ratios C2A-16
C2A-3.3 Foreign trade C2A-18
C2A-4 Financial Condition and Performance...C2A-21
C2A-5 Facilities Operating Cooling Water Intake
Structures C2A-22
C2A-5.1 Waterbody and Cooling System Type
C2A-23
C2A-5.2 Facility Size C2A-24
C2A-5.3 Firm Size C2A-26
References C2A-28
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§ 3l6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Table C2A-1: Phase III Facilities in the Paper and Allied Products Industry (SIC 26)
Number of Phase III Facilities"
SIC 1 _ SI.C. Important Products Manufaclu red Potentially
i Description Tota| Regulated
'. '. Facilities'*
2611 Pulp Mills
2621 Paper Mills
|
2631 Paperboard
Mills
Pulp from wood or from other materials, such
as rags, 1 inters, wastepaper, and straw;
integrated logging and pulp mill operations if
primarily shipping pulp.
60 41
Paper from wood pulp and other fiber pulp, j 290 133
converted paper products; integrated
operations of producing pulp and
manufacturing paper if primarily shipping
paper or paper products.
Paperboard, including paperboard coated on
the paperboard machine, from wood pulp and
other fiber pulp; and converted paperboard
products; integrated operations of producing
pulp and manufacturing paperboard if
primarily shipping paperboard or paperboard
products.
Total
190 52
540 225
Subject Subject
to 50 to 200
MGD All MGD All
Option Option
14 1
13 2
13 0
39 3
Subject to
100 MGD
CWB
Option
4
5
1
10
Other Paper and Allied Products Segments
2676
2679
Sanitary
Paper
Products
Converted
Paper and
Paperboard
Products,
Not
Elsewhere
Classified
Sanitary paper products from purchased
paper, such as facial tissues and
handkerchiefs, table napkins, toilet paper,
towels, disposable diapers, and sanitary
napkins and tampons.
Laminated building paper, cigarette paper,
confetti, pressed and molded pulp cups and
dishes, paper doilies, egg cartons, egg case
filler flats, papier-mache, filter paper, foil
board, gift wrap paper, wallpaper, etc.
Total Other
42200
19 300 0
23 520 0
Total Paper and Allied Products (SIC 26)
Total SIC Code 26
563
230
41
1 Number of weighted detailed questionnaire survey respondents.
b Individual numbers may not add up due to independent rounding.
Source: Executive Office of the President, 1987; U.S. EPA 2000; U.S. EPA analysis, 2006.
As shown in Table C2A-1, EPA estimates that out of the total of 563 facilities with a NPDES permit and
operating cooling water intake structures in the Paper and Allied Products Industry (SIC 26), 41 (or 7.3%) would
be subject to the 50 MGD All option, 3 (or 0.5%) would be subject to the 200 MGD All option, and 10 (or 1.8%)
would be subject to the 100 MGD CWB option. EPA also estimated the percentage of total production that
occurs at facilities estimated to be subject to regulation under each analysis option. Total value of shipments for
the Paper And Allied Products industry from the 2004 Annual Survey of Manufactures is $81.9 billion. Value of
shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because the
DQ did not collect value of shipments data, these data were not available for Phase III facilities. Total revenue, as
C2A-2
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§ 3l6(b) Final Rule: Phase HI- EA. Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
reported on the DQ, was used as a close approximation for value of shipments for these facilities. EPA estimated
the total revenue of facilities in the paper industry expected to be subject to regulation under the 50 MOD, 200
MOD and 100 MOD regulatory analysis options to be about $19.1 billion, $1.2 billion, and $4.2 billion,
respectively. Therefore, EPA estimates that the percentage of total production in the paper industry that occurs at
facilities estimated to be subject to regulation under the 50 MOD, 200 MGD, and 100 MOD options is 23%, 1%
and 5%, respectively.
The responses to the Detailed Industry Questionnaire indicate that three segments account for most of the
potential Phase III facilities in the Paper and Allied Products industry: (1) Pulp Mills (SIC 2611), (2) Paper Mills
(SIC 2621), and (3) Paperboard Mills (SIC 2631). The remainder of this profile therefore focuses on these three
industry segments.
Table C2A-2 provides the cross-walk between SIC codes and NAICS codes for the profiled paper SIC codes. The
table shows that both Pulp Mills and Paperboard Mills have a one-to-one relationship to their NAICS codes.
Paper Mills correspond to two NAICS codes (322121 and 322122). NAICS 322121, classified as Paper (except
newsprint) Mills, represents a large portion of SIC code 2621 (93 percent based on value of shipments).
Table C2A-2: Relationship between SIC and NAICS Codes for the Paper and Allied Products Industry
(20021)
SIC
Code
2611
2621
2631
SIC Description
Pulp mills
Paper mills
Paperboard mills
NAICS
Code
322110
322121
322122
322130
NAICS Description
Pulp mills
Paper (except newsprint)
mills (pt)
Newsprint mills
Paperboard mills
Establishments
31
306
21
203
Value of
Shipments
($000)
3,650,916
42,198,838
2,964,916
21,216,677
Employment
8,043
96,204
6,367
48,005
* Industry data for relevant NAICS codes from the 2002 Economic Census.
Source: U.S. DOC, 1997; U.S. DOC. 1987, 1992, 1997, and2002.
C2A-1 SUMMARY INSIGHTS FROM THIS PROFILE
A key purpose of this profile is to provide insight into the ability of pulp and paper firms to absorb compliance
costs under each analysis option without material adverse economic/financial effects. The industry's ability to
withstand compliance costs is primarily influenced by the following two factors: (1) the extent to which the
industry may be expected to shift compliance costs to its customers through price increases and (2) the financial
health of the industry and its general business outlook.
* Likely Ability to Pass Compliance Costs Through to Customers
As reported in the following sections of this profile, the pulp and paper industry is relatively unconcentrated,
which would suggest that firms in this industry may face difficulty in passing through to customers a significant
portion of their compliance-related costs. The domestic pulp industry also faces significant competitive pressures
from abroad, further curtailing ihe potential of firms in this industry to pass through to customers a significant
portion of their compliance-related costs. The domestic Paper Mills and Paperboard Mills segments do not face
as significant foreign competitive pressures, and, based on this factor, would have more latitude in passing
through to customers any increase in production costs resulting from regulatory compliance. However, foreign
pressure is likely to increase as capacity in foreign countries, particularly China, continues to grow and exert
pressure on the domestic market. As discussed above, given the proportion of total value of shipments in the
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§ 316(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
industry estimated to be subject to regulation under each analysis option.EPA believes that the theoretical
threshold for justifying the use of industry-wide CPT rates in the impact analysis of existing Phase III pulp and
paper facilities has not been met. For these reasons, in its analysis of regulatory impacts for the pulp and paper
industry, EPA assumed that complying firms would be unable to pass compliance costs through to customers: i.e.,
complying facilities must absorb all compliance costs at the time of compliance (see following sections and
Appendix 3, Cost Pass-Through Analysis, to Chapter C3: Economic Impact Analysis for Manufacturers, for
further information).
* Financial Health and General Business Outlook
Over the past decade, the pulp and paper industry, like other U.S. manufacturing industries, has experienced a
range of economic/financial conditions, including substantial challenges. In the early 1990s, general economic
weakness diminished financial performance in the domestic pulp and paper industry. Domestic market conditions
were erratic in the 1990s, with financial performance peaking mid-decade, before declining again as
overproduction caused a glut of product and decreasing prices. Going into 2000, the industry's financial
performance had started to improve, but the subsequent recession and global economic downturn, coupled with
continuing overproduction, led to declining financial results through 2003. Financial performance in 2004 and
2005, however, showed significant improvement. Going forward, the industry continues to face increased foreign
competition, global and domestic overcapacity, and difficulty adapting to changing business conditions (McNutt,
Cenatempo & Kinstrey, 2004). At the same time, with the ongoing improvement in U.S. economic conditions,
the pulp and paper industry appears poised to achieve stronger financial performance in 2006 and later years.
This should position firms to better withstand additional regulatory compliance costs without imposing significant
financial impacts.
C2A-2 DOMESTIC PRODUCTION
The paper and allied products industry is one of the top ten U.S. manufacturing industries, and among the top five
segments in sales of nondurable goods. Growth in the paper industry is closely tied to overall gross domestic
product (GDP) growth. Although the domestic market consumes over 90 percent of total U.S. paper and allied
products industry output, exports have taken on an increasingly important role, and growth in a number of key
foreign paper and paperboard markets are a key factor in the health and expansion of the U.S. industry (McGraw-
Hill, 2000). The industry is considered mature, with growth slower than that of the GDP, and U.S. producers
have actively sought growth opportunities in overseas markets. Although exports still represent a small share of
domestic shipments, they exert an important marginal influence on capacity utilization. Prices and industry
profits, which are sensitive to capacity utilization, have therefore become increasingly sensitive to trends in global
markets. The industry experienced relatively stable production and sales during the 1990s, but saw more volatile
capacity utilization, profitability, and prices (Ince, 1999).
With the slowing of the U.S. economy in 2000, and the onset of recession in 2001, the resulting drop in demand
and prices put pressure on companies in the industry to eliminate excess capacity. Through aggressive
consolidation and streamlining of their operations, facilities sought to lower expenses through elimination of older
and less cost efficient operations. In 2002, paper companies eliminated three million tons of capacity, with
similar reductions expected in 2003 (Value Line, 2003b).
The U.S. Paper and Allied Products industry has a worldwide reputation as a high quality, high volume, and low-
cost producer. The industry benefits from many key operating advantages, including a large domestic market; the
world's highest per capita consumption; a modern manufacturing infrastructure; adequate raw material, water, and
energy resources; a highly skilled labor force; and an efficient transportation and distribution network (Stanley,
2000). U.S. producers face growing competition from new facilities constructed overseas, however (McGraw-
Hill, 2000).
C2A-4
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June I, 2006
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§ 3l6(b) Final Rule: Phase ill - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
The industry is a major energy user, second only to the chemicals and metals industries. However, 56 percent of
total energy used in 1998-99 was self-generated (McGraw-Hill, 2000). The use of renewable resources (biomass,
black liquor, hydroelectric, etc.) for energy production has increased from 40 percent of total industry energy
consumption in 1972 to 56 percent in 2000, and is currently estimated to account for about 60 percent of
consumption in 2004 (Paper Ag«, 2004a).
C2A-2.1 Output
The paper and allied products industry has experienced continued globalization and cyclical patterns in production
and earnings over the last two decades. Capital investments in the 1980s resulted in significant overcapacity.
U.S. producers experienced record sales in 1995. In 1996, lower domestic and foreign demand, coupled with
declining prices, caused the industry's total shipments to decline by 2.2 percent. More recently, three consecutive
years of increasing demand and slowly increasing prices led to better industry performance at the end of the
1990s. During these years, domestic producers controlled operating rates to allow drawdown of high inventories
and to achieve higher capacity utilization. U.S. producers have also placed a greater emphasis on foreign markets
both through export sales and investments in overseas facilities (McGraw-Hill, 2000). The paper products
industry recorded improved sales and stronger earnings in 1999 and early 2000, but began to experience declines
in sales in the second half of 2000, reflecting reduced paper and packaging demand due to the slowdown in the
U.S. economy and a growth in imports (S&P, 2001). Most products were characterized by weak demand, reduced
production and price reductions in 2001, due to continuing reductions in domestic demand (Paperloop Inc., 2001).
Annual sales in the U.S. in 2001 dropped 1.5%, while earnings at the top 31 U.S. corporations fell by nearly 75%,
partly due to a decrease in prices of up to 15% (Paun et al. 2004).
Capacity for U.S. paper and paperboard declined annually from 2001 to 2003, in contrast to annual increases in
capacity for the previous two decades. Capacity declined 1.9% in 2001, 1.3% in 2002, and 0.4% in 2003, and is
expected to remain unchanged from 2004 to 2006 due to increased foreign competition, mature domestic markets,
and competition from other media (Paper Age, 2004b). Overcapacity has been a problem within the industry. As
the world economy began to slow in the early 2000s, demand in the U.S. and abroad waned, forcing producers to
limit production to prevent oveisupply and keep pricing levels from dropping further (S&P, 2004b). In addition
to production downtime, many older, less efficient, single mill operations were permanently closed. In 2001, pulp
production decreased 7.3% to 53 million tons, while paper and paperboard production decreased 5.5% to 81
million tons (Paun et al. 2004).
For 2004, paper industry demand and prices were expected to remain at 2003 levels or increase slightly. As the
economy continues to improve, demand should pick up, with better financial performance expected in 2006 and
beyond, as long as the industry continues careful management of production levels and control of inventories. In
addition, the weakened dollar should help to improve performance in export markets (S&P, 2004a). These
improving conditions should better position firms to manage any increase in production costs resulting from
regulatory compliance.
Figure C2A-1 shows the trend in constant value of shipments and value added for the three profiled
segments.1 Value of shipments and value added, two common measures of manufacturing output, provide insight
into an industry's overall economic health and outlook. Value of shipments is the sum of receipts from the sale of
outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors.
Value added measures the value of production activity in a particular industry and is calculated as the difference
between the value of shipments, and the value of inputs used to make the products sold.
Terms highlighted in bold and italic font are further explained in the glossary.
June I, 2006
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C2A-5
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£ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
The trends over time in value of shipments and value added show that the Paper and Allied Products has
performed erratically over the 1987-2004 period, with swings in shipments and value added generally following
the performance trend of the aggregate U.S. economy. Of the three profiled industry segments, the Paperboard
Mills segment recorded an overall increase in the total value of shipments during the 18-year analysis period,
whereas both Paper Mills and Pulp Mills recorded real declines in shipments over the same period. All three
industries recorded real declines in value added over the 18-year period.
C2A-6
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June I, 2006
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
Figure C2A-1: Value of Shipments and Value Added for Profiled Paper and Allied Products
Segments (millions, $2005)
Value of Shipments
60,000 ,
50,000
40,000
30,000 -
20,000
*
_.-*. / \
f "N_ / V
*-> A - _
«.. ^m "-- "-.
-«'
""«...
^-.A --,
r ^*^r+S^ +
^-^^-----^ ^-x
' ' ' ' ' ' ' ' ' ' KJ ' K* ' rj K*
-JOO-OO N*l**j£vil?\--J»'SS KJW*.
« Papcrboard Mills (SIC 263 I )
* Pulp Mills (SIC 26 II)
Value Added
25,000
20,000
15,000
10,000
A
A- i \
/ x / w...
/ ---
»-,-*
/^~~*^. / \ .*-*'' *"*-».
v^^^*^^-* » » - »
^*-,,
/* "*-^ A
r v^,^ /^^
^ --* ». .,.*, . . A . A-A
-j oo «O O'-'hJ'-M-foivt S «~i oo 55 O ^ tsiub
.----- Paper Mills (NAICS lo SIC)
Paper Mills (SIC 262 I)
, - ,+. - . Paperboard Mills (NAICS to SIC)
Pgperboard Mills (SIC 263 1 )
-A Putp Mills (SIC 26! I)
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled
in the North American Industry Classification System (NAICS). For this analysis. EPA converted the NAICS classification data
to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.
June I. 2006
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C2A-7
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Table C2A-3 provides the Federal Reserve System's index of industrial production for the profiled pulp and paper
segments, which shows trends in production between 1989 and 2005. This index more closely reflects total
output in physical terms, whereas value of shipments and value added reflect the economic value of production.
The production index is expressed as a percentage of output in the base year, 2000. Pulp Mill industry production
increased sharply between 2001 and 2002 and has been rising continuously since then (see Table C2 A-9). In
total, the industry experienced a 26.3 percent increase in production over 1989 to 2005. The Paper Mills industry,
on the other hand, saw a continuous decrease in production between 2000 and 2003, followed by a slight increase
in 2004 and 2005. Overall, however, production decreased by 13.9 percent over 1989 to 2005. Paperboard Mill
production has fluctuated slightly in recent years, but the industry recorded an overall 4.8 percent increase in
production over the 1989 to 2005 time period.
Table C2A-3: U.S. Pulp and Paper Industry Industrial Production Index (Annual Averages)
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005d
Total Percent Change
1989-2005
Average Annual
Growth Rate
Index
Pulp Mills*
Percent
2002=100 Change
84.1
84.0
85.3
89.7
75.4
79.8
85.8
78.7
78.3
80.4
81.0
80.1
81.6
100.0
100.7
105.1
106.2
26. 3%
1.5%
-0.1%
1.6%
5.2%
-16.0%
5.9%
7.5%
-8.3%
-0.4%
2.7%
0.7%
-1.1%
1.9%
22.5%
0.7%
4.5%
1.0%
Paper
Index
2002=100
110.9
108.6
105.1
103.8
103.2
109.0
112.7
106.0
105.0
105.5
110.4
109.4
101.3
100.0
92.1
95.3
95.5
-13.9%
-0.9%
Mills*
Percent
Change
-2.1%
-3.3%
-1.2%
-0.6%
5.6%
3.4%
-5.9%
-1.0%
0.5%
4.7%
-0.9%
-7.5%
-1.2%
-7.9%
3.5%
0.3%
Paperboard
Index
2002=100
93.4
93.8
92.9
97.1
99.1
104.8
108.7
103.5
106.2
107.2
108.6
105.1
101.3
99.9
97.1
99.3
97.9
4.8%
0.3%
Mills'
Percent
Change
0.4%
-1.0%
4.4%
2.1%
5.8%
3.7%
-4.8%
2.6%
1.0%
1.3%
-3.2%
-3.6%
-1.4%
-2.8%
2.3%
-1.5%
" NAICS 32211.
bNAICS32212.
c NAICS 32213.
d Average through 9 months of 2005.
Source: Economagic, 2006.
C2A-2.2 Prices
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and
indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment.
As shown in Figure C2A-2, price levels in the U.S. paper industry closely reflect domestic and foreign demand,
and industry capacity and operating rates, which determine supply (S&P, 2001). Prices tend to be volatile due to
C2A-8
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June I, 2006
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§ 316(b) Final Rule: Phase/H-EA, PartC: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
mismatches between short-term supply and demand. The industry is very capital intensive, and development of
new capacity requires several years. Prices therefore tend to increase when demand and capacity utilization rise,
and drop sharply when demand softens or when new capacity comes on line. In the past, producers have been
reluctant to cut production when demand declines because fixed capital costs are a substantial portion of total
manufacturing costs; this reluctance has occasionally caused persistent oversupply. During the recent economic
slowdown, however, producers appeared more willing to cut output to prevent sharp reductions in prices (Ince,
1999; S&P, 2001).
The paper industry suffered from low prices throughout the early 1990s. The depressed prices resulted from the
paper boom of the late 1980s. Prices recovered in the mid 1990s before declining again in the latter part of the
decade. Entering 2000, prices in the paper industry reversed course and rose, before experiencing declines in
2001 and 2002, as prices for most paper grades dropped between 5 and 15 percent (Value Line, 2003b). Faced
with substantial declines in demand during those years, producers cut production, endured downtime, and closed
less efficient facilities to prevent major price declines for paper products (S&P, 2001). Prices started to level off
near the end of 2002, and proceeded to rise during 2003 through 2005. As demonstrated in Figure C2A-2, prices
have continued to increase steadily through 2004 and 2005.
Figure C2A-2: Producer Price Indexes for Profiled Paper and Allied Products Segments
- Paperboard Mills (NAICS
322130)
Paper Mills (NAICS 32212)
Pulp Mills (NAICS 322110)
Source: BLS, 2006.
C2A-2.3 Number of facilities and firms
The Statistics of U.S. Businesses reports that the number of facilities and firms in the Pulp Mills segment
decreased by 17.4 and 12.5 percent, respectively, between 1990 and 2003. One of the reasons for this decline has
been the increase in the number of mills that produce de-inked recycled market pulp and thus displace demand for
virgin pulp mill product. These are secondary fiber processing plants that use recovered paper and paperboard as
their sole source of raw material. Producers of de-inked market pulp have experienced strong demand over the
past several years in both U.S. and foreign markets. As a result, U.S. de-inked recycled market pulp capacity
June I, 2006
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C2A-9
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§ 3l6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
more than doubled between 1994 and 1998 (McGraw-Hill, 2000). Since 1994, the secondary fiber share of total
papermaking fiber production has increased steadily, reaching 37 percent in 1999 (McGraw-Hill, 2000).
In contrast, the number of facilities and firms in the Paper Mills and Paperboard Mills segments declined.
While the number of facilities in the Paper Mills industry decreased by 12.2 percent between 1990 and 2003, the
number of firms in the industry rose slightly. In contrast, the number of both facilities and firms in the
Paperboard Mills industry declined by 2.2 and 11.8 percent, respectively. Overcapacity in the 1990s limited the
construction of new facilities. In 1998 and 1999,577,000 and 2.5 million tons of paper and paperboard capacity
were removed from the capacity base. Over the same period, more than one million tons of pulp capacity were
removed (Pponline, 1999). In 200 land 2002, 8.2 million tons of capacity closed, mostly in containerboard,
market pulp, and print and writing papers. (Paper Age, 2004c). Table C2A-4 and Table C2A-5 present the
number of facilities and firms for the three profiled paper and allied products segments between 1990 and 2003.
Table C2A-4: Number of Facilities Owned by Firms in the Profiled Paper and Allied Products Segments
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998"
I999a
20008
2001s
2002'
2003"
Total Percent Change
1990-2003
Average Annual
Growth Rate
Pulp
Number of
Facilities
46
53
44
46
52
53
62
41
44
45
48
51
44
38
-17.4%
-1.5%
Mills
Percent
Change
15.2%
Paper Mills
Number of
Facilities
327
349
-17.0% 324
4.5%
13.0%
1.9%
17.0%
-33.9%
7.3%
2.3%
6.7%
6.3%
-13.7%
-13.6%
306
316
317
344
259
235
242
240
238
271
287
-12.2%
-1.0%
Percent
Change
6.7%
-7.2%
-5.6%
3.3%
0.3%
8.5%
-24.7%
-9.4%"
3.2%
-1.0%
-0.8%
14.0%
5.9%
Paperboard
Number of
Facilities
226
228
222
217
218
219
228
214
232
233
238
247
231
221
-2.2%
-0.2%
Mills
Percent
Change
0.9%
-2.6%
-2.3%
0.5%
0.5%
4.1%
-6.1%
~8.4%
0.4%
2.1%
3.8%
-6.5%
-4.3%
" Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
C2A-10
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June I, 2006
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
Table C2A-5: Number of Firms in the Profiled Paper and Allied Products Segments
Pulp
Year Number of
Firms
1990 31
1991
37
1992 29
1993 32
1994
37
1995 | 32
1996
1997
1998'
1999"
2000'
2001'
2002"
2003'
Tola! Percent Change
1990-2003
Average Annual
Growth Rale
43
27
32
33
36
40
27
27
-12.9%
-1.1%
Mills
Percent
Change
19.4%
Paper Mills
Number of Percent
Firms Change
158
186
-21.6% 161
10.3%
15.6%
-13.5%
34.4%
-37.2%
18.5%
3.1%
9.1%
11.1%
-32.5%
0.0%
153
163
163
186
131
124
133
134
140
174
162
2.5%
0.2%
17.7%
-13.4%
-5.0%
6.5%
0.0%
14.1%
-29.6%
-5.3%
7.2%
0.7%
4.6%
23.9%
-6.7%
Paperboard Mills
Number of
Firms
102
102
95
99
96
93
101
85
95
95
105
116
107
90
-11.8%
-1.0%
Percent
Change
0.0%
-6.9%
4.2%
-3.0%
-3.1%
8.6%
-15.8%
11.8%
0.0%
10.5%
10.5%
-7.8%
-15.9
Before 1998, data were compiled in the SIC system; sine* 1998, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA. 1989-2003.
C2A-2.4 Employment and productivity
The U.S. paper industry is among the most modern in the world. It has a highly skilled labor force and is
characterized by large capital expenditures, which have been largely aimed at productivity improvements.
Employment in the three profiled paper industry segments remained relatively constant from 1987 through the
mid 1990s. Since then, employment at Pulp Mills has dropped considerably, decreasing by 46 percent; Paper
Mills have also seen a substantial reduction in the workforce of close to 48 percent. Employment in Paperboard
Mills fell the least over this period, but still declined by over 24 percent. Part of this employment loss is
attributable to firms closing older and higher cost facilities (McNutt, Cenatempo & Kinstrey, 2004). Figure
C2A-3 presents employment for the three profiled paper segments between 1987 and 2004.
June I, 2006
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C2A-1!
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^ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Figure C2A-3: Employment for Profiled Paper and Allied Products Segments
140,000 -,
120,000 -
100,000 -
80,000 -
60,000 -
40,000 -
20,000
- Paper M ills (NAICS to SIC)
Paper M ills (SIC 2621)
-» - - Paperboard M ills (NAICS to
SIC)
- Paperboard M ills (SIC 2631)
A - A -A - * - * -A - A
-A--- Pulp M ills (NAICS to SIC)
A Pulp M ills (SIC 2611)
IJ tO KJ M K]
i g g g g
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled
in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data
to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC. 1987, 1992, 1997. and 2002.
Table C2A-6 on the following page presents the change in value added per labor hour, a measure of labor
productivity, for each of the profiled industry segments between 1987 and 2004. The table shows that labor
productivity in the Pulp Mills segment has been relatively volatile, posting several double-digit gains and losses
between 1987 and 2004. These changes were primarily driven by fluctuations in value added and production
levels. Overall, productivity in Pulp Mills increased by only 1.1 percent during this period, while increasing by
61 and 32 percent in the Paper Mills and Paperboard Mills, respectively.
C2A-12
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j 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
Table C2A-6: Productivity Treads for Profiled Paper and Allied Products Segments ($2005)
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997*
1998*
1999'
2000'
2001"
2002'
2003'
2004s
Total % Change
1987-2004
Average Annual
Growth Rate
Value
Added
($ mil)
3,494
4,616
5,621
4,694
3,248
3,315
2,170
2,600
4,767
2,629
1,771
1,631
1,653
2,048
1,547
1,869
1,751
1,921
-45.0%
-3.5%
Pulp
Prod.
Hrs. -
(mil)
24
24
25
28
28
26
23
22
23
24
13
12
12
12
12
13
13
13
-45.6%
-3.5%
Mills
Value
Added/Hour
$/hr
146
193
221
169
118
126
94
119
211
110
137
131
141
172
129
142
132
148
1.1%
0.1%
Percent
Change
32.1%
14.6%
-23.4%
-30.6%
7.1%
-25.5%
26.9%
76.9%
-47.8%
24.7%
-4.4%
7.7%
22.0%
-25.0%
10.0%
-7.2%
12.1%
Paper Mills
Value
Added
($ mil)
21,593
24,982
24,405
22,808
20,592
19,269
18,408
18,727
27,347
22,514
22,365
22,352
22,389
23,200
20,856
20,980
19,397
19,503
-9.7%
-0.6%
Prod.
Hrs.
(mil)
213
215
214
211
212
215
212
206
201
197
182
173
167
155
145
129
125
119
-44.1%
-3.4%
Value
Added/Hour
$/hr
102
116
114
108
97
90
87
91
136
114
123
129
134
149
143
163
155
164
61.4%
2.9%
Percent
Change
14.4%
-1.8%
-5.0%
-10.4%
-7.8%
-3.2%
5.1%
49.3%
-16.1%
7.9%
4.9%
3.8%
11.4%
-4.0%
13.8%
-4.9%
5.6%
Paper-board Mills
Value
Added
($mil)
10,591
13,003
12,557
11,161
9,635
10,636
9,546
10,782
15,403
11,533
10,623
1 1,749
1 1,947
13,356
12,075
11,642
10,772
10,625
0.3%
0.0%
Prod.
Hrs.
(mil)
89
91
89
91
87
88
90
94
98
95
93
90
86
86
83
78
74
67
-24.1%
-1.6%
Value
Added/Hour
.... Percent
$/hr _,.
Change
120
143 19.7%
141 -1.7%
123 -12.4%
111 -9.7%
120 8.0%
106 -11.8%
115 8.5%
158 37.2%
122 -23.0%
114 -6.1%
130 14.2%
139 6.6%
155 11.4%
145 -6.4%
149 2.8%
145 -2.9%
158 9.3%
32.1%
1.7%
" Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Behveen NAICS and SIC.
Source: U.S. DOC, 1988-1991. 1993-1996, 1998-2001; and2003-2004; U.S. DOC, 1987, 1992, 1997. and2002.
C2A-2.5 Capital expenditures
The paper and allied products industry is a highly capital intensive industry. Capital-intensive industries are
characterized by a large value of capita) equipment per dollar value of production. New capital expenditures
are needed to modernize, expand, and replace existing capacity. Consistently high levels of capital expenditures
have made the U.S. paper industry- one of the most modern industries in the world (Stanley, 2000). The total level
of capital expenditures for the pulp, paper, and paperboard industries was $2.7 billion in 2004 (in $2005). The
Paper Mills and Paperboard Mills segments accounted for approximately 93 percent of that spending (see Table
C2A-7). Most of the spending is for production improvements (through existing machine upgrades, retrofits, or
new installed equipment), environmental concerns, and increased recycling (McGraw Hill, 2000). The total
capital expenditure for 2004 is considerably less, in real terms, than what was spent in the early 1990s, as
producers became wary of adding too much capacity that might lead to oversupply and depressed prices.
The Department of Commerce estimates that environmental spending accounted for about 14 percent of all capital
outlays made by the U.S. paper industry since the 1980s, and the Cluster Rule promulgated in 1998 is expected to
require increased environmental expenditures (S&P, 2001).
June /, 2006
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§ 3l6(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Table C2A-7: Capital Expenditures for Profiled Paper and Allied Products Segments (millions, $2005)
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997s
1998'
1999"
2000"
200 1"
2002"
2003"
2004"
Total Percent Change
1987- 200f
Average Annual
Growth Rate
Pulp Mills
Capital
Expenditures
354
458
994
1,448
1,316
1,002
540
392
562
834
405
483
214
265
211
203
192
192
-45.9%
-3.5%
Percent
Change
29.3%
117.1%
45.6%
-9.1%
-23.8%
-46.1%
-27.5%
43.6%
48.3%
-51.4%
19.3%
-55.8%
24.2%
-20.4%
-3.9%
-5.5%
-0.1%
Paper Milk
Capital
Expenditures
4,237
4,887
7,473
5,877
4,829
3,779
3,632
3,991
3,341
3,754
3,407
3,632
2,694
2,878
2,702
2,272
2,212
1,591
-62.5%
-5.6%
Percent
Change
15.3%
52.9%
-21.4%
-17.8%
-21.8%
-3.9%
9.9%
-16.3%
12.3%
-9.2%
6.6%
-25.8%
6.8%
-6.1%
-15.9%
-2.6%
-28.1%
Pa per board
Capital
Expenditures
1,183
2,248
2,359
4,090
2,857
2,648
2,084
2,169
2,546
2,819
1,897
1,620
1,458
1,330
1,127
878
807
956
-19.2%
-1.2%
Mills
Percent
Change
89.9%
5.0%
73.3%
-30.1%
-7.3%
-21.3%
4.1%
17.4%
10.7%
-32.7%
-14.6%
-10.0%
-8.8%
-15.2%
-22.1%
-8.1%
18.5%
' Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and2003-200-1; U.S. DOC, 1987, 1992. 1997, and2002.
C2A-2.6 Capacity utilization
Capacity utilization measures actual output as a percentage of total potential output given the available
capacity. Capacity utilization provides insight into the extent of excess or insufficient capacity in an industry, and
into the likelihood of investment in new capacity. According to the U.S. Industry and Trade Outlook, a utilization
rate in the range of 92 to 96 percent is necessary for the Pulp Mills segment to remain productive and profitable
(McGraw-Hill, 2000).
As shown in Figure C2A-4, capacity utilization fluctuated sharply in all three profiled segments over the analysis
period. Capacity utilization increased between 1989 and 1994, and then fell sharply in 1995. This sharp drop
resulted from an effort to reduce inventories, which had begun rising in 1995 in response to low demand and
oversupply (McGraw-Hill, 2000). As inventories were sold off and global economic activity strengthened,
capacity utilization began to rise again in 1996, peaked in 1997, and again declined in 1998 due to reduced
demand from the Asian market (S&P, 2001). With the global economic slowdown starting in 2000, paper
producers were forced to implement production cutbacks and downtime to prevent oversupply from further
depressing prices. As a result, utilization rates fell farther in 2000 and 2001 to values below those observed in the
prior decade. At the same time, overall capacity contracted as companies permanently closed less efficient
facilities. By 2004, capacity utilization in the Paperboard Mill and Pulp Mill industries had returned to its 1990
C2A-I4
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§ 3l6(b) Final Rule: Phase III - EA, Pan C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
level, while Paper Mill capacity utilization increased between 2001 and 2002 and has remained relatively constant
over 2003 to 2004. The industry is expected to continue consolidating, which should aid profitability in the long
run (S&P, 2004b).
Figure C2A-4: Caps city Utilization Rate (Fourth Quarter) for Pulp and Paper Industry
100 -,
95
90 -
85
80
" *
-*--- Paperboard Mills (NAICS
to SIC)
Paperboard Mills (SIC
2631)
--» .'* »'
-A- - - Pulp Mills (NAICSto SIC)
A Pulp Mills (SIC 2611)
-rH
Paper Mills (SIC 2621)
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled
in the North American Industry C: ossification System (NAICS). For this analysis, EPA converted the N AICS classification data
to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1989-2004.
C2A-3 STRUCTURE AND COMPETITIVENESS
Paper and allied products companies range in size from large corporations having billions of dollars of sales, to
small producers with revenue a fraction of the size of the large producers. Because all paper and allied products
companies use the same base materials in their production, most manufacture more than one product. To escape
the extreme price volatility of commodity markets, many smaller manufacturers have differentiated their products
by offering value-added grades. The smaller markets for value-added products make this avenue less available to
the larger firms (S&P, 2001).
The paper industry has consolidated through mergers and acquisitions and has closed older mills over the last few
years, as a way to improve profits in a mature industry. About six percent of North American containerboard
capacity was shut down (most on a permanent basis) in late 1998 and early 1999. Companies have been reluctant
to invest in any major new capacity, which might result in excess capacity (S&P, 2001). In 1999, new capacity
additions in the paper and allied products industry were at their lowest level of the past ten years; this caution in
adding to capacity is expected to continue (Pponline.com, 2000). Another problem for the industry is the
increasing capacity being brought online in foreign countries, which could result in higher U.S. import levels and
increased competition for U.S. products in export markets (S&P, 2004a).
Major recent mergers include International Paper's acquisition of Champion International in 2000 and Union
Camp in 1999, Georgia-Pacific's takeover of Fort James Corp. (itself a 1997 combination of James River and
June 1, 2006
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C2A-IS
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§ 3l6(b) Final Rule: Phase HI- EA, Pan C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Fort Howard), Weyerhaeuser's acquisition of Willamette Industries Inc., the merger of Mead and Westvaco, and
Temple-Inland's takeover of Gaylord Container (S&P, 2001,2004b).
C2A-3.1 Firm size
For SIC codes 2611,2621, and 2631, the Small Business Administration defines a small firm as having fewer
than 750 employees. The size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond
with the SBA size classifications, therefore preventing precise use of the SBA size threshold in conjunction with
SUSB data. The SUSB data presented in Table C2A-8 show the following size distribution in 2003:
> 15 of 27 (56 percent) firms in the Pulp Mills segment had less than 500 employees. Therefore, at least 56
percent of firms were classified as small. These small firms owned 15 facilities, or 39 percent of all
facilities in the segment.
> 117 of 162 (72 percent) firms in the Paper Mills segment had less than 500 employees. These small firms
owned 124, or 43.2 percent of all Paper Mills.
> 54 of 90 (60 percent) firms in the Paper board Mills segment had less than 500 employees. Therefore, at
least 66 percent of paperboard mills were classified as small. These firms owned 56, or 25 percent of all
Paperboard Mills.
An unknown number of the firms with more than 500 employees have less than 750 employees, and would
therefore also be classified as small firms. Table C2A-8 below shows the distribution of firms and facilities for
each profiled segment by employment size of the parent firm.
Table C2A-8: Number of Firms and Facilities by Size Category for Profiled Paper and Allied Products
Segments in 2003*
Employment Size
Category
0-19
20-99
100-499
500+
Total
Pulp Mills
... ._. No. of
No. of Firms ,, .....
Facilities
9
2
4
12
27
9
2
4
23
38
Paper Mills
.. ,. No. of
No. ofFirms _ .....
Facilities
46
27
44
45
162
46
28
50
163
287
Paperboard
No. ofFirms
17
22
15
36
90
Mills
No. of
Facilities
18
23
15
165
221
' Before 1998, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA. 1989-2003.
C2A-3.2 Concentration ratios
Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is
closely related to entry barriers, with more concentrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHl) are common
measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a
CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry's total
C2A-16
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§ 3I6(b) Final Rule: Phase HI - EA, Pan C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things
being equal. An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI
indicates concentration based on the largest 50 firms in the industry. It is equal to the sum of the squares of the
market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with
market shares of 60, 30, and 10 parcent, respectively, the HHI of this industry would be equal to 4,600 (602 + 302
+ 102). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the
industry. Based on the U.S. Department of Justice's guidelines for evaluating mergers, markets in which the HHI
is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered
to be moderately concentrated, arid those in which the HHI is in excess of 1800 are considered to be concentrated.
Table C2A-9 shows that Pulp Mi: Is have an HHI of 1,106, Paper Mills have an HHI of 467, and Paperboard Mills
have an HHI of 485. At these HHI levels, all three industry segments appear relatively unconcentrated. With the
majority of the firms in this industry having small market shares, this suggests limited potential for passing
through to customers any increase in production costs resulting from regulatory compliance.
The concentration ratios for the three segments remained relatively stable between 1987 and 1997. The Pulp
Mills segment has the highest concentration of the three segments, with a CR4 of 59 percent and a HHI of 1,106
in 1997. Recent mergers and acquisitions have led to an increase in concentration in the Paper and Paperboard
segments. In the late 1990s, the top five U.S. firms controlled 38 percent of production capacity, with higher
concentrations in individual product lines due to targeted consolidation and specialization (Ince, 1999). In 2001,
only four firms had greater than 11 percent of the market, with none having a share greater than 17 percent. More
than half of the firms in the paper industry had market shares under 2 percent (Paun et al. 2004). The Paper Mills
and Paperboard Mills segments also account for most of the production of their primary products. The Pulp Mills
segment accounts for a lower percentage of all pulp shipments, with pulp also commonly produced by integrated
Paper and Paperboard Mills.
Table C2A-9: Selected Ratios for Profiled Paper and Allied Products Segments, 1987,1992, and 1997
SIC (S) or
NA1CS (N)
Code
S2611
N 322110
S2621
N 32212
S2631
N 322130
Year
1987
1992
1997
1987
1992
1997
1987
1992
1997
Total
Number
of Firms
26
29
24
122
127
139
91
89
81
Concentration Ratios
4 Firm
(CR4)
44%
48%
59%
33%
29%
34%
32%
31%
34%
8 Firm
(CR8)
69%
75%
86%
50%
49%
55%
51%
52%
53%
20 Firm
(CR20)
99%
98%
100%
78%
77%
80%
77%
80%
82%
50 Firm
(CR50)
100%
100%
100%
94%
94%
94%
97%
97%
98%
Herfindahl-Hirschman
Index
743
858
1,106
432
392
467
431
438
485
1 The 1997 Census of Manufactures is the most recent concentration ratio data available.
Source: U.S. DOC, 1987, 1992, 1997, and2002.
Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry
with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it
competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in
beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the
extent of competition in an industry.
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§ 316(b) Final Rule: Phase til - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
C2A-3.3 Foreign trade
This profile uses two measures of foreign competition: export dependence and import penetration.
Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic
markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that
industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests
that higher import penetration levels will reduce market power and pricing discretion because foreign competition
limits domestic firms' ability to exercise such power. Firms belonging to segments in which imports account for
a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to pass-
through costs because foreign producers would not incur costs as a result of the Phase HI regulation. The
estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31-33) for 2001 is 22 percent.
For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with
import ratios close to or above 22 percent would more likely face stiff competition from foreign firms and thus be
less likely to succeed in passing compliance costs through to customers.
Export dependence, calculated as exports divided by value of shipments, measures the share of a segment's sales
that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not
increase the production costs of foreign producers with whom domestic firms must compete in export markets.
As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing
prices to recover cost increases resulting from regulation-induced increases in production costs. The estimated
export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the
ability of industries to withstand compliance cost burdens, EPA judges that industries with export ratios close to
or above 15 percent are at a relatively greater disadvantage in potentially recovering compliance costs through
price increases since export sales are presumed subject to substantial competition from foreign producers.
Table C2A-10 presents trade statistics for the Pulp Mills, and Paper and Paperboard Mills segments. Imports and
exports play a much larger role in the Pulp Mills segment than for the other two segments. Import penetration and
export dependence levels for the Pulp Mills segment were an estimated 73 and 76 percent, respectively, in 2002.
The Paper and Paperboard Mills segments import penetration and export dependence ratios were 16 and 9
percent, respectively, in 2002. For Pulp Mills, the large share of domestic production that is exported and
domestic consumption served by imports implies the industry faces significant foreign competition, limiting the
industry's ability to pass through to customers any increase in production costs resulting from regulatory
compliance. For Paper and Paperboard Mills, both measures of foreign competition are well below the U.S.
manufacturing averages estimated for 2001. Given just these measures, it would be reasonable to assume that this
segment does not face significant foreign competitive pressures, and would have more latitude in passing through
to customers any increase in production costs resulting from regulatory compliance. However, foreign pressure is
likely to increase as capacity in foreign countries, particularly China, continues to grow and exert pressure on the
domestic market (McNutt, Cenatempo & Kinstrey, 2004). In addition, as noted above, the HHI of the Paper and
Paperboard segments is 392 and 438 respectively, suggesting firms in these segments have small market shares,
which would curtail their ability to pass through any increase in production costs.
C2A-I8
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§ 316(b) Final Rule: Phase III - EA, Pa't C: Economic Analysis for Existing Facilities
Chapter CIA: Paper and Allied Products
Table C2A-10: Trade Statistics for Profiled Paper and Allied Products Segments (millions, $2005)
Year
Implied
Value of Imports Value of Exports Value of Shipments Domestic _ ImP° "port
r r *- » Penetration" Dependence
Consumption
Pulp Mills
1989
1990
1991
1992
1993
1994
1995
1996
1997d
1998a
1999d
2000"
200 ld
2002"
Total Percent
Change 1989-2002
Average Annual
Growth Rate
4,354 5,199 9,157
3,917 4,518 8,572
2,844 3,877 7,075
2,731 4,200 7,093
2,370 3,148 5,432
2,838 3,669 5,996
4,558 5,718 8,428
3,107 4,011 6,579
3,022 3,822 3,835
2,780 3,224 3,638
2,915 3,222 3,567
3,702 3,987 4,150
2,862 3,118 3,546
2,510 3,000 3,928
-42.3% -42.3% -57.1%
-4% -4% -6%
8,312 52% 57%
7,972 49% 53%
6,042 47% 55%
5,624 49% 59%
4,653 51% 58%
5,165 55% 61%
7,268 63% 68%
5,675 55% 61%
3,035 100% 100%
3,194 87% 89%
3,260 89% 90%
3,865 96% 96%
3,290 87% 88%
3,439 73% 76%
-58.6%
-7%
Paper and Paperboard Mills
1989
1990
1991
1992
1993
1994
1995
1996
1997d
1998d
1999"
2000d
2001"
2002"
Total Percent
Change 1989-2002
Average Annual
Growth Rate
10,488 4,301 73,791
10,126 4,739 70,403
9,164 5,385 64,199
8,706 5,532 63,496
9,120 5,315 61,226
9,114 5,978 66,303
12,412 7,835 84,774
10,892 7,572 71,477
10,583 7,690 67,339
11,421 7,251 67,476
11,565 6,927 67,631
12,554 7,509 69,912
11,795 6,562 63,362
10,762 5,209 59,897
2.6% 21.1% -18.8%
0.2% 1.5% -1.6%
* Calculated by EPA as shipments + imports - exports.
b Calculated by EPA as imports divided by implied domestic consumption.
c Calculated by EPA as exports divided by shipments.
79,978 13.1% 5.8%
75,791 13.4% 6.7%
67,979 13.5% 8.4%
66,669 13.1% 8.7%
65,032 14.0% 8.7%
69,440 13.1% 9.0%
89,351 13.9% 9.2%
74,796 14.6% 10.6%
70,232 15.1% 11.4%
71,645 15.9% 10.7%
72,269 16.0% 10.2%
74,957 16.7% 10.7%
68,595 17.2% 10.4%
65,450 16% 9%
-18.2%
-1.5%
d Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 2006; U.S. DOC, 1988-1991, 1993-1996. 1998-2001: and 2003-2004.
U.S. DOC. 1987, 1992. 1997, and 2002.
June 1, 2006
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C2A-19
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$ 3l6(b) Final Rule: Phase HI - EA. Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
As shown in Figure C2A-1, the value of imports and exports peaked in the mid-1990s, before dropping and
rebounding in 2000. As expected, values of both dropped again in 2001 and 2002, as the global economy fell into
recession.
Figure C2A-5: Value of Imports and Exports for Profiled Paper and Allied Products Segments
(millions, $2005)
Pulp Mills
7,000 -,
6,000 -
5.000 -
4,000 -
3,000 -
2,000 -
i nno .
>^ --4t / / \ V
^A *^"N. 11 \ '*. .*-. * Exports (SIC 26tl)
~"*\ ^^^ * """* * Imports (SIC 261 1)
i 8 ! 8 1 ! 1 1 3 1 i 8 § 8
Paper and Paperboard Mills
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
> *--*-. ^ ..». * Imports (SIC 262 1,2631)
^^*^* *~~+ > 1 Exports (SIC 262 1,2631)
,
I * 3 8 3 ! 3 2 3 1 1 S S 8
a Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1 997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 2006.
C2A-20
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§ 316(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for1 Existing Facilities
Chapter C2A: Paper and Allied Products
C2A-4 FINANCIAL CONDITION AND PERFORMANCE
Financial performance in the paper and allied products industry is closely linked to macroeconomic cycles, both
in the domestic market and those of key foreign trade partners, and the resulting levels of demand. Many pulp
producers, for example, were not very profitable during most of the 1990s as chronic oversupply, cyclical
demand, rapidly fluctuating operating rates, sharp inventory swings, and uneven world demand plagued the global
pulp market for more than a decade (Stanley, 2000).
Net Profit Margin is calculated as after-tax income before nonrecurring gains and losses as a percentage of sales
or revenue, and measures profitability, as reflected in the conventional accounting concept of net income. Over
time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the
industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from
several factors, including: variations in aggregate economic conditions (including international and U.S.
conditions), variations in industry-specific market conditions (e.g., short-term capacity expansion resulting in
overcapacity), or changes in the pricing and availability of inputs to the industry's production processes (e.g., the
cost of energy to the pulp and paper process). The extent to which these fluctuations affect an industry's
profitability, in turn, depends heavily on the fixed vs. variable cost structure of the industry's operations. In a
capital intensive industry such as the pulp and paper industry, the relatively high fixed capital costs as well as
other fixed overhead outlays, can cause even small fluctuations in output or prices to have a large positive or
negative affect on profit margin.
Return on Total Capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by
the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of
the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or
liability element). As such, the return on total capital provides insight into the profitability of a business' assets
independent of financial structure and is thus a "purer" indicator of asset profitability than return on equity. In the
same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate
over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The
factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in
return on total capital.
Figure C2A-6 below shows trends in net profit margins and return on total capital for the pulp and paper industry
between 1992 and 2005. The table shows considerable volatility in the trend. Profitability was low between 1988
and 1993, reflecting oversupply in world markets and decreasing shipments from U.S. producers (McGraw-Hill,
2000). By the mid-1990s, financial performance improved as demand rebounded. Financial performance
weakened again in 2000 through 2003, reflecting slower growth in both the U.S. and the world economy.
Coupled with overproduction in the U.S. and global markets, these factors led to deteriorating financial
performance in these years. Industry analysts anticipated stronger financial performance for the pulp and paper
industry for 2004 (Value Line, 2004). As expected, both net profit margins and return on capital improved in
both 2004 and 2005. With continued improvement in the U.S. economy, the outlook for the industry should be
stronger in subsequent years.
June I, 2006
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§ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Figure C2A-6: Net Profit Margin and Return on Capital for Pulp and Paper Mills
- Return on Capital -
Pulp & Paper Mills
-Net Profit Margin -
Pulp & Paper Mills
Source: Value Line. 2003a; Value Line, 2006.
C2A-5 FACILITIES OPERATING COOLING WATER INTAKE STRUCTURES
Point source facilities that use or propose to use a cooling water intake structure that withdraws cooling water
directly from a surface waterbody of the United States are potentially subject to Section 316(b) of the Clean Water
Act. In 1982, the paper and allied products industry withdrew 534 billion gallons of cooling water, accounting for
approximately 0.7 percent of total industrial cooling water intake in the United States. The industry ranked 5th in
industrial cooling water use, behind the electric power generation industry, and the chemical, primary metals, and
petroleum industries (1982 Census of Manufactures).
This section provides information for facilities in the profiled paper and allied products segments within the scope
of the regulatory options. For each analysis option, existing facilities that meet all of the following conditions are
potentially subject to regulation:
> Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or
arrangement with an independent supplier who has a cooling water intake structure; or their cooling water
intake structure(s) withdraw(s) cooling water from waters of the United States, and at least twenty-five
(25) percent of the water withdrawn is used for contact or non-contact cooling purposes;
> Have a National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one;
and
> Meet the applicability criteria for the specific regulatory analysis option in terms of design intake flow
and source waterbody type (i.e., 50 MGD for All Waterbodies, 100 MOD for Certain Waterbodies, or 200
MGD for All Waterbodies).
The regulatory analysis options also cover substantial additions or modifications to operations undertaken at such
facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the
Phase III regulation based on a minimum applicability threshold of 2 MGD, this section focuses only on the
facilities nationwide in the profiled paper and allied products segments that are within the scope of the regulatory
C2A-22
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
June I, 2006
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§ 316(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
options (see Table C2A-1, above for additional information on the broader set of facilities potentially subject to
Phase III regulation).
C2A-5.1 Waterbody and Coaling System Type
Table C2A-11, Table C2A-12, and Table C2A-13 report the distribution of Phase III facilities within the scope of
the regulatory analysis options in the profiled paper and allied products segments by type of waterbody and
cooling system under each primary analysis option. The tables show that most of the facilities have either a once-
through system or employ a comDination of a once-through and closed system.
Table C2A-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type
and Cooling System for the Profiled Paper and Allied Products Segments
Recirculating
Waterbody Type
No. % of Total
Combination
No. % of Total
Once-Through
No. % of Total
Other
No. % of Total
Total
Pulp Mills
Freshwater River/ Siream
Great Lake
TotaC '
2
0
2
100%
0%
11% 1
6
0
6
100%
0%
38%
4
2
6
73%
27%
42%
1
0
100%
0%
/ 8%
r 13
1 2
IS
Paper Mills
Estuary/ Tidal River
Freshwater River/ Stream
Lake/ Reservoir
Totaf
0 0%
0 0%
0 0%
0 0%
0 0%
5 81%
1 19%
6 46%
1 16%
4 61%
2 23%
7 54%
0 0%
0 0%
0 0%
0 0%
1
9
3
13
Panel-board Mills
Freshwater River/ Stream
Lake/ Reservoir
Totaf
0 20%
0 0%
0 17%
3 100%
0 0%
J 22%
5 100%
0 0%
5 41%
2 38%
3 62%
4 36%
9
3
12
Total for Profiled Paper and Allied Products Industries
Estuary/ Tidal River
Freshwater River/ Stream \
Lake/ Reservoir
Great Lake j
Totaf
0
2
0
0
2
0%
100%
0%
0%
4%
0
13
1
0
14
0%
92%
8%
0%
1
14
2
2
36% 18
6% 0
76%
9%
9%
46%
3
3
0
6
0%
51%
49%
22%
14%
1
32
6
2
40
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA. 2000; U.S. EPA analysis. 2006.
EPA applied sample weights to the sampled facilities to account for non-sampled facilities and facilities that did not
respond to the survey. For more information on EPA's 2000 Section 316(b) Industry Survey, please refer to the Information
Collection Request (U.S. EPA, 2000}.
June 1, 2006
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C2A-23
-------
§ 3I6(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Table C2A-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type
and Cooling System for the Profiled Paper and Allied Products Segments
Waterbody Type
Recirculating
No. % of Total
Combination
No. % of Total
Once-Through
No. % of Total
Other
No. % of Total
Pulp Mills
Freshwater River/ Stream
Tataf
0 0%
0 0%
1 100%
/ 100%
0 0%
0 0%
0 0%
0 0%
Total
1
/
Paper Mills
Freshwater River/ Stream
Tola?
0 0%
0 0%
0 0%
0 0%
2 100%
2 100%
0 0%
0 0%
2
2
Paperboard Mills
Total"
Freshwater River/ Stream
Totaf
0 0%
0 0%
0 0%
0 0%
I
Total for Profiled Paper and Allied Products Industries
0 0%
0 0%
1 100%
/ 41%
2 100%
2 59%
0 0%
0 0%
3
3
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Table C2A-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody
Type and Cooling System for the Profiled Paper and Allied Products Segments
Waterbody Type
Recirculating
No. % of Total
Combination
No. % of Total
Once-Through
No. % of Total
Other
No. % of Total
Total
Pulp Mills
Freshwater River/ Stream
Great Lake
Tola?
0 0%
0 0%
0 0%
1 100%
0 0%
/ 29%
0 0%
2 100%
2 42%
1 100%
0 0%
/ 29%
2
2
4
Paper Mills
Freshwater River/ Stream
Totaf
0
0
0%
0%
2
2
100%
27%
4
4
100%
73%
0
0
0%
0%
, 6
6
Paperboard Mills
Freshwater River/ Stream
Tola?
0
0
0%
0%
0
0
0%
0%
1
/
100%
100%
0
0
0%
0%
\ 1
/
Total for Profiled Paper and Allied Products Industries
Freshwater River/ Stream
Great Lake
Totaf
0 0%
0 0%
0 0%
3 100%
0 0%
3 25%
6 77%
2 23%
7 65%
1 100%
0 0%
1 10%
10
2
11
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA. 2000; U.S. EPA analysis, 2006.
C2A-5.2 Facility Size
All of the pulp and paper facilities analyzed are relatively large, with no facilities employing fewer than 100
people. Figure C2A-7, Figure C2A-8, and Figure C2A-9 show the number of facilities in the profiled pulp and
paper segments by employment size category for each primary analysis option.
C2A-24
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June !, 2006
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§ 3l6(b) Final Rule: Phase III -- EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
Figure C2A-7: Number of Facilities Estimated within Scope of the 50 MGD All Option by
Employment Size for Profiled Paper and Allied Products Segments
H Pulp Mills {SIC 2611)
Paper Mills (SIC 2621)
D Paperboard Mills (SIC 2631)
<100
100-249 250-499 500-999
>=1000
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Figure C2A-8: Number of Facilities Estimated within Scope of the 200 MGD All Option by
Employment Size for Profiled Paper and Allied Products Segments
2
1-
1-
1-
1-
1-
0-
0-
0
n n
n n o
n n n
Pulp Mills (SIC 2611)
Paper Mills (SIC 2621)
O Paperboard Mills (SIC 2631)
<100
100-249
250-499
500-999
>=1000
Source: U.S. EPA, 2000: U.S. EPA analysis, 2006.
June 1, 2006
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C2A-25
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§ 3l6(b) Final Rule: Phase HI-EA, PartC: Economic Analysis for Existing Facilities
Chapter C2A: Profile of Manufacturers
Figure C2A-9: Number of Facilities Estimated within Scope of the 100 MGD CWB Option by
Employment Size for Profiled Paper and Allied Products Segments
4-
4-
3-
3-
2-
2-
1-
1-
Pulp Mills (SIC 2611}
Paper Mills (SIC 2621)
QPaperboard Mills (SIC 2631)
<100
100-249
25CM99
500-999
>=1000
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
C2A-5.3 Firm Size
EPA used the Small Business Administration (SBA) small entity size standards to determine the number of
facilities in the three profiled paper segments that are owned by small firms. Firms in this industry are considered
small if they employ fewer than 750 people.
As shown in Table C2A-14, Table C2A-15, and Table C2A-16, large firms own all of the facilities estimated
subject to regulation in this industry under the three regulatory analysis options.
Table C2A-14: Number of Facilities Estimated Subject to the 50 MGD All Option in Profiled Paper and
Allied Products Segments by Firm Size
SIC Code
2611
2621
2631
SIC Description
Pulp Mills
Paper Mills
Paperboard Mills
Total
Number
15
13
12
40
Large
% of SIC
100%
100%
100%
100%
Number
0
0
0
0
Small !
% of SIC |
0%
0%
0%
0% 1
Total
15
13
12
40
Source: U.S. EPA, 2000: D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
C2A-26
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June I, 2006
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§ 3!6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
Table C2A-15: Number of Facilities Estimated Subject to the 200 MGD All Option in Profiled Paper and
Allied Products Segments by Firm Size
SIC Code
2611
2621
2631
SIC Description
Pulp Mills
Paper Mills
Paperboard Mills
Total
Number
1
2
0
3
Large
% of SIC
100%
100%
0%
100%
Number
0
0
0
0
Small
% of SIC
0%
0%
0%
0%
Total
1
2
0
3
Source: U.S. EPA, 2000; D&B, 2001, U.S. SBA 2006; U.S. EPA analysis. 2006.
Table C2A-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option in Profiled Paper
and Allied Products Segments by Firm Size
SIC Code
2611
2621
2631
SIC Description
Pulp Mills
Paper Mills
Paperboard Mills
Total
Number
4
6
1
Large
% ofSIC
100%
100%
100%
// 100%
Number
0
0
0
0
Small
% of SIC
0%
0%
0%
0%
Total
4
6
I
H
Source: U.S. EPA. 2000; D&B. 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
June 1, 2006
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C2A-27
-------
§ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers
REFERENCES
Bureau of Labor Statistics (BLS). 2006. Producer Price Index, Industry Data Series: PCU322110-Pulp Mills;
PCU32212-Paper Mills; PCU322130-Paperboard Mills. Available at: http://www.bls.gov/ppi/home.htm.
Downloaded February 1, 2006.
Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001.
Economagic. 2006. Industrial Production: Industry Subtotals, Individual Series, and Special Aggregates.
Seasonably Adjusted. Data Series: Pulp Mills, Paper Mills, and Paperboard Mills. Available at:
http://www.economagic.com/frbgl7.htmtfIPMarket. Downloaded February 2,2006.
Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification
Manual.
Ince, Peter J. 1999. "Global cycle changes the rules for U.S. pulp and paper." PIMA 's North American
Papermaker. December, v. 81, issue 12, p. 37.
McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry &
Trade Outlook '00.
McNutt, Jim, Dan Cenatempo and Bob Kinstrey. 2004. "State of the North American Pulp and Paper Industry."
Presented at the Center for Paper Business and Industry Studies at Tappi Paper Summit, Atlanta, GA, May 3,
2004. Available at:
http://www.cpbis.gatech.edu/secure/protocols/general/docs/031107State_of_the_NA_PandP_Industry_Article.pdf
Paper Age. 2004a. "The more things change." January/February. Vol. 120 No. 1. Available at:
http://www.paperage.com/issues/jan_feb2004/01 _2004patrick.html
Paper Age. 2004b. "Continued capacity declines seen in paper industry survey." Feb. 27,2004. Available at:
http://www.paperage.com/2004news/02_27 2004capacity_survey.html
Paper Age. 2004c. "The year ahead." January/February. Vol. 120 No. 1. Available at:
http://www.paperage.com/issues/jan_feb2004/01_2004price.html
Paperloop Inc. 2001. "Market Report: United States 3Q 2001."
Paun, D., Srivastava, V., Garth, J., Scott, E., Black, K.., Dodd, A., Nguyen, L., Ganguly, I., Rice, J. & Seok, H.D.
2004. A financial review of the North American paper industry. Tappi Journal. Vol.3(l). January 2004.
Available at: http://www.tappi.org/index.asp?rc= 1 &pid=28430&ch= 1 &jp=&bhcd2=l084195150
Pponline.com. 2000. "U.S. pulp and paper industry poised for cyclical upswing." January 11,2000.
Pponline.com. 1999. "U.S. pulp, paper, board capacity growth'ultra slow'." December 9, 1999.
Standard & Poor's(S&P). 2004a. Stock Reports - International Paper. February 21,2004.
Standard & Poor's (S&P). 2004b. Stock Reports - Longview Fibre. February 21, 2004.
Standard & Poor's (S&P). 2001. Industry Surveys - Paper & Forest Products. April 12, 2001.
Stanley, G.L. 2000. "Economic data for pulp and paper industry shows an encouraging future." TAPPI Journal
83(1 ):pp. 27-32.
C2A-28 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June 1, 2006
-------
$ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2A: Paper and Allied Products
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. Internationa] Trade Administration.
Industry, Trade, and the Economy: Data and Analysis. Data by NAICS and SIC. Available at:
http://www.ita.doc.gov/td/industry/otea/industry_sector/tables_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bureau of the Census. Current Industrial Reports.
Survey of Plant Capacity.
U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the
Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1987, 1992, 1997, and 2002. Bureau of the Census. Census of
Manufactures.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge
Between NAICS and SIC.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling
Water Intake Structures.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards. Available at:
http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses. Available at:
http://www.sba.gov/advo/research/data.html. Downloaded February 4, 2006.
Value Line. 2006. Value Line 3.0 Investment Analyzer.
Value Line. 2004. Paper & Forest Products Industry. January 9, 2004.
Value Line. 2003a. Value Line Investment Survey.
Value Line. 2003b. Paper & Forest Products Industry. April 11,2003.
June /, 2006
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C2A-29
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§ 3I6(b) Final Rule: Phase HI-EA, Pan C: Economic Analysis for Existing Facilities Chapter C2A: Profile of Manufacturers
THIS PAGE INTENTIONALLY LEFT BLANK
C2A-30
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June I, 2006
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Chapter C2B: Chemicals and Allied
Products (SIC 28)
INTRODUCTION
EPA's Detailed Industry Questionnaire, hereafter referred
to as the DQ, identified thirteen i-digit SIC codes in the
Chemical and Allied Products Industry (SIC 28) with at
least one existing facility that operates a CWIS, holds a
NPDES permit, and withdraws equal to or greater than two
million gallons per day (MOD) from a water of the United
States, and uses at least 25 percent of its intake flow for
cooling purposes. (Facilities with these characteristics are
hereafter referred to as facilities potentially subject to the
Phase III regulation or "potential Phase III facilities").
For each of the fifteen SIC codes, Table C2B-1, following
page, provides a description of the industry segment, a list
of primary products manufactured, the total number of
detailed questionnaire respondents (weighted to represent a
national total of facilities that hold a NPDES permit and
operate cooling water intake structures), the number of
facilities estimated to be potentially subject to Phase III
regulation based on the minimum withdrawal threshold of 2
MOD, and the number of facilities estimated to be subject
to regulation under the three regulatory analysis options.
CHAPTER CONTENTS:
Introduction C2B-1
C2B-1 Summary Insights from this Profile C2B-5
C2B-2 Domestic Production C2B-5
C2B-2.1 Output C2B-6
C2B-2.2 Prices C2B-8
C2B-2.3 Number of Facilities and Firms....C2B-10
C2B-2.4 Employment and Productivity C2B-12
C2B-2.5 Capital Expenditures C2B-14
C2B-2.6 Capacity Utilization C2B-15
C2B-3 Structure and Competitiveness C2B-18
C2B-3.1 Firm Size C2B-I8
C2B-3.2 Concentration Ratios C2B-19
C2B-3.3 Foreign Trade C2B-21
C2B-4 Financial Condition and Performance...C2B-26
C2B-5 Facilities Operating Cooling Water Intake
Structures C2B-28
C2B-5.1 Waterbody and Cooling System Type
C2B-29
C2B-5.2 Facility Size C2B-31
C2B-5.3 Firm Size C2B-33
References C2B-36
June 1. 2006
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C2B-I
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Table C2B-1: Phase III Facilities in the Chemicals and Allied Products Industry
SIC i SIC Description
Important Products Manufactured
Number of Phase III
Subject
Potentially to SO
Total Regulated MGD
Facilities'1 All
Option
(SIC 28)
facilities'
Subject Subject
to 200 to 100
MGD MGD
All CWB
Option Option
Inorganic Chemicals (SIC 281)c
2812 Alkalies and Chlorine
2813 Industrial Gases
28 1 6 Inorganic Pigments
2819 Industrial Inorganic
Chemicals, Not
Elsewhere Classified
Alkalies, caustic soda, chlorine, and soda
ash
Industrial gases (including organic) for
sale in compressed, liquid, and solid forms
Black pigments, except carbon black,
white pigments, and color pigments
Miscellaneous other industrial inorganic
chemicals
Total Inorganic Chemicals
28 20 16
110 4 4
26 90
271 30 6
435 64 26
3 II
0 0
0 0
0 i
3 12
Plastics Material and Resins (SIC 282)
2821 Plastics Material and
Synthetic Resins, and
Nonvulcanizable
Elastomers
Cellulose plastics materials; phenolic and
other tar acid resins; urea and mclamine
resins; vinyl resins; styrene resins; alkyd
resins; acrylic resins; polyethylene resins;
polypropylene resins; rosin modified
resins; coumarone-indene and petroleum
polymer resins; miscellaneous resins
305 19 11
0 4
Organic Chemicals (SIC 286)d
2865 Cyclic Organic
Crudes and
Intermediates, and
Organic Dyes and
Pigments
2869 Industrial Organic
Chemicals, Not
Elsewhere Classified
I
Aromatic chemicals, such as benzene,
toluene, mixed xylenes naphthalene,
synthetic organic dyes, and synthetic
organic pigments
Aliphatic and other acyclic organic
chemicals; solvents; polyhydric alcohols;
synthetic perfume and flavoring materials;
rubber processing chemicals; plasticizers;
synthetic tanning agents; chemical warfare
gases; and esters, amines, etc.
59 94
364 52 12
Total Organic Chemicals 423 61 17
0 4
3 4
3 8
Other Chemical Segments
2823 Cellulosic Manmade
Fibers
2824 Manmade Organic
Fibers, Except
Cellulosic
2833 Medicinal Chemicals
and Botanical
Products
2834 Pharmaceutical
Cellulose acetate and regenerated cellulose
such as rayon by the viscose or
cuprammonium process
Regenerated proteins, and polymers or
copolymers of such components as vinyl
chloride, vinylidene chloride, linear esters,
vinyl alcohols, acrylonitrile, ethylenes,
amides, and related polymeric materials
Agar-agar and similar products of natural
origin, endocrine products, manufacturing
or isolating basic vitamins, and isolating
active medicinal principals such as
alkaloids from botanical drugs and herbs
Intended for final consumption, such as
ampoules, tablets, capsules, vials,
7 1 1
36 13 0
33 22
91 40
0 0
0 0
0 2
0 0
C2B-2
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June I, 2006
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysts for Existing Facilities
Chapter C2B: Chemicals and Allied Products
Table C2B-1: Phase III Facilities in the Chemicals and Allied Products
i
SIC SIC Description
Industry (SIC 28)
Number of Phase III facilities*
Important Products Manufactured Potentially
Total Regulated
Facilities'*
2873
2899
Preparations
Nitrogenous
Fertilizers
Chemicals and
Chemical
Preparations, Not
Elsewhere Classified
ointments, medicinal powders, solutions,
and suspensions
Ammonia fertilizer compounds and
anhydrous ammonia, nitric acid,
ammonium nitrate, ammonium sulfate and
nitrogen solutions, urea, and natural
organic fertilizers (except compost) and
mixtures
Fatty acids; essential oils; gelatin (except
vegetable); sizes; bluing; laundry sours;
writing and stamp pad ink; industrial
compounds; metal, oil, and water treating
compounds; waterproofing compounds;
and :hemical supplies for foundries
Total Other
60 9
K.2 4
389 34
Subject Subject
to 50 to 200
MGD MGD
All All
Option Option
0 0
0 0
3 0
Subject
to 100
MGD
CWB
Option
0
0
2
Total Chemicals and Allied Products (SIC 28)
Total SIC Code 28
1,552 178
56 6
26
Number of weighted detailed questionnaire survey respondents.
* Individual numbers may not add up due to independent rounding.
c SIC code 281 is officially titled "Industrial Inorganic Chemicals." However, to avoid confusion with SIC code 2819, "Industrial
Inorganic Chemicals, Not Elsewhere Classified." this profile refers to SIC code 281 as the "Inorganic Chemicals segment."
d SIC code 286 is officially titled "Industrial Organic Chemicals." However, to avoid confusion with SIC code 2869, "Industrial Organic
Chemicals, Not Elsewhere Classified," this profile refers to SIC code 286 as the "Organic Chemicals segment."
Source: Executive Office of the President, 1987; U.S. EPA 2000; U.S. EPA analysis, 2006.
As shown in Table C2B-1, EPA estimates that, out of the total of 1,552 facilities with a NPDES permit and
operating cooling water intake structures in the Chemicals and Allied Products Industry (SIC 28), 56 (or 4%)
would be subject to regulation under the 50 MGD All option, 6 (or 0.3%) would be subject to regulation under the
200 MGD Aii option, and 26 (or 1.7%) would be subject to regulation under the 100 MGD CWB option. EPA
also estimated the percentage of total production that occurs at facilities estimated to be subject to regulation
under each regulatory analysis option. Total value of shipments for the Chemicals and Allied Products Industry
from the 2004 Annual Survey of Manufactures is $357.7 billion. Value of shipments, a measure of the dollar
value of production, was selected for the basis of this estimate. Because the DQ did not collect value of
shipments data, these data were not available for Phase III facilities. Total revenue, as reported on the DQ, was
used as a close approximation for value of shipments for these facilities. EPA estimated the total revenue of
facilities expected to be subject to regulation under the 50 MGD, 200 MGD and 100 MGD regulatory analysis
options to be $30.2 billion, $13.8 billion, and $22.3 billion. Therefore, EPA estimates that the percentage of total
production in the paper industry that occurs at facilities estimated to be subject to regulation under the 50 MGD,
200 MGD, and 100 MGD options is 8%, 4% and 6%, respectively..
The responses to the Detailed Questionnaire indicate that three chemical segments account for 95% of the
chemicals industry potential Phase III facilities: (1) Inorganic Chemicals (including SIC codes 2812, 2813, 2816,
and 2819); (2) Plastics Material and Resins (SIC code 2821); and (3) Organic Chemicals (including SIC codes
2865 and 2869). This profile therefore provides detailed information for these three industry groups.
June I, 2006
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C2B-3
-------
§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Table C2B-2 on the following page provides the cross-walk between SIC codes and NAICS codes for the profiled
chemical SIC codes. The table shows that alkalies and chlorine (SIC 2812), industrial gases (SIC 2813), Plastics
Material and Synthetic Resins, and Nonvulcanizable Elastomers (SIC 2821) have one-to-one relationships to
NAICS codes. The other SIC codes in the three profiled chemical segments correspond to two or more NAICS
codes.
Table C2B-2: Relationship between SIC and NAICS Codes for the Chemicals
(2002)
SIC
Code
SIC Description
NAICS
Code
NAICS Description
Establishments
and Allied Products Industry
Value of
Shipments
($000)
Employment
Inorganic Chemicals (SIC 281)
2812
2813
2816
Alkalies and Chlorine
Industrial Gases
Inorganic Pigments
2819
Industrial Inorganic
Chemicals, Not
Elsewhere Classified
325181
325120
325131
325182
325131
325188
325998
331311
Alkalies and chlorine
manufacturing
Industrial gas manufacturing (pt)
Inorganic dye and pigment
manufacturing (pt)
Carbon black manufacturing (pt)
Inorganic dye and pigment
manufacturing (pt)
All other basic inorganic chemical
manufacturing (pt)
All other miscellaneous chemical
product and preparation
manufacturing (pt)
Alumina refining
41
572
81
25
81
631
1188
10
2,809,496
5,864,978
3,522,308
1,033,515
3,522,308
16,084,006
13,404,657
830,110
6,253
10,654
7,233
1,665
7,233
47,474
36,348
1,554
Plastics Material and Resins (SIC 282)
2821
Plastics Material and 32521 1
Synthetic Resins, and
Nonvulcanizable
Elastomers
Plastics material and resin
manufacturing
690 46,825,479 67,171
Organic Chemicals (SIC 286)
2865 | Cyclic Organic
I Crudes and
Intermediates, and
Organic Dyes and
I Pigments
2869 Industrial Organic
Chemicals, Not
Elsewhere Classified
325110
325132
325192
325110
325120
325188
325193
325199
Petrochemical manufacturing (pt)
Synthetic organic dye and pigment
manufacturing
Cyclic crude and intermediate
manufacturing
Petrochemical manufacturing (pt)
Industrial gas manufacturing (pt)
All other basic inorganic chemical
manufacturing (pt)
Ethyl alcohol manufacturing
All other basic organic chemical
manufacturing (pt)
56
123
37
56
572
631
72
685
21,084,070
2,816,169
4,935,751
21,084,070
5,864,978
16,084,006
2,288,305
48,290,302
9,380
7,647
6,528
9,380
10,654
47,474
2,265
77,995
* Industry data for relevant NAICS codes from the 2002 Economic Census.
Scarce: U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.
C2B-4
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June I, 2006
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§ 316(b) Final Rule: Phase III - EA, Pan C: Economic Analysis for Existing Facilities
Chapter C2B: Chemicals and Allied Products
C2B-1 SUMMARY INSIG HTS FROM THIS PROFILE
A key purpose of this profile is to provide insight into the ability of chemicals firms to absorb compliance costs
under each primary analysis option without material adverse economic/financial effects. The industry's ability to
withstand compliance costs is primarily influenced by two factors: (1) the extent to which the industry may be
expected to shift compliance costs to its customers through price increases, and (2) the financial health of the
industry and its general business outlook.
Likely Ability to Pass Compliance Costs Through to Customers
As reported in the following sections of this profile, the chemicals industry has a variable level of concentration,
with some industry segments exhibiting relatively low concentration while others show somewhat higher
concentration. Regardless of the domestic concentration level and its implications for market power, the U.S.
chemicals industry faces increasing competitive pressure from abroad, which substantially limits any apparent
ability of firms to pass a significant portion of their compliance-related costs through to customers. In addition,
the relatively low share of total industry output that is estimated subject to the regulation under each analysis
option also diminishes a firms' ability to shift compliance costs to customers. For these reasons, in its analysis of
regulatory impacts for the chemicals industry, EPA assumed that complying firms would be unable to pass
compliance costs through to customers; i.e., complying facilities must absorb all compliance costs (see following
sections and Appendix 3, Cost Pass-Through Analysis, to Chapter C3: Economic Impact Analysis for
Manufacturers, for further information).
Financial Health and General Business Outlook
Over the past decade, the chemicals industry, like other U.S. manufacturing industries, has experienced a range of
economic/financial conditions and a number of substantial challenges. In the early 1990s, the domestic chemicals
industry was affected by reduced U.S. demand as the economy entered a recessionary period. Although domestic
market conditions improved by rr.id-decade, an oversupply of crude oil, weakness in Asian markets, along with
other domestic factors, dealt a serious blow to refiners in 1998. More recently, as the U.S. economy began
recovery from its economic weakness, the domestic chemicals industry is showing signs of recovery with
continuous improvements in demand levels and financial performance during 2003 to 2005. Although the
industry weathered difficult periods over the past few years, the strengthening of the industry's financial condition
and general business outlook suggest improved ability to withstand additional regulatory compliance costs
without a material financial impact.
C2B-2 DOMESTIC PRODUCTION
The U.S. chemical and allied products industry includes a large number of companies that, in total, produce more
than 70,000 different chemical products. These products range from commodity materials used in other industries
to finished consumer products such as soaps and detergents. The industry accounts for nearly 12 percent of U.S.
manufacturing value added, and produces approximately two percent of total national gross domestic product
(McGraw-Hill, 2000).
Raw materials containing hydrocarbons such as oil, natural gas, and coal are primary feedstocks for the
production of organic chemicals. Inorganic chemicals are chemicals that do not contain carbon but are produced
from other gases and minerals (McGraw-Hill, 2000).
The chemicals and allied products industry is highly energy intensive, accounting for seven percent of total U.S.
energy consumption. Just over 50 percent of the industry's energy consumption is used as feedstock in the
production of chemical products. The remainder is used to power production processes. Oil accounts for
approximately 42 percent of total energy consumption by the industry. For some products, e.g., petrochemicals,
June 1, 2006
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C2B-5
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§ 316(b) Final Rule: Phase HI- EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
energy costs account for up to 85 percent of total production costs. Overall, total energy costs represent seven
percent of the value of chemical industry shipments (S&P, 2001).
C2B-2.1 Output
Figure C2B-1 shows constant dollar value of shipments and value added for the three profiled segments
between 1987 and 20041. Value of shipments and value added are two common measures of manufacturing
output. Change in these values over time provides insight into the overall economic health and outlook for an
industry. Value of shipments is the sum of receipts earned from the sale of outputs; it indicates the overall size of
a market or the size of a firm in relation to its market or competitors. Value added, defined as the difference
between the value of shipments and the value of inputs used to make the products sold, measures the value of
production activity in a particular industry.
The Organic Chemicals segment experienced a decrease in both value of shipments and value added between
1988 and 1993, followed by volatility through 1998. The mid 1990s were marked by increased competition in the
global market for petrochemicals, which comprise the majority of organic chemical products. The increased
competition stems from the considerable capacity expansions for these products seen in developing nations.
(McGraw-Hill, 2000). Value of shipments for the segment increased through 2000, while value added remained
flat. Both value of shipments and value added declined in 2001 as the segment faced decreased demand due to
the economic slowdown, but have risen significantly and continuously since that year. In 2004, both value of
shipments and value added were higher than during any other year in the time period analyzed.
The Plastics Material and Resins and Inorganic Chemicals segments remained somewhat more stable over the
period between 1987 and 2004. In the early 1990s, domestic producers benefited from the relatively weak dollar,
which made U.S. products more competitive in the global market. During the later part of the 1990s, the strength
of the U.S. economy bolstered domestic end-use markets, offsetting the effect of reduced U.S. export sales, which
resulted from increased global competition and a strengthened dollar (McGraw-Hill, 2000). The global economic
slowdown that began in 2000 led to decreased production, in particular, of chemical goods that are used in the
production processes of other industries, notably steel, apparel, textiles, forest products, and technology. During
2002 to 2004, the values of shipments and value added of the Plastics Material and Resins segment increased
significantly, reaching maximum levels observed in the analyzed time period by 2004. The value of shipments
and value added of the Inorganic Chemicals segment, on the other hand, has remained relatively stable since
2000.
In the early 2000s, the industry struggled to maintain earnings against the global economic decline. Currently, the
industry continues to face high raw material and energy costs, as well as an increase in competition from abroad.
Although the U.S. economy has improved recently, the chemical industry has lagged in increasing growth of sales
and earnings. This may change in the future, as the American Chemistry Council reported that the chemical
industry should experience positive growth only slightly lower than GDP in 2004 (C&EN, 2003c). Recent
increases in the value of shipments and value added indicate improved performance. This should better position
firms to incur costs associated with regulatory compliance.
Terms highlighted in bold and italic font are further explained in the glossary.
C2B-6 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June I, 2006
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-1: Value of Shipments and Value Added for Profiled Chemicals Industry Segments
(millions, $2005)
Value of Shipments
120,000
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
t
. .-' -" '
*-»^-/" V '*"'
»
A *.^V-\ V
» *x s »
*. ,<
«f ^+-*~« .\
^r-*' ~*-*~***.^*-*- +' '». +
' K> tv>' l-o' NJ K>
-J OO \O O (OUJlhUlCs-^JOG^OO-^ K>W**
- Organic Chemicals (NAICS
to SIC)
Organic Chemicals (SIC
2865,2869)
(NAICS to SIC)
* Plastics Material and Resins
(SIC 2821)
to SIC)
* Inorganic Chemicals (SIC
2812,2813,2816, 2819)
Value Added
45,000 -,
40,000 -
35,000
30.000 -
25,000 -
20,000
15,000 -
10,000
"VAV, /
; .. «
A
^<^^^y^\\ ,./
r --*, .. / ifc--t--A-A:
V"^ * |
1
1
I . ........
Joe^o 'iJi*i^wi3s^jeooo frJ^***'
Organic Chemicals (NAICS
to SIC)
Organic Chemicals (SIC
2865, 2869)
(NAiCSto SIC)
» Plastics Material and Resins
(SIC 2821)
to SIC)
- -A - Inorganic Chemicals (SIC
2812, 2813, 2816, 2819)
' Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC. 19S7, 1992, 1997, and 2002.
Table C2B-3 provides the Federal Reserve System's index of industrial production for the three profiled
segments, which shows trends in production since 1989. This index reflects total output in physical terms,
June I, 2006
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C.2B-7
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§ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
whereas value of shipments and value added reflects the value of output in economic terms. Table C2B-3 shows
varying trends in the three segments since 1989, but sharp declines in production in all three segments in 2000 or
2001. These declines were caused by the marked slowdown in the U.S. economy, which affected demand in
major chemical-using segments such as steel, apparel, textiles, forest products, and the technology sectors
(Chemical Marketing Reporter, 2001).
Production continued to decline through 2001 and has fluctuated annually since that year. In 2002, production
increased somewhat before dipping again in 2003. The decline was followed by gains in 2004, and yet more
declines in 2005. Between 1989 and 2005, the Basic Inorganic Chemicals and Organic Chemicals segments saw
overall production declines of 5.3 and 3.3 percent, respectively, while the Plastics Materials and Resins segment
saw an overall 28.5 percent production increase.
Table C2B-3: Chemicals
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005d
Total Percent Change
1989-2005
Average Annual
Growth Kate
Industry Industrial Production Index (Annual Averages)
Basic Inorganic Chemicals"
Index
2002=100
101.3
103.8
99.3
100.9
97.9
103.2
102.5
102.0
113.4
103.8
111.6
110.3
95.1
100.0
98.4
105.9
96.0
5.3%
-0.3%
Percent
Change
2.4%
-4.3%
1.6%
-3.0%
5.5%
Plastics Material and Resins"
Index
2002=100
74.3
75.0
72.1
78.4
76.9
87.8
-0.7% 88.5
-0.5% 85.7
11.2% 94.3
-8.5% 102.0
7.5% 105.9
-1.2% 105.1
-13.7% 95.4
5.1% 100.0
-1.6% 94.9
7.5% 100.8
-4.0%
95.4
28.5%
1.6%
Organic Chemicals'
Percent ' Index
Change i 2002=100
102.4
1.0%
-3.8%
108.9
103.8
8.7% 104.4
-1.9% : 99.4
14.1% i 94.1
0.8% 95.0
-3.2% 95.4
10.1% 97.4
8.2% 101.4
3.8% ; 103.1
-0.8%
-9.2%
4.9%
-5.1%
95.7
91.7
100.0
98.7
6.2% ' 100.7
-4.6 99.0
-3.3%
: -0.2%
Percent
Change
6.4%
-4.7%
0.6%
-4.8%
-5.4%
1.0%
0.4%
2.1%
4.1%
1.7%
-7.1%
-4.2%
9.0%
-1.3%
2.1%
-1.0
' Includes NAICS 32512-8.
b Includes NAICS 325211.
c Includes NAICS 32511,9.
d Value for Plastics Materials and Resins through 11 months of 2005.
Source: Economagic, 2006.
C2B-2.2 Prices
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and
indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment.
C2B-8
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£ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-2 shows the producer price index for the profiled chemical segments. Selling prices for the products
of the Organic and Inorganic Chemicals segments increased from 1987 to 1989 and remained stable through
1994. Between 1994 and 1995, prices increased sharply, followed by a period of relatively stable prices through
1999. The sharp price rises for Organic Chemicals and Plastics Material and Resins in 2000 resulted in part from
increases in the price of natural gas, which is the feedstock for 70 percent of U.S. ethylene production. High
natural gas prices put U.S. organic chemicals and, to a lesser extent, plastic resin producers at a disadvantage
relative to foreign producers who rely on naphta and gas oil as a feedstock. Natural gas prices declined, however,
in 2001 easing pressure on U.S. producers (Chemical Marketing Reporter, 2001). Price increases for Plastics
Material and Resins also reflected a shift by U.S. producers away from production of commodity resins to
specialty and higher-value-added products (McGraw-Hill, 2000). Prices for Plastics Material and Resins followed
a trend similar to the other two chemical industry segments but with larger fluctuations (see Figure C2B-2).
(C&EN, 2003c). Prices for all three chemical segments declined slightly in 2002 before rising steeply through
2003 to 2005.2
Chemical and plastics prices fluctuate in large part as a result of varying energy prices. Basic petrochemicals,
which comprise the majority of organic chemical products, depend heavily on energy commodities as inputs to
the production process - energy input costs may account for up to 85 percent of total product costs. The prices of
natural gas and oil therefore influence the production costs and the selling price for these products. High basic
petrochemical prices affect prices for chemical intermediates and final end products, including organic chemicals
and plastics.
Another factor influencing prices for commodity chemical products is the cyclical nature of market supply and
demand conditions. The Plastics, Organic Chemicals, and Inorganic Chemicals segments are characterized by
large capacity additions that can lead to fluctuations in prices in response to imbalances in supply and demand.
2 Note that data 2004 and 2005 price data were only available for the Plastics Materials and Resins and Inorganic
Chemicals segments.
June 1, 2006
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C2B-9
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-2; Producer Price Indexes for Profiled Chemicals Industry Segments
-Plastics Material and Resins
(SIC 2821)
-Inorganic Chemicals (SIC
2812,2813,2816, 2819)
-Organic Chemicals (SIC
2865,2869)
Note: For Inorganic Chemicals and Organic Chemicals, data presented are the average of PPI values for the corresponding
S1C/NAICS codes of the industry segments. Data for 2004 and 2005 was collected by corresponding NAICS code(s) and
appended to SIC code data for Plastics Materials and Resins and Inorganic Chemicals after converting all data to a common base
year. Data comparability issues between SIC code and NAICS code data did not allow the same methodology for Organic
Chemicals, Therefore, SIC code data for Organic Chemicals is presented through 2003, after adjusting to the same base year
(12/03) as the other industry segments.
Source: BLS, 2006.
C2B-2.3 Number of Facilities and Firms
According to the Statistics of U.S. Businesses, the number of facilities in the Inorganic Chemicals segment
remained relatively stable between 1989 and 1997, followed by four consecutive years of decreases in the number
of facilities. Although the number of facilities increased slightly in 2003, the Inorganic Chemicals segment
experienced an overall 13.7 percent decline in the number of facilities over the 1990 to 2003 time period. The
other two segments saw overall increases in the number of facilities over the 1989 to 2003 time period, though the
Organic Chemicals segment saw declines in 1999 through 2002. The Plastics Material and Resins segment saw
significant increases in the number of facilities reported between 1993 and 1996, reflecting growth in the demand
for plastics in a number of end-uses (McGraw-Hill, 2000). Table C2B-4 shows the downward trend in the
number of facilities producing inorganic chemical products following a peak in 1991. The decrease is partly
attributable to the consolidation within the Inorganic Chemicals segment (S&P, 2001).
C2B-IO
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f 3l6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2B: Chemicals and All ted Products
Table C2B-4; Number of Facilities for Profiled Chemical Segments*
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998b
1999b
2000b
200 lb
2002b
2003b
Total Percent Change
1999-2003
Average Annual Growth
Rate
Inorganic Chemicals
Number of
Facilities
,421
,508
,466
,476
,460
,425
,396
,414
,310
,309
,300
,266
,182
,227
13. 7%
-1.1%
Percent
Change
6.1%
-2.8%
0.7%
-1.1%
-2.4%
-2.0%
1.3%
-7.3%
-0.1%
-0.7%
-2.6%
-6.6%
3.7%
Plastics Material
Number of
Facilities
517
529
460
502
499
558
630
593
565
586
597
621
695
802
55.7%
3.4%
and Resins
Percent
Change
2.3%
-13.0%
9.1%
-0.6%
11.8%
12.9%
-5.9%
-4.7%
3.7%
1.9%
4.0%
11.9%
15.4%
Organic Chemicals
Number of
Facilities
837
851
888
908
902
907
868
945
1,093
1,076
1,072
1,064
1,052
1,074
25.3%
1.9%
Percent
Change
1.7%
4.3%
2.3%
-0.7%
0.6%
-4.3%
8.9%
15.6%
-1.5%
-0.4%
-0.7%
-1.2%
2.1%
The Statistics of U.S. Business is derived from Census County Business Patterns data, and reports somewhat different numbers of
firms and facilities than other Census data sources.
b Before 1998, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the
North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC
code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
The trend in the number of firms between 1989 and 2003 is similar to the number of facilities. The number of
firms in the Inorganic Chemicals segment peaked in 1992, and then declined continuously during 1993 to 2002,
before increasing slightly in 2003 The Organic Chemicals segment showed more volatility before peaking in
1998 with 710 firms. The number of firms in this segment declined slightly over 1999 to 2002, before reaching a
new high of 717 firms in 2003. The number of firms in the Plastics Material and Resins segment increased
substantially between 1993 and 1996, from 284 to 403 firms, before decreasing in the next two years. Starting in
1999, the Plastics Material and Resins segment showed five years of positive growth in the number of firms.
Table C2B-5 on the following page shows the number of firms in the three profiled chemical segments between
1990 and 2003.
June 1, 2006
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C2B-1I
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£ 316(b) Final Rule: Phase ///- EA, Part C: Economic Analysis for Existing Facilities
Chapter C2B: Chemicals and Allied Products
Table C2B-5:
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998b
1999b
2000b
Number of Firms for Profiled
Chemical Segments'
Inorganic Chemicals Plastics Material and Resins Organic Chemicals
Number of
Firms
640
678
699
683
677
657
625
611
618
609
611
200 lb ; 606
2002b
2003b
Total Percent Change
1990-2003
Average Annual
Growth Kate
552
592
-7.5%
-0.6%
Percent
Change
5.9%
3.1%
-2.3%
-0.9%
-3.0%
-4.9%
Number of
Firms
301
319
255
284
295
343
403
-2.2% 358
1.1%
-1.3%
0.2%
-0.8%
-8.9%
7.3%
322
337
352
375
443
554
84.1%
4.8%
Percent Number of
Change Firms
579
6.0%
-20.1%
584
611
11.4% 648
3.9% 644
16.3%
644
17.5% 596
-11.2% 674
-10.1% 710
4.7%
684
4.5% 683
6.5% 692
18.1% 685
25.1%
717
23.9%
1.7%
Percent
Change
0.9%
4.6%
6.1%
-0.6%
0.0%
-7.5%
13.1%
5.3%
-3.6%
-0.1%
1.3%
-1.0%
4.7%
* The Statistics of U.S. Business is derived from Census County Business Patterns data, and reports somewhat different numbers of
firms and facilities than other Census data sources.
b Before 1998, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the
North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC
code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
C2B-2.4 Employment and Productivity
Figure C2B-3 below provides information on employment from the Annual Survey of Manufactures. With the
exception of minor short-lived fluctuations, employment in the Organic Chemicals and Plastics Material and
Resins segments remained relatively stable between 1988 and 2000 before seeing declines of greater than 4.5
percent in 2001. Slight increases in employment in 2002 were followed by further declines during 2003 to 2004.
The Inorganic Chemicals segment, however, experienced a significant decrease in employment from 103,400 to
80,200 employees over the 1992 to 1996 period. This decrease reflects the industry's restructuring and
downsizing efforts intended to reduce costs in response to competitive challenges. Employment in this segment
remained fairly constant over the next two years before experiencing three years of employment declines greater
than 4 percent. A brief increase in employment in 2002 was followed by further declines in both 2003 and 2004.
From 1987 to 2004, the Inorganic Chemicals segment had the largest overall decrease in employment at 28
percent. The Organic Chemicals segment employment declined 24 percent, while the Plastics Material and
Resins segment was the only segment to increase employment, which rose by 2.6 percent for the period.
C2B-12
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§ 3l6(b) Final Rule; Phase HI - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-3; Employment for Profiled Chemical Segments (OOOs)
m- - Organic Chem icals (N AICS
to SIC)
Organic Chemicals (SIC
2865,2869)
A- - Inorganic Chemicals (NAICS
to SIC)
A Inorganic Chemicals (SIC
2812, 2813, 2816, 2819)
-»- - - Plastics Material and Resins
(NAICS to SIC)
-# Plastics Material and Resins
(SIC 2821)
* Before 1997, the Department af Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and2003-2004; U.S. DOC. 1987. 1992. 1997, and2002.
Table C2B-6 presents the change in value added per labor hour, a measure of labor productivity, for each of
the profiled industry segments between 1988 and 2004. The trends in each segment show considerable volatility
through the 1990s into the 2000s. The gains in productivity in the Inorganic Chemicals segment reflect firms'
attempts to reduce costs by restructuring production and materials handling processes in response to maturing
domestic markets and increased global competition (S&P, 2001). Over the 1988 to 2004 period, all three
segments saw significant increases in productivity.
June I, 2006
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C2B-I3
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§ 3l6(b) Final Rule: Phaselll-EA, PartC: Economic Analysis for Existing Facilities ChapterC2B: Chemicals and Allied Products
Table C2B-6; Productivity Trends for Profiled Chemical Segments ($2005)
Year
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997'
1998"
1999"
2000s
2001"
2002*
2003"
2004"
Total
Percent
Change
1988-2004
Average
Annual
Percent
Change
Inorganic Chemicals
Value
Added
(Smill.)
19,020
20,550
22,120
20,875
21,686
20,134
18,703
19,808
19,789
20,377
26,790
19,203
15,961
16,694
16,989
17,344
16,992
-10.7%
-0.7%
Prod.
Hours
(mill.)
114
109
115
121
120
108
101
100
97
91
92
88
94
87
86
82
77
-32.5%
-2.4%
Value
Added/Hour
$/hr.
168
189
193
173
180
186
186
198
204
224
293
219
171
191
197
212
222
32.4%
1.8%
Percent
Change
12.8%
2.2%
-10.6%
4.4%
3.4%
-0.5%
6.6%
3.3%
9.4%
30.8%
-25.2%
-22.0%
12.2%
2.8%
7.8%
4.6%
Plastics Material and Resins
Value
Added
(Smill.)
19,547
18,540
16,756
14,620
16,215
15,163
19,009
21,429
18,289
20,710
22,162
21,302
20,582
16,516
17,723
18,745
23,844
22.0%
1.2%
Prod.
Hours
(mill.)
80
84
83
81
79
81
89
92
81
84
83
84
87
80
91
87
82
3.1%
0.2%
Value
Added/Hour
$/hr.
245
222
203
181
207
187
213
234
227
248
266
252
236
206
195
215
290
18.3%
1.1%
Percent
Change
Organic Chemicals
Value
Added
(Smill.)
39,548
-9.6% 41,520
-8.3% 39,120
-10.9% 34,622
14.2% 33,541
-9.3% 33,469
13.4%
36,148
10.1% ; 41,191
-3.1%
33,979
9.2% 41,575
7.5%
33,665
-5.4% 34,780
-6.3%
-12.9%
34,987
24,482
-5.3% 31,192
10.2%
31,966
35.0% 42,251
6.8%
0.4%
Prod.
Hours
(mill.)
152
155
156
156
155
156
146
148
158
150
147
143
138
135
133
130
122
-19.7%
-1.4%
Value
Added/Hour
Percent
S/hr ,
Change
261
269 3.1%
251 -6.5%
222 -11.6%
216 -2.8%
215 -0.5%
248 15.6%
279 12.4%
215 -23.0%
277 28.7%
230 -17.0%
244 6.2%
253 3.7%
181 -28.4%
235 29.9%
247 4.9%
346 40.4%
33.0%
1.8%
" Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the
North American Industry Classification System (NA1CS). For this analysis, EPA converted the NAICS classification data to the SIC
code classifications using the 1997 Economic Census Bridge Between NAICS and SIC,
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and2003-2004; U.S. DOC, 1987, 1992, 1997, and2002.
C2B-2.5 Capital Expenditures
The chemicals industry is relatively capital-intensive. According to the Census's 2001 Annual Survey of
Manufactures, facilities in NAICS 325, which includes the entire profiled chemical SIC codes, had aggregate
capital spending of almost $19 billion in 2001. Capital-intensive industries are characterized by large,
technologically complex manufacturing facilities, which reflect the economies of scale required to manufacture
products efficiently. New capital expenditures are needed to extensively modernize, expand, and replace
existing capacity to meet growing demand. All three profiled chemical industry segments experienced substantial
increases in capital expenditures through the 1990s. Table C2B-7 on the following page shows that capital
expenditures in the Inorganic Chemicals segment increased, in real terms, from $1.216 billion in 1987 to $2.803
billion in 1998. Although the following five years saw declines in capital expenditures, the Inorganic Chemicals
segment increased capital expenditures by 14.8 percent from 1987 to 2004. The Plastics segment more than
doubled its capital expenditures from 1987 through 1999, before significant reductions occurred in the subsequent
two years. The Organic Chemicals segment peaked in 1996, and has seen its capital expenditures decline
C2B-14
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§ 3l6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
continuously until 2004, when expenditures increased slightly. Overall, capital expenditures in this segment
declined by almost 33 percent from 1988 to 2004. Much of the growth in capital expenditures was driven by
investment in capacity expansions to meet the increase in global demand for chemical products. Domestically,
the continued substitution of synthetic materials for other basic materials and rising living standards caused
consistent growth in the demand for chemical commodities (S&P, 2001). As the economy slowed in 2000,
chemical industry firms curtailed capital expenditures in the face of weakening financial performance. As the
economy picked up steam, an early 2003 survey of 19 chemical companies found that businesses sought to start
increasing capital projects in 2003 (C&EN, 2003b).
Table C2B-7; Capital Expenditures for Profiled Chemical Segments (in millions, S2005)
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997*
1998"
1999"
2000"
20011
2002a
2003"
2004"
Total Percent Change
1987(S)-2004
Average Annual
Growth Kate
Inorganic Chemicals
Capital
Expenditures
,216
,242
,909
,826
,827
2,017
1,496
1,620
2,079
2,391
2,347
2,803
2,373
2,320
2,193
1,514
1,210
1,397
14.8%
0.8%
Percent
Change
2.1%
53.7%
-4.3%
0.1%
10.4%
-25.8%
8.3%
28.3%
15.0%
-1.9%
19.5%
-15.3%
-2.2%
-5.5%
-31.0%
-20.1%
15.4%
Plastics Material and Resins
Capital
Expenditures
1,910
2,378
2,806
3,348
2,989
2,216
2,443
3,150
2,829
3,325
3,435
3,987
4,286
2,516
2,017
2,225
1,586
1,882
-1.5%
-0.1%
Percent
Change
24.5%
18.0%
19.3%
-10.7%
-25.9%
10.3%
28.9%
-10.2%
1 7.6%
3.3%
16.0%
7.5%
-41.3%
-19.8%
10.3%
-28.7%
18.7%
Organic Chemicals
Capital
Expenditures
n/a
4,713
5,807
7,022
6,972
6,174
5,109
4,358
5,953
7,457
6,832
5,804
5,340
5,129
3,860
3,611
2,981
3,169
-32.8%
-2.4%
Percent
Change
23.2%
20.9%
-0.7%
-11.4%
-17.2%
-14.7%
36.6%
25.3%
-8.4%
-15.0%
-8.0%
-4.0%
-24.7%
-6.5%
-17.4%
6.3%
* Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the
North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC
code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996. 1998-2001; and 2003-2004; U.S. DOC, 1987.1992, 1997, and 2002.
C2B-2.6 Capacity Utilization
Capacity utilization measures actual output as a percentage of total potential output given the available
capacity. Capacity utilization reflects excess or insufficient capacity in an industry and is an indication of whether
new investment is likely. To take advantage of economies of scale, chemical commodities are typically produced
in large facilities. Capacity additions in this industry are often made on a relatively large scale and can
substantially affect the industry's capacity utilization rates. Figure C2B-4 presents the capacity utilization index
from 1989 to 2004 for specific 4-digit SIC codes within each of the profiled segments in the chemicals industry.
Capacity utilization in the Organic Chemicals segment remained the most stable through this time period with
June I, 2006
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C2B-15
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§ 3!6{b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2B: Chemicals and Allied Products
only moderate fluctuations between 1989 and 1999, followed by decreased utilization rates in 2000 and 2001,
before rebounding in 2002. Plastics Material and Resins capacity utilization showed a downward trend, as the
production of many commodity resins shifted overseas. U.S. producers responded by emphasizing the
manufacture of specialty and higher-value-added products and by rationalizing capacity to improve profitability
(McGraw-Hill, 2000).
Overall, the Inorganic Chemicals segment demonstrated the most volatility in capacity utilization between 1989
and 2002. The chlor-alkali industry (SIC code 2812) experienced an almost consistent decline in capacity
utilization since its high of 96 percent from 1992 through 1994. This decrease reflects the enactment of treaties
and legislation designed to reduce the emission of chlorinated compounds into the environment. These
regulations decreased the demand for chlorine, which, together with caustic soda, accounts for more than 75
percent of production by this segment. The significant increase in capacity utilization in the industrial gases
segment (SIC code 2813) in the mid 1990s reflects the expansion of key intermediate purchasers of chemical
commodities such as the primary metals and electronics industries. As these markets and the economy in general
started to slow, utilization rates declined as well. Similarly, capacity utilization in the pigments and other
inorganic chemicals segments (SIC codes 2816 and 2819) remained relatively stable between 1989 and 1998,
before dropping in the early 2000s. Capacity utilization in the inorganic pigments industry increased significantly
in 2002 before declining again over 2003 to 2004; no such rebound is evident in the industrial inorganic
chemicals segment, where capacity utilization has been declining each year since 1998. The stability in these
segments through 1999 reflects the fact that these are essentially mature markets where the demand for products
tends to track growth in gross domestic product (GDP) (McGraw-Hill 2000). As the economy continued its
sluggish performance in the early 2000s, utilization within this segment dampened, as demand for product
decreased.
C2B-16
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Cbemical Segments
100 -,
95 -
90
85 H
80
75 -
70 -
65
60
.-*-
»--»
'
M 'A-
''*
*v
Alkalies and Chlorine {NAICS to
SC)
-Alkalies and Chlorine (SIC 2812)
- Inorganic P igments (NAICS to
SIC)
Inorganic Pigments (SIC 2816)
-A- ' - todustrialGases (NAICS to SIC)
...4 IndusIrialGases (SIC 2813)
I (NACS to SIC)
Indus trial bio rganic Chemicals,
NEC (SK 2819)
ii II 8 1 I
N> N* 1O to K>
8 § S S S
100
95
90 -
85
80
75 -
70 -
60
* ........... *
-»--- Plastics Material and Resins
(NAICStoSIC)
« Plastics Material and Resins
(SIC 2821)
SJ «0 K) S) r-J
8 § § S g
7une /, 2006
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C2B-17
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§ 3l6(b) Final Rule: Phase lll-EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Chemical Segments
100
95
90 -
85 -
80
75 -
70
60
S> hO S>
- *- - - Cyclic Organic Crudes and
Intermediates (NAICS to
SIC)
-» Cyclic Organic Crudes and
Intermediates (SIC 2865)
- - Industrial Organic Chemicals,
NEC (NAICS to SIC)
- Industrial Organic Chemicals,
NEC (SIC 2869)
* Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NA1CS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1989-2004.
C2B-3 STRUCTURE AND COMPETITIVENESS
The chemicals industry continues to restructure and reduce costs in response to competitive challenges, including
global oversupply for commodities. In the early 1990s, the chemical industry's cost cutting came largely from
restructuring and downsizing. The industry has taken steps to improve productivity, and consolidated to cut costs.
Companies seeking growth within these relatively mature industry segments have made acquisitions to achieve
production or marketing efficiencies. The Plastics Material and Resins segment, for example, experienced sizable
consolidations in the late 1990s into 2000 (S&P, 2001).
C2B-3.1 Firm Size
The Small Business Administration (SBA) defines small firms in the chemical industries according to the firm's
number of employees. Firms in the Inorganic Chemicals segment (SIC codes 2812,2813,2816, 2819) and in
Industrial Organic Chemicals, NEC (SIC code 2869) are defined as small if they have 1,000 or fewer employees;
firms in Plastics Material and Resins (SIC 2821) and Cyclic Organic Crudes and Intermediates (SIC code 2865)
are defined as small if they have 750 or fewer employees. The size categories reported in the Statistics of U.S.
Businesses (SUSB) do not correspond with the SBA size classifications, therefore preventing precise use of the
SBA size threshold in conjunction with SUSB data.
The SUSB data presented in Table C2B-8 show that in 2003,474 of 592 firms in the Inorganic Chemicals
segment had less than 500 employees. Therefore, at least 80 percent of firms in this segment were classified as
small. These small firms owned 555 facilities, or 45 percent of all facilities in the segment. In the Plastics and
Resins Industry segment, 455 of 554 firms, or 82 percent, had less than 500 employees in 2003. These small
firms owned 493 of 802 facilities (61 percent) in the segment. In the Organic Chemicals segment, 76 percent of
firms (546 of 717) had fewer than 500 employees, owning 55 percent of all facilities in that segment.
C2B-18
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£ 316(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Table C2B-8 below shows the distribution of firms, facilities, and receipts in the Inorganic Chemicals, Plastics
Material and Resins, and Organic Chemicals segments by the employment size of the parent firm.
Table C2B-8: Number of Firms and Facilities by Firm Size Category for Profiled
Chemical Segments, 2003*
Employment
Size Category
0-19
20-99
100-499
500+
Total
Inorganic Chemicals
Number of Number of
Firms Facilities
261
143
70
118
592
261
171
123
672
1.227
Plastics Material and Resins
Nu mber of N um ber of
Firms Facilities
228
171
56
99
554
230
176
87
309
802
Organic Chemicals
Number of Number of
Firms Facilities
289
174
83
172
717
291
184
117
483
1,074
' Before 1998, the Department of Commerce compiled data in the SIC system; since 1997, these data have been
compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the
NAICS classification data to We SIC code classifications using the 1997 Economic Census Bridge Between NAICS
and SIC.
Source: U.S. SBA, 1989-200).
C2B-3.2 Concentration Ratios
Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is
closely related to entry barriers with more concentrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common
measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a
CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry's total
value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things
being equal . An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI
indicates concentration based on the largest 50 firms in the industry. It is equal to the sum of the squares of the
market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with
market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (602 + 302
+ 102). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the
industry. Based on the U.S. Department of Justice's guidelines for evaluating mergers, markets in which the HHI
is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered
to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated.
Of the profiled chemicals and allied products segments, as shown in Table C2B-9, only Alkalies and Chlorine
(SIC 2812), Industrial Gases (SIC 2813), Inorganic Pigments (SIC 2816), and Cyclic Crudes and Intermediates
(SIC 2865) would be considered concentrated based on their CR4 and HHI values. In contrast, Industrial
Inorganic Chemicals, NEC (SIC 2319), Plastics Material and Resins (SIC 2821), and Industrial Organic
Chemicals, NEC (SIC 2869) would be considered competitive. The diversity of products in some of the profiled
segments, however, makes generalizations about concentration less reliable than in industries with a more limited
The measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a
high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with
foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in beverage
containers). Concentration ratios based on share of domestic production are therefore only one indicator of the extent of
competition in an industry.
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§ 3l6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
product slate. That is, within a single SIC code, the numbers of producers may vary substantially by individual
product - firms may possess relatively high market power in products with a smaller number of competing
producers even though the total SIC code would appear to have a relatively low concentration. On the basis of
concentration information, some industry segments would therefore appear to be moderately concentrated;
accordingly, firms in these segments might possess a moderate degree of market power and thus the ability to pass
compliance costs through to customers as price increases. However, as discussed above and more specifically in
the following section, competition from foreign producers in both domestic and export markets, increasingly
restrains any discretionary pricing power of U.S. firms in the profiled industry segments.
Table C2B-9: Selected Ratios for SIC and NAICS Codes Within The Profiled Chemical Segments in
1987,1992,and 1997"
SIC (S) or
NAICS (N) Code
Year
4 Firm (CR4)
8 Firm (CR8)
Concentration Ratios
20 Firm 50 Firm
(CR20) (CR50)
Herfindahl-
Hirschman Index
Inorganic Chemicals
S2812
N 325181
S2813
N 325 120
S2816
N325131b
S2819
N 325188'
1987
1992
1997
1987
1992
1997
1987
1992
1997
1987
1992
1997
72%
75%
80%
77%
78%
64%
64%
69%
67%
38%
39%
31%
93%
90%
92%
88%
91%
85%
76%
79%
79%
49%
50%
42%
99%
99%
100%
95%
96%
96%
94%
93%
95%
68%
68%
63%
100%
100%
100%
98%
99%
99%
99%
99%
100%
84%
85%
82%
2,328
1,994
2,870
1,538
,629
,225
,550
,910
,848
468
677
394
Plastics Material and Resins
S2821
N 3252 11
1987
1992
1997
20%
24%
26%
33%
39%
39%
61%
63%
64%
89%
90%
89%
248
284
304
Organic Chemicals
S2865
N 325132'
N325192d
S2869
N325199b
1987
1992
1997
1997
1987
1992
1997
34%
31%
42%
62%
31%
29%
25%
50%
45%
59%
79%
48%
43%
38%
77%
72%
83%
98%
68%
67%
57%
96%
94%
97%
100%
86%
86%
80%
542
428
700
1701
376
336
256
* The 1997 Census of Manufactures is the most recent concentration ratio data available.
b NAICS code represents largest percentage of facilities and value of shipments within this SIC based on 1997 Bridge Between SIC
and NAICS
c NAICS code represents largest percentage of facilities within this SIC based on 1997 Bridge Between SIC and NAICS
d NAICS code represents largest percentage of value of shipments within this SIC based on 1997 Bridge Between SIC and NAICS
Source: U.S. DOC. 1987, 1992, 1997, and 2002.
C2B-20
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§ 316(b) Final Rule: Phase III - EA, Part C. Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
C2B-3.3 Foreign Trade
The chemicals industry is the largest exporter in the United States. The industry generates more than 10 percent
of the nation's total exports, and overseas sales constitute a growing share of U.S. chemical company revenues.
The major U.S. producers still derive 50 percent or more of their revenue from domestic sales, however (S&P,
2001).
This profile uses two measures of foreign competition: export dependence and import penetration.
Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic
markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that
industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests
that higher import penetration levels will reduce market power and pricing discretion because foreign competition
limits domestic firms' ability to exercise such power. Firms belonging to segments in which imports account for
a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to pass-
through costs because foreign producers would not incur costs as a result of the Phase III regulation. The
estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31 -33) for 2001 is 22 percent.
For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with
import ratios close to or above 22 percent would more likely face stiff competition from foreign firms and thus be
less likely to succeed in passing compliance costs through to customers.
Export dependence, calculated as exports divided by value of shipments, measures the share of a segment's sales
that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not
increase the production costs of foreign producers with whom domestic firms must compete in export markets.
As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing
prices to recover cost increases resulting from regulation-induced increases in production costs. The estimated
export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the
ability of industries to withstand compliance cost burdens, EPA judges that industries with export ratios close to
or above 15 percent are at a relatively greater disadvantage in potentially recovering compliance costs through
price increases since export sales are presumed subject to substantial competition from foreign producers.
Table C2B-10 presents trade statistics for each of the profiled chemical segments. Both export dependence and
import penetration experienced increases in each of these segments between 1989 and 2001.
Globalization of markets has become a key factor in the Inorganic Chemicals segment, with both import
penetration and export dependence growing substantially over the 14-year analysis period. During this period,
imports rose by just over 6 percent, while exports climbed 0.4 percent. The greater growth in imports underscores
the increasing competition from foreign producers in domestic markets.
Increased globalization has also affected the Plastics Material and Resins segment. Imports and exports of
plastics and resins have increased significantly over the time period, reflecting the continued growth in the global
market. Of the three profiled chemical segments, this segment has shown the largest overall increases in values of
imports and exports with total growth of 174 percent and 67 percent, respectively, from 1989 through 2002.
Import penetration grew more quickly than export dependence in this segment due to declining export
opportunities and increased competition from new foreign capacity. The United States remained a net exporter of
plastics and resins, despite these trends. The market for organic chemicals, particularly petrochemicals, has
become increasingly competitive. Significant capacity expansions for petrochemicals worldwide increased
competition in domestic markets from imports and began to limit export opportunities for U.S. producers.
Through 1999, the segment still exported more than it imported. This balance recently changed though as imports
exceeded exports during 2000 through 2002. From 1989 through 2002, imports in this segment grew by 161
percent, while export growth was at 39 percent.
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§3l6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
In 2002, the Inorganic Chemicals segment's import penetration ratio was 24.7 percent, while the Organic
Chemicals segment's import penetration ratio was slightly higher at 24.8 percent. Both segments likely face
strong competition from foreign firms in U.S. markets. The Plastics Material and Resins segment had an import
penetration ratio of 14.0 percent in 2002, suggesting this segment does not presently face strong competition from
foreign firms' presence in U.S. markets. However, the import penetration ratio nearly doubled in the decade from
1991 to 2001, which could indicate that foreign firms have begun aggressive pursuit of these U.S. markets. In
2002, the export dependence ratio was 26 percent for the Inorganic Chemicals segment, 26 percent for the Plastics
Material and Resins segment, and 23 percent for the Organic Chemicals segment. All three segments likely face
significant competitive pressure in retaining these positions in export markets. Given these levels of exposure to
competition from foreign firms in domestic and export markets, the profiled chemicals industry segments likely
have little discretionary power to recover compliance costs through price increases.
Recent trends in international chemicals markets imply that U.S. producers will continue to face strong
competition from foreign producers. The industry's trade balance declined in 2000, due to increased imports
from Western Europe, encouraged by the strong U.S. dollar relative to the Euro, and growth in the petrochemical
industry in the Middle East. Declines in the dollar relative to the Euro improved export performance somewhat,
but decline in the global economy resulted in mixed trade performance in 2001 (Chemical Market Reporter,
2001). In 2002, the chemical industry's traditional trade surplus reversed, reaching a deficit of around $4 billion
(C&EN, 2003a). After nine months of 2003, the deficit had ballooned to $7.7 billion (C&EN, 2003c).
C2B-22
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
June I, 2006
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§ 316(b) Final Rule: Phase III- EA, Part C.' Economic Analysis for Existing Facilities
Chapter C2B: Chemicals and Allied Products
Table C2B-10: Trade Statistics for Profiled Chemical Segments j
Year
Value of imports
(millions, $2005)
,, , , Value of Implied
Value of exports .. _ r .
, ! rlnA*. shipments Domestic
(millions, $2005) , .... »,_. . .
v ' (mi lions, $2005) Consumption*
Import
Penetration11
Export
Dependence"
Inorganic Chemicals, Except Pigments
1989
1990
1991
1992
1993
1994
1995
1996
1997d
1998"1
I999d
2000d
2001d
2002"
Total Percent Change
1989-2002
Average Annual
Growth Rale
6,035
5,941
5,687
5,407
5,123
5,846
6,825
7,466
6,166
6,188
6,167
7,035
6,750
6,407
6.2%
0.5%
6,852
6,405
6,625
6,658
6,117
6,477
7,520
7,613
7,326
6,493
6,178
7,065
7,196
6,882
0.4%
0.0%
30,090
32
31
31
,270
,294
,214
29,255
26,924
28,538
28,993
29,817
36,250
28,705
26,186
25
,510
26,423
-12.2%
-1
.0%
29,274
31,806
30,357
29,963
28,262
26,293
27,843
28,846
28,658
35,946
28,694
26,157
25,063
25,948
-11.4%
-0.9%
20.6%
18.7%
18.7%
18.0%
18.1%
22.2%
24.5%
25.9%
21.5%
17.2%
21.5%
26.9%
26.9%
24.7%
19.8%
1.4%
22.8%
19.8%
21.2%
21.3%
20.9%
24.1%
26.3%
26.3%
24.6%
17.9%
21.5%
27.0%
28.2%
26.0%
14.4%
1.0%
Plastics Material and Resins
1989
1990
1991
1992
1993
1994
1995
19%
1997d
1998d
1999d
2000d
200 ld
2002"
Total Percent Change
1989-2002
Average Annual
Growth Rate
2,216
2,488
2,356
2,676
3,194
4,074
4,971
4,988
5,163
5,250
5,528
6,462
6,143
6,071
173.9%
8.1%
7,878
8,605
9,802
9,094
9,109
10,467
12,582
12,646
12,759
1 1,940
11,957
13,892
13,004
13,121
66.6%
4.0%
47,461
43,040
39,252
40,626
40,015
46,336
52,889
47
53
52
53
58
,897
,139
,327
,300
,537
50,770
50,407
6.2%
0.5%
41,800
36,924
31,807
34,208
34,100
39,943
45,278
40,239
45,543
45,637
46,871
51,106
43,910
43,358
3.7%
0.3%
5.3%
6.7%
7.4%
7.8%
9.4%
10.2%
11.0%
12.4%
11.3%
11.5%
11.8%
12.6%
14.0%
14.0%
164.1%
7.8%
16.6%
20.0%
25.0%
22.4%
22.8%
22.6%
23.8%
26.4%
24.0%
22.8%
22.4%
23.7%
25.6%
26.0%
56.8%
3.5%
June I, 2006
Internal Drift - Deliberative, Predecisianal - Da not Quote, Cite, or Distribute
C2B-23
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13 / 6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Table C2B-10: Trade Statistics
Year
Value of imports
(millions, $2005)
1989
1990
1991
1992
1993
1994
1995
1996
1997d
I998d
8,300
8,619
8,742
9,400
9,300
10,751
12,862
13,779
18,370
17,702
1999d 19,153
2000d 23,504
200 ld
2002d
Total Percent Change
1989-2002
Average Annual
Growth Rate
21,988
21,653
160.9%
7.7%
Value of exports
(millions, $2005)
Organic Chemicals,
14,134
13,452
13,445
13,083
13,258
15,386
19,011
16,956
21,306
19,269
20,040
22,517
20,189
19,641
39.0%
2.6%
for Profiled
Value of
shipments
Except Gum &
93,226
89,380
84,596
82,834
80,601
85,959
92,397
89,426
97,285
81,847
87,599
97,856
83,041
85,421
-8.4%
-0.7%
Chemical Segments
Implied
Domestic
Consumption'
Wood
87,392
84,546
79,894
79,151
76,643
81,325
86,247
86,249
94,349
80,281
86,711
98,843
84,840
87,434
0.0%
0.0%
Import
Penetration11
9.5%
10.2%
10.9%
11.9%
12.1%
13.2%
14.9%
16.0%
19.5%
22.1%
22.1%
23.8%
25.9%
24.8%
160.8%
7.7%
Export
Dependence'
15.2%
15.1%
15.9%
15.8%
16.4%
17.9%
20.6%
19.0%
21.9%
23.5%
22.9%
23.0%
24.3%
23.0%
51.7%
3.3%
* Calculated by EPA as shipments + imports - exports.
b Calculated by EPA as imports divided by implied domestic consumption.
c Calculated by EPA as exports divided by shipments.
d Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.
C2B-24
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June I, 2006
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§ 3I6(b) Final Rule: Phase HI - EA, Pan C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-5: Value of Imports and Exports for Profiled Chemicals Industry Segments
10,000 -
7,500 -
5,000 -
, , ,
OO yj ^i \f) \Q ^ 'm> ^5 ^ ^o 3> O -O O
. ., -A.- . , t.'vnnrtf /MAlPCfrt CI
m
» Exports (SIC 28 12, 2813,
2819)
- - * A.. . * Imnftrf c /MA I PR in ^IPI
A Imports (SIC 2812, 2813,
2819)
15 000
12,500
10,000 -
7.500 -
5,000 -
? Sflfl -
0 -
/ "*»--*'
.,,,.,... . i ,
1 1 1 8 1 1 1 1 3 I 1 i 1 1
)
'
Exports (SIC 282 1 )
*- Imports (SIC 2821)
SIC)
SIC)
Internal Draft - Deliberative, Predecisional - Do not Quote. Cue, or Distribute
C2B-25
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§ 3l6(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-S: Value of Imports and Exports for Profiled Chemicals Industry Segments
25,000 -,
">"> son -
20,000
17,500 -
15,000 -
12,500 -
10,000
7,500 -
5,000
~> son -
0
A. !
* -' 1 . , . *, . , FYnnrt
^__f/ - A Imports (SIC 2865, 2869)
A * *"
i i
1 I * 1 1 1 1 1 1 I 1 1 1 1
" Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 2006.
C2B-4 FINANCIAL CONDITION AND PERFORMANCE
The financial performance and condition of the chemical industry are important determinants of its ability to
withstand the costs of regulatory compliance without material, adverse economic/financial impact. To provide
insight into the industry's financial performance and condition, EPA reviewed two key measures of financial
performance over the 14-year period, 1992-2005: net profit margin and return on total capital. EPA calculated
these measures as a revenue-weighted index of measure values for public reporting firms in the respective
industries, using data from the Value Line Investment Survey. Financial performance in the most recent financial
reporting period (2005) is obviously not a perfect indicator of conditions at the time of regulatory compliance.
However, examining the trend, and deviation from the trend, through the most recent reporting period gives
insight into where the industry may be, in terms of financial performance and condition, at the time of
compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the
potential risk faced by the industry in a future period in which compliance requirements are faced: all else equal,
the more volatile the historical performance, the more likely the industry may be in a period of relatively weak
financial conditions at the time of compliance.
Net profit margin is calculated as after-tax income before nonrecurring gains and losses as a percentage of sales
or revenues, and measures profitability, as reflected in the conventional accounting concept of net income. Over
time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the
industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from
several factors, including: variations in aggregate economic conditions (including international and U.S.
conditions), variations in industry-specific market conditions (e.g., short-term capacity expansion resulting in
overcapacity), or changes in the pricing and availability of inputs to the industry's production processes (e.g., the
cost of energy to the chemical process). The extent to which these fluctuations affect an industry's profitability,
C2B-26
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June I, 2006
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§ 316(b) Final Rule: Phase Hi - EA, Pan C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
in turn, depends heavily on the fixed vs. variable cost structure of the industry's operations. In a capital intensive
industry such as the chemical and allied products industry, the relatively high fixed capital costs as well as other
fixed overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative
affect on profit margin.
Return on total capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by
the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of
the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or
liability element). As such, the return on total capital provides insight into the profitability of a business' assets
independent of financial structure and is thus a "purer" indicator of asset profitability than return on equity. In the
same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate
over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The
factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in
return on total capital.
Figure C2B-6 presents net profit margin and return on total capital for public-reporting firms in two chemical
industry segments - (1) Industrial Chemicals and (2) Plastics and Synthetic Fibers - for the 14-year period, 1992
and 2005. The Industrial Chemicals segment corresponds approximately to the Organic Chemicals and Inorganic
Chemicals profiled industry segments; the Plastics and Synthetic Fibers segment corresponds approximately to
the Plastics Material and Resins profiled industry segment. The financial performance information reported in
Figure C2B-6 confirms the trends and performance discussed above in this section.
As shown in Figure C2B-6, the Industrial Chemicals (Organic Chemicals and Inorganic Chemicals) segment has
seen moderate volatility of financial performance over the analysis period. Return on total capital moved off a
post-recession low near 10 percent in 1992 to achieve levels in excess of 20 percent during 1995-1997. Recovery
of demand accompanied by industry restructuring and downsizing accounted for the upturn in performance.
During the latter part of the decade, though, increased competition from foreign producers and demand weakness
in Asian markets eroded this performance. As a result, return on capital fell below 15 percent in 1998, and
remained at this lower level through 2000. In 2001, a series of factors - high energy and raw material prices at
the start of the year, overcapacity, the terrorist attacks, and slowing U.S. and global economies at the end of the
year - led to a further sharp decline in return on capital performance of approximately 8 percent. Starting in 2002,
however, return on total capital has shown steady improvement, increasing to more than 15 percent by 2005. Net
profit margin shows a similar, though less volatile, trend, with declines in 2000 through 2001, followed by steady
improvement between 2002 and 2005. In 2005, net profit margin reached the highest values observed during the
entire 1992 to 2005 time period.
The same factors largely influenced performance in the Plastics and Synthetic Fibers (Plastics Material and
Resins) segment over the 14-year period. Performance in this segment followed a similar, but less volatile,
pattern to that of the Industrial Chemicals segment. Return on total capital rose from a low near 10 percent in
1993 to a period high of 15 percent in 1995. Since then, performance trended down to reach a period low of
approximately 9 percent in 2001. This segment achieved steady, though moderate improvement during 2002 to
2005. Net profit margin again shows a similar, though less volatile, trend compared to return on capital.
Overall, the profiled segments of the chemical industry remain at weaker levels of financial performance than
achieved during the mid 1990s but appear to be recovering from the sharp weakness of 2001-2002. Continued
recovery in 2006 and beyond suggests improved ability to withstand additional regulatory compliance costs
without imposing significant financial impacts.
June I, 2006
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C2B-27
-------
§ 3I6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing facilities
Chapter C2B: Chemicals and Allied Products
Figure C2B-6: Net Profit Margin and Return in Total Capital for the Chemical Industry
Industrial Chemicals (Organic and Inorganic)
25%
20%
15%
0%
*o *c *o *o
Ul ON ^J OO
ro NI to to 10
- Return on Total Capital
Industrial Chemicals
-Net Profit Margin -
Industrial Chemicals
Plastics and Synthetic Fibers
20%
15%
10%
5%
0%
* Return on Total Capital -
Plastics and Synthetic
Fibers
-Net Profit Margin -
Plastics and Synthetic
Fibers
g
O S \D
U* O. --I
8 § §
Source: Value Line, 2003; Valve Line, 2006.
C2B-5 FACILITIES OPERATING COOLING WATER INTAKE STRUCTURES
Section 316(b) of the Clean Water Act applies to point source facilities that use or propose to use a cooling water
intake structure that withdraws cooling water directly from a surface waterbody of the United States, in 1982, the
chemical and allied products industry withdrew 2,797 billion gallons of cooling water, accounting for
approximately 3.6 percent of total industrial cooling water intake in the United States . The industry ranked 2nd in
industrial cooling water use behind the electric power generation industry (1982 Census of Manufactures).
Data on cooling water use are from the 1982 Census of Manufactures. 1982 was the last year in which the Census of
Manufactures reported cooling water use.
C2B-28
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June I, 2006
-------
§ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
This section provides information for facilities in the profiled chemical and allied products segments estimated to
be subject to regulation under the regulatory analysis options. Existing facilities that meet all of the following
conditions could have been subject to regulation under the three regulatory analysis options:
» Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or
arrangement with an independent supplier who has a cooling water intake structure; or their cooling water
intake structure(s) withdraw(s) cooling water from waters of the United States, and at least twenty-five
(25) percent of the water withdrawn is used for contact or non-contact cooling purposes;
> Have a National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one;
and
> Meet the applicability criteria for the specific regulatory analysis option in terms of design intake flow
and source waterbody type (i.e., 50 MGD for All Waterbodies, 100 MGD for Certain Waterbodies, or 200
MGD for All Waterbodies).
The regulatory analysis options also cover substantial additions or modifications to operations undertaken at such
facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the
Phase HI regulation based on a minimum applicability threshold of 2 MGD, this section focuses on the facilities
nationwide in the profiled chemical and allied products segments that are estimated to be subject to regulation
under the DIP applicability thresholds defined by the regulatory analysis options (see Table C2B-1, above for
additional information on the broader set of facilities potentially subject to Phase III regulation).
C2B-5.1 Waterbody and Cooling System Type
Table C2B-11 show the distribution of Phase III facilities in the profiled chemical segments by type of waterbody
and cooling system for each analysis option. The tables show that most of the Phase III facilities either have a
once-through system or employ a combination of a once through and a recirculating system. The majority of
existing facilities draw water fron a freshwater stream or river.
EPA applied sample weights to the sampled facilities to account for non-sampled facilities and facilities that did not
respond to the survey. For more information on EPA's 2000 Section 316(b) Industry Survey, please refer to the Information
Collection Request (U.S. EPA, 200C).
June 1, 2006 Internal Draft - Deliberative, Predecisionai - Do not Quote, Cite, or Distribute C2B-29
-------
§ 3i6(b) Final Rule: Phase HI - EA. Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Table C2B-11 : Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type
and Cooling System for the Profiled Chemical Segments
Waterbody Type
Recirculating
No. % of Total
Combination
No. % of Total
Once-Through
No. % of Total
Other
No. % of Total
Total
Inorganic Chemicals
Estuary/ Tidal River
Freshwater River/ Stream
Great Lake
Ocean
Totaf
0 0%
0 0%
0 0%
0 0%
0 0%
4 100%
0 0%
0 0%
0 0%
4 17%
1 7%
7 40%
4 26%
4 27%
16 66%
0 0%
0 0%
4 100%
0 0%
4 17%
5
7
9
4
25
Plastics Material and Resins
Freshwater River/ Stream
Lake/ Reservoir
Totaf
0 0%
0 0%
0 0%
9 84%
2 16%
10 100%
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
9
2
10
Organic Chemicals
Freshwater River/ Stream j 0
Totaf
0
0% 0
0%
0
0%
0%
9
9
100%
51%
9
9
100%
41%
18
18
Total Profiled Chemicals Industries
Estuary/ Tidal River
Freshwater River/ Stream
Great Lake
Lake/ Reservoir
Ocean
Totaf
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
4 30%
9 59%
0 0%
2 1 1%
0 0%
IS 28%
1 5%
16 61%
4 17%
0 0%
4 17%
25 48%
0 0%
9 67%
4 33
0 0%
0 0%
13 25%
5
33
9
2
4
55
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Table C2B-12: Number of Facilities Estimated Subject to the 200 MGD All Option
and Cooling System for the Profiled Chemical Segments
Waterbody Type
Recirculating
No. % of Total
Combination
No. % of Total
Once-Through
No. % of Total
by Waterbody Type
Other
No. % of Total
Inorganic Chemicals
Estuary/ Tidal River
Freshwater River/ Stream
Totaf
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
I 50%
1 50%
2 100%
0
0
0
0%
0%
0%
Total
1
1
2
Plastics Material and Resins
Totaf
0 0%
0 0%
0 0%
0
0%
0
Organic Chemicals
Estuary/ Tidal River
Freshwater River/ Stream
Totaf
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
1 20%
2 80%
3 100%
0 0%
0 0%
0 0%
1
2
3
Total Profiled Chemicals Industries
Estuary/ Tidal River
Freshwater River/ Stream
Totaf
0
0
0
0%
0%
0%
0
0
0
0%
0%
0%
2
3
5
33%
67%
100%
0
0
0
0%
0%
0%
2
'' 3
5
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000: U.S. EPA analysis, 2006.
C2B-30
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June 1, 2006
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§ 3l6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Table C2B-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody Type
and Cooling System for the Profiled Chemical Segments
Waterbody Type
! Recirculating
No. % of Total
Combination
No. % of Total
Once-Through
No. % of Total
Other
No. % of Total
Total
Inorganic Chemicals
Estuary/ Tidal River !
Freshwater River/ Stream
Totaf J
0
0
0
0%
0%
0%
40
0
100%
0%
36%
1
7
9
15%
85%
64%
0
0
0
0%
0%
0%
5
7
12
Plastics Material and Resins
Freshwater River/ Stream
Totaf \
0
0
0%
0%
4
4
100%
100%
0
0
0%
0%
0
0
0%
0%
4
4
Organic Chemicals
Estuary/ Tidal River
Freshwater River/ Stream
Totaf
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
1 7%
8 93%
9 100%
0 0%
0 0%
0 0%
1
8
9
Total Profiled Chemicals Industries
Estuary/ Tidal River ;
Freshwater River/ Stream
Totaf i
0
0
0
0%
0%
0%
4
4
9
50%
50%
35%
2
14
16
11%
89%
65%
0
0
0
0%
0%
9%
6
19
25
" Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis. 2006.
C2B-5.2 Facility Size
The facilities in the Inorganic Chemicals, Plastics Materials and Resins and Organic Chemicals segments that are
estimated subject to regulation under each analysis option are relatively large, with the vast majority of facilities
employing more than 100 employees. Figure C2B-7 show the number of facilities in the profiled chemical
segments by employment size category for each analysis option.
June /, 2006
Internal Draft - Deliberative, fredecisional - Do not Quote, Cite, or Distribute
C2B-31
-------
§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-7: Number of Facilities Estimated Subject to the SO MGD All Option by Employment
Size for Profiled Chemicals Industry Segments
14-r
12-
10-
8-
6
4-
2-
0
Inorganic Chemicals (SIC 2812,
2813.2816,2819)
Rastics (SIC 2821)
Q Organic Chemicals (SIC 2865,
2869)
<100 100-249 250-499 500-999 >=1000
Source: U.S. EPA, 2000: U.S. EPA analysis, 2006.
Figure C2B-8: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment
Size for Profiled Chemicals Industry Segments
3-,
3-
2
2
1-
1-
0-
/
/
/
/
/
/
=1000
Inorganic Chemicals (SIC 2812,
2813,2816,2819)
Plastics (SIC 2821)
D Organic Chemicals (SIC 2865, 2869)
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
C2B-32
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
June I, 2006
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§ 3l6(b) Final Rule: Phase Hi - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Figure C2B-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Employment Size for Profiled Chemicals Industry Segments
Inorganic Chemicals (SIC 2812,
2813,2816,2819)
Plastics (SIC 2821)
D Organic Chemicals (SIC 2865,2869)
<100
100-249 250-499
500-999
>=1000
Source: U.S. EPA, 2000; U.S. Ef'A analysis, 2006.
C2B-5.3 Firm Size
EPA used the Small Business Administration (SBA) small entity size standards to determine the number of
facilities in the three profiled chemical segments that are owned by small firms. Firms in the Inorganic Chemicals
segment (SIC codes 2812,2813, 2816, 2819) and in Industrial Organic Chemicals, NEC (SIC code 2869) are
defined as small if they have 1,000 or fewer employees; firms in Plastics Material and Resins (SIC 2821) and
Cyclic Organic Crudes and Intermediates (SIC code 2865) are defined as small if they have 750 or fewer
employees.
As shown in Table C2B-14Table C2B-16, Table C2B-15, and Table C2B-16, large firms own all of the facilities
estimated subject to the Phase III final regulation in this industry, regardless of the option.
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§ 3!6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
Table C2B-14: Number of Facilities Estimated Subject to the 50 MGD All Option by
Firm Size for Profiled Chemical Segments
SIC Code
No.
Large
% of SIC
No.
Small
% of SIC
Total
Inorganic Chemicals
2812 15
2813
2816
2819
Total
4
0
5
25
100%
100%
0%
100%
100%
0
0
0
0
0
0%
0%
0%
0%
0%
15
4
0
5
25
Plastics Material and Resins
2821
10
100%
0
0%
10
Organic Chemicals
2865
2869
Total
4
13
18
100%
100%
100%
0
0
0
0%
0%
0%
4
13
18
Total for Profiled Chemical Facilities
Total
53
Source: U.S. EPA, 2000; D&B,
109%
0
2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
0%
53
Table C2B-15: Number of Facilities Estimated Subject to the 200 MGD All Option by
Firm Size for Profiled Chemical Segments
SIC Code
No.
Large
% of SIC
Small
No. %
ofSIC
Total
Inorganic Chemicals
2812
2813
2816
2819
Total
1
0
0
0
2
100%
0%
0
0
0% 0
0% 0
100%
0
Of/o
0%
0%
0%
0%
2
0
0
0
2
Plastics Material and Resins
2821 0
0%
0
0% | 0
Organic Chemicals
2865 0
2869 3
Total 3
0
100%
700%
0
0
0
0% 0
0% 3
0% 3
Total for Profiled Chemical Facilities
Total 5
Source: U.S. EPA. 2000; DAB.
100%
0
2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
0% \ 5
C2B-34
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J 316(b) Final Rule: Phase HI -- EA, Part C: Economic Analysis for Existing Facilities:
Chapter C2B: Chemicals and Allied Products
Table C2B-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Firm Size for Profiled Chemical Segments
SIC Code
No
Large
% of SIC
No.
Small
% of SIC
Total
Inorganic Chemicals
2812 11
2813
0
2816 : 0
2819 ; 1
Total
12
100%
0%
0%
100%
100%
0
0
0
0
0
0%
0%
0%
0%
0%
11
0
0
1
12
Plastics Material and Resins
2821
2865
2869
Total
4
100%
0
0%
4
Organic Chemicals
4
4
8
100%
100%
100%
0
0
0
0%
0%
0%
4
4
8
Total for Profiled Chemical Facilities
Total
24
Source: U.S. EPA. 2000; D&B,
100%
0
2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
0%
24
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§3!6(b) Final Rule: Phase HI-EA, Pan C: Economic Analysis for Existing Facilities Chapter C2B: Chemicals and Allied Products
REFERENCES
Bureau of Labor Statistics (BLS). 2006. Producer Price Index. Industry Data Series: PDU28l2#-Alkalies and
Chlorine; PDU28l3#-Industrial Gases; PDU2816#-Inorganic Pigments; PDU2819#-Industrial Inorganic
Chemicals n.e.c., PDU2821#-Plastic Materials and Resins; PDU2865#-Cyclic Crudes and Intermediates;
PDU2869#-IndustriaI Organic Chemicals, n.e.c.; PCU325131- Inorganic Dye and Pigment Manufacturing;
PCU32512- Industrial Gas Mfg; PCU325181- Alkalies and Chlorine; PCU325188- All Other Basic Inorganic
Chemical Manufacturing. Available at: http://www.bls.gov/ppi/home.htm. Downloaded March 7, 2006.
Chemical & Engineering News (C&EN). 2003a. "Chemicals finally showed some signs of life in 2002; this year
should be better." pp. 16-18. January 13, 2003.
Chemical & Engineering News (C&EN). 2003b. "Counting Pennies." Volume 81, No. 5, pp. 17-21. February
3, 2003.
Chemical & Engineering News (C&EN). 2003c. "2003 Industry Review." Volume 81, No. 51, pp. 18-26.
December 22, 2003. Available at: http://pubs.acs.org/cen/business/8151/8151businessreview.html
Chemical Marketing Reporter. 2001. "U.S. Chemical Industry Outlook: Trade and Domestic Demand". v260,
issue 25, p. 33. June 18, 2001.
Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001.
Economagic. 2006. Industrial Production: Industry Subtotals, Individual Series, and Special Aggregates.
Seasonably Adjusted. Data Series: Basic Inorganic Chemicals; Plastics Material and Resin; and Organic
Chemicals. Available at: http://www.economagic.com/frbgl7.htmtfIPMarket. Downloaded February 2,2006.
Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification
Manual.
McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry &
Trade Outlook '00.
Standard & Poor's. (S&P)2001. Industry Surveys - Chemicals: Basic. July 5, 2001.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bureau of the Census. Current Industrial Reports.
Survey of Plant Capacity.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration.
Industry, Trade, and the Economy: Data and Analysis. Data by NAICS and SIC. Available at:
http://www.ita.doc.gov/td/industry/otea/industry_sector/tables_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the
Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge
Between NAICS and SIC.
U.S. Department of Commerce (U.S. DOC). 1987, 1992, 1997, and 2002. Bureau of the Census. Census of
Manufactures.
U.S. Environmental Protection Agency (U.S. EPA) 2000. Detailed Industry Questionnaire: Phase II Cooling
Water Intake Structures.
C2B-36
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June I, 2006
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§ 3l6(b) Final Rule: PhaselU-EA, PcrtC: Economic Analysis for Existing Facilities ChapterC2B: Chemicals and Allied Products
U.S. Environmental Protection Agency (U.S. EPA). 1995a. Profile of the Organic Chemicals Industry.
September, 1995.
U.S. Environmental Protection Agency (U.S. EPA) 1995b. Profile of the Inorganic Chemical Industry.
September, 1995.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses. Available at:
http://www.sba.gov/advo/researcri/data.html. Downloaded February 4. 2006.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards. Available at:
http://www.sba.gov/size/sizetabhs2002.html.
Value Line. 2006. Value Line 3.0 Investment Analyzer.
Value Line. 2003. Value Line Investment Survey.
June 1, 2006
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§ 3l6(b) Final Rule: Phase III - EA, Pan C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Chapter C2C: Petroleum Refining
(SIC 2911)
INTRODUCTION
EPA's Detailed Industry Questionnaire, hereafter referred
to as the DQ, identified the Petroleum Refining Industry
(SIC 2911) with at least one existing facility that operates a
CWIS, holds a NPDES permit, and withdraws equal to or
greater than two million gallons per day (MOD) from a
water of the United States, and uses at least 25 percent of
its intake flow for cooling purposes. (Facilities with these
characteristics are hereafter referred to as facilities
potentially subject to the Phase HI regulation or "potential
Phase III facilities").
Table C2C-1, below, provides a description of the industry
segment, a list of primary produces manufactured, the total
number of detailed questionnaire respondents (weighted to
represent a national total of facilities that hold a NPDES
permit and operate cooling water intake structures), the
number of facilities estimated to be potentially subject to
Phase III regulation based on the minimum withdrawal
threshold of 2 MGD, and the number of facilities estimated
to be subject to regulation under each primary analysis
option.
CHAPTER CONTENTS
Introduction C2C-1
C2C-1 Summary Insights from this Profile C2C-2
C2C-2 Domestic Production C2C-3
C2C-2.I Output C2C-4
C2C-2.2 Prices C2C-7
C2C-2.3 Number of Facilities and Firms C2C-7
C2C-2.4 Employment and Productivity C2C-8
C2C-2.5 Capita] Expenditures C2C-IO
C2C-2.6 Capacity Utilization C2C-11
C2C-3 Structure and Competitiveness C2C-12
C2C-3.1 Firm Size C2C-13
C2C-3.2 Concentration Ratios C2C-13
C2C-3.3 Foreign Trade C2C-14
C2C-4 Financial Condition and Performance...C2C-17
C2C-5 Facilities Operating Cooling Water Intake
Structures C2C-18
C2C-5.1 Waterbody and Cooling System Type
C2C-19
C2C-5.2 Facility Size C2C-20
C2C-5.3 Firm Size C2C-22
References C2C-23
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Table C2C-1: Phase III Facilities in the Petroleum Refining Industry (SIC 29)
Number of Phase III Facilities*
SIC 1 SIC Description
Important Products Manufactured
Potentially
Total Regulated
Facilities11
2911
Petroleum
Refining
Gasoline, kerosene, distillate fuel oils, residual
fuel oils, and lubricants, through fractionation
or straight distillation of crude oil, redistillation
of unfinished petroleum derivatives, cracking,
or other processes; aliphatic and aromatic
chemicals as byproducts
163 36
Subject Subject
to SO to 200
MGD All MGD All
Option Option
17 4
Subject
to 100
MGD
CWB
Option
8
* Number of weighted detailed questionnaire survey respondents.
b Individual numbers may not add up due to independent rounding.
Source: Executive Office of the President, 1987: U.S. EPA 2000: U.S. EPA analysis, 2006.
As shown in Table C2C-1, EPA estimates that, out of the total of 163 facilities with aNPDES permit and
operating cooling water intake structures in the Chemicals and Allied Products Industry (SIC 28), 17 (or 10%)
would be subject to regulation under the 50 MGD All option, 4 (or 2.5%) would be subject to regulation under the
200 MGD All option, and 8 (or 4.9%) would be subject to regulation under the 100 MGD CWB option.. EPA
also estimated the percentage of total production that occurs at facilities estimated to be subject to regulation
under each analysis option. Total value of shipments for the Paper and Allied Products Industry from the 2004
Annual Survey of Manufactures is $288.1 billion. Value of shipments, a measure of the dollar value of
production, was selected for the basis of this estimate. Because the DQ did not collect value of shipments data,
these data were not available for Phase III facilities. Total revenue, as reported on the DQ, was used as a close
approximation for value of shipments for these facilities. EPA estimated the total revenue of facilities expected to
be subject to regulation under the 50 MGD, 200 MGD, and 100 MGD option to be $25.4 billion, $9.3 billion, and
$15.3 billion, respectively. Therefore, EPA estimates that the percentage of total production in the petroleum
industry that occurs at facilities estimated to be subject to regulation under the 50 MGD, 200 MGD, and 100
MGD options is 9%, 3% and 5%, respectively.
Table C2C-2 provides the crosswalk between SIC codes and NAICS codes for the profiled petroleum SIC codes.
For the Petroleum Refining segment, the translation of NAICS-reported data to the SIC framework is
straightforward as these frameworks have a simple one-to-one match for Petroleum Refining: SIC code 2911 and
NAICS code 324110.
Table C2C-2; Relationship between SIC and NAICS Codes for the Petroleum Refining Industry (2002')
SIC
Code
2911
SIC Description
Petroleum Refining
! NAICS
Code
; 324110
NAICS Description
Petroleum Refineries
Establishments
203
Value of Shipments
($000)
193,547,214
Employment
61,585
* Industry data for relevant NAICS codes from the 2002 Economic Census.
Source: U.S. DOC, 1997; U.S. DOC, 1987, 1992. 1997, and2002.
C2C-1 SUMMARY INSIGHTS FROM THIS PROFILE
A key purpose of this profile is to provide insight into the ability of Petroleum Refining firms absorb compliance
costs under each analysis option without material, adverse economic/financial effects. The industry's ability to
withstand compliance costs is primarily influenced by the following two factors: (1) the extent to which the
C2C-2
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£ 3I6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
industry may be expected to shift compliance costs to its customers through price increases and (2) the financial
health of the industry and its general business outlook.
Likely Ability to Pass Compliance Costs Through to Customers
As reported in the following sections of this profile, the Petroleum Refining segment is relatively unconcentrated,
which suggests that firms in this industry would have less power to pass a significant portion of their compliance-
related costs through to customers. As discussed above, given the small proportion of total value of shipments in
the industry estimated to be subject to regulation under each option, EPA believes that the theoretical threshold
for justifying the use of industry-wide CPT rates in the impact analysis of potential Phase III refineries has not
been met. Even though the Petroleum Refining segment is not characterized by high competitive pressure from
foreign markets, the low market concentration leads EPA to believe that the market power held by individual
firms is likely to be quite small. For these reasons, in its analysis of regulatory impacts for the Petroleum
Refining segment, EPA assumed that complying firms would be unable to pass compliance costs through to
customers: i.e., complying facilities must absorb all compliance costs at the time of compliance (see following
sections and Appendix 3, Cost Pass-Through Analysis, to Chapter C3: Economic Impact Analysis for
Manufacturers, for further information).
Financial Health and General Business Outlook
Over the past decade, Petroleum Refining, like other U.S. manufacturing industries, has experienced a range of
economic/financial conditions, including substantial challenges. In the early 1990s, the domestic Petroleum
Refining segment was affected by reduced U.S. demand as the economy entered a recessionary period. Although
domestic market conditions improved by mid-decade, oversupply of crude oil, weakness in Asian markets, along
with other domestic factors, materially weakened refiners' financial performance in 1998. As petroleum
producing countries reduced crude oil supply and refiners cut production, prices rebounded in the late 1990's and
into 2000, before another U.S. recession, the attacks of 9/11, and global economic downturn again had a negative
effect on petroleum refiners. More recently, as the U.S. economy began recovery from its economic weakness,
domestic petroleum refineries have appeared to recuperate, with continuous improvements in demand levels and
financial performance during 2003 to 2005. Although the industry has weathered difficult periods over the past
few years, the strengthening of the industry's financial condition and general business outlook suggest improved
ability to withstand additional regulatory compliance costs without imposing significant financial impacts.
C2C-2 DOMESTIC PRODUCTION
The Petroleum Refining segment accounts for about 4 percent of the value of shipments of the U.S. entire
manufacturing sector and 0.4 percent of the manufacturing sector's labor supply (U.S. DOE, 1999a). According
to the Annual Survey of Manufactures, in 2001, Petroleum Refineries achieved shipments of approximately $206
billion dollars ($2003) and employed 63,251 people. Petroleum products constitute approximately 40 percent of
the total energy used in the United States, including virtually all of the energy consumed in transportation (U.S.
DOE, 1999a).
U.S. DOE Energy Information Administration (EIA) data report that there were 149 operable Petroleum
Refineries in the U.S. as of January 2003, of which 145 were operating and four were idle (U.S. DOE, 2004)'.
Some data reported in this profile are taken from EIA publications. Readers should note that the Census data
In addition, there was one operating and one idle refinery in Puerto Rico and one operating refinery in the Virgin
Islands.
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§ 316(b) Final Rule: Phase III - BA, Part C: Economic Analysis for Existing Facilities; Chapter C2C: Petroleum Refining
reported for SIC 2911 cover a somewhat broader range of facilities than do the U.S. DOE/EIA data, and the two
data sources are therefore not entirely comparable.
The petroleum industry includes exploration and production of crude oil, refining, transportation, and marketing.
Petroleum refining is a capital-intensive process that converts crude oil into a variety of refined products.
Refineries range in complexity, depending on the types of products produced. Nearly half of all U.S. refinery
output is motor gasoline.
The number of U.S. refineries has declined by almost half since the early 1980s. The remaining refineries have
improved their efficiency and flexibility to process heavier crude oils by adding "downstream" capacity . While
the number of refineries has declined, the average refinery capacity and utilization has increased, resulting in an
increase in domestic refinery production overall.
C2C-2.1 Output
Table C2C-3 shows trends in production of petroleum refinery products from 1990 through 2004. In general,
output of refined products grew over this period, reflecting growth in transportation demand and other end-uses.
Output fell in 1991 due to the domestic economic recession, and the early years of the 2000s experienced little or
negative growth due to the downturn of the U.S. economy and events of 9/11 (API, 2003). At the beginning of
2002, petroleum products were in excess supply in the world market, and the focus was on the elimination of
excess supplies and stabilization of prices (U.S. DOE, 2004). In 2003, the industry rebounded, with refinery
processing increasing 2 percent, producing record or near record levels of gasoline and distillate (API, 2004).
Petroleum demand in 2004 is expected to increase 1.1 percent. As the U.S. and global economy improves,
Petroleum Refining firms should continue to see improving results in their markets and earnings. This should
place companies in a better position to incur any costs associated with regulatory compliance.
For comparison, preliminary 1997 Census data included 244 establishments for NAICS 3241/SIC 2911, whereas U.S.
DOE/EIA reported 164 operable refineries as of January 1997.
The first step in refining is atmospheric distillation, which uses heat to separate various hydrocarbon components in
crude oil. Beyond this basic step are more complex operations (generally referred to as "downstream" from the initial
distillation) that increase the refinery's capacity to process a wide range of crude oils and increase the yield of lighter (low-
boiling point) products such as gasoline. These downstream operations include vacuum distillation, cracking units, reforming
units, and other processes (U.S. DOE, 1999a).
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/ 3J6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Table C2C-3; U.S. Petroleum Refinery Product Production (million barrels per day)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Total Percent
Change 1990-2004
Average Annual
Growth Rate
Motor
Gasoline
6.96
6.98
7.06
7.30
7.18
7.46
7.57
7.74
7.89
7.93
7.95
8.02
8.18
8.19
8.23
18.2%
1.2%
Distillate
Fuel Oil JetFuel
2.93 .49
2.96 .44
2.97 .40
3.13 .42
3.20 .45
3.16 1.42
3.32 1.52
3.39
3.42
3.40
3.58
3.70
3.59
3.71
3.82
.55
.53
.57
.61
.53
.51
.50
.55
30.4% 4.0%
1.9% 0.3%
Residual
Fuel Oil
0.95
0.93
0.89
0.84
0.83
0.79
0.73
0.71
0.76
0.70
0.70
0.72
0.60
0.66
0.65
-31.6%
-2.7%
Other
Products'
0.78
0.76
0.80
0.78
0.79
0.78
0.76
0.84
0.89
0.84
0.79
0.73
0.77
0.78
0.83
6.4%
0.4%
Total
Output
15.27
15.26
15.40
15.79
15.79
15.99
16.32
16.76
17.03
16.99
17.24
17.29
17.27
17.49
17.77
16.4%
1.1%
Percent Change
in Total Output
n/a
-0.1%
0.9%
2.5%
0.0%
1.3%
2.1%
2.7%
1.6%
-0.2%
1.5%
0.3%
-0.1%
1.3%
1.6%
* Kerosene, lubricants, petrochemical feedstocks, waxes, and miscellaneous products.
Source: U.S. DOE. 2005
Value of shipments and value added are two common measures of manufacturing output4. They provide
insight into the overall economic health and outlook for an industry. Value of shipments is the sum of the receipts
a manufacturer earns from the sals of its outputs; it indicates the overall size of a market or the size of a firm in
relation to its market or competitors. Value added measures the value of production activity in a particular
industry. It is the difference between the value of shipments and the value of inputs used to make the products
sold.
Figure C2C-1 on the following page shows value of shipments and value added for petroleum products from 1987
to 2004. Value of shipments rose through 1990; however, during and following the recession of 1991, value of
shipments fell through 1994. This was followed by some volatility in value over the next few years until
experiencing a sharp drop in 199&, when a range of factors led to a dramatic decrease in petroleum prices.
Increased production quotas by OPEC, increased production from Iraq through the "oil-for-food" program, weak
demand in Asia due to their financial crisis, and a warm winter in the U.S. all increased the supply of petroleum
products (U.S. DOE, 1999c). Estimates of worldwide petroleum supply exceeding demand during 1998 range
from 1.47 millions barrels per day to 2.4 million barrels per day (World Oil, 1999). As crude oil producers and
refiners cutback on production, the industry rebounded with significant improvements in 1999 and 2000, before
the latest recession and global economic slowdown and weakening demand decreased the value of shipments in
2001. In 2003 and 2004, however, the value of shipments increased significantly, peaking at nearly $300 billion
in 2004. Value added generally followed the path of value of shipments over this time period, though it did not
quite have the volatility of the value of shipments.
Terms highlighted in bold and italic font are further explained in the glossary.
June 1, 2006
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£ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Figure C2C-1: Value of Shipments and Value Added for Petroleum Refineries (millions, $2005)
Value of Shipments
320 000 T - -
300,000 - p I
280,000 / \
260,000
240,000- , i ; -----Petroleum Refineries (NAICS
: '. ,' i 324110)
220,000 ' _ :
J\ ' m * Petroleum Refineries (SIC
200,000- / \B ; ! 2911)
180,000 B.^* \ /"'*
160,000 ^-W* \ .P
140,000 ,-' 1
120,000 J,,,,,,,rTi,,,,,,,I
Value Added
55,000 -| |
50,000 ;' i
45,000 f ' |
m '. I
40'000 '. / | ------- Petroleum Refineries
' ;' I (NAICS 32410)
35,000 - " * - i
/ - / '.; I Petroleum Refineries (SIC
30,000- *~m~*\ m~m^m '-. * I 29U)
25,000 - / ""»..,,/ !
20,000 |
15,000 -I , , r, , , , , , r, , , , , , , 1
^- .1 ta-ta-ta-*-ta-_*K>N^fJN>NJ
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-200!; and2003-2004; U.S. DOC, 1987, 1992, 1997, and2002.
C2C-6
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
C2C-2.2 Prices
The producer price index (PFI) measures price changes, by segment, from the perspective of the seller, and
indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment.
Figure C2C-2 shows substantial fluctuations in petroleum product prices between 1987 and 2002. Through the
early 1990s, refiners faced declining prices due to the effects of the 1991 recession and weak demand before
rebounding somewhat in the mid 1990s. Prices plummeted in 1998 as a massive oversupply of petroleum
products coupled with decreased demand led to significant drops in petroleum prices. As the subsequent
production cutbacks took hold and the glut of supply dwindled, prices recovered in 1999 and 2000, as shown in
Figure C2C-2. The higher prices reflect low refinery product inventories and higher crude oil input prices (Value
Line, 2001). Excess supply, the global recession, impacts from 9/11, and the relatively warm winter of 2001-
2002 led to decreases in prices in subsequent years (U.S. DOE, 2004). During 2003 to 2005, however, prices rose
dramatically. By 2005, the price of petroleum products was nearly double the price seen in 2000, the previous
peak year during the 1987 to 200:5 time period.
Figure C2C-2: Producer Price Index for Petroleum Refineries
220 -I
200 -
180
160 -
140
J20 -
100 -
80 -
60
40
f
j
1
I
4
A*v
^^^^\J
' * i i i . i i i IIP
818iS831313>i8888!S
Petroleum Refineries (NAICS
324110)
Source: BLS, 2006.
C2C-2.3 Number of Facilities and Firms
The number of operable refineries fell substantially during the 1980s, with a more gradual reduction in refineries
continuing through the 1990s and into the 2000s. This decrease resulted in part from the elimination of the Crude
Oil Entitlements Program in the early 1980s. The Entitlements Program encouraged smaller refineries to add
capacity throughout the 1970s. After the program was eliminated, surplus capacity and falling profit margins led
to the closure of less efficient capacity (U.S. DOE, 1999a). The decrease in the number of refineries continued, as
the industry consolidated to improve margins. After peaking in the early 1980s, refining capacity decreased
throughout the rest of the decade. Refining capacity has remained relatively stable since the decrease in the
1980s, with a slight upward trend occurring in the latter part of the 1990s into the 2000s. This trend is expected to
continue, with no new "greenfield" refineries likely to be built in the United States, but continuing capacity
expansion at existing facilities (S&P, 2001).
June I, 2006
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C2C-7
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Table C2C-4 presents the numbers of refinery facilities and firms from 1990 to 2003 based on Statistics of U.S.
Businesses for SIC 2911. As shown in the table, despite some gains in the early 2000s, the number of refinery
facilities and the number of firms reporting Petroleum Refining as their primary business both declined since
1990.
Table C2C-4: Number of Firms and Facilities for Petroleum Refineries
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998"
1999"
2000"
2001"
2002"
2003"
Total Percent Change
1990 - 2003
Average Annual Growth
Rate
Number
215
215
185
148
161
150
173
128
155
145
162
165
202
142
-34.0%
-3.1%
Firms
Percent Change
0.0%
-14.0%
Number
340
346
303
-20.0% i 251
8.8% | 265
-6.8%
15.3%
-26.0%
21.1%
-6.5%
11.7%
1.9%
22.4%
-29.7%
251
275
248
304
292
298
302
349
274
-19.4%
-1.6%
Facilities
Percent Change
1.8%
-12.4%
-17.2%
5.6%
-5.3%
9.6%
-9.8%
22.6%
-3.9%
2.1%
1.3%
15.6%
-21.5%
* Before 1998, these data were compiled in the Standard Industrial Classification (SIC) system; since 1998, these data
have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted
the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS
and SIC..
Source: U.S. SBA, 1989-2003.
C2C-2.4 Employment and Productivity
Employment in the Petroleum Refining segment declined by 22 percent between 1987 and 2004, from 74,600 to
58,331 employees, as shown in Figure C2C-3. After increasing in the early 1990s, employment at Petroleum
Refineries declined almost continuously through 2004, reflecting overall industry consolidation.
C2C-8
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June 1, 2006
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§ 3l6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Figure CZC-3; Employment for Petroleum Refineries
*U>VUM '
74,000
72,000
70,000
68,000
66,000 -
64,000 -
62,000
60,000 -
58,000
sd nan
' " !
*\ m^ '
*. ' ^ \
-.../ ^M
''*
\
\
" ^
*-B
"W' m
"'._
' 1
|
324110)
Petroleum Refineries (SC
2911)
* S «
IsJ K> K> K) SJ
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997 these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NA1CS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987. 1992, 1997. and 2002.
Table C2C-5 shows substantial year-to-year changes in labor productivity, measured by value added per
production hour. These fluctuations reflect volatility in value added, which in turn reflect variations in the
relationship between input prices (primarily crude oil) and refinery product prices. Changes in production hours
from year to year were less volatile, with a net reduction over the period 1987 to 2004. Value added, however,
was not affected as it more than doubled over the same period.
June 1, 2006
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C2C-9
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§ 316(b) Final Rule: Phase HI - EA, Part C; Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Table C2C-5: Productivity Trends for Petroleum Refineries
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997*
1998'
1999a
2000'
2001"
2002'
2003'
2004"
Total Percent
Change 1 987-2004
Annual Average
Growth Rate
Value Added
(millions)
21,779
30,642
30,797
31,357
26.281
24,789
23,734
29,569
29,185
31,065
36,281
27,917
36,103
41,069
44,145
30,533
41,240
53,070
143.7%
5.4%
Production Hours
(millions)
103
103
105
106
107
109
107
110
107
103
100
98
94
92
94
85
86
85
-17.3%
-1.1%
($2005)
Value Added/Hour
($/nr)
211
298
294
296
247
227
223
269
274
303
363
285
384
445
472
361
482
621
194.7%
6.6%
% Change in
Value Added/
Hour
41.2%
-1.1%
0.7%
-16.7%
-8.1%
-1.7%
20.6%
1.8%
10.7%
20.0%
-21.4%
34.4%
15.9%
6.1%
-23.5%
33.3%
29.0%
' Before 1997, these data were compiled in the Standard Industrial Classification (SIC) system; since 1997,
these data have been compiled in the North American Industry Classification System (NAICS). For this
analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997
Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992. 1997, and
2002.
C2C-2.5 Capital Expenditures
Petroleum industry capital expenditures increased substantially between 1987 and 1993, generally decreased
afterwards through 2000, then increased significantly in 2001, as shown in Table C2C-6. During 2001 through
2004, capital expenditures fluctuated somewhat, peaking at nearly 8 billion in 2002 before declining in both 2003
and 2004. In 2004, the industry spent about $6.7 billion ($2005), as compared with $3.1 billion ($2005) in 1988,
representing a 115 percent increase in expenditures during this time period. Much recent investment in Petroleum
Refineries has been to expand and de-bottleneck units downstream from distillation, partially in response to
environmental requirements. Changes in refinery configurations have included adding catalytic cracking units,
installing additional sulfur removal hydrotreaters, and using manufacturing additives such as oxygenates. These
process changes have resulted from two factors:
> processing of heavier crudes with higher levels of sulfur and metals; and
> regulations requiring gasoline reformulation to reduce volatiles in gasoline and production of diesel fuels
with reduced sulfur content (U.S. EPA, 1996b).
C2C-IO
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June 1, 2006
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§ 316(b) Final Rule: Phase III - EA, Pa't C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Environmentally related investments have also accounted for a substantial part of capital expenditures. In the
future, substantial capital investments by refineries will be required to comply with: product quality regulations,
including EPA's Tier 2 Gasoline Sulfur Rule requiring reductions in the sulfur content of gasoline; reductions or
elimination of the use of MTBE in gasoline; and, proposed sulfur reductions in highway diesel fuel (NPC, 2000).
Table C2C-6: Capital Expenditures for Petroleum Refineries ($2005)
Vtar
1987
1988
1989
1990
1991
1992
1993
1994
1995
Capital Expenditures
(millions)
3,117
3,446
4,263
5,247
7,436
7,968
7,593
6,862
7,140
1996 6,208
1997* 4,987
1998' . 4,845
1999'
2000"
2001*
2002"
2003'
2004"
Tola! Percent Change
1987-2004
Average Annual
Growth Kate
4,517
5,252
7,463
7,956
7,268
6,710
115.3%
4.6%
% Change
10.6%
23.7%
23.1%
41.7%
7.2%
-4.7%
-9.6%
4.1%
-13.1%
-19.7%
-2.9%
-6.8%
16.3%
42.1%
6.6%
-8.6%
-7.7%
11 Before 1997, these data were compiled in the Standard Industrial Classification (SIC)
system; since 1997, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data
to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and
SIC.
Source: U.S. DOC. 1988-1991. 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987,
1992. 1997, and 2002.
C2C-2.6 Capacity Utilization
Refinery capacity is frequently measured in terms of crude oil distillation capacity. EIA defines refinery capacity
utilization as input divided by calendar day capacity, which is the maximum amount of crude oil input that can be
processed during a 24-hour period with certain limitations. Some downstream refinery capacities are measured in
terms of "stream days," which is. the amount a unit can process when running full capacity under optimal crude
and product mix conditions for 24 hours (U.S. DOE, 1999a). Downstream capacities are reported only for
specific units or products, and are not summed across products, since not all products could be produced at the
reported levels simultaneously.
Figure C2C-4 below shows the fluctuation in utilization rates over the period 1989-2002, based Census Bureau
data. Capacity utilization fluctuated over a relatively lower range between 1989-1992, followed by an increase in
June 1. 2006
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C2C-1I
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§ 316(b) Final Rule: Phaselll-EA, PartC: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
utilization rates for five straight years, concluding in 1997. After decreasing in 1998, utilization rates climbed
until 2000, before excess supply, recession, and other factors led to decreases in rates in the early 2000s. The
industry appears to be recovering, however, as capacity utilization increased to 93 percent in 2004. Overall
refinery utilization has remained high over this entire time period. Capacity utilization for production of specific
products may vary, however, as the industry adjusts to changes in the desired product mix and characteristics.
Figure C2C-4; Capacity Utilization Rates (Fourth Quarter) for Petroleum Refineries
96 j
94
92
90
88
86
84
V
- - Petroleum Refineries (NAICS
324110)
Petroleum Refineries (SIC
2911)
^O "&
O
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1989-2004.
C2C-3 STRUCTURE AND COMPETITIVENESS
The Petroleum Refining segment in the United States is made up of integrated international oil companies,
integrated domestic oil companies, and independent domestic refining/marketing companies. In general, the
petroleum industry is highly integrated, with many firms involved in more than one stage of petroleum industry
operations. Large companies, referred to as the "majors," are fully integrated across crude oil exploration and
production, refining, and marketing. Smaller, nonintegrated companies, referred to as the "independents,"
generally specialize in one segment of the industry.
Like the oil business in general, refining was dominated in the 1990s by integrated internationals, specifically a
few large companies such as Exxon Corporation, Mobil Corporation, and Chevron Corporation. These three
ranked in the top ten of Fortune's 500 sales during this time period. Substantial diversification by major
petroleum companies into other energy and non-energy segments was financed by high oil prices in the 1970s and
1980s. With lower profitability in the 1990s, the major producers began to exit unconventional energy operations
(e.g., oil shale) as well as coal and non-energy operations in the 1990s. Some have recently ceased chemical
production.
C2C-I2
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June I, 2006
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f 316(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
During the 1990s and into the early 2000s, several mergers, acquisitions, and joint ventures occurred in the
Petroleum Refining segment in an effort to cut cost and increase profitability. This consolidation has taken place
among the largest firms (as illustrated by the acquisition of Amoco Corporation by British Petroleum in 1999, the
merger of Chevron and Texaco h 2001, the merger of Conoco and Phillips in 2002, and the mega-merger of
Exxon and Mobil Corporation in 1998) as well as among independent refiners and marketers (e.g., the
independent refiner/marketer Ultramar Diamond Shamrock (UDS) acquired Total Petroleum North America in
1997) (U.S. DOE, 1999b, 2004). Merger activity seems to have slowed since 2002, however, possibly as
companies seek to address financial issues or wait to see that the recent positive economic growth continues (U.S.
DOE, 2004).
C2C-3.1 Firm Size
For SIC 2911, the Small Business Administration defines a small firm as having 1,500 or fewer employees. The
size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size
classifications, therefore preventing precise use of the SBA size threshold in conjunction with SUSB data. Table
C2C-7 below shows the distribution of firms and establishments in SIC 2911 by the employment size of the
parent firm. The SUSB data show that 163 of the 274 SIC 2911 establishments reported for 2003 (59 percent) are
owned by larger firms (those with 500 employees or more), some of which may still be defined as small under the
SBA definition, and 111 (41 percent) are owned by small firms (those with fewer than 500 employees).
Table C2C-7: Number of Firms and Establishments for
Petroleum Refineries by Firm Employment Size Category, 2003
Employment Size
Category
0-19
20-99
100-499
500+
Total
Number of Firms
59
21
21
41
142
Number of Establishments
60
25
26
163
274
Note: Based on MAICS 324110
Source: U.S. SBA, 1989-2003.
C2C-3.2 Concentration Ratios
Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is
closely related to entry barriers, with more concentrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common
measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a
CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry's total
value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things
being equal . An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI
indicates concentration based on the largest 50 firms in the industry. It is equal to the sum of the squares of the
Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry
with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it
competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in
beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the
extent of competition in an industry.
June 1. 2006
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C2C-13
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§ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with
market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (602 + 302
+ 102). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the
industry. Based on the U.S. Department of Justice's guidelines for evaluating mergers, markets in which the HHI
is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered
to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated.
As shown in Table C2C-15, the CR4 and the HHI for SIC 2911 are both below the benchmarks of 50 percent and
1,000, respectively. For the Petroleum Refining segment, the HHI is 422, suggesting the sector is unconcentrated.
With the majority of the firms in this industry having small market shares, this suggests limited potential for
passing through to customers any increase in production costs resulting from regulatory compliance.
Table C2C-8: Selected Ratios for Petroleum Refineries
SIC (S) or
NAICS (N)
Code
S2911
N 3241 10
Year
1987
1992
1997
Total
Number of
Firms
200
132
122
Concentration Ratios
4 Firm
(CR4)
32%
30%
29%
8 Firm
(CR8)
52%
49%
49%
20 Firm
(CR20)
78%
78%
82%
50 Firm
(CR50)
95%
97%
98%
Herfindahl-
Hirschman Index
435
414
422
* The 7997 Census of Manufactures is the most recent concentration ratio data available.
Source: U.S. DOC, 1987, 1992, 1997, and 2002.
C2C-3.3 Foreign Trade
This profile uses two measures of foreign competition: export dependence and import penetration.
Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic
markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that
industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests
that higher import penetration levels will reduce market power and pricing discretion because foreign competition
limits domestic firms' ability to exercise such power. Firms belonging to segments in which imports account for
a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to pass-
through costs because foreign producers would not incur costs as a result of the Phase III regulation. The
estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31-33) for 2001 is 22 percent.
For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with
import ratios close to or above 22 percent would more likely face stiff competition from foreign firms and thus be
less likely to succeed in passing compliance costs through to customers.
Export dependence, calculated as exports divided by value of shipments, measures the share of a segment's sales
that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not
increase the production costs of foreign producers with whom domestic firms must compete in export markets.
As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing
prices to recover cost increases resulting from regulation-induced increases in production costs. The estimated
export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the
ability of industries to withstand compliance cost burdens, EPA judges that industries with export ratios close to
or above 15 percent are at a relatively greater disadvantage in potentially recovering compliance costs through
price increases since export sales are presumed subject to substantial competition from foreign producers.
C2C-14
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June 1, 2006
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§ 3l6(b) Final Rule: Phase ill - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Table C2C-9 presents trade statistics for the profiled Petroleum Refining segment from 1989 to 2002. The table
shows that while export dependence has been relatively stable, import penetration decreased during the economic
weakness of the early 1990s, before leveling off through the mid 1990s. Import penetration increased steadily
through 2000 and then dropped slightly in 2001. This cycle follows the growth in the U.S. economy of the late
1990s, followed by the subsequent economic slowdown arriving in the latter half of 2000 into 2001. Mexico
received the largest amount of U.S. exported refined petroleum products in 2001, followed by Canada and Japan.
Imports of refined petroleum products increased 47.3 percent from 1989 to 2001, with 46.6 percent of total
imports coming from OPEC countries (U.S. DOE, 2003).
The import penetration ratio for facilities in the Petroleum Refining segment in 2002 was only 15 percent, well
below the U.S. manufacturing segment average of 22 percent. The export dependence ratio for petroleum refiners
in 2001 was only four percent compared to the U.S. manufacturing average of 15 percent. Thus, based on the
lack of competitive pressures from foreign markets/firms, the petroleum industry appears to be in a position to
pass-through to consumers a significant portion of compliance-related costs associated with the Phase III
regulation. However, given the low HHI for this industry EPA believes that existing market competition among
domestic firms most likely nullifies any favorable influence the lack of foreign competitors would have on
increasing the market power of firms in this industry.
Table C2C-9: Foreign Trade Statistics for Petroleum Refining
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997d
1998d
1999d
2000"
2001d
2002d
Total Percent Change
1989-2002
Average Annual
Growth Rate
' Calculated by EPA
b Calculated by EPA
($2005)
Value of Value of Value of Implied . . _
«» Import Export
Imports Exports Shipments Domestic _ . . b ., c
, .. , , .... , , !... - ... Penetration" Dependence1
(millions) (millions) (millions) Consumption
16,837 6,162 187,227 197,902
19,605 8,227 219.025 230,403
14,458 8,438 193,023 199,042
13,218 7,474 176.809 182,553
12,358 7,155 164,853 170,055
11,519 6,158 159,839 165,200
10,668 6,491 165,743 169,920
22,111 7,526 188.817 203,402
24,009 8,087 186.428 202,351
19,825 6,027 137,306 151,104
25,071 6,602 165,289 183,759
44,920 9,784 241,662 276,797
38,456 8,839 218,854 248,471
34,278 8,322 208,236 234,192
103.6% 35.0% 11.2% 18.3%
5.6% 2.3% 0.8% 1.3%
as shipments + imports - exports.
as imports divided by implied domestic consumption.
9%
9%
7%
7%
7%
7%
6%
11%
12%
13%
14%
16%
15%
15%
3%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
c Calculated by EPA as exports divided by shipments.
d Before 1997, these data were compiled in the Standard Industrial Classification (SIC) system; since
1997, these data have been
compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification
data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC,
7987, 1992,
1997, and 2002.
The United States consumes more petroleum than it produces, requiring net imports of both crude oil and refined
products to meet domestic demand. In 2002, the U.S. imported 9.05 million barrels per day (MBD) of crude oil
June 1, 2006
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C2C-15
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§ 3l6(b) Final Rule: Phase III- EA. Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
and 2.31 MBD of refined products. These refined product imports represented roughly 12 percent of the 19.65
MBD of refined products supplied to U.S. consumers. The U.S. exported 0.97 MBD of refined products in 2002
(U.S. DOE, 2003).
Imports of refined petroleum products have fluctuated since 1985. Imports rose to 2.3 MB in the early 1980s, due
to rapid growth in oil consumption, especially consumption of light products, which exceeded the growth in U.S.
refining capacity. Imports then declined as a result of the 1990/91 recession and increased upgrading of refinery
capacity resulting primarily from the 1990 Clean Air Act Amendments and other environmental requirements
(U.S. DOE, 1997). Since the 1995 low point, imports steadily increased through 2000 with the exception of 1998,
before dropping again, due to general economic weakness, in 2001 and 2002 (see Figure C2C-5).
Figure C2C-5: Value of Imports and Exports for Petroleum Refining (millions, $2005)
so nnn
JV,vUU '
45,000
40,000 -
35,000 -
30,000 -
25,000
20,000
15,000
10,000
s nnn
0
_
' *i
"»
« Imports (SC 2911)
^.-**. -* ...,,, FYnnrtcfNJATrS'^dl 101
^/*\ / * | Exports (SC 2911)
1 1 8 3 Si 1 I II 1 1 1 1
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NA1CS). For this analysis, EPA converted the NA1CS classification data to
the SIC code classifications using the 1 997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 2006.
Petroleum exports include heavy products such as residual fuel oil and petroleum coke, which are produced as co-
products with motor gasoline and other light products. Production of these heavier products often exceeds U.S.
demand, and foreign demand absorbs the excess. Petroleum coke is the leading petroleum export product,
accounting for 35 percent of petroleum exports in 2002, followed by residual fuel oil (18 percent of exports) and
motor gasoline (almost 13 percent) (U.S. DOE, 2003). Exports generally reflect foreign demand, but other factors
influence exports as well. For example, exports of motor gasoline increased due to high prices in Europe at the
time of the 1990 Persian Gulf War. U.S. refiners and marketers have gained experience in marketing to diverse
world markets, and U.S. products are now sold widely abroad (U.S. DOE, 1997). As reported by the International
Trade Administration and shown in Figure C2C-5, the real value of petroleum exports has fluctuated between $5
and $10 billion during the years 1989 and 2002.
C2C-16
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June I. 2006
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities-
Chapter C2C: Petroleum Refining
C2C-4 FINANCIAL CONDITION AND PERFORMANCE
The financial performance and condition of the Petroleum Refining segment are important determinants of its
ability to withstand the costs of regulatory compliance without material adverse economic/financial impact. To
provide insight into the industry's financial performance and condition, EiPA reviewed two key measures of
financial performance over the 14-year period, 1992-2005: net profit margin and return on total capital. EPA
calculated these measures as a revenue-weighted index of measure values for public reporting firms in the
respective industries, using data from the Value Line Investment Survey. Financial performance in the most
recent financial reporting period (2005) is obviously not a perfect indicator of conditions at the time of regulatory
compliance. However, examining the trend, and deviation from the trend, through the most recent reporting
period gives insight into where the industry may be, in terms of financial performance and condition, at the time
of compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the
potential risk faced by the industiy in a future period in which compliance requirements are faced: all else equal,
the more volatile the historical performance, the more likely the industry may be in a period of relatively weak
financial conditions at the time of compliance.
Net profit margin is calculated as after-tax income before nonrecurring gains and losses as a percentage of sales
or revenue, and measures profitability, as reflected in the conventional accounting concept of net income. Over
time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the
industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from
several factors, including: variations in aggregate economic conditions (including international and U.S.
conditions), variations in industry-specific market conditions (e.g., short-term capacity expansion resulting in
overcapacity), or changes in the pricing and availability of inputs to the industry's production processes (e.g., the
cost of energy to the petroleum refining process). The extent to which these fluctuations affect an industry's
profitability, in turn, depends heavily on the fixed vs. variable cost structure of the industry's operations. In a
capital intensive industry such as Petroleum Refining, the relatively high fixed capital costs as well as other fixed
overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative affect
on profit margin.
Return on total capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by
the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of
the capita) deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or
liability element). As such, the return on total capital provides insight into the profitability of a business' assets
independent of financial structure and is thus a "purer" indicator of asset profitability than return on equity. In the
same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate,
over time, a sufficient return on capital if the industry is to remain economically viable and attract capital. The
factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in
return on total capital.
Figure C2C-6 below shows trends in net profit margins and return on total capital for the Petroleum Refining
segment between 1992 and 2005. Through the first half of the 1990s, unusually low product margins, low
profitability, and substantial restructuring characterized the petroleum industry. These low profit margins resulted
from three supply-side factors - (I) increases in operating costs as a result of governmental regulations; (2)
expensive upgrading of processing units to accommodate lower-quality crude oils;7 and (3) upgrading of
Crude oils processed by U.S. refineries have become heavier and more contaminated with materials such as sulfur.
This trend reflects reduced U.S. dependence on the more expensive high gravity ("light") and low sulfur ("sweet") crude oils
produced in the Middle East, and greater reliance on crude oil from Latin America (especially Mexico and Venezuela), which
is relatively heavy and contains highetr sulfur ("sour") (U.S. DOE, 1999a).
June I, 2006
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§ 3!6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities Chapter C2C: Petroleum Refining
s
operations to adapt to changes in demand for refinery products - coupled with lower product prices, resulting
from competitive pressures (API, 1999). In the late 1990s, the petroleum industry pursued cost-cutting measures
Q
throughout their operations (Rodekohr, 1999) . These cost-cutting measures, along with increases in the prices of
petroleum refining products, resulted in significantly improved financial performance in the Petroleum Refining
segment. Refinery profits remained high in 2000 and the first half of 2001, due to low product inventories and
high operating rates. The latter half of 2001 and 2002 saw the effects of the global recession, the attacks of 9/11,
and a mild winter. These factors, coupled with world supply in excess of demand, led to decreases in refiner
margins, as crude oil prices increases and petroleum product prices decreased. In 2003, as the U.S. economy
began recovery from its economic weakness, the domestic Petroleum Refining segment returned to relatively
strong financial performance. The segment's performance continued to improve in 2004 and 2005, reaching the
highest return on total capital and net profit margin observed over the time period analyzed by 2005.
Figure C2C-6: Net Profit Margin and Return on Total Capital for Petroleum Refining
25%
20%
- Return on Total Capital
Petroleum Refining
-Net Profit Margin -
Petroleum Refining
5%
0%
_,-., . . .
\C> 3> M? "O *O *Q *&
Source: Value Line. 2003; Value Line, 2006.
C2C-5 FACILITIES OPERATING COOLING WATER INTAKE STRUCTURES
Section 316(b) of the Clean Water Act applies to point source facilities that use, or propose to use, a cooling water
intake structure that withdraws cooling water directly from a surface waterbody of the United States. In 1982, the
Petroleum and Coal Products industry (SIC 29) withdrew 590 billion gallons of cooling water, accounting for
Demand for lighter products such as gasoline and diesel fuel has increased, and demand for heavier products has
decreased.
9
Reductions in costs resulted from:
< divesting marginal refineries and gasoline outlets;
< divesting less profitable activities (e.g., gasoline credit cards);
< reducing corporate overhead costs, including eliminating redundancies through restructuring;
< outsourcing some administrative activities; and
< use of new technologies requiring less labor.
C2C-18 Internal Draft -- Deliberative, Predecisional - Do not Quote, Cite, or Distribute June 1, 2006
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§ 3I6(b) Final Rule: Phase III - EA. Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
approximately 0.8 percent of total industrial cooling water intake in the United States . The industry ranked 4*
in industrial cooling water use, behind the electric power generation industry and the chemical and primary metals
industries (1982 Census of Manufactures).
This section provides information for facilities in the petroleum segment estimated to be subject to regulation for
the regulatory analysis options. Existing facilities that meet all of the following conditions are expected to be
subject to regulation:
> Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or
arrangement with an independent supplier who has a cooling water intake structure; or their cooling water
intake structure(s) withdraw(s) cooling water from waters of the United States, and at least twenty-five
(25) percent of the water withdrawn is used for contact or non-contact cooling purposes;
> Have a National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one;
and
> Meet the applicability criteria for the specific regulatory analysis option in terms of design intake flow
and source waterbody type (i.e., 50 MOD for All Waterbodies, 100 MGD for Certain Waterbodies, or 200
MOD for All Waterbodies).
The regulatory analysis options also cover substantial additions or modifications to operations undertaken at such
facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the
Phase III regulation based on a minimum applicability threshold of 2 MGD, this section focuses on the facilities
nationwide in the petroleum segment that are estimated to be subject to regulation under the DIP applicability
thresholds defined by the regulatory analysis options (see Table C2C-1, above for additional information on the
broader set of facilities potentially subject to regulation).
C2C-5.1 Waterbody and Cooling System Type
Table C2C-10 show the distribution of Phase III facilities by type of water body and cooling system for each
option.
Data on cooling water use are from the 1982 Census of Manufactures. 1982 was the last year in which the Census of
Manufactures reported cooling water use.
EPA applied sample weights to the sampled facilities to account for non-sampled facilities and facilities that did not
respond to the survey. For more information on EPA's 2000 Section 316(b) Industry Survey, please refer to the Information
Collection Request (U.S. EPA, 2000).
June I, 2006
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C2C-I9
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£ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Table C2C-10: Number of Facilities Estimated Subject to the 50 MGD All Option by
Waterbody Type and Cooling System for the Petroleum Refining Segment
Water Body Type
Estuary/ Tidal River
Freshwater Stream/ River
Great Lake
Ocean
Total"
Cooling System
Recirculating
Number
0
2
0
0
2
%of
Total
0%
100%
0%
0%
13%
Combination
Number
3
4
2
0
9
%of
Total
35%
41%
24%
0%
56%
Once-Through
Number
2
2
0
1
_ ^
%of
Total
40%
40%
0%
20%
32%
Total
5
g
2
I
/7
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA. 2000: U.S. EPA analysis, 2006.
Table C2C-11: Number of Facilities Estimated Subject to the 200 MGD All Option by
Waterbody Type and Cooling System for the Petroleum Refining Segment
Water Body Type
Estuary/ Tidal River
Freshwater Stream/ River
Total"
Cooling System
Recircnlating
Number
0
0
0
%of
Total
0%
0%
0%
Combination
Number
2
1
3
%of
Total
68%
32%
76%
Once-Through
Number
1
0
1
%of
Total
100%
0%
24%
Total
3
1
4
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Table C2C-12: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Waterbody Type and Cooling System for the Petroleum Refining Segment
Water Body Type
Estuary/ Tidal River
Freshwater Stream/ River
Great Lake
Total"
Cooling System
Recirculating
Number
0
1
0
I
%of
Total
0%
100%
0%
14%
Combination
Number
2
2
1
5
%of
Total
40%
39%
21%
72%
Once-Through
Number
1
0
0
/
%of
Total
100%
0%
0%
14%
Total
3
3
1
8
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
According to the American Petroleum Institute and EPA, water use at Petroleum Refineries has been declining
because facilities are increasing their reuse of water (U.S. EPA, 1996a).
C2C-5.2 Facility Size
All petroleum refinery facilities that are estimated to be subject to regulation under the regulatory analysis options
are relatively large. Figure C2C-7 show the number of potential Phase III facilities by employment size category
for the regulatory analysis options.
C2C-20
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June 1, 2006
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Figure C2C-7: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment
Size for the Petroleum Refinery Segment
O Petroleum Refineries (SIC 2911)
<100
100-249 250-499 500-999 >=1000
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Figure C2C-8: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment
Size for the Petroleum Refinery Segment
10-,
9
8-
7-
6-
5-
4-
3-
2-
1
0-
/
/
/
/
/
3
000 ^^^^1 R^^^l
<100 100-2451 250-499 500-999 >=1000
Ftetroteum Refineries (SC 291 1 )
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
June I. 2006
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C2C-21
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
Figure C2C-9: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Employment Size for the Petroleum Refinery Segment
10-t
9-
8-
7
6-
5-
4
3-
2-
1-
0
I Petroleum Refineries (SIC 2911)
<100
100-249
250-499
500-999
>=1000
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
C2C-5.3 Firm Size
EPA used the Small Business Administration (SBA) small entity thresholds to determine the number of facilities
in the petroleum-refining segment that owned by small firms. Firms in this industry are considered small if they
employ fewer than 1,500 people. As shown in Table C2C-13, Table C2C-14, and Table C2C-15, all of the
facilities that are estimated to be subject to regulation are owned by large business, regardless of the option.
Table C2C-13: Number of Facilities Estimated Subject to the 50 MGD All Option by Firm Size
for the Petroleum Refinery Segment
SIC
Large
No. % of SIC
2911 17 100%
Small
No.
0
Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis.
% of SIC
0%
Total
17
2006.
Table C2C-14: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size
for the Petroleum Refinery Segment
SIC
2911
Large
No. % of SIC
4 100%
Small
No. % of SIC
0 0%
Total
4
Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
Table C2C-1S: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm
Size for the Petroleum Refinery Segment
SIC
2911
Large
No. % of SIC
8 100%
No.
0
Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis,
Small
% of SIC
0%
Total
8
2006.
C2C-22
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June I, 2006
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2C: Petroleum Refining
REFERENCES
American Petroleum Institute (API). 2004. "Year-end API monthly statistical report." January 14, 2004.
American Petroleum Institute (API). 2003. "Year-end statistical report, 2002." January 15,2003.
American Petroleum Institute (API). 1999. Policy Analysis and Strategic Planning Department. Economic State
of the U.S. Petroleum Industry. February 26, 1999.
Bureau of Labor Statistics (BLS). 2006. Producer Price Index. Industry Data Series: PCU324110-Petroleum
Refineries. Available at: http://www.bls.gov/ppi/home.htm. Downloaded February 2,2006.
Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001.
Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification
Manual.
National Petroleum Council (NPC). 2000. £7.5. Petroleum Refining. Assuring the Adequacy and Affordability of
Cleaner Fuels. Executive Summary. June 2000.
Rodekohr, Dr. Mark. Financial Developments in '96- '97: How the U.S. Majors Survived the 1998 Crude Oil
Price Storm. Presentation. May 27, 1999. Available at:
http://www.eia.doe.gov/emeu/finance/highlite7/sldOO 1 .htm
Standard & Poor's. (S&P)2001. Industry Surveys - Oil & Gas: Production & Marketing. March 8,2001.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration.
Industry, Trade, and the Economy: Data and Analysis. Data by NAICS and SIC. Available at:
http://www.ita.doc.gov/td/industr>/otea/industry_sector/tables_naics.htm. Downloaded February 2,2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bureau of the Census. Current Industrial Reports.
Survey of Plant Capacity.
U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the
Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge
Between NAICS and SIC.
U.S. Department of Commerce (U.S. DOC). 1987, 1992, 1997, and 2002. Bureau of the Census. Census of
Manufactures.
U.S. Department of Energy (U.S. DOE) 2005. Energy Information Administration. Annual Energy Review
2004. DOE/EIA-0384(2004). August 2005.
U.S. Department of Energy (U.S. DOE). 2004. Energy Information Administration. Performance Profiles of
Major Energy Producers 2002. DOE/EIA-0206(04). February 2004.
U.S. Department of Energy (U.S. DOE). 2003. Energy Information Administration. Annual Energy Review
2002. DOE/E1A-0384(2002). October 2003.
U.S. Department of Energy (U.S. DOE). 1999a. Energy Information Administration. Petroleum: An Energy
Profile, 1999. p. 25. DOE/EIA-0545(99). July 1999.
June 1. 2006
Internal Draft - Deliberative, Predecisianal - Do not Quote, Cite, or Distribute
C2C-23
-------
§ 3l6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities Chapter C2C: Petroleum Refining
U.S. Department of Energy (U.S. DOE). 1999b. Energy Information Administration. The U.S. Petroleum
Refining and Gasoline Marketing Industry. Recent Structural Changes in U.S. Refining: Joint Ventures, Mergers,
and Mega-Mergers. July 9, 1999.
U.S. Department of Energy (U.S. DOE). 1999c. Energy Information Administration. Petroleum Marketing
Annual 1998. DOE/EIA-0487(98). October 1999.
U.S. Department of Energy (U.S. DOE). 1997. Energy Information Administration. Petroleum 1996: Issues and
Trends, p. 15. DOE/EIA-0615(96). September 1997.
U.S. Department of Energy (U.S. DOE). Financial Reporting System (FRS) historical data.
http://www.eia.doe.gov/emeu/aer/finance.html
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling
Water Intake Structures.
U.S. Environmental Protection Agency (U.S. EPA). 1996a. Office of Water. Preliminary Data for the
Petroleum Refining Category, EPA-821-R-96-016. July, 1996.
U.S. Environmental Protection Agency (U.S. EPA). 1996b. Office of Solid Waste. Study of Selected Petroleum
Refining Residuals: Industry Study. August, 1996.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards. Available at:
http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses. Available at:
http://www.sba.gov/advo/stats/int_data.html
Value Line. 2006. Value Line 3.0 Investment Analyzer.
Value Line. 2003. Value Line Investment Survey.
Value Line. 2001. "Petroleum (Integrated) Industry." September 21, 2001.
World Oil. 1999. M 1998: A year of infamy." February 1, 1999. Vol. 220. No.2 Available at:
http://www.worldoil.com/magazine/MAGAZ INE_DETAIL.asp?ART_ID=478&MONTH_YEAR=Feb-1999
^..o-orp library
^?.;-
';;;,,...
1200 r'<> "''; ':V'^.o
C2C-24 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June I, 2006
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§ 3l6(b) Final Rule: Phase HI - EA. Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Chapter C2D: Steel (SIC 331)
INTRODUCTION
EPA's Detailed Industry Questionnaire, hereafter referred
to as the DQ, identified five 4-digit SIC codes in the Steel
Works, Blast Furnaces, and Rolling and Finishing Mills
Industries (SIC 331) with at least one existing facility that
operates a C WIS, holds a NPDES permit, and withdraws
equal to or greater than two million gallons per day (MOD)
from a water of the United States, and uses at least 25
percent of its intake flow for cooling purposes (facilities
with these characteristics are hereafter referred to as
facilities potentially subject to the Phase III regulation or
"potential Phase III facilities").
For each of the five SIC codes, Table C2D-1, following
page, provides a description of the industry segment, a list
of primary products manufactured, the total number of
detailed questionnaire respondents (weighted to represent a
national total of facilities that hold a NPDES permit and
operate cooling water intake structures), the number of
facilities estimated to be potentially subject to Phase III
regulation based on the minimum withdrawal threshold of 2
MOD, and the number of facilities estimated to be subject
to regulation for the regulatory analysis options.
CHAPTER CONTENTS
Introduction C2D-1
C2D-1 Summary Insights from this Profile C2D-3
C2D-2 Domestic Production C2D-4
C2D-2.1 Output C2D-5
C2D-2.2 Employment and Productivity C2D-11
C2D-2.3 Capital Expenditures C2D-13
C2D-2.4 Capacity Utilization C2D-14
C2D-3 Structure and Competitiveness C2D-15
C2D-3.1 Firm Size C2D-I5
C2D-3.2 Concentration Ratios C2D-16
C2D-3.3 Foreign Trade C2D-17
C2D-4 Financial Condition and Performance...C2D-19
C2D-5 Facilities Operating Cooling Water Intake
Structures C2D-21
C2D-5.1 Waterbody and Cooling System Type
C2D-22
C2D-5.2 Facility Size C2D-23
C2D-5.3 Firm Size C2D-25
References C2D-27
June 1. 2006
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$ 316(b) Final Rule: Phase llf-EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Table C2D-1; Phase III Facilities in the Steel Industry (SIC 331)
f
SIC
SIC Description
Important Products Manufactured
Number of Phase III Facilities*
Potentially
Total Regulated
Facilities"
Subject to Subject to
50 MGD 200 MGD
All All
Option Option
Subject to
100 MGD
CWB
Option
Steel Mills (SIC 3312)
3312
Steel Works, Blast
Furnaces
(Including Coke
Ovens), and
Rolling Mills
Hot metal, pig iron, and silvery pig iron from
iron ore and iron and steel scrap; converting
pig iron, scrap iron, and scrap steel into steel;
hot-rolling iron and steel into basic shapes,
such as plates, sheets, strips, rods, bars, and
tubing; merchant blast furnaces and byproduct
or beehive coke ovens
161 46 21 14 19
Steel Products (SICs 3315,3316,3317)
3315
3316
3317
\
Steel Wiredrawing
and Steel Nails and
Spikes
Cold-Rolled Steel
Sheet, Strip, and
Bars
Steel Pipe and
Tubes
Drawing wire from purchased iron or steel
rods, bars, or wire; further manufacture of
products made from wire; steel nails and
spikes from purchased materials
Cold-rolling steel sheets and strip from
purchased hot-rolled sheets; cold-drawing
steel bars and steel shapes from hot-rolled
steel bars; producing other cold finished steel
Production of welded or seamless steel pipe
and tubes and heavy riveted steel pipe from
purchased materials
Total Steel Products
122 7 3 00
57 10 0 00
130 5 1 01
309 21 S 01
Other Segments
3313
Electrometallurgica
1 Products, Except
Steel
Ferro and nonferrous metal additive alloys by
electrometaUurgical or metallothermic
processes, including high percentage
ferroalloys and high percentage nonferrous
additive alloys
622 00
Total Steel (SIC 331)
Total SIC Code 331 ! 476
68
27
14
20
" Number of weighted detailed questionnaire survey respondents.
b Individual numbers may not add up due to independent rounding.
Source: Executive Office of the President, 1987; U.S. EPA 2000; U.S. EPA analysis, 2006.
As shown in Table C2D-1, EPA estimates that, out of the total of 476 facilities with a NPDES permit and
operating cooling water intake structures in the Steel Industry (SIC 331), 27 (or 4%) would be subject to
regulation under the 50 MGD All option, 14 (or 2.9%) would be subject to regulation under the 200 MGD All
option, and 20 (or 4.2%) would be subject to regulation under the 100 MGD CWB option. EPA also estimated
the percentage of total production that occurs at facilities estimated to be subject to regulation for each primary
analysis option. Total value of shipments for the steel industry from the 2004 Annual Survey of Manufacturers is
$92.8 billion. Value of shipments, a measure of the dollar value of production, was selected for the basis of this
estimate. Because the DQ did not collect value of shipments data, these data were not available for Phase III
facilities. Total revenue, as reported on the DQ, was used as a close approximation for value of shipments for
these facilities. EPA estimated the total revenue of facilities expected to be subject to regulation under the 50
MGD, 200 MGD and 100 MGD to be $32 billion, $24.3 billion, and $26.8 billion, respectively. Therefore, EPA
C2D-2
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June I, 2006
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
estimates that the percentage of total production in the steel industry that occurs at facilities estimated to be
subject to regulation under the 50 MOD, 200 MOD, and 100 MGD options is 34%, 26%, and 29%, respectively..
The responses to the Detailed Questionnaire indicate that two main steel segments account for the largest numbers
of potential Phase HI facilities: (1) Steel Mills (SIC code 3312) and (2) Steel Products (SIC codes 3315, 3316, and
3317). The remainder of the stee industry profile therefore focuses on these two industry segments
Table C2D-2 provides the crosswalk between SIC codes and the new NAICS codes for the profiled steel SIC
codes. The table shows that both cold finishing of steel shapes (SIC 3316) and steel pipe and tubes (SIC 3317)
have a one-to-one relationship to NAICS codes. The other SIC codes in the profiled steel segments correspond to
two NAICS codes.
Table C2D-2: Relationships between SIC and NAICS Codes for the Steel Industries (2002)
SIC
Code
3312
3313
3315
3316
3317
SIC Description
Blast furnaces and
steel mills
Blast furnaces and
steel mills
Electrometallurgical
products
Electrometallurgical
products
Steel wire and related
products
Steel wire and related
products
Cold finishing of steel
shapes
Steel pipe and tubes
[SAICS
Code
324199
NAICS Description
All other petroleum and coal
products manufacturing (pt)
331111 Iron and steel mills (pt)
331112
331492
331222
332618
331221
331210
Electrometallurgical
ferroalloy product
manufacturing
Secondary smelting, refining,
and alloying of nonfenous
metal (except copper and
aluminum) (pt)
Steel wire drawing
Other fabricated wire product
manufacturing (pt)
Rolled steel shape
manufacturing
Iron and steel pipes and tubes
manufacturing from
purchased steel
Number of
Establishments
82
379
22
235
338
1,672
147
183
Value of
Shipments
($1000)
1,895,666
46,221,417
819,311
2,686,875
3,905,687
42,314
5,004,079
6,240,489
Employment
3,191
117,016
2,333
9,669
18,576
5,879,897
12,202
21,858
1 Industry data for relevant NAICS codes from the 2002 Economic Census.
Source: U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and2002.
C2D-1 SUMMARY INSIGHTS FROM THIS PROFILE
A key purpose of this profile is to provide insight into the ability of steel industry firms to absorb compliance
costs under each primary analysis option without material adverse economic/financial effects. The industry's
ability to withstand compliance costs is primarily influenced by two factors: (1) the extent to which the industry
may be expected to shift compliance costs to its customers through price increases and (2) the financial health of
the industry and its general business outlook.
Likely Ability to Pass Compliance Costs Through to Customers
As reported in the following sections of this profile, the steel industry is relatively unconcentrated, which would
suggest that firms in this industry would have difficulty in passing a significant portion of their compliance-
/, 2006
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C2D-3
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
related costs through to customers. In addition, the domestic steel industry faces high competition from imports
into the U.S. market, further curtailing the potential of firms in this industry to pass through to customers a
significant portion of their compliance-related costs. As discussed above, given the relatively small proportion of
total value of shipments in the industry estimated subject to regulation under the primary analysis options, EPA
believes that the theoretical threshold for justifying the use of industry-wide CPT rates in the impact analysis of
existing Phase III steel facilities has not been met. For these reasons, in its analysis of regulatory impacts for the
steel industry, EPA assumed that complying firms would be unable to pass compliance costs through to
customers: i.e., complying facilities must absorb all compliance costs at the time of compliance (see following
sections and Appendix 3, Cost Pass-Through Analysis, to Chapter C3: Economic Impact Analysis for
Manufacturers, for further information).
Financial Health and General Business Outlook
Over the past decade, the steel industry, like other U.S. manufacturing industries, experienced a range of
economic/financial conditions, including substantial challenges. The U.S. steel industry went through a difficult
restructuring process in the 1980s and early 1990s, including the closing of a number of inefficient mills,
substantial investment in new technologies, and reductions in the labor force. Although U.S. demand for steel
was strong in the late 1990s, low-priced imports increased substantially in 1998, which caused a number of U.S.
steel bankruptcies and steelworker layoffs. The increased imports resulted from the Asian financial crisis, with
the associated decline in Asian demand for steel and currency devaluations. Tariffs provided temporary relief
through 2002; however, all tariffs were removed by the end of 2003. The steel industry was also negatively
affected by economic recession in 2000 and 2001 and has been slow to recover. In 2004, however, the industry's
financial performance improved significantly, with 2004, followed by 2005, showing the highest financial
performance over the survey timeframe. The industry has weathered difficult periods over the past few years and
may be in position for better performance with continued strengthening of the U.S. economy. However, until
such improvement manifests more concretely, the industry's relatively weak financial condition suggest a lower
ability (among the industries subject to the 316(b) regulation) to withstand additional regulatory compliance costs
without imposing significant financial impacts.
C2D-2 DOMESTIC PRODUCTION
Steel is one of the most important products of the U.S. industrial metals industry. For most of the twentieth
century, the U.S. steel industry consisted of a few large companies utilizing an integrated steelmaking process to
produce the raw steel used in a variety of commodity steel products. The integrated process requires a large
capital investment to process coal, iron ore, limestone, and other raw materials into molten iron, which is then
transformed into finished steel products (S&P, 2001). In recent decades, the integrated steel industry has
undergone a dramatic downsizing as a result of increased steel imports, decreased consumption by the auto
industry, and the advent of "minimills" (S&P, 2001). While the traditional integrated facilities using basic
oxygen furnaces (BOF) still account for a substantial percent of U.S. steel mill product production, the share of
electric arc furnace (EAF) facilities using scrap steel as an input has grown steadily1. By 2002, about 72
companies operating about 107 steelmaking plants used the EAF steelmaking process; these non-integrated,
minimill facilities produced 46.1 million metric tons of steel, an increase of about eight percent compared with
that of 2001, and accounted for 50.4 percent of total steelmaking (USGS, 2002). The range of products produced
by EAFs has also expanded over time. Initially, EAFs produced primarily lower-quality structural materials.
1 Production from open hearth furnaces, which dominated production until the early 1950s, ended in 1991. BOF facilities
have traditionally been referred to as integrated producers, because they combined iron-making from coke, production of pig
iron in a blast furnace, and production of steel in the BOF. In recent years, some facilities have closed their coke ovens.
These BOF facilities are no longer fully integrated.
C2D-4
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§ 3!6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase HI Existing Facilities Chapter C2D: Steel
Starting in the 1990s, EAFs began producing higher quality sheet products as well. AH recent capacity additions
have been at EAF facilities.
Basic steel mill products include carbon steel, steel alloys, and stainless steel. Steel forming and finishing
operations may take place at facilities co-located with steelmaking or at separate facilities. These operations take
steel (in the form of blooms, billets, and slabs) and use heating, rolling or drawing, pickling, cleaning,
galvanizing, and electroplating processes in various combinations to produce finished bars, wire, sheets, and coils
(semifinished steel products). Establishments that produce hot rolled products, along with basic BOF and EAF
steelmaking facilities, are included in SIC 3312. SIC codes 3315,3316, and 3317 perform additional processing
of steel bars, wires, sheets, and coils (including cold-rolling of sheets) to produce steel products for a variety of
end-uses (U.S. EPA, 1995).
The steel industry is the fourth largest energy-consuming industry in the U.S. economy. Energy costs account for
approximately 17 percent of the total manufacturing cost (A1SI, 2000). Steelmakers use coal, oil, electricity, and
natural gas to fire furnaces and run process equipment. Minimill producers require large quantities of electricity
to operate the electric arc furnaces used to melt and refine scrap metal, while integrated steelmakers depend on
coal for up to 60 percent of their total energy requirements (McGraw-Hill, 1998).
C2D-2.1 Output
Steel mill products are sold to service centers (which buy finished steel, often process it further, and sell to a
variety of fabricators, manufacturers, and construction industry clients), to vehicle producers, and to the
construction industry. The rapid .growth in sales of heavy sports utility vehicles contributed to increased U.S.
steel consumption in the 1990s. Efforts to increase the fuel efficiency of vehicles have eroded steel's position in
the automotive market as a whole, however, as aluminum and plastic have replaced steel in many automotive
applications. Other end-uses for steel include a wide range of agricultural, industrial, appliance, transportation,
and container applications. Use of steel in beverage cans has been largely replaced by aluminum.
Table C2D-3 shows trends in production from the two major groups of steel producers: BOF and EAF facilities.
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§316(b) Final Rule: Phase III-EA, PartC: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Table C2D-3: U.S. Steel Production by Type of Producer
Year
1990s
1991"
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005C
Total Percent Change
1990-2005
Average Annual
Growth Rate
Steel Production
Million MT % Change
89.7
79.7
84.3
88.8
91.2
95.2
95.5
98.5
98.6
97.4
102
90.1
91.6
93.7
99.7
92.4
~~ J.0% '"
0.2%
-11.15%
5.77%
5.34%
2.70%
4.39%
0.32%
3.14%
0.10%
-1.22%
4.72%
-11.67%
1.66%
2.29%
6.40%
-7.32%
Percent from
EOF
59.1%
60.0%
62.0%
60.6%
60.7%
59.6%
57.4%
56.2%
54.9%
53.7%
53.0%
52.6%
49.6%
49.0%
47.8%
44.9%
Percent from
EAF
37.3%
38.4%
38.0%
39.4%
39.3%
40.4%
42.6%
43.8%
45.1%
46.3%
47.0%
47.4%
50.4%
51.0%
52.2%
55.1%
3.5 percent of 1990 production was from open hearth furnaces.
b 1.6 percent of 1991 production was from open hearth furnaces.
c Estimated.
Source: AISI, 2001 b; USGS, 1997, USGS, 2001; USGS2004; USGS, 2006; USGS, Iron
and Steel Statistical Compendium.
This table shows the cyclical nature of the U.S. steel industry, with variations in growth from year to year
reflecting general U.S. and world economic conditions, persistent excess production capacity worldwide, the
competitive strength of imports, and trends in steel's share of the automotive and other end-use markets for steel.
The U.S. steel industry went through a difficult restructuring process in the 1980s and early 1990s, including the
closing of a number of inefficient mills, substantial investment in new technologies, and reductions in the labor
force. The U.S. became a world leader in low-cost production, lead by the minimiII producers. Although U.S.
demand for steel was strong in the late 1990s, low-priced imports increased substantially in 1998, which led to a
number of U.S. steel bankruptcies and steelworker layoffs. The increased imports resulted from the Asian
financial crisis, with the associated decline in Asian demand for steel and currency devaluations. The U.S.
government initiated the Steel Action Program in response to the crisis, focusing on strong enforcement of trade
laws through the World Trade Organization and bilateral efforts to address market-distorting practices abroad2.
The industry began to show signs of recovery in the second half of 1999, and by early 2000 capacity utilization
recovered to above 90 percent and earnings were up for most major steel companies (U.S. DOC, 2000),
However, beginning in 2000, the weakening of the U.S. economy significantly reduced steel demand and total
U.S. steel production fell by nearly 12 percent in 2001. In March 2002, the U.S. steel industry received temporary
relief under Section 201 of the 1974 Trade Act with 3 years of tariffs ranging up to 30 percent on certain steel
2 World steel trade is characterized by noncompetitive practices in a number of countries, which have resulted in
substantial friction over trade issues since the late 1960s. Since 1980, almost 40 percent of the unfair trade practice cases
investigated in the U.S. have been related to steel products (U.S. DOC, 2000).
C2D-6
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§ 3l6(b) Final Rule: Phase HI - EA. Pan C: Economic Analysis for Phase III Existing facilities Chapter C2D: Steel
imports. Relief from imports was nullified to some extent when the U.S. Department of Commerce exempted 727
imported steel products from the tariff in June 2002. By year-end, 2002 was the fourth highest steel import year
In U.S. history (USGS, 2002). Removal of all tariffs occurred on December 4,2003 (S&P, 2004).
The steel industry is recovering, but slowly, from the import penetration in the late 90's followed by the economic
recession in 2001. In 2003, the integrated steel industry had poor operating results, as high raw material costs
outweighed increased sales and higher volumes. As a result, most domestic steel producers instituted a raw
material surcharge to offset sharply rising costs for raw materials such as scrap, iron ore and coke. Additionally,
worldwide capacity remains in excess of long-term needs. Imports will most likely rise in 2004 after the removal
of tariffs. However, to the extent that imports put downward pressure on prices, they may force the shutdown of
marginal capacity currently operating. These capacity reductions will reduce domestic supply, and may set the
stage for better financial performance in later years (S&P, 2004).
Value of shipments and value added are two common measures of manufacturing output3. Change in these
values over time provides insight into the overall economic health and outlook for an industry. Value of
shipments is the sum of receipts earned from the sale of outputs; it indicates the overall size of a market or the
size of a firm in relation to its market or competitors. Value added, defined as the difference between the value of
shipments and the value of inputs used to make the products sold, measures the value of production activity in a
particular industry.
Figure C2D-1 presents trends in constant-dollar value of shipments and value added for Steel Mills and Steel
Products. Value of shipments and value added from Steel Mills declined in the early 1990s, and recovered
through 1997, prior to the 1998 import crisis and the later U.S. economic recession. The segment's value of
shipments continued to decline through 2001, but has risen continuously since 2002, peaking at nearly $75 billion
in 2004. Steel Mills value added, on the other hand, continued to decline until 2003, increasing slightly in 2004.
Value of shipments and value added for Steel Products were less volatile, increasing gradually over 1990 through
1997. Value added stayed relatively constant through 2004, while value of shipments declined until 2003, then
increased slightly in 2004.
' Terms highlighted in bold and italic font are further explained in the glossary.
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
Figure C2D-1: Value of Shipments and Value Added for Profiled Steel Industry Segments
(millions, $2005)
Value of Shipments
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987. 1992, 1997, and 2002.
C2D-8
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§ 316(b) Final Rule: Phase III - EA, Part C Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
B2D-2.2 Prices
The producer price index (PP'I) measures price changes, by segment, from the perspective of the seller, and
indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment.
Figure C2D-2 below shows that prices increased from 1987 to 1989 and then decreased in the early 1990s, due to
a depressed domestic economy and the resulting decline in the demand for steel. Prices rebounded sharply
through 1995 before eroding again, due to the global oversupply and increases in exports discussed above. Basic
steel prices declined sharply with the growth of imports in the late 1990s, recovered in 2000, but dropped again in
2001 with the decline in steel deriand (S&P, 2001; AISI, 200la). Prices began to rise in 2002 with the beginning
of economic recovery, and then proceeded to increase dramatically during 2003 to 2005. In 2005, both Steel
Products and Steel Mills segments recorded the highest prices observed during the 1987 to 2005 time period.
Figure C2D-2: Producer Price Index for Profiled Steel Industry Segments
200 -,
190 -
180
170
160 -
150
140
130
120
1 10
100
90
-Steel Products (N A ICS 33 12 10.
33 1221, 331222)
Steel Mills (NAICS 331 1 1 I)
Note: Data for 2005 were preliminary at the time of this writing. The NAICS values shown in this figure match the historical
values of the profiled SIC codes. As data by SIC were only available through 2003, the representative NAICS codes are
presented for evaluation through 2005.
Source: BLS, 2006.
B2D-2.3 Number of Facilities and Firms
The number of operating Steel Mills fluctuated significantly between 1990 and 2003, as the U.S. industry
underwent a substantial restructuring. Table C2D-4 shows substantial decreases in the number of facilities in
1992 and 1993 due to a significant decrease in global demand for Steel Products and resulting overcapacity. This
decrease was followed by a significant recovery in 1995 and 1996. The number of facilities continued to rise
through 2001, with the largest increase around 1999. This increase may have resulted in part from the advent of
minimills, as discussed above. The import crisis in 1998 ultimately led to bankruptcy for a number of U.S.
producers, including LTV and Bethlehem Steel (S&P, 2001). Additionally, 7 major bankruptcies occurred over
2002 and early 2003, including Bayou Steel Corp, Kentucky Electric Steel Inc, Slater Steel Inc, and Weirton Steel
June I. 2006
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§ 3!6(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
Corp (USGS, 2004). Nonetheless, the Steel Mills segment saw an overall 74 percent increase in the number of
facilities during 1990 to 2003.
In contrast to the volatility in the number of Steel Mills, the number of facilities in the Steel Products segment has
remained relatively stable between 1990 and 2003, with decreases towards the end of the period.
Table C2D-4: Number of Facilities in the Profiled Steel Industry Segments
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998"
1999'
2000"
2001'
20021
2003"
Total Percent Change
1990-2003
Average Annual
Growth Rate
Steel
Number of
Facilities
497
531
412
343
339
391
483
297
398
685
981
1,352
1,249
866
74.2%
4.4%
Mills
Percent
Change
6.8%
-22.4%
-16.7%
-1.2%
15.3%
23.5%
-38.5%
34.0%
72.1%
43.2%
37.9%
-7.6%
-30.7%
Steel
Number of
Facilities
776
807
831
833
804
791
770
727
865
919
1,026
1,028
953
918
18.3%
1.3%
Products
Percent
Change
4.0%
3.0%
0,2%
-3.5%
-1.6%
2.7%
-5.6%
19.0%
6.2%
11.7%
0.2%
-7.3%
-3.6%
" Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in
the North American Industry Classification System (NA1CS). For this analysis, EPA converted the
NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge
Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
The trend in the number of firms over the period between 1990 and 2003 is similar to the trend in the number of
facilities in both industry segments. The number of firms in the Steel Mill segment decreased to a period-low of
216 in 1997, before increasing significantly over 1998 to 2001. This rise in the number of Steel Mill firms was
followed by slight declines in 2002 and 2003. Overall, however, the number of Steel Mill firms increased by just
over 83 percent between 1990 and 2003. The number of firms in the Steel Products segment also decreased from
1992 to 1998, before rising steadily through 2001, then declining slightly in 2002 and 2003.
Table C2D-5 shows the number of firms in the two profiled steel segments between 1990 and 2003.
C2D-IO
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§ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase 111 Existing Facilities
Chapter C2D: Steel
Table C2D-5: Number of Firms in the Profiled Steel Industry Segments
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998*
1999"
2000'
2001"
2002'
2003"
Total Percent Change
1990-2003
Average Annual
Growth Rate
Steel Mills
Number of Firms Percent Change
408
433
321
261
258
309
397
216
314
593
885
1,254
1,140
748
83.3%
4.8%
6.1%
-25.9%
-18.7%
-1.1%
19.8%
28.5%
-45.6%
45.3%
89.0%
49.2%
41.6%
-9.0%
34.4%
Steel Products
Number of Firms Percent Change
.597
635
661
641
618
607
583
544
666
716
810
811
757
767
28.5%
1.9%
6.4%
4.1%
-3.0%
-3.6%
-1.8%
-4.0%
-6.7%
22.4%
7.4%
13.2%
0.1%
-6.7%
1.4%
* Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North
American Industry Classification System (NAICS). For this analysis, EPA converted the NA1CS classification data
to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
C2D-2.2 Employment and Productivity
Figure C2D-3, following page, provides information on Employment from the Annual Survey of Manufactures
for the Steel Mills and Steel Products segments. As shown in the figure, employment levels in the Steel Mills
segment decreased by a total of 4!? percent between 1987 and 2004. Employment is a significant cost component
for steelmakers, accounting for approximately 30 percent of total costs (McGraw-Hill, 1998). Labor cost
reductions enabled Steel Mills to improve profitability and competitiveness in the face of limited opportunity for
price increase in the highly competitive market for Steel Products. The steady decline in employment reflects the
smaller number of Steel Mill facilities and firms, in conjunction with aggressive efforts to improve worker
productivity in order to cut labor costs and improve profits (McGraw-Hill, 1998). Employment declined further
as a result of the 1998 import crisis, with almost 26,000 U.S. steelworkers reportedly losing their jobs (AISI,
200la). Employment in the Steel Products segment over the period 1987-2001 remained fairly constant, before
experiencing moderate declines in the subsequent three years.
June 1, 2006
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£ 3l6(b) Final Rule: Phase IH-EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
Figure C2D-3; Employment for Profiled Steel Industry Segments
225,000
200,000
175,000
150,000
125,000
100,000 .
75,000
50,000
25,000
-
Steel Mills {NAICS 10 SIC)
-Steel Mills (SIC 3312)
Sleel Products (NAICS to SIC)
- Sleel Products (SIC 3315,3316,
3317)
s s
o
* Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the
North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the
SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996. 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997. and 2002.
Table C2D-6 presents the change in value added per labor hour, a measure of labor productivity, for the Steel
Mill and Steel Products segments between 1987 and 2004. Labor productivity at Steel Mills increased slightly
over this period. Value added per labor hour increased around 14.4 percent between 1987 and 2004. Much of
this increase in labor productivity can be attributed to the restructuring of the U.S. steel industry and the increased
role of minimills in production. Minimills are capable of producing rolled steel from scrap with substantially
lower labor needs than integrated mills (McGraw-Hill, 1998). Labor productivity in the Steel Products segment
has also fluctuated, but increased by 17.8 percent overall from 1987 to 2004.
C2D-12
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§ 3t6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Table C2D-6: Productivity Trends for the Profiled Steel Industry Segments ($2005)
Steel Mills
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997*
1998"
1999*
2000*
2001*
2002'
2003*
2004'
Total Percent Change
1987-2004
Average Annual
Growth Rate
Value
Added
(millions)
9,836
10,418
10,219
10,069
9,213
9,131
8,880
9,050
9,130
8,902
8,708
8,669
8,186
8,315
7,200
6,660
6,251
6,780
-31.1%
-2.2%
Production
Hours
(millions)
306
324
348
315
279
277
268
266
263
260
252
245
237
241
283
194
180
184
-39.8%
-2.9%
Value Added/Hour
S/hr *?rcenl
Change
32
32
29
32
33
33
33
34
35
34
35
35
35
34
25
34
35
37
14.4%
0.8%
-0.2%
-8.5%
8.9%
3.3%
-0.3%
0.7%
2.4%
2.3%
-1.6%
1.2%
2.0%
-2.1%
-0.4%
-26.1%
35.3%
0.9%
6.0%
Steel Products
Value
Added
(millions)
2,499
2,706
2,597
2,595
2,485
2,573
2,707
2,729
2,809
2,806
2,806
2,867
2,747
2,803
2,516
2,404
2,186
2,162
-13.5%
-0.8%
Production
Hours
(millions)
108
94
112
93
106
87
109
91
114
134
110
113
108
109
97
91
85
79
-26.5%
-1.8%
Value Added/Hour
.... Percent
$/hr _.
Change
23
29
23
28
23
30
25
30
25
21
25
25
26
26
26
27
26
27
17.8%
1.0%
24.4%
-19.9%
21.0%
-16.7%
. 26.9%
-16.1%
20.9%
-17.7%
-15.1%
21.1%
-0.1%
0.5%
0.4%
1.3%
2.1%
-2.9%
6.4%
* Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the North
American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code
classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004: U.S. DOC. 1987, 1992. 1997, and2002.
C2D-2.3 Capital Expenditures
Steel production is a capital intensive process. The integrated production process requires a capital investment of
approximately $2,000 per ton of capacity for plants and equipment. The nonintegrated process employed in
minimills is significantly less capital intensive with capital costs of approximately $500 per ton of capacity
(McGraw-Hill, 1998).
New capital expenditures are needed to modernize, expand, and replace existing capacity to meet growing
demand. Capital expenditures in the Steel Mills and the Steel Products segments between 1987 and 2004 are
presented in Table C2D-7, following page. The table shows that capital expenditures in both the Steel Products
and the Steel Mills dropped significantly between 1987 and 2004. Capital outlays increased in the late 1980s and
early 1990s, rising by a total of 112 percent from 1987 to 1991. This substantial increase coincides with the
advent of thin slab casting, a technology that allowed minimills to compete in the market for flat rolled sheet steel.
The significant decreases in capital expenditures by Steel Mills that followed this expansion reflect the bottoming
out of the demand for Steel Products in the early 1990s. The recovery in capital expenditures in the mid 1990s
reflected increased demand and higher utilization rates (McGraw-Hill, 1998). However, the import crisis of the
late 1990s and later weakening of the U.S. economy put pressure on the domestic industry, and expenditures for
June I. 2006
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§ 3I6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
new capacity decreased steadily since 1997 (McGraw-Hill, 2000). In 2004, however, capital expenditures in both
the Steel Mills and Steel Products sectors rose by 45 and 11 percent, respectively.
Table C2D-7: Capital Expenditures for
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997"
1998"
1999>
the Profiled Steel Industry Segments (millions, $2005)
Steel Mills
Capital
Expenditures
1,869
2,804
3,566
3,509
3,965
2,869
2,256
3,246
3,348
3,366
3,046
2,993
2,537
2000" 1 2,308
2001"
2002"
2003"
1,675
1,452
1,006
2004" 1,459
Total Percent Change
1987-2004
Average Annual
Growth Rate
-21.9%
-1.4%
Percent Change
50.0%
27.2%
-1.6%
13.0%
-27.6%
-21.4%
43.9%
3.2%
0.5%
-9.5%
-1.7%
-15.2%
-9.0%
-27.4%
-13.3%
-30.7%
45.0%
Steel
Capital
Expenditures
831
633
719
718
511
527
575
664
648
698
642
613
518
538
412
457
454
503
-39.4%
-2.9%
Products
Percent Change
-23.8%
13.5%
-0.1%
-28.8%
3.0%
9.2%
15.4%
-2.4%
7.7%
-8.0%
-4.5%
-15.6%
3.9%
-23.4%
10.9%
-0.7%
10.8%
* Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification
data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996 J 998-2001; and 2003-2004; U.S. DOC. 1987. 1992. 1997, and 2002.
C2D-2.4 Capacity Utilization
Capacity utilization measures actual output as a percentage of total potential output given the available
capacity. Capacity utilization provides insight into the extent of excess or insufficient capacity in an industry, and
into the likelihood of investment in new capacity. Figure C2D-4 presents the capacity utilization index from 1989
to 2004 for the 4-digit SIC codes that make up the Steel Mill and Steel Products segments. As shown in the
figure, the index follows similar trends in each segment. For all segments, capacity utilization peaked in 1994 and
decreased through 2001. Capacity utilization remained relatively constant through 2003 and 2004 for both
segments, though the Steel Mills segment showed slight declines during both years. This trend reflects the over-
capacity in the U.S. steel industry, which has followed the substantial capacity additions in the late 1980s and
early 1990s and increased imports throughout the 1990s. Worldwide capacity remains in excess of long-term
needs (S&P, 2004).
C2D-14
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§ 3l6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Figure C2D-4; Capacity Utilization Rates (Fourth Quarter) for Profiled Steel Industry Segments
100
90
70
50
Steel Mills {NAICS lo SIC)
Sitti Mills (SIC 3312)
Steel Products (NAICS10 SIC)
-Steel Products (SIC 33 15, 3316,
3317)
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using ihe 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1989-2004.
C2D-3 STRUCTURE AND COMPETITIVENESS
The companies that manufacture steel operate in a highly capital intensive industry. The Steel Mill segment is
comprised of two different kinds of facilities, integrated mills and minimills. The integrated steelmaking process
requires expensive plant and equipment purchases that will support production capacities ranging from two
million to four million tons per year. Until the early 1960s, integrated steelmaking was the dominant method of
U.S. steel manufacturing. Since then, the integrated steel business underwent dramatic downsizing due to
competition from minimills and imports. These trends reduced the number of integrated steelmakers (S&P,
2001). Minimills vary in size, from capacities of 150,000 tons at small facilities to larger facilities with annual
capacities of between 400,000 tons and two million tons. Integrated companies have significant capital costs of
approximately $2,000 per ton of capacity compared with minimills' $500 per ton. Because minimills do not
require as much investment in capital equipment as integrated steelmakers, minimills have been able to lower
prices, driving integrated companies out of many of the commodity steel markets (S&P, 2001). The advent of
minimills, with their lower initial capital investments, has made it easier for new producers to enter the market.
C2D-3.1 Firm Size
For both Steel Mills and Steel Products, the Small Business Administration defines a small firm as having 1,000
or fewer employees. The size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond
with the SBA size classifications, therefore preventing precise use of the SBA size threshold in conjunction with
SUSB data. Table C2D-8 below shows the distribution of firms, facilities, and receipts by the employment size of
the parent firm. The SUSB data presented in Table C2D-8 show that in 2003, 674 of 748 firms in the Steel Mills
segment had less than 500 employees. Therefore, at least 90 percent of firms in this segment were classified as
small. These small firms owned 691 facilities, or 80 percent of all facilities in the segment.
June 1, 2006
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§ 316(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Of the 767 firms with facilities that manufacture Steel Products, 677, or 88 percent, employ fewer than 500
employees, and are therefore considered small businesses. Small firms own 78 percent of facilities in the
industry.
Table C2D-8: Number of Firms and Facilities by Employment Size
Category in the Profiled Steel Industry Segments, 2003'
Employment
Size Category
0-19
20-99
100-499
500+
Total
Steel Mills
Number of Number of
Firms Facilities
491
120
63
74
748
494
122
75
176
866
Steel Products
Number of Number of
Firms Facilities
413
156
108
91
767
413
161
140
204
918
" Before 1998, data were compiled in the SIC system; since 1997, these data have been
compiled in the North American Industry Classification System (NAICS). For this analysis,
EPA converted the NAICS classification data to the SIC code classifications using the 1997
Economic Census Bridge Between NAiCS and SIC.
Source: U.S. SBA, 1989-2003.
C2D-3.2 Concentration Ratios
Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is
closely related to entry barriers with more concentrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common
measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a
CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry's total
value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things
being equal4. An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI
indicates concentration based on the largest 50 firms in the industry. It is equal to the sum of the squares of the
market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with
market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (602 + 302
+ 102). The higher the index, the fewer the number of firms supplying the industry and the more concentrated the
industry. Based on the U.S. Department of Justice's guidelines for evaluating mergers, markets in which the HHI
is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered
to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated.
Table C2D-9 shows that Steel Mills have an HHI of 445 and that Steel Products, comprised of SIC 3315, 3316,
and 3317, have HHIs of 223, 631, and 200, respectively. The Steel Mills and Steel Products segments are
considered competitive, based on standard measures of concentration. The CR4 and the HHI for the relevant SIC
codes are below the benchmarks of 50 percent and 1,000, respectively. Moreover, the table shows that each of the
industry segments generally became more competitive between 1987 and 1997. The relatively low concentration
4 Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry
with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it
competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in
beverage containers). Concentration ratios based on share of production are therefore only one indicator of the extent of
competition in an industry.
C2D-I6
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
values suggest that this factor would not increase the industry's overall ability to pass through compliance costs as
price increases to customers.
Table C2D-9: Selected Ratios
SIC (S) or
NAICS (N)
Code
Year
Total
Number of
Finns
4 Firm
(CR4)
for the Profiled
8 Firm
(CR8)
Steel Industry Segments
Concentration Ratios
20 Firm 50 Firm
(CR20) (CR50)
Herfmdahl-
Hirschman Index
Steel Mills
S3312
N33inib
1987
1992
1997
271
135
191
44%
37%
33%
63%
58%
53%
81% 94%
81% 96%
75% 94%
607
551
445
Steel Products
S3315
N 331222
S3316
N 331221*
S3317
N331210
1987
1992
1997
1987
1992
1997
1987
1992
1997
274
271
199
156
15:?
153
15:>
166
160
21%
19%
21%
45%
43%
44%
23%
19%
20%
34%
32%
36%
62%
60%
60%
34%
31%
30%
54% 78%
54% 80%
56% 80%
82% 95%
81% 96%
81% 96%
58% 85%
53% 80%
52% 82%
212
201
223
654
604
631
242
194
200
* The 1997 Census of Manufactures is ihe most recent concentration ratio data available.
b NAICS code represents largest percentage of facilities and value of shipments within this SIC based on 1997 Bridge Between SIC
and NAICS
Source: U.S. DOC, 1987, 1992, 1997, and2002.
C2D-3.3 Foreign Trade
This profile uses two measures of foreign competition: export dependence and import penetration,
Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic
markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that
industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests
that higher import penetration levels will reduce market power and pricing discretion because foreign competition
limits domestic firms' ability to exercise such power. Firms belonging to segments in which imports account for
a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to pass-
through costs because foreign producers would not incur costs as a result of the Phase III regulation. The
estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31 -33) for 2001 is 22 percent.
For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with
import ratios close to or above 22 percent would more likely face stiff competition from foreign firms and thus be
less likely to succeed in passing compliance costs through to customers.
Export dependence, calculated as exports divided by value of shipments, measures the share of a segment's sales
that is presumed subject to strong Foreign competition in export markets. The Phase III regulation would not
increase the production costs of foreign producers with whom domestic firms must compete in export markets.
As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing
prices to recover cost increases resulting from regulation-induced increases in production costs. The estimated
export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the
June I, 2006
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2D: Steel
ability of industries to withstand compliance cost burdens, EPA judges that industries with export ratios close to
or above 15 percent are at a relatively greater disadvantage in potentially recovering compliance costs through
price increases since export sales are presumed subject to substantial competition from foreign producers.
The global market for steel continues to be extremely competitive. From 1945 until 1960, the U.S. steel industry
enjoyed a period of tremendous prosperity and was a net exporter until 1959. However, by the early 1960s,
foreign steel industries had thoroughly recovered from World War II and had begun construction of new plants
that were more advanced and efficient than the U.S. integrated steel mills. Foreign producers also enjoyed lower
labor costs, allowing them to take substantial market share from U.S. producers. This increased competition from
foreign producers, combined with decreased consumption in some key end use markets, served as a catalyst for
the restructuring and downsizing of the U.S. steel industry. The industry emerged from this restructuring
considerably smaller, more technologically advanced and internationally competitive (S&P, 2001).
Table C2D-10 presents trade statistics for the profiled steel industry segments from 1990 to 2002. The table
shows that while the trend in export dependence has been relatively stable, import penetration increased almost
continuously from the early 1990s until 1998 and fluctuated annually during 1999 to 2002. Historically, the U.S.
steel industry has exported a relatively small share of shipments compared to the steel industries of other
developed nations (McGraw-Hill, 2000). U.S. exports rose in 1995 to the highest level since 1941, and remained
relatively high through 2002. Imports penetration rose to 21 percent in 1998, after hovering around 15 percent in
the early 1990s. This increase in imports reflected excess steel capacity worldwide and the competitiveness of
foreign steel producers, as described previously. Canada received the largest amount of U.S. exported steel in
2003, followed by Mexico. Imports of steel mill products increased 8.4 percent from 2001 to 2002. Brazil,
Canada, the EU, Japan, the Republic of Korea, Mexico, Russia, and Turkey were major sources of steel mill
product imports (USGS, 2002).
The steel industry's import penetration ratio was 18.2 percent in 2002, implying that the industry currently faces
moderate competition from foreign firms in setting prices for U.S. sales. However, as noted above, the removal
of temporary import restrictions will leave the industry more exposed to competition from foreign producers. The
steel industry's export dependence ratio in 2002 was 7.3 percent; therefore, the industry will not likely be affected
by competitive pressures from abroad in export sales. This finding implies that competitive pressures from
foreign firms/markets do not characterize the steel industry and thus market power and cost pass through potential
are not diminished by export penetration. However, it is questionable that firms in an industry will have a
comparatively high cost pass-through potential simply because firms in that industry are not active in export
markets. From the standpoint of firms gaining market power, EPA believes that the finding of low export
dependence diminishes the importance of export competition as indicator of market power. Thus, other indicators
must be relied upon to gauge the amount of market power firms in the steel industry are expected to hold. On
balance, the U.S. steel industry is subject to significant international competitive pressure, largely manifesting
though the penetration of foreign product into domestic markets. Although the U.S. industry's competitiveness
against foreign producers improved in recent years, the industry remains substantially vulnerable to foreign
competition, indicating a low likelihood that steel industry producers subject to the 316(b) regulation would be
able to pass a material share of compliance costs through to customers.
C2D-I8 Internal Draft - Deliberative, Predecisional - Do not Quote. Cite, or Distribute June I, 2006
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§ 3!6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
Table C2D-10: Import Penetration and Export Dependence: Steel Mill
Year
1989
1990
1991
Value of
Imports
(millions!
13,710
12,253
11,076
1992 ! 11,040
1993 11,794
1994 16,696
1995
1996
1997d
1998d
1999d
2000d
2001d
2002d
Total Percent Change
1989-2002
Average Annual
Growth Rate
15,709
16,547
17,440
20,886
16,173
18,479
14,044
14,593
6.4%
0.5%
Value of
Exports
(millions)
4,259
4,064
5,134
4,141
3,789
3,980
5,953
5,191
6,105
5,747
5,249
5,883
5,496
5,132
20. 5%
1.4%
Value of
Shipments
(millions)
87,290
85,638
75,827
75,383
75,925
82,449
87,314
87,487
90,133
86,768
81,817
80,551
69,930
70,535
-19.2%
-1.6%
Implied
Domestic
Consumption*
96,742
91827
81,769
82;282
83,930
95,166
97,070
98,842
101,468
101,908
92,740
93,147
78,479
79,997
-17.3%
-1.5%
Products ($2005)
Import
Penetration1*
14.2%
13.1%
13.5%
13.4%
14.1%
17.5%
16.2%
16.7%
17.2%
20.5%
17.4%
19.8%
17.9%
18.2%
Export
Dependence'
4.9%
4.7%
6.8%
5.5%
5.0%
4.8%
6.8%
5.9%
6.8%
6.6%
6.4%
7.3%
7.9%
7.3%
* Calculated by EPA as shipments + imports - exports.
b Calculated by EPA as imports divided by implied domestic consumption.
c Calculated by EPA as exports divided by shipments.
a Before 1997, data were compiled in tlie SIC system; since 1998, these data have been compiled in the North American Industry
Classification System (NAICS). For th:s analysis, EPA converted the NA1CS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 2006; U.S. DOC, 1988-1991,1993-1996,1998-2001; and 2003-2004; U.S. DOC. 1987, 1992,1997. and 2002.
C2D-4 FINANCIAL COND ITION AND PERFORMANCE
The financial performance and condition of the steel industry are important determinants of its ability to withstand
the costs of regulatory compliance without material, adverse economic/financial impact. To provide insight into
the industry's financial performance and condition, EPA reviewed two key measures of financial performance
over the 14-year period, 1992-2005: net profit margin and return on total capital. EPA calculated these measures
as a revenue-weighted index of measure values for public reporting firms in the respective industries, using data
from the Value Line Investment Survey. Financial performance in the most recent financial reporting period
(2005) is obviously not a perfect indicator of conditions at the time of regulatory compliance. However,
examining the trend, and deviation from the trend, through the most recent reporting period gives insight into
where the industry may be, in terms of financial performance and condition, at the time of compliance. In
addition, the volatility of performance against the trend, in itself, provides a measure of Ihe potential risk faced by
the industry in a future period in which compliance requirements are faced: all else equal, the more volatile the
historical performance, the more likely the industry may be in a period of relatively weak financial conditions at
the time of compliance.
Net profit margin is calculated as after-tax income before nonrecurring gains and losses as a percentage of sales
or revenue, and measures profitability, as reflected in the conventional accounting concept of net income. Over
time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the
industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from
June I. 2006
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§ 3l6(b) Final Rale: Phase III- EA, Part C: Economic Analysis for Phase ill Existing Facilities Chapter C2D: Steel
several factors, including: variations in aggregate economic conditions (including international and U.S.
conditions), variations in industry-specific market conditions (e.g., short-term capacity expansion resulting in
overcapacity), or changes in the pricing and availability of inputs to the industry's production processes (e.g., the
cost of energy to the steel production process). The extent to which these fluctuations affect an industry's
profitability, in turn, depends heavily on the fixed vs. variable cost structure of the industry's operations. In a
capital intensive industry such as the steel industry, the relatively high fixed capital costs as well as other fixed
overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative affect
on profit margin.
Return on total capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by
the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of
the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or
liability element). As such, the return on total capital provides insight into the profitability of a business' assets
independent of financial structure and is thus a "purer" indicator of asset profitability than return on equity. In the
same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate
over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The
factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in
return on total capital.
Figure C2D-5, following page, presents trends in net profit margins and return on total capital for the steel
industry between 1992 and 2003. The graph shows considerable volatility in the trend over this period. After
registering improvement in financial performance in the first half of the 1990s, steel industry financial
performance declined markedly from 1997/1998 forward to 2003, due first to increasing imports and later to
general economic weakness. Measures of financial performance improved in 2002 when the U.S. steel industry
received temporary relief with tariffs ranging up to 30 percent on certain steel imports, but in 2003 the integrated
steel industry again had poor operating results, as high raw material costs outweighed increased sales and higher
volumes. In 2004, the industry rebounded, with returns on both total capital and net profit margins reaching the
highest values observed during the entire analysis period. In 2005, the industry saw a slight weakening in
financial performance. However, overall financial performance remained substantially higher than in the prior
years of the analysis period.
C2D-20 Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute June I. 2006
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§ 3l6(b) Final Rule: Phase /// - EA, Pan C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
Figure C2D-S: Net Profit Margin and Retard on Total Capital for the Iron and Steel Industry
Return on Total Capital - Iron and
Steel Industry
Net Profit Margin - Iron and Steel
Industry
Source: Valve Line, 2003: Value Line, 2006.
C2D-5 FACILITIES OPERATING COOLING WATER INTAKE STRUCTURES
Section 3l6(b) of the Clean Water Act applies to point source facilities that use or propose to use a cooling water
intake structure that withdraws cooling water directly from a surface waterbody of the United States. In 1982, the
Primary Metals industries as a whole (including Nonferrous and Steel producers) withdrew 1,312 billion gallons
of cooling water, accounting for approximately 1.7 percent of total industrial cooling water intake in the United
States5. The industry ranked 3rd in industrial cooling water use, behind the electric power generation industry, and
the chemical industry (1982 Census of Manufactures).
This section provides information for facilities in the profiled steel segments estimated to be subject to regulation
under the primary analysis options. Existing facilities that meet all of the following conditions would have been
subject to regulation under the three regulatory analysis options:
> Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or
arrangement with an independent supplier who has a cooling water intake structure; or their cooling water
intake structure(s) withdraw(s) cooling water from waters of the U.S., and at teast twenty-five (25)
percent of the water withdrawn is used for contact or non-contact cooling purposes;
> Have an National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one;
and
* Meet the applicability criteria for the specific regulatory analysis option in terms of design intake flow
and source waterbody type (i.e., 50 MOD for All Waterbodies, 100 MOD for Certain Waterbodies, or 200
MOD for All Waterbodies).
5 Data on cooling water use are from the 1982 Census of Manufactures. 1982 was the last year in which the Census of
Manufactures reported cooling water use.
June I, 2006
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§ 3!6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
The analysis options also cover substantial additions or modifications to operations undertaken at such facilities.
Although EPA initially identified the set of facilities that were estimated to be potentially subject to the Phase III
regulation based on a minimum applicability threshold of 2 MGD, this section focuses on the facilities nationwide
in the profiled steel segments that are estimated to be subject to regulation under the DIP applicability thresholds
defined by the primary analysis options (see Table C2D-1, above for additional information on the broader set of
facilities potentially subject to Phase III regulation).6
C2D-5.1 Waterbody and Cooling System Type
Minimills use electric-arc-furnaces (EAF) to make steel from ferrous scrap. The electric-arc-iurnace is
extensively cooled by water, which is in turn recycled through cooling towers (U.S. EPA, 1995). This is
important to note since most new steel facilities are minimills.
Table C2D-11, Table C2D-12, and Table C2D-16 show the distribution of Phase III facilities in the profiled steel
segments by type of water body and cooling system for each analysis option. The tables show that most of the
Phase III facilities employ a combination of a once-through and recirculating systems or an "other" system. The
largest proportion of existing facilities draws water from a freshwater stream or river.
Table C2D-11: Number of Facilities Estimated Subject to the 50 MGD All Option by Waterbody Type
and Cooling System for the Profiled Steel Industry Segments
Water Body Type
Cooling Systems
Recirculating
« w % of
Number _, ,
Total
Combination
M . % °f
Number _, .
Total
Once-Through
« u a/« of
Number _. . .
Total
Other
v, u % »f
N"mber Total
Total
Steel Mills
Freshwater Stream/ River
Great Lake
Totaf
1
0
100%
0%
; 6%
3
9
12
29%
71%
61%
1
1
2
50%
50%
12%
4
0
4
100%
0%
22%
10
10
20
Steel Products
Freshwater Stream/ River
Lake/Reservoir
Totaf
0
0
0
0%
0%
0%
3
1
4
73%
27%
100%
0
0
0
0%
0%
0%
0
0
0
0%
0%
0%
3
1
4
Total for Profiled Steel Industries
Freshwater Stream/ River
Great Lake
Lake/Reservoir
Totaf
1
0
0
100%
0%
0%
; s%
7
9
1
16
40%
53%
7%
68%
1
1
0
2
50%
50%
0%
10%
4
0
0
4
100%
0%
0%
18%
13
10
1
24
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
6 EPA applied sample weights to the sampled facilities to account for non-sampled facilities and facilities that did not
respond to the survey. For more information on EPA's 2000 Section 316(b) Industry Survey, please refer to the Information
Collection Request (U.S. EPA, 2000).
C2D-22
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June I, 2006
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£ 3i6(b) Final Rule; Phase III - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Table C2D-12: Number of Facilities Estimated Subject to the 200 MGD All Option by Waterbody Type
and Cooling System for the Profiled Steel Industry Segments
Water Body Type
Cooling Systems
Recirculating
» u % of
Number Total
Combination
« u % »f
Number Total
Once-Through
Kl I, % °f
Number Total
Other
. . . % of
Number
Total
Total
Steel Mills
Freshwater Stream/ River
Great Lake
Total"
0 0%
0 0%
0 0%
1 12%
9 88%
10 76%
0 0
0 0
0 0%
3 100%
0 0%
3 24%
4
9
13
Steel Products
Freshwater Stream/ River
Total"
0 0%
0 0%
3 100%
3 100%
0 0%
6 0%
0 0%
0 0%
3
3
Total for Profiled Steel Industries
Freshwater Stream/ River
Great Lake
Totaf
0 0%
0 0%
0 0%
4 33%
9 67%
13 80%
0 0
0 0
0 0%
3 100%
0 0%
3 20%
7
9
16
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Table C2D-13: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Waterbody
Type and Cooling System for the Profiled Steel Industry Segments
Water Body Type
Cooling Systems
Recirculating
x, u % <>f
Number _. ^ ,
Total
Combination
« u % °f
Nttlnber Total
Once-Through
M K %0f
N"mber Total
Other
a L %»f
Number Total
Total
Steel Mills
Freshwater Stream/ River
Great Lake
Total"
1 100%
0 0%
1 7%
2 21%
9 79%
1 1 62%
0 0%
1 100%
1 7%
4 100%
0 0%
4 25%
8
10
17
Steel Products
Freshwater Stream/ River
Lake/Reservoir
Totaf
0 0%
0 0%
0 0%
3 73%
1 27%
4 100%
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
3
1
4
Total for Profiled Steel Industries
Freshwater Stream/ River
Great Lake
Lake/Reservoir
Tataf
1 100%
0 0%
0 0%
1 5%
5 36% | 0 0%
9 57%
1 8%
15 70%
I 100%
0 0%
1 5%
4 100%
0 0%
0 0%
4 20%
11
10
1
22
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
C2D-5.2 Facility Size
The facilities in the Steel Mills and Steel Products segments that are estimated subject to regulation are relatively
large, with no facilities employing fewer than 250 people. Figure C2D-6 show the number of Phase III facilities
by employment size category.
June 1, 2006
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C2D-23
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§ 3!6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
Figure C2D-6: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment
Size for Profiled Steel Industry Segments
18-r
I Steel Mills (SC 3312)
I Steel Products (SC3315, 3316,
3317)
<100
100-249 250-499 500-999 >=1000
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Figure C2D-7: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment
Size for Profiled Steel Industry Segments
12-
10-
8-
6-
4-
2
0
13
oo
on
on
Steel Mils (SC 331 2)
Steel Products (SC3315, 3316, 3317)
<100
100-249 250-499 500-999
>=1000
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
C2D-24
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£ 316(b) Final Rule: Phase HI - EA, Pan C: Economic Analysis for Phase HI Existing Facilities
Chapter C2D: Steel
Figure C2D-8: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Employment Size for Profiled Steel Industry Segments
I Steel Mills (SIC 3312)
I Steel Products (SIC 3315,3316,3317)
<100
100-249 250-499 500-999
>=1000
Source: U.S. EPA, 2000; U.S. EfA analysis. 2006.
C2D-5.3 Firm Size
EPA used the Small Business Administration (SBA) small entity size standards to determine the number of
Section 316(b) profiled steel industry facilities owned by small firms. Firms in the Steel Mills and Steel Products
segments are defined as small if they have 1000 or fewer employees. As shown in Table C2D-14, Table C2D-15,
and Table C2D-16, large firms own all of the Steel Mill and Steel Products facilities estimated subject to the
regulation under the three primary analysis options.
Table C2D-14: Number of Facilities Estimated Subject to the 50
Size for the Profiled Steel Segments
SIC Code
Large
Number
% of SIC
MGD All Option by Firm
Small
Number
% of SIC
Total
Steel Mills
3312
20
100%
0
0%
20
Steel Products
3315
3316
3317
Total
3
0
1
4
100%
0%
100%
100%
0
0
0
0
0%
0%
0%
0%
3
0
1
4
Total for Profiled Steel Facilities
TotaT
24
100%
0
0%
24
' Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA. 2000; D&if, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
June 1, 2006
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C2D-25
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§ 3I6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2D: Steel
Table C2D-15: Number of Facilities Estimated Subject to the 200 MGD All Option by
Firm Size for the Profiled Steel Segments
SIC Code
Large
Number % of SIC
Small
Number %
of SIC
Steel Mills
3312
13 100%
0
0%
Total
13
Steel Products
3315
3316
3317
Total
0 0%
0 0%
0 0%
0 0%
0
0
0
0
0%
0%
0%
0%
0
0
0
0
Total for Profiled Steel Facilities
Tatar
13 100%
0
0%
13
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; D&B, 2001: U.S. SBA 2006; U.S. EPA analysis. 2006.
Table C2D-16: Number of Facilities Estimated Subject to the 100
Firm Size for the Profiled Steel Segments
SIC Code
Large
Number % of SIC
MGD CWB Option by
Small
Number % of SIC
Steel Mills
3312
17 100%
0
0%
Total
17
Steel Products
3315
3316
3317
Total
0 0%
0 0%
1 100%
0 0%
0
0
0
0
0%
0%
0%
0%
0
0
1
0
Total for Profiled Steel Facilities
Totaf 18 100% 0
0%
18
* Individual numbers may not add up to total due to independent rounding.
Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
C2D-26
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§ 316(b) Final Rule: Phase IH-EA, PartC: Economic Analysis for Phase 111 Existing Facilities
Chapter C2D: Steel
REFERENCES
American Iron and Steel Institute (AISI). 200la. "Imports Continue at Severely Depressed Prices; United U.S.
Steel Industry Urges Effective 201 Trade Remedy." September 25, 2001
American Iron and Steel Institute (AISI). 200 Ib. July 2001 Selected Steel Industry Data.
Bureau of Labor Statistics (BLS). 2006. Producer Price Index. Industry Data Series: PCU331111-Iron and Steel
Mills; PCU 331210-Iron/Steel Pipe& Tube Mfg from Purchased Steel; PCU 331221-Rolled Steel Shape
Manufacturing; PCU331222-Steel Wire Drawing. Available at: http://www.bls.gov/ppi/home.htm. Downloaded
February 1,2006.
Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001.
Economagic. 2006. Industrial Production: Industry Subtotals, Individual Series, and Special Aggregates.
Seasonably Adjusted. Data Series: Raw Steel and Iron and Steel Products. Available at:
http://www.econornagic.corn/frbgl7.htmtfIPMarket. Downloaded February 2, 2006.
Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification
Manual.
McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry &
Trade Outlook '00.
McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 1998. U.S. Industry &
Trade Outlook '98.
Standard & Poors (S&P). 2004. Sub-Industry Outlook: Steel. February 21, 2004.
Standard & Poors (S&P). 2001. Industry Surveys-Metals; Industrial. July 12, 2001.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration.
Industry, Trade, and the Economy: Data and Analysis. Data by NAICS and SIC. Available at:
http://www.ita.doc.gov/td/industry/otea/industry_sector/tables_naics.htm. Downloaded February 2, 2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bureau of the Census. Current Industrial Reports.
Survey of Plant Capacity.
U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the
Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1987, 1992, 1997, and 2002. Bureau of the Census. Census of
Manufactures.
U.S. Department of Commerce (U.S. DOC). 2000. International Trade Administration. Report to the President:
Global Steel TradeSStructwal Problems and Future Solutions. July, 2000.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. Bridge Between NAICS and SIC.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling
Water Intake Structures.
U.S. Environmental Protection Agency (U.S. EPA). 1995. Profile of the Iron and Steel Industry. EPA310-R-
95-005. September, 1995.
June I. 2006
Internal Draft Deliberative, Predecisional - Do not Quote, Cite, or Distribute
C2D-27
-------
§ 3l6(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Phase 111 Existing Facilities
Chapter C2D: Steel
United States Geological Survey (USGS). 2006. Mineral Commodity Summaries. Iron and Steel. Author:
Michael D. Fenton. Available at:
http://minerals.usgs.gov/minerals/pubs/commodity/iron_&_steel/index.html#mcs
United States Geological Survey (USGS). 2004. Mineral Commodity Summaries. Iron and Steel. Author:
Michael D. Fenton. Available at:
http://minerals.usgs.gov/minerals/pubs/commodity/iron_&_steel/index.html#mcs
United States Geological Survey (USGS). 2002. Minerals Yearbook. Iron and Steel. Author: Michael D.
Fenton.
United States Geological Survey (USGS). 2001. Mineral Commodity Summaries. Iron and Steel. Author:
Michael D. Fenton. Available at:
http://minerals.usgs.gov/minerals/pubs/commodity /iron_&_steel/index.html#mcs
United States Geological Survey (USGS). 1997. Mineral Commodity Summaries. Iron and Steel. Author:
Michael D. Fenton. Available at:
http://minerals.usgs.gov/minerals/pubs/commodity /iron_&_steel/index.html#mcs
United States Geological Survey (USGS). Historical Statistics for Mineral Commodities in the United States.
Iron and Steel.
United States Geological Survey (USGS). Iron and Steel Statistical Compendium.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards. Available at:
http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Slatistics of U.S. Businesses. Available at:
http://www.sba.gov/advo/research/data.html. Downloaded February 4, 2006.
Value Line. 2006. Value Line 3.0 Investment Analyzer.
Value Line. 2003. Value Line Investment Survey.
Value Line. 2001. Metals & Mining (Diversified) Industry. July 27, 2001.
C2D-28
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Chapter C2E: Aluminum (SIC 333/5)
INTRODUCTION
EPA's Detailed Industry Questionnaire, hereafter referred
to as the DQ, identified two 4-digit SIC codes in the
Nonferrous Metals industries (SIC codes 333/335) with at
least one existing facility that operates a CWIS, holds a
NPDES permit, withdraws equal to or greater than two
million gallons per day (MOD) from a water of the United
States, and uses at least 25 percent of its intake flow for
cooling purposes (facilities with these characteristics are
hereafter referred to as facilities potentially subject to the
Phase III regulation or "potential Phase III facilities").
For these two SIC codes, Table C2E-I, below, provides a
description of the industry segment, a list of primary
products manufactured, the total number of detailed
questionnaire respondents (weighted to represent a national
total of facilities that hold a NPDEiS permit and operate
cooling water intake structures), the number of facilities
estimated to be potentially subject to regulation based on
the minimum withdrawal threshold of 2 MOD, and the
number of facilities estimated to be subject to the
regulatory analysis options.
CHAPTER CONTENTS
Introduction C2E-1
C2E-1 Summary Insights from this Profile C2E-2
C2E-2 Domestic Production C2E-3
C2E-2.1 Output C2E-4
C2E-2.2 Prices C2E-7
C2E-2.3 Number of Facilities and Firms C2E-8
C2E-2.4 Employment and Productivity C2E-10
C2E-2.5 Capital Expenditures C2E-12
C2E-2.6 Capacity Utilization C2E-13
C2E-3 Structure and Competitiveness C2E-14
C2E-3.1 Firm Size C2E-I4
C2E-3.2 Concentration Ratios C2E-15
C2E-3.3 Foreign Trade C2E-16
C2E-4 Financial Condition and Performance... C2E-19
C2E-5 Facilities Operating Cooling Water Intake
Structures C2E-21
C2E-5.1 Waterbody and Cooling System Type
C2E-22
C2E-5.2 Facility Size C2E-23
C2E-5.3 Firm Size C2E-25
References C2E-27
Table C2E-1: Phase III Facilities in the Aluminum Industries (SIC 333/335)
SIC
3334
3353
SIC Description , Important Products Manufactured
Number of Facilities'
Potentially
Total Regulated
1 1 Facilities"
1
Primary
Production of
Aluminum
Aluminum Sheet,
Plate, and Foil
Producing aluminum from alumina and in
refining aluminum by any process
Flat rolling aluminum and aluminum-base
alloy basic shapes, such as rod and bar,
pipe and tube, and tube blooms;
producing tube by drawing
~ Total
31 11
57 10
~~88 ~~ 21 ~
Subject
MGD All
Option
1
3
5
Subject
Option
1
0
T
Subject
to 100
MGD
CWB
Option
I
0
_
1 Number of weighted detailed questionnaire survey respondents.
b Individual numbers may not add up due lo independent rounding.
Source: Executive Office of the President, 1987: U.S. EPA 2000: U.S. EPA analysis, 2006.
June I, 2006
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C2E-1
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§ 3I6(b) Final Rule: Phase III-EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
As shown in Table C2E-1, EPA estimates that, out of the total of 88 facilities with a NPDES permit and operating
cooling water intake structures in the Aluminum Industries (SIC 333/335), 5 (or 6%) facilities are estimated to be
subject to the 50 MOD option, while 1 or (1.1%) facility is expected to be subject to each of the other two
regulatory analysis options. EPA also estimated the percentage of total production that occurs at facilities
estimated to be subject to the regulatory analysis options. Total value of shipments for the Aluminum Industries
(SIC 333/335) from the 2004 Annual Survey of Manufacturers is $18.3 billion. Value of shipments, ameasure of
the dollar value of production, was selected for the basis of this estimate. Because value of shipments data were
not collected using the DQ, these data were not available for the sample of Phase III manufacturing facilities
potentially subject to the regulatory analysis options. Total revenue, as reported on the DQ, was used as a close
approximation for value of shipments for these facilities. EPA estimates the total revenue of facilities in the
aluminum industry subject to the 50 MGD, 200 MGD, and 100 MOD options is $5.3 billion, $0.5 billion, and
$0.5 billion, respectively. Therefore, EPA estimates that the percentage of total domestic aluminum production
that occurs at facilities estimated to be subject to the 50 MGD, 200 MGD, and 100 MGD options is 29%, 3%, and
3%, respectively.
Table C2E-2 provides the crosswalk between SIC codes and the new NAICS codes for the profiled aluminum SIC
codes. The table shows that both of the profiled 4-digit SIC codes in the aluminum industry have a one-to-one
relationship to NAICS codes.
Table C2E-2: Relationships between SIC and NAICS Codes for the Aluminum Industries (2002*)
SIC
Code
3334
3353
SIC Description
Primary aluminum
Aluminum sheet,
plate, and foil
NAICS
Code
331312
331315
NAICS Description
Primary aluminum
production
Aluminum sheet, plate, and
foil manufacturing
Number of
Establishments
40
103
Value of
Shipments
($1000)
4,748,435
11,964,636
Employment
12,197
19,362
* Industry data for relevant NAICS codes from the 2002 Economic Census.
Source: U.S. DOC, 1997; U.S. DOC, 1987, 1992, 1997, and 2002.
C2E-1 SUMMARY INSIGHTS FROM THIS PROFILE
A key purpose of this profile is to provide insight into the ability of aluminum industry firms to absorb
compliance costs under the regulatory analysis options without material adverse economic/financial effects. The
industry's ability to withstand compliance costs is primarily influenced by two factors: (1) the extent to which the
industry can shift compliance costs to its customers through price increases, and (2) the financial health of the
industry and its general business outlook.
Likely Ability to Pass Compliance Costs Through to Customers
As reported in the following sections of this profile, the aluminum industry is moderately concentrated. This
potentially supports the notion that firms in this industry may be able to pass a significant portion of their
compliance-related costs through to consumers. However, the domestic Primary Aluminum Production segment
faces significant competition from imports into the U.S. market. In addition, facilities in the Aluminum Sheet,
Plate, and Foil segment have a notable reliance on sales into foreign markets. The substantial competitive
pressure from abroad weakens the potential of firms in this industry to pass through to customers a significant
portion of their compliance-related costs. As discussed above, given the relatively small proportion of total value
of shipments in the industry potentially subject to regulation under the regulatory analysis options, EPA believes
that the theoretical threshold for justifying the use of industry-wide CPT rates in the impact analysis of existing
C2E-2
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§ 3l6(b) Final Rule: Phase III- EA, Past C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Phase III aluminum facilities has not been met. For these reasons, in its analysis of regulatory impacts for the
aluminum industry, EPA assumed that complying firms would be unable to pass compliance costs through to
customers: i.e., complying facilities must absorb all compliance costs at the time of compliance (see following
sections and Appendix 3, Cost Pass-Through Analysis, to Chapter C3: Economic Impact Analysis for
Manufacturers, for further information).
Financial Health and General Business Outlook
Over the past decade, the aluminum industry, like other U.S. manufacturing industries, has experienced a range of
economic/financial conditions, including substantial challenges. In the early 1990s, the domestic aluminum
industry was adversely affected by reduced U.S. demand and the dissolution of the Soviet Union, which resulted
in substantially increased Russian aluminum exports. Although domestic market conditions improved by mid-
decade, weakness in Asian markets, along with growing Russian exports, dampened performance during the latter
half of the 1990s. Demand for aluminum industry products declined again in 2000 through 2002, reflecting
weakness in both the U.S. and world economies, and again resulted in oversupply and declining financial
performance. More recently, as the U.S. economy began recovering from economic weakness, the domestic
aluminum industry is showing signs of recovery with higher demand levels and improving financial performance
over the course of 2004 and 2005. Although the industry has weathered difficult periods over the past few years,
the strengthening of the industry's financial condition and general business outlook suggest improved ability to
withstand additional regulatory compliance costs without imposing significant financial impacts.
C2E-2 DOMESTIC PRODUCTION
Commercial production of aluminum using the electrolytic reduction process, known as the Hall-Heroult process,
began in the late 1800s. The production of primary aluminum involves mining bauxite ore and refining it into
alumina, one of the feedstocks for aluminum metal. Direct electric current is used to split the alumina into molten
aluminum metal and carbon dioxide. The molten aluminum metal is then collected and cast into ingots.
Technological improvements over the years have improved the efficiency of aluminum smelting, with a particular
emphasis on reducing energy requirements. Currently, no commercially viable alternative exists to the
electrometallurgical process (Aluminum Association, 2001).
In 2003, aluminum recovered from purchased scrap was about 2.8 million tons, of which about 60% came from
new (manufacturing) scrap and 40% from old scrap (discarded aluminum products). Aluminum recovered from
old scrap was equivalent to aboul 17% of apparent consumption (USGS, 2004a). Recycling consists of melting
used beverage cans and scrap generated from operations. Recycling saves approximately 95% of the energy costs
involved in primary smelting from bauxite (S&P, 2001). In contrast to the steel industry, aluminum minimills
have had limited impact on the profitability of traditional integrated aluminum producers. Aluminum minimills
are not able to produce can sheet of the same quality as that produced by integrated facilities. As a result, they are
able to compete only in production of commodity sheet products for the building and distributor markets, which
are considered mature markets. According to Standard & Poor's (2001), construction of new minimill capacity is
unlikely given the potential that added capacity would drive down prices in the face of slow growth in the markets
for minimill products. No secondary smelters (included, along with secondary smelting of other metals, in SIC
code 3341) were reported in EPA's Detailed Industry Questionnaire. These facilities are therefore not addressed
in this profile.
Facilities in SIC code 3353 produce semi-fabricated products from primary or secondary aluminum. Examples of
semi-fabricated aluminum products include (Aluminum Association, undated):
> sheet (cans, construction materials, and automotive parts);
* plate (aircraft and spacecraft fuel tanks);
June I. 2006
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C2E-3
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
» foil (household aluminum foil, building insulation, and automotive parts);
» rod, bar, and wire (electrical transmission lines); and
* extrusions (storm windows, bridge structures, and automotive parts).
U.S. aluminum companies are generally vertically integrated. The major aluminum companies own large bauxite
reserves, mine bauxite ore and refine it into alumina, produce aluminum ingot, and operate the rolling mills and
finishing plants used to produce semi-fabricated aluminum products (S&P, 2001).
As noted, the production of primary aluminum is an electrometallurgical process, which is extremely energy
intensive. Electricity accounts for approximately 30% of total production costs for primary aluminum smelting.
The aluminum industry is therefore a major industrial user of electricity, spending more than $2 billion annually.
The industry has pursued opportunities to reduce its use of electricity as a means of lowering costs. In the last 50
years, the average amount of electricity needed to make a pound of aluminum has declined from 12kilowatt hours
to approximately 7 kilowatt hours (Aluminum Association, undated).
C2E-2.1 Output
The largest single source of demand for aluminum is the transportation segment, primarily the manufacture of
motor vehicles. Demand for lighter, more fuel-efficient vehicles has increased demand for aluminum in auto
manufacturing, at the expense of steel (S&P, 2001)- Until 1996, containers were the largest U.S. market for
aluminum. Production of beverage cans is a major use of aluminum sheet, and aluminum has entirely replaced
steel in the beverage can market. Other major uses of aluminum include construction (including aluminum
siding, windows, and gutters) and consumer durables (USGS, 200la).
Demand for aluminum reflects the overall state of the domestic and world economies, as well as long-term trends
in materials use in major end-use sectors. Because aluminum production involves large fixed investments and
capacity adapts slowly to fluctuations in demand, the industry has experienced alternating periods of excess
capacity and tight supplies. The early 1980s was a period of oversupply, high inventories, and excess capacity.
By 1986, excess capacity was closed, inventories were low, and demand increased substantially. The early 1990s
were affected by reduced U.S. demand and the dissolution of the Soviet Union, resulting in large increases in
Russian exports of aluminum. By the mid-1990s, global production declined, demand rebounded, and aluminum
prices rose. Subsequent increased production reflected an overall increase in the demand for aluminum with
stronger domestic economic growth, driven by increased consumption by the transportation, container, and
construction segments. The economic crises in Asian markets in the later 1990s, along with growing Russian
exports, again resulted in a period of oversupply, although U.S. demand for aluminum remained strong. Demand
declined again in 2000 through 2002 due to slower growth in both the U.S. and the world economy, resulting in
oversupply. The surplus was mitigated somewhat as demand in the automotive and housing markets remained
relatively high through mid-2003. In addition, the California energy crisis in 2000 and 2001 reduced production
from primary smelters located in the Pacific Northwest (Aluminum Association, 1999; USGS, 1999c; USGS,
1998; USGS, 1994c; Value Line, 2001). Production in China increased during this period, and although increased
Chinese consumption helped reduce the surplus slightly, the country switched from being a net importer to a net
exporter. Additionally, interest rates are likely to increase which may decrease U.S. demand for aluminum from
major industrial end markets (aerospace, automotive, home-construction, and commercial-construction).
However, with the economy showing signs of recovery the aluminum industry saw higher demand levels in 2003.
If the economy remains strong, demand is expected to continue at 2003 levels (Value Line, 2003a, 2003b; S&P
2004).
Table C2E-3 shows trends in output of aluminum by Primary Aluminum producers and recovery of aluminum
from old and new scrap. Secondary production grew from 24% to just over 30% of total domestic production
C2E-4
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June 1, 2006
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§ 3l6(b) Final Rule: Phase II! - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
over the period from 1991 to 2005. Primary production of aluminum recorded a net decrease over the 15-year
period, with a particularly sharp decline in 2001. As noted above, this decrease reflects reduced domestic and
world demand for aluminum, and curtailed production at a number of F'acific Northwest mills caused by the
California energy crisis (S&P 2001; USGS, 200la). Production remained fairly constant for the final four years
of the period.
Table C2E-3: U.S. Aluminum Production
Aluminum Ingot
Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005s
Total percent change
1991-2005
Average annual
growth rate
Primary Production
Thousand
MT
4.121
4.042
3,695
3,299
3,375
3,577
3603
3.713
3.779
1688
2.637
2,707
2,703
2,516
2,500
-393%
-3 5%
% Change
-1.9%
-8.6%
-10.7%
2.3%
6.0%
0.7%
3.1%
1.8%
-2.4%
-28.5%
2.7%
-0.1%
-6.9%
-0.6%
Secondary Production
(from old scrap)
Thousand
MT
,320
,610
,630
,500
,510
,580
,530
,500
1,570
1,370
,210
,170
,070
,160
,100
-16.7%
-1.3%
% Change
22.0%
1.2%
-8.0%
0.7%
4.6%
-3.2%
-2.0%
4.7%
-12.7%
-11. 7%
-3.3%
-8.5%
8.4%
-5.2%
Total
Production
Thousand . _.
MT %ChM«e
5,441
5,652
5,325
4,799
4,885
5,157
5,133
5,213
5,349
5,058
3,847
3,877
3,773
3,676
3,600
-33.8%
-2.9%
3.9%
-5.8%
-9.9%
1.8%
5.6%
-0.5%
1.6%
2.6%
-5.4%
-23.9%
0.8%
-2.7%
-2.6%
-2.1%
Source: USGS 1995a, 1999a, 2002a, 2006a
Value of shipments and value added are two common measures of manufacturing output1. Change in these
values over time provides insight into the overall economic health and outlook for an industry. Value of
shipments is the sum of receipts earned from the sale of outputs; it indicates the overall size of a market or the
size of a firm in relation to its market or competitors. Value added, defined as the difference between the value of
shipments and the value of inputs used to make the products sold, measures the value of production activity in a
particular industry.
Figure C2E-1 reports constant dollar value of shipments and value added for the Primary Aluminum, and
Aluminum Sheet, Plate, and Foil ssgments between 1987 and 2004.
1 Terms highlighted in bold and italic font are further explained in the glossary.
June 1, 2006
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
C2E-S
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£ 316(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E; Aluminum
Figure C2E-I: Value of Shipments and Value Added for Profiled Aluminum Industry Segments
(millions, $2005)
Value of Shipments
20.000
18,000
16.000
14,000
12.000
10,000
8.000
6,000
4,000
2,000
0
\^^ jf '> , --' Aluminum Sheet, Plate, and Foil
V"^ '*"*.-' (NAICS to SIC)
P--,v « Aluminum Sheet, Plate, and Foil (SIC
/ "V 3353)
/ ^ ' - - Primary Aluminum Production
/ (NAICS to SIC)
* *'«^ / xx ,f..m * Primary Aluminum Production (SIC
\fc... '»-». 3334)
'«,
'»...-
-,,.,....,. .11
3 I 1 1 38 % 1 S 1 1 1 i § 1 1 1 5
Value Added
1,600
1,400
1,200
1. 000
800
600
400
200 -
""*,
^.....Jfr * * "».-* (NAICS to SIC)
/ -.. JH m » Aluminum Sheet, Plate, and Foil (SIC
* '"'-. 335:)>
" - £1 - - - Primary Aluminum Production
'- . (NAICStoSIC)
'^ Primary Aluminum Production (SIC
'" 3334)
, ..,.,, .11
3 8 1 2 ! 8 3 2 3 * * 2 i § § g S S
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.
The value of Primary Aluminum shipments shows generally the same pattern as the quantity data shown in Table
C2E-3. Trends in production over 1990 to 2004 reflect trends in demand for aluminum; both production and
C2E-6
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June I, 2006
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§ 3l6(b) Final Rule: Phase 111 - EA, Pa*t C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
value of shipments have fallen with increases n the percentage of domestic demand provided by imports, and in
the secondary production of aluminum, which substitutes in some but not all markets for primary production.
Value added by aluminum production excludes the value of purchased materials and services (including
electricity), and shows less fluctuation since 1990 than value of shipments.
Demand for semi-finished aluminum products reflects demand from the transportation, container, and building
industries. Real value of shipments of Aluminum Sheet, Plate, and Foil declined from the late 1980s through
1993, and then recovered by mid-decade, before turning down again in the late 1990s. Demand for semi-finished
products has been affected by strong growth in both the container and packaging segment and the auto segment
(S&P,2001).
Both industry segments show lower values for the constant dollar value of shipments and value added at the end
of the 18-year analysis period than at the beginning of the period. These declining values reflect the overall
maturity of the aluminum production industry and the increasing role of foreign production in meeting total U.S.
demand.
C2E-2.2 Prices
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and
indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment.
The price trends shown for Primary Aluminum in Figure C2E-2 reflect the fluctuations in world supply and
demand discussed in the previous section. During the early 1980s, the aluminum industry experienced
oversupply, high inventories, excess capacity, and weak demand, resulting in falling prices for aluminum. By
1986, much of the excess capacity had been permanently closed, inventories had been worked down, and
worldwide demand for aluminum increased strongly. This resulted in price increases through 1988, as shown in
Figure C2E-2.
In the early 1990s, the dissolution of the Soviet Union had a major impact on aluminum markets. Large quantities
of Russian aluminum that formerly had been consumed internally, primarily in military applications, were sold in
world markets to generate hard currency. At the same time, world demand for aluminum was decreasing. The
result was increasing inventories and depressed aluminum prices.
The United States and five other primary aluminum producing nations signed an agreement in January 1994 to
curtail global output, in response to the sharp decline in aluminum prices. At the time of the agreement, there was
an estimated global overcapacity of 1.5 to 2.0 million metric tons per year (S&P, 2000).
By the mid-1990s, production cutbacks, increased demand, and declining inventories led to a sharp rebound of
prices. Prices declined again during the late 1990s, however, when the economic crises in Asian markets reduced
the demand for aluminum (USGS, 200 Ib). During 2000, prices rebounded sharply despite the continuing trend of
high Russian production and exports. However, economic recession caused prices to fall again through
2002(S&P, 2001-2004). Prices seen by both segments increased sharply in 2003, and continued to rise in 2004
and 2005, reaching peak levels for the Aluminum Sheet, Plate and Foil segment.
June /, 2006
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
C2E-7
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$ 316(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Figure C2E-2: Producer Price Indexes for Profiled Aluminum Industry Segments
170 T-
-Priraary Aluminum (NAICS
331312)
Aluminum Sheet, Plate and Foil
(NAICS 331315)
-J «e >o
Note: Data for 2005 was preliminary at the time of this writing. The NAICS values shown in this figure match the historical
values of the profiled SIC codes. As data by SIC were only available through 2003, the representative NAICS codes are
presented for evaluation through 2005.
Source: BLS, 2006.
C2E-2.3 Number of Facilities and Firms
U.S. Geological Survey data indicate that the number of Primary Aluminum facilities and the number of firms
that own them remained fairly constant over the period 1995 through 2005, as shown in Table C2E-4. The
number of domestic companies and plants sharply declined in 2002 and dropped again in 2004, Furthermore, in
2002, the 10 domestic producers had a total of 7 smelters that were either temporarily or permanently idled. The
bulk of the idled capacity resulted from curtailed production at a number of Pacific Northwest mills caused by the
California energy crisis. Most of the smelters outside of this region continued to operate at or near their
engineered capacities (S&P 2001; USGS, 2001 a; USGS, 2002c).
Table C2E-4: Primary Aluminum Production -
Year
Source:
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Number of Companies
13
13
13
13
12
12
12
7
7
6
6
USGS, 1995a-2006a
Number of Companies and Plants
Number of Plants
22
22
22
23
23
23
23
16
15
14
15
C2E-8
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
June 1, 2006
-------
§ 3!6(b) Final Rule: Phase III - EA, Pan C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Statistics of U.S. Businesses covers a larger number of facilities classified under SIC 3334 than do the USGS
data, and also provide data on SIC 3353 (Aluminum Sheet, Plate, and Foil). These data, shown in Table C2E-5
and Table C2E-6, show more fluctuation in the number of establishments and the number of firms.
Table C2E-5 shows that the number of Primary Aluminum facilities decreased by 30 percent between 1991 and
1995, with the majority of this decrease, 27 percent, occurring between 1991 and 1993. The number of facilities
in the Aluminum Sheet, Plate, and Foil segment showed a more consistent trend, increasing each year except in
1993. In 1998, the number of facilities decreased in both segments. Since then, the number of Primary Aluminum
facilities has continuously grown, while the number of Aluminum Sheet, Plate, and Foil facilities showed some
fluctuation.
Table C2E-5: Number of Facilities for Profiled Aluminum Industry Segments
Primary Aluminum Production
Aluminum Sheet, Plate, and Foil
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998'
1999'
2000"
2001'
2002"
2003s
Total Percent Change
1989-2003
Average Annual
Growth Kate
Number of
Establishments
54
57
52
44
41
40
51
34
28
29
32
38
50
54
0.0%
0.0%
Percent Change
5.6%
-8.8%
-15.4%
-6.8%
-2.4%
27.5%
-33.3%
-17.6%
3.6%
10.3%
18.8%
31.6%
8.0%
Number of
Establishments
64
73
73
63
69
76
81
91
79
93
103
III
95
99
54.7%
3.4%
Percent Change
14.1%
0.0%
-13.7%
9.5%
10.1%
6.6%
12.3%
-13.2%
17.7%
10.8%
7.8%
-14.4%
4.2%
* Before 1998, these data were compiled in the SIC system; since 1998, these data have been compiled in the North
American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-200J.
The trend in the number of firms over the period between 1990 and 2003 is similar to the trend in the number of
facilities in both industry segments. Table C2E-6 on the following page presents SUSB information on the
number of firms in each segment between 1990 and 2003.
June 1. 2006
Internal Draft - Deliberative. Predecisional - Do not Quote, Cite, or Distribute
C2E-9
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§ 3!6(b) Final Rule: Phase /// - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Table C2E-6: Number of Firms for Profiled Aluminum Industry Segments
Year
1990
1991
1992
1993
Primary Aluminum Production
Number of Firms Percent Change
38
41
36
33
1994 ; 30
1995
1996
1997
1998*
1999a
2000"
2001s
2002'
2003'
Total Percent Change
1990-2003
Average Annual
Growth Rate
30
40
23
19
20
22
28
43
43
13.2%
1.0%
7.9%
-12.2%
-8.3%
-9.1%
0.0%
33.3%
-42.5%
Aluminum Sheet, Plate, and Foil
Number of Firms Percent Change
43
53
53
45
47
51
56
66
-17.4% 56
5.3%
10.0%
27.3%
53.6%
0.0%
66
73
82
74
76
76.7%
4.5%
23.3%
0.0%
-15.1%
4.4%
8.5%
9.8%
17.9%
-15.2%
17.9%
10.6%
12.3%
-9.8%
2.7%
" Before 1998, these data were compiled in the SIC system; since 1998, these data have been compiled in the North
American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the
SIC code classifications using the 1997 Economic Census Bridge Between NAICS andSIC.
Source: U.S. SBA, 1989-2003.
C2E-2.4 Employment and Productivity
Figure C2E-3, below, provides information on employment from the Annual Survey of Manufactures for the
Primary Aluminum and Aluminum Sheet, Plate, and Foil segments. Trends in Primary Aluminum facility
employment reflect trends in both production and producers' efforts to compete with less labor-intensive
minimills through improvements in labor productivity (McGraw-Hill, 2000). The figure shows that employment
in the Primary Aluminum segment has declined steadily since 1992, even in years of increased production.
Employment in the Aluminum Sheet, Plate, and Foil segment declined from 1987 through 1994, but rose between
1995 and 1997, before declining again during 1997 to 2004. Employment in the Primary Aluminum Production
segment increased during the 1987 to 1992 period, but fell persistently over the remainder of the 1990s and
through 2004.
C2E-IO
Internal Draft - Deliberative, Predecisional - Do not Quote, Cite, or Distribute
June I, 2006
-------
§ 3l6(b) Final Rule: Phase HI - EA. Pert C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Figure C2E-3: Employment for Profiled Aluminum Industry Segments
28,000
26,000
24,000
22,000
20.000 -
18.000 -
16,000
14,000 -
12,000 -
10,000
8,000
Aluminum Sheet, Plate, and Foil
; (NAICS to SIC)
j -* Aluminum Sheet, Plate, and Foil ( SIC
| 3353)
' Primary Aluminum Production
! (NAICS lo SIC)
--Primary Aluminum Production (SIC
3334)
»~t*Ju^i'i
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using (he 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.
Table C2E-7 presents the change in value added per labor hour, a measure of labor productivity, for the Primary
Aluminum Production and Aluminum Sheet, Plate, and Foil segments between 1987 and 2004. The trend in labor
productivity in both segments showed volatility over this period, reflecting variations in capacity utilization.
Value added per hour in the Primary Aluminum segment showed a 0.4 percent net increase over the entire period
1987 and 2004. Value added per hour in the Aluminum Sheet, Plate, and Foil segment, however, saw an 11.6
percent decrease over the whole period between 1987 and 2001.
June 1, 2006
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C2E-II
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§ 3l6(b) Final Rule: Phase 111 - EA, Part C; Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Table C2E-7: Productivity Trends for Profiled Aluminum Segments ($2005)
Year
Primary Production of Aluminum
Value Production va'ue Added/Hour
Aluminum Sheet, Plate, and Foil
Value Production Value Added/Hour
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997'
1998"
1999'
2000'
2001'
2002'
2003'
2004"
Total Percent Change
1987-2004
Average Annual
Growth Rale
Added
(millions)
871
991
1,023
1,031
1,031
1,046
923
878
907
896
831
849
788
743
638
678
574
540
-38.0%
-2.8%
Hours
(millions)
28
32
30
32
32
32
29
27
28
29
26
27
26
24
19
19
18
17
-38.3%
-2.8%
(S/hour)
31
31
34
32
32
32
32
33
32
31
32
32
30
30
33
35
32
32
0.4%
0.0%
Percent
Change
n/a
-1.5%
9.1%
-4.9%
0.0%
0.8%
-1.7%
2.5%
-1.8%
-1.9%
1.4%
0.0%
-4.9%
0.4%
8.0%
7.2%
-10.6%
0.2%
Added
(millions)
1,397
1,427
1,417
1,403
1,327
1,316
1,298
1,219
1,250
1,289
1,381
1,259
1,229
1,178
1,071
1,080
986
1,007
-28.0%
-1.9%
Hours
(millions)
40
41
41
40
39
40
39
37
38
39
41
39
37
35
32
33
32
33
-18.5%
-1.2%
(S/hour)
35
35
35
35
34
33
34
33
33
33
34
33
34
34
33
33
31
31
-11.6%
-0.7%
Percent
Change
n/a
-0.4%
0.3%
1.7%
-4.4%
-2.3%
2.0%
-0.7%
-1.7%
1.5%
0.8%
-2.6%
2.7%
1.4%
-1.8%
-1.5%
-7.3%
0.5%
' Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in the
North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC
code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.
C2E-2.5 Capital Expenditures
Aluminum production is a highly capital-intensive process. Capital expenditures are needed to modernize,
replace, and when market conditions warrant, expand capacity. Environmental requirements also require major
capital expenditures.
Capital expenditures in the Primary Aluminum Production and Aluminum Sheet, Plate, and Foil segments
between 1987 and 2004 are presented in Table C2E-8. The table shows that capital expenditures in the Primary
Aluminum segment increased throughout the early 1990s, reaching a high in 1992 and again in 1998. In between
these two periods of increased capital investment there was a significant decrease of 46 percent between 1992 and
1994. These decreases resulted from the production cutbacks and capacity reductions implemented in response to
oversupply conditions prevalent in the market for aluminum. Capital expenditures declined between 1999 and
2003, but increased significantly in 2004.
Capital expenditures in the Aluminum Sheet, Plate, and Foil segment also fluctuated considerably between 1987
and 2004, with the highest values occurring in 1990, two years earlier than in the Primary Aluminum segment.
Producers of Aluminum Sheet, Plate, and Foil reduced capital expenditures by approximately 50 percent between
1988 and 1997. Outlays increased by 62 percent in 2001, but declined again in both 2002 and 2003.
C2E-12
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June 1, 2006
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/ 3l6(b) Final Rule: Phase III EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Table C2E-8: Capital Expenditures for Profiled Aluminum Segments (millions, $2005)
Year
Primary Aluminum Production Aluminum Sheet, Plate, and Foil
Capital Expenditures Percent Change Capital Expenditures Percent Change
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997'
1998"
1999'
266
217
260
258
276
279
212
150
185
247
376
458
403
2000' 393
2001'
2002'
2003'
2004'
Total Percent Change
1987-2004
Average Annual
Growth Rate
283
160
90
129
-51.5%
-4.2%
n/a
-18.2%
19.4%
-0.6%
6.8%
1.2%
-24.0%
-29.2%
23.0%
34.0%
52.2%
21.8%
-12.2%
-2.3%
-28.0%
-43.3%
-44.0%
43.4%
673
776
788
936
753
543
306
340
461
478
389
369
373
389
630
310
207
207
-69.2%
-6.7%
n/a
15.4%
1.5%
18.8%
-19.6%
-27.9%
-43.6%
11.1%
35.5%
3.7%
-18.5%
-5.3%
1.2%
4.1%
62.0%
-50.8%
-33.2%
0.1%
Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 1988-1991. 1993-1996. 1998-2001; and 2003-2004; U.S. DOC, 1987. 1992. 1997, and 2002.
C2E-2.6 Capacity Utilization
Capacity utilization measures actual output as a percentage of total potential output given the available capacity.
Capacity utilization reflects excess or insufficient capacity in an industry and is an indication of whether new
investment is likely. Capacity utilization is also closely linked to financial performance for industries with
substantial fixed costs, such as the aluminum industry. Like integrated steel mills, the aluminum manufacturing
process requires a large capital base to transform raw material into finished product. Because of the resulting high
fixed costs of production, earnings can be very sensitive to production levels, with high output levels relative to
capacity needed for plants to remain profitable.
Figure C2E-4 shows capacity utilization from 1989 to 2004 for the Primary Aluminum Production and Aluminum
Sheet, Plate, and Foil segments. The figure shows that for most of the 1990s, the Primary Aluminum segment
was characterized by excess capacity. Although capacity utilization for this segment was in the high 90 percent
range between 1990 and 1992, domestic utilization fell sharply in 1993 as large amounts of Russian aluminum
entered the global market for the first time (McGraw-Hill, 1999). Capacity utilization remained at this lower level
through 1999. In 2000 and 2001, capacity utilization fell again reflecting the general weakening of product
demand during the Asian economic crisis and later, general economic weakness in the U.S. and world economies.
Reflecting the economic recovery, product demand increased and capacity utilization rose during 2002 through
2004. In 2004, capacity utilization for the Primary Aluminum segment was above 90 percent.
June I. 2006
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C2E-13
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§ 316(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Although also experiencing year-to-year fluctuation, capacity utilization in the Aluminum Sheet, Plate, and Foil
segment grew overall between 1989 and 1998. This growth resulted largely from the continued strength of rolled
aluminum products, which account for more than 50 percent of all shipments from the aluminum industry.
Increased consumption by the transportation segment, the largest end-use segment for aluminum sheet, plate, and
foil, is responsible for bringing idle capacity into production (McGraw-Hill, 1999) However, falling demand in
these segments after 1998 and through 2001, led to a marked fall-off in capacity utilization. Again, reflecting the
economic recovery that began in 2002, capacity utilization in this segment had risen substantially by 2004.
Figure C2E-4: Capacity Utilization Rates (Fourth Quarter) for Profiled Aluminum Segments
90
80
60
'- Primary Aluminum Production
{NAlCStoSIC)
- Primary Aluminum Production (SIC
3334)
* Aluminum Sheet, Plate, and Foil
(NAlCStoSIC)
- Aluminum Sheet, Plate, and Foil ( SIC
3353)
1 if I :§
i S
8 1
^ £
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NA1CS). For this analysts, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1989-2004.
C2E-3 STRUCTURE AND COMPETITIVENESS
Aluminum production is a highly-concentrated industry. A number of large mergers among aluminum producers
have increased the degree of concentration in the industry. For example, Alcoa (the largest aluminum producer)
acquired Alumax (the third largest producer) in 1998 and Reynolds (the second largest producer) in May 2000.
Alcan acquired Algroup in 2000 and Pechiney in 2004. Three companies now account for just over 50 percent of
global aluminum output (S&P, 2004). Some sources speculate that, with increased consolidation resulting from
mergers, aluminum producers might refrain from returning idle capacity to production as demand for aluminum
grows, which could reduce the cyclical volatility in production and aluminum prices that has characterized the
industry in the past (S&P, 2000).
C2E-3.1 Firm Size
The Small Business Administration (SBA) defines a small firm for SIC codes 3334 and 3353 as a firm with 1,000
or fewer and 750 or fewer employees, respectively. The Statistics of U.S. Businesses (SUSB) provide
employment data for firms with 500 or fewer employees and do not specify data for companies with 500-750
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§ 3!6(b) Final Rule: Phase HI EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
employees for SIC 3353 and 500-1000 for SIC 3334. Therefore, based on 2001 data for firms with up to 500
employees,
» 34 of the 43 firms in the Primary Aluminum Production segment had less than 500 employees.
Therefore, at least 79 percent of this segment's firms are classified as small. These small firms owned 35
facilities, or 65 percent of all facilities in the segment.
> 61 of the 76 firms in the Aluminum Sheet, Plate and Foil segment had less than 500 employees.
Therefore, at least 80 percent of this segment's firms are classified as small. These small firms owned 62
facilities, or 63 percent of all facilities in the segment.
Table C2E-9 below shows the distribution of firms and facilities in SIC 3334 and 3353 by the employment size of
the parent firm.
Table C2E-9: Number of Firms and Facilities by Employment Size Category for the Profiled
Aluminum Industry Segments, 2003*
Employment
Size Category
0-19
20-99
100-499
500+
Total
Primary Aluminum Production
Number of Firms Number of Facilities
26
5
3
9
43
26
6
3
19
54
Aluminum Sheet, Plate, and Foil
Number of Firms Number of Facilities
39
14
8
15
_
39
14
9
37
99
' Before 1998, data were compiled in the SIC system; since 1997, these data have been compiled in (he North American
Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code
classifications using the 1997 Ecoromic Census Bridge Between NAICS and SIC.
Source: U.S. SBA. 1989-2003.
C2E-3.2 Concentration Ratios
Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely
related to entry barriers with more concentrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of
industry concentration. The CR4 indicates the market share of the four largest firms. For example, a CR4 of 72
percent means that the four largest firms in the industry account for 72 percent of the industry's total value of
shipments. The higher the concentration ratio, the less competition there is in the industry, other things being
equal2. An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI indicates
concentration based on the largest 50 firms in the industry. It is equal to the sum of the squares of the market
shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market
shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (602 + 302 + 102).
The higher the index, the fewer the number of firms supplying the industry and the more concentrated the
industry. Based on the U.S. Department of Justice's guidelines for evaluating mergers, markets in which the HHI
2 Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry
with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it
competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in
beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the
extent of competition in an industry.
June I, 2006
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f 3!6(b) Final Rule: Phase III- EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and 1800 are considered
to be moderately concentrated, and those in which the HHI is in excess of 1800 are considered to be concentrated.
Table C2E-10 shows that Primary Aluminum has an HHI of 1231 and Aluminum Sheet, Plate and Foil has an
HHI of 1447. The Primary Aluminum and Aluminum Sheet, Plate, and Foil segments, with HHI values of 1231
and 1447, respectively, appear to be moderately concentrated. Thus, based on this factor, firms in the aluminum
industry enjoy moderate amounts of market power, which may enable them to pass-through costs at a more than
negligible rate. However, an accurate assessment of the cost pass-through potential of firms in the Aluminum
industry must be considered in conjunction with other measures of market power.
The four largest firms in Primary Aluminum Production accounted for 59 percent of total U.S. primary capacity in
1997. Consolidation in the industry since the early 1990s has increased concentration. With the merger of Alcoa,
Inc. and Reynolds in May 2000, the single merged company accounted for 50 percent of domestic primary
aluminum capacity, and the four largest U.S. producers control 72 percent of the domestic capacity (Alcoa Inc. for
50 percent, Century Aluminum Co. for almost 10 percent, and Noranda Aluminum Inc. and Ormet Primary
Aluminum Corp. for 6 percent each) reported at the end of 2002 (USGS, 2002c).
Table C2E-10: Selected Ratios for the Profiled Aluminum Segments, 1987,1992, and 1997
SIC (S) or
NAICS (N)
Code
S3334
N 331312
S3353
N 331315
Year
1987
1992
1997
1987
1992
1997
Total
Number
of Firms
34
30
13
39
45
41
4 Firm
(CR4)
74%
59%
59%
74%
68%
65%
8 Firm
(CR8)
95%
82%
82%
91%
86%
85%
Concentration Ratios
20 Firm
(CR20)
99%
99%
100%
99%
99%
98%
50 Firm
(CR50)
100%
100%
N/A
100%
100%
100%
Herfindahl-
Hirschman
Index
1,934
1,456
1,231
1,719
1,633
1,447
Note: The 1997 Census of Manufactures is the most recent concentration ratio data available.
Source: U.S. DOC, 1987, 1992, 1997, and 2002.
C2E-3.3 Foreign Trade
This profile uses two measures of foreign competition: export dependence and import penetration.
Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic
markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that
industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests
that higher import penetration levels will reduce market power and pricing discretion because foreign competition
limits domestic firms' ability to exercise such power. Firms belonging to segments in which imports account for
a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to pass-
through costs because foreign producers would not incur costs as a result of the Phase III regulation. The
estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31-33) for 2001 is 22 percent.
For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with
import ratios close to or above 22 percent would more likely face stiff competition from foreign firms and thus be
less likely to succeed in passing compliance costs through to customers.
Export dependence, calculated as exports divided by value of shipments, measures the share of a segment's sales
that is presumed subject to strong foreign competition in export markets. The Phase III regulation would not
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§ 3!6(b) Final Rule: Phase III - EA, Pa*t C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
increase the production costs of foreign producers with whom domestic firms must compete in export markets.
As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing
prices to recover cost increases resulting from regulation-induced increases in production costs. The estimated
export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the
ability of industries to withstand compliance cost burdens, EPA judges that industries with export ratios close to
or above 15 percent are at a relatively greater disadvantage in potentially recovering compliance costs through
price increases since export sales are presumed subject to substantial competition from foreign producers.
Table C2E-11 reports export dependence and import penetration for both the Primary Aluminum Production and
the Aluminum Sheet, Plate, and Foil segments, since 1993. Imports of Primary Aluminum rose dramatically in
1994, primarily due to the large exports from Russian producers. Representatives of major aluminum producing
countries met in late 1993 and 1994 to address the excess global supply of primary aluminum. Those discussions
resulted in the Russian Federation's agreement to reduce production by 500,000 MTs per year, and plans for other
producers to cut their production and to assist Russian producers to improve their environmental performance and
stimulate the development of internal demand for the Russian production (USGS, 1994c). Nonetheless, imports
have continued to represent a substantial and growing proportion of U.S. demand, reaching an estimated 41
percent in 2002 for Primary Aluminum Production. By 2002, Canada was the largest supplier of imports,
supplying more than one-half of total imports. Russia continued to be the second largest supplier of aluminum
materials to the U.S. (USGS, 2002c). The majority of U.S. exports (two-thirds) are shipped to Canada and
Mexico.
As discussed previously, the import penetration ratio for the Primary Aluminum Production segment in 2002 was
41 percent, which is nearly twice the U.S. manufacturing segment average of 22 percent. The export ratio for
Primary Aluminum Production in 2001 was eight percent; therefore, competitive pressures from abroad in export
sales are less likely to affect this segment. On balance, the U.S. Primary Aluminum Production segment is
subject to significant Internationa competitive pressure, largely manifesting though the penetration of foreign
product into domestic markets. This finding indicates a low likelihood that Primary Aluminum producers subject
to the 316(b) regulation would be able to pass a material share of compliance costs through to customers.
In 2002, the import penetration ratio for facilities in the Aluminum Sheet, Plate, and Foil segment was 11 percent,
which is one-half of the U.S. manufacturing segment average of 22 percent. In 2002, the export dependence ratio
for this segment was 13 percent, or just below the average for U.S. manufacturers. This industry segment appears
to face lower competition from foreign producers in domestic markets than the Primary Aluminum Production
segment, but this segment competes more vigorously in foreign markets, where it is more exposed to foreign
competition than the Primary Aluminum Production segment. On balance, this industry segment is likely to face
moderate competitive pressure from foreign producers, whether in domestic or export markets, in attempting to
recover regulation-induced increases in production costs through price increase.
Overall, the competitive pressure from foreign firms/markets may offset the finding, stated above, that the
aluminum industry would appear to possess market power from being a moderately concentrated industry. As a
result, from a total market perspective, the industry is not likely to possess any substantial market power
advantage in being able to pass compliance costs through to customers as price increases.
June I, 2006
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§ 3I6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Table C2E-11: Import Share and Export Dependence for the Profiled Aluminum Segments ($2005)
Year
Value of Imports Value of Exports
(millions) (millions)
Value of
Shipments
(millions)
Implied
Domestic
Consumption"
Import
Penetration11
Export
Dependence'
Primary Aluminum Production
1993d
1994d
1995"
1996"
2,727
4,322
4,491
3,631
1997d 4,176
1998'
1999'
2000'
2001'
2002*
Total Percent Change
1993-2002
Average Annual
Percent Change
4,387
4,547
4,817
4,472
4,507
65.2%
5.7%
686
666
840
815
738
643
702
714
511
464
-32.4%
-4.3%
7,667
11,563
10,905
9,664
8,230
7,591
6,559
6,933
8,128
7,087
-7.6%
-0.9%
9,708
15,220
14,557
12,481
11,669
11,335
10,403
11,036
12,090
11,130
14.6%
1.5%
28.1%
28.4%
30.9%
29.1%
35.8%
38.7%
43.7%
43.6%
37.0%
40.5%
9.0%
5.8%
7.7%
8.4%
9.0%
8.5%
10.7%
10.3%
6.3%
6.5%
Aluminum Sheet, Plate, and Foil
1993d
1994"
1995d
1996d
1997d
1998'
1999'
2000"
2001'
2002"
Total Percent Change
1993-2002
Average Annual
Percent Change
;
,062
,344
.,000
,533
,504
,616
,650
,816
,579
,693
59.5%
5.3%
1,879
2,294
3,188
2,845
2,865
2,698
2,552
2,576
2,231
1,945
3.5%
0.4%
14,547
17,251
16,869
15,281
14,302
13,820
12,269
13,138
16,912
15,101
3.8%
0.4%
13,730
16,301
15,681
13,968
12,942
12,738
1 1,367
12,378
16,260
14,849
8.1%
0.9%
7.7%
8.2%
12.8%
11.0%
11.6%
12.7%
14.5%
14.7%
9.7%
11.4%
12.9%
13.3%
18.9%
18.6%
20.0%
19.5%
20.8%
19.6%
13.2%
12.9%
* Calculated by EPA as shipments -t- imports - exports.
b Calculated by EPA as imports divided by implied domestic consumption.
c Calculated by EPA as exports divided by shipments.
d As no ITA data is available before 1997, Export and Import values are taken from USGS Mineral Yearbooks for years 1993-1997.
"Metals and Alloys, Crude" represent SIC 3334 and "Plate, Sheets, Bars, Strip, etc." is equivalent to SIC 3353.
' Before 1998, the Department of Commerce compiled data in the SIC system; since 1998, these data have been compiled in the North
American Industry Classification System (NA1CS). For this analysis, EPA converted the NAICS classification data to the SIC code
classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: USCS I993c-I997c; U.S. DOC. 1988-1991, 1993-1996. 1998-2001; and2003-2004; U.S. DOC, 1987, 1992, 1997, and2002;
U.S. DOC, 2006.
Table C2E-12 shows trends in exports and imports separately for aluminum metal and alloys and for semi-
finished products separately. U.S. aluminum companies have a large overseas presence, which makes it difficult
to analyze import data. Reported import data may reflect shipments from an overseas facility owned by a U.S.
firm. The import data therefore do not provide a completely accurate picture of the extent to which foreign
companies have penetrated the domestic market for aluminum. This table shows that imports have grown
substantially in both categories between 1993 and 2004. Exports of primary aluminum have generally declined,
C2E-I8
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/ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
with some fluctuation over the period. Exports of semi-finished aluminum products rose steadily until 1999,
before declining during 2000 to 2003. Exports did, however, rebound in 2004.
Table C2E-12: Trade Statistics for Aluminum and Semi-fabricated Aluminum Products
(Quantities in thousand metric tons; Values in {millions)
Metals and Alloys, Crude Plate, Sheets,
Year Import' Export* Import*
1993
1994
Quantity
1,840
2,480
1995 1,930
1996
1997
1998
1999
2000
2001
2002
2003
2004
Total Percent Change
1993-2004
Average Annual
Growth Rate
1,910
2,060
2,400
2,650
2,490
2,560
2,790
2,870
3,250
76.6%
5.3%
Value
2,150
3,480
3,690
3,040
3.500
3,660
3,760
4,030
3,930
4,040
4,270
5,880
173.5%
9.6%
Quantity
400
339
369
417
352
265
318
273
192
206
214
298
-25.5%
-2.6%
Value
541
536
690
682
606
Quantity
400
507
622
498
562
449 ! 649
515
468
735
791
320 683
337 ' 796
351
565
4.4%
0.4%
653
724
81.0%
5.5%
Value
837
1,082
1,643
1,283
1,519
1,715
1,777
2,088
1,762
1,922
1,510
1,950
133.0%
8.0%
Bars, Strip, etc.
Export*
Quantity
594
719
812
760
882
893
907
845
751
706
690
795
31*%
2.7%
Value
1,481
1,847
2,619
2,382
2,746
2,723
2,564
2,380
2,120
1,880
1,900
2,380
60.7%
4.4%
Source: USGS I994c-2004c.
" Table 10: U.S. Imports for Consumption of Aluminum, by Class
* Table 9: U.S. Exports of Aluminum, by Class
C2E-4 FINANCIAL CONDITION AND PERFORMANCE
The financial performance and condition of the aluminum industry are important determinants of its ability to
withstand the costs of regulatory compliance without material, adverse economic/financial impact. To provide
insight into the industry's financial performance and condition, EPA reviewed two key measures of financial
performance over the 14-year period, 1992-2005: net profit margin and return on total capital. EPA calculated
these measures as a revenue-weighted index of measure values for public reporting firms in the respective
industries, using data from the Value Line Investment Survey. Financial performance in the most recent financial
reporting period (2005) is obviously not a perfect indicator of conditions at the time of regulatory compliance.
However, examining the trend, and deviation from the trend, through the most recent reporting period gives
insight into where the industry may be, in terms of financial performance and condition, at the time of
compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the
potential risk faced by the industry in a future period in which compliance requirements are faced: all else equal,
the more volatile the historical performance, the more likely the industry may be in a period of relatively weak
financial conditions at the time of compliance.
Net profit margin is calculated as after-tax income before nonrecurring gains and losses as a percentage of sales or
revenues, and measures profitability, as reflected in the conventional accounting concept of net income. Over
time, the firms in an industry, and the industry collectively, must generate a sufficient positive profit margin if the
industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from
June I, 2006
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
a several factors, including: variations in aggregate economic conditions (including international and U.S.
conditions), variations in industry-specific market conditions (e.g., short-term capacity expansion resulting in
overcapacity), or changes in the pricing and availability of inputs to the industry's production processes (e.g., the
cost of energy to the aluminum production process). The extent to which these fluctuations affect an industry's
profitability, in turn, depends heavily on the fixed vs. variable cost structure of the industry's operations. In a
capital intensive industry such as the aluminum industry, the relatively high fixed capital costs as well as other
fixed overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative
affect on profit margin.
Return on total capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by the
total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the
capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or
liability element). As such, the return on total capital provides insight into the profitability of a business' assets
independent of financial structure and is thus a "purer" indicator of asset profitability than return on equity. In the
same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate
over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The
factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in
return on total capital.
Figure C2E-5, following page, shows net profit margin and return on total capital for the aluminum industry
between 1992 and 2005. The graph shows considerable volatility. Performance was very low between 1988 and
1993, reflecting general economic weaknesses and oversupply in the market (McGraw-Hill, 2000). By the mid-
1990s, performance improved as demand recovered and aluminum prices increased. Performance declined again
though in 2000 through 2002, reflecting economic downturn in both the U.S. and world economies. By 2003,
financial performance began to level off compared to the significant declines experienced in the three prior years
and by 2004, had begun to improve. The industry saw further improvements in financial performance in 2005.
These results point to improving financial performance in 2006 and beyond as U.S. economic conditions continue
to strengthen.
C2E-20
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Figure C2E-5: Net Profit Margin and Return on Total Capital for the Aluminum Industry
16%
14%
12% -
10% -
8% -
6% -
4%
2% -
0% -
-2%
-4%
- Return on Total Capital - Aluminum
Industry
- Net Profit Margin - Aluminum
Industry
W £. LH ON -*J 00
g 8 8 S
O N> W
Source: Value Line, 2003c; Value Line, 2006.
C2E-5 FACILITIES OPERATING COOLING WATER INTAKE STRUCTURES
Section 316(b) of the Clean Water Act applies to point source facilities that use or propose to use a cooling water
intake structure that withdraws cooling water directly from a surface waterbody of the United States. In 1982, the
Primary Metals industries as a whole (including Steel and Non-ferrous producers) withdrew 1,312 billion gallons
of cooling water, accounting for approximately 1.7 percent of total industrial cooling water intake in the United
States3. The industry ranked 3rd in industrial cooling water use, behind the electric power generation industry,
and the chemical industry (1982 Census of Manufactures).
This section provides information for facilities in the profiled aluminum segments estimated to be subject to
regulation under the regulatory analysis options. Existing facilities that meet all of the following conditions
would have been subject to the regulation under the three regulatory analysis options:
> Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or
arrangement with an independent supplier who has a cooling water intake structure; or their cooling water
intake structure(s) withdraw(s) cooling water from waters of the U.S., and at least twenty-five (25)
percent of the water withdrawn is used for contact or non-contact cooling purposes;
> Have an National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one;
and
> Meet the applicability criteria for the specific regulatory analysis option in terms of design intake flow
and source waterbody type (i.e., 50 MOD for All Waterbodies, 100 MGD for Certain Waterbodies, or 200
MOD for All Waterbodies).
3 Data on cooling water use are from the 1982 Census of Manufactures. 1982 was the last year in which the Census of
Manufactures reported cooling water use.
June 1, 2006
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§ 316(b) Final Rule: Phase HI- EA, Part C; Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
The regulatory options also cover substantial additions or modifications to operations undertaken at such
facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the
Phase MI regulation based on a minimum applicability threshold of 2 MGD, this section focuses on the facilities
nationwide in the profiled steel segments that are estimated to be subject to regulation based on the design intake
flow and waterbody applicability criteria set forth in the regulatory analysis options (see Table C2E-I, above for
additional information on the broader set of facilities potentially subject to regulation).4
C2E-5.1 Waterbody and Cooling System Type
Table C2E-13, Table C2E-14, and Table C2E-18 show the distribution of Phase HI facilities in the profiled
aluminum segment by type of water body and cooling system. The table shows that the majority of the potential
Phase III facilities use a once-through cooling system. None of the facilities withdraw from an estuary, the most
sensitive type of water body.
Table C2E-13: Number of Facilities Estimated Subject to the SO MGD All Option by
Waterbody Type and Cooling System for the Profiled Aluminum Segments
Water Body Type
Cooling System
Recirculating
Number % of Total
Once-Through
Total
Number % of Total
Primary Production of Aluminum
Lake or Reservoir
1 100%
0
Aluminum Sheet, Plate, and Foil
"Great" Lake " ~]
-------
§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Table C2E-14: Number of Facilities Estimated Subject to the 200 MGD All Option by
Waterbody Type and Cooling System for the Profiled Aluminum Segments
Water Body Type
Cooling System
Recirculating
Number % of Total
Once-Through
Total
Number % of Total
Primary Production of Aluminum
Lake or Reservoir
1 100%
0 0% 1
Aluminum Sheet, Plate, and Foil
Total
0 0%
0 0% 0
Total for Profiled Aluminum Facilities
Lake or Reservoir
Total
I 100%
; 100%
0 0% 1
0 0% 1
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
Table C2E-15: Number of Facilities Estimated Subject to the 100 MGD CWB Option
by Waterbody Type and Cooling System for the Profiled Aluminum Segments
Water Body Type
Recirculating
1 Number % of Total
Cooling System
Once-Through
Number % of Total
Total
Primary Production of Aluminum
Lake or Reservoir
I 100% | 0
Aluminum Sheet, Plate, and Foil
0%
Total
Lake or Reservoir
Total
0 0%
0
Total for Profiled Aluminum Facilities
1 100%
I 100%
0
0
0% 0
0% 1
0% 1
Source: U.S. EPA. 2000; L'.S. EPA analysis. 2006.
C2E-5.2 Facility Size
The 316(b) facilities in the aluminum industry are relatively large. The single Primary Aluminum producer
employs at least 1,000 people, while all three Aluminum Sheet, Plate and Foil manufacturers have between 500
and 999 employees. Figure C2E-6 show the number of Phase III facilities by employment size category.
June I, 2006
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Figure C2E-6: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment
Size for the Profiled Aluminum Segments
2-
1-
I Primary Production of Aluminum
(SIC 3334}
I Aluminum Sheet, Plate, and Foil
(SIC 3353)
500-999
>=1000
Source: U.S. EPA. 2000; U.S. EPA analysis. 2006.
Figure C2E-7: Number of Facilities Estimated Subject to the 200 MGD All Option by Employment
Size for the Profiled Aluminum Segments
41
3-
2
1-
0_
/
1
^mmar r x^
500-999 >=1000
Primary Production of Aluminum (SC
3334)
Aluminum Sheet, Rate, and Foil (SIC
3353)
Source: U.S. EPA. 2000: U.S. EPA analysis, 2006.
C2E-24
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June I, 2006
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§ 3I6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Figure C2E-8: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Employment Size for the Profiled Aluminum Segments
4-
3-
2
1-
0-
/
1
<4MHHr- ^^m^> /
500-999 >=1000
Primary Production of Aluminum (SIC
3334)
Aluminum Sheet, Plate, and Foil (SIC
3353)
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
C2E-5.3 Firm Size
EPA used the Small Business Administration (SBA) small entity size standards to determine the number of
Section 316(b) profiled aluminum industry facilities owned by small firms. Firms in the Primary Production of
Aluminum segment are defined as small if they have 1000 or fewer employees; firms in the Aluminum Sheet,
Plate, and Foil segment are defined as small if they have 750 or fewer employees. Table C2E-16, Table C2E-17,
and Table C2E-18 show that large firms own all of the aluminum facilities estimated subject to regulation under
the regulatory analysis options.
Table C2E-16 Number of Facilities Estimated Subject to the 50 MGD Al! Option by Firm
Size for the Profiled Aluminum Segments
SIC Code
3334
3353
Total
Number
1
3
4
Large
% of SIC
100%
100%
100%
Number
0
0
0
Small
% of SIC
0%
0%
0%
Total
1
3
4
Source: U.S. EPA, 2000; D&B. 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
Table C2E-17: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm
Size for the Profiled Aluminum Segments
SIC Code
3334
3353
Total
Number
1
0
Large
% of SIC
100%
0%
/ 100%
Number
0
0
0
Small
VoofSIC
0%
0%
0%
Total
1
0
1
Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
June 1. 2006
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C2E-25
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§ 316(b) Final Rule: Phase HI- EA, Part C: Economic Analysis for Existing Facilities
Chapter C2E: Aluminum
Table C2E-18: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Firm Size for the Profiled Aluminum Segments
SIC Code
3334
3353
Total
Large
Number % of SIC
1 100%
0 0%
/ 700%
Number
0
0
0
Small
% of SIC
0%
0%
0%
Total
I
0
/
Source: U.S. EPA, 2000; D&B. 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
C2E-26
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§ 316(b) Final Rule: Phase III - EA, Pa*t C. Economic Analysis for Existing Facilities Chapter C2E: Aluminum
REFERENCES
The Aluminum Association. 2001. The Aluminum Situation. September 2001.
The Aluminum Association. 1999. "Northwest Smelter Restarts Are Seen Unlikely", Industry News. October
29, 1999.
The Aluminum Association. Undated. Aluminum: An American Industry in Profile.
Bureau of Labor Statistics (BLS) 2006. Producer Price Index. Industry Data Series: PCU331312-Primary
Aluminum Production; PCU331315-Aluminum Sheet, Plate, & Foil Mfg. Available at:
http://www.bls.gov/ppi/home.htm. Downloaded February 1,2006.
Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001.
Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification
Manual.
McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry &
Trade Outlook '00.
McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 1999. U.S. Industry &
Trade Outlook '99.
Standard & Poor's (S&P). 2004. Sub Industry Outlook-Alcoa Inc. February 21,2004.
Standard & Poor's (S&P). 2001. Industry Surveys - Metals: Industrial. July 12,2001.
Standard & Poor's (S&P). 2000. Industry Surveys - Metals: Industrial. January 20,2000.
U.S. Department of Commerce (U.S. DOC). 2006. Bureau of the Census. International Trade Administration.
Industry, Trade, and the Economy: Data and Analysis. Data by NAICS and SIC. Available at:
http://www.ita.doc.gov/td/industr//otea/industry_sector/tables_naics.htm. Downloaded February 2,2006.
U.S. Department of Commerce (U.S. DOC). 1989-2004. Bureau of the Census. Current Industrial Reports.
Survey of Plant Capacity.
U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, 1998-2001, and 2003-2004. Bureau of the
Census. Annual Survey of Manufactures.
U.S. Department of Commerce (U.S. DOC). 1987, 1992, 1997, and 2002. Bureau of the Census. Census of
Manufactures.
U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge
Between NAICS and SIC.
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling
Water Intake Structures.
United States Geological Survey (USGS). 1995a-2006a. Mineral Commodity Summaries. Aluminum. Author:
Patricia Plunkert.
United States Geological Survey (USGS). 1993c-2004c. Minerals Yearbook. Aluminum. Author: Patricia
Plunkert.
June I, 2006 Internal Dr-tft - Deliberative. Predecisional - Do not Quote, Cite, or Distribute C2E-27
-------
§ 3I6(b) Final Rule: Phase HI-EA, Part C: Economic Analysis for Existing Facilities Chapter C2E: Aluminum
United States Geological Survey (USGS). 2001b-2003b. Mineral Industry Surveys. Aluminum. Author: Patricia
Plunkert.
United States Geological Survey (USGS). 2002. Historical Statistics for Mineral and Material Commodities in
the United States. Aluminum. Authors:
United States Geological Survey (USGS). 1998. Metal Prices in the United States through 1998. Available at:
http://minerals.usgs.gov/minerals/pubs/metal_prices/metal _pricesl998.pdf
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards. Available at:
http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses. Available at:
http://www.sba.gov/advo/research/data.html. Downloaded February 4,2006.
Value Line. 2006. Value Line 3.0 Investment Analyzer.
Value Line. 2003a. Metal Fabricating Industry. March 28, 2003.
Value Line. 2003b. Metals & Mining (Diversified) Industry. April 25, 2003.
Value Line. 2003c. Value Line Investment Survey.
Value Line. 2001. Metals & Mining (Diversified) Industry. July 27, 2001.
C2E-28 Internal Draft - Deliberative. Predecisional - Do not Quote, Cite, or Distribute June I, 2006
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase III Existing FacilitiesChapter C2F: Food and Kindred Products
Chapter C2F: Profile of Food and Kindred
Products Industry (SIC 20)
C2F-2.1
C2F -2.2
C2F -2,3
Output C2F-4
Number of Facilities and Firms C2F-8
Employment and Productivity C2F-10
C2F -2.4 Capital Expenditures C2F-11
C2F -2.5 Capacity Utilization C2F-12
C2F-3 Structure and Competitiveness C2F-14
C2F -3.1 Firm and Facility Size C2F-14
C2F -3.2 Concentration Ratios C2F-15
C2F -3.3 Foreign trade C2F-16
C2F-4 Financial Condition and Performance... C2F-18
C2F-5 Facilities Operating Cooling Water Intake
Structures C2F-22
C2F-5.I
INTRODUCTION
In framing its analysis and data gathering for the section
316(b) Regulation for Phase III Facilities, EPA initially
focused on the electric power industry and five
manufacturing industries - Paper. Chemicals, Petroleum,
Aluminum, Steel (the "Primary Manufacturing
Industries") - that were estimated to account for over 90
percent of cooling water usage, according to Census of
Manufactures data. Accordingly, EPA targeted its Detailed
Industry Questionnaire (the "DQ") to these industries.
Although the DQ was targeted to these industries, EPA
received 22 questionnaires from h-scope facilities with
operations in industries other than these major cooling-
water intensive industries (these industries are referred to as
the "Other Industries")- These questionnaires were
received as part of the non-utility electric power generators
sample frame; however, further inspection found these
facilities to be cooling water-dependent facilities whose
primary operations lie in businesses outside the electric
power industry or Primary Manufacturing Industries.
These 22 questionnaires represent eight 2-digit SIC
industries: Agriculture Production - Crops (SIC 01); Metal
Mining (SIC 10); Mining and Quarrying of Nonmetallic
Minerals, except fuels (SIC 14); Food and Kindred
Products (SIC 20); Textile Mill Products (SIC 22); Lumber and Wood Products, except furniture (SIC 24);
Fabricated Metal Products, except machinery and transportation equipment (SIC 34); and Transportation
Equipment (SIC 37). However, over half (12)of the 22 questionnaires received were from facilities in the Food
and Kindred Products industry (SIC 20). Moreover, from the 1982 Census of Manufactures (the most recent
Economic Census to report data on cooling water use by industrial sector), the Food and Kindred Products sector
was the fifth largest user of cooling water - i.e., the next 2-digit SIC sector behind the Primary Manufacturing
Industries (both Aluminum and Steel fall under the 2-digit SIC 33 for primary metal industries). Given the
substantial number of questionnaires received from in-scope facilities in the Food and Kindred Products industry,
and its relatively high reliance on cooling water, EPA prepared an industry profile for the Food and Kindred
Products industry.
EPA used the cooling water usage-based multiplier of 3.11, as documented at NODA and in the public record of
the Phase HI final regulation, to estimate the industry-level costs and impacts of Phase III regulatory compliance
for the Food and Kindred Products industry. Therefore, these 12 sampled facilities represent 37 facilities in the
Food and Kindred Products Industry. Table C2F-1, following page, lists the five 4-digit SIC codes from which
the 22 Food and Kindred Products industry surveys were received, the number of potentially regulated facilities
CHAPTER CONTENTS
Introduction C2F-1
C2F-1 Summary Insights from this Profile C2F-3
C2F-2 Domestic Production C2F-4
Waterbody and Cooling System Type
C2F-23
C2F -5.2 Facility Size C2F-23
C2F -5.3 Firm Size C2F-25
References C2F-26
June 1, 2006
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/ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase 111 Existing Facilities Chapter C2F: Food and Kindred Products
(based on a minimum applicability threshold of two MGD), and the number of facilities estimated to be subject to
regulation under the regulatory analysis options. Although the questionnaires received fall in only five of the
forty-eight 4-digit SIC codes within the Food and Kindred Products industry, EPA knows of no basis to exclude
any of the remaining 4-digit codes from consideration in this profile. Accordingly, this profile focuses on the
entirety of SIC 20, Food and Kindred Products.
Table C2F-1; Phase 111 Facilities in the Food and Kindred Products Industry (SIC 20)
SIC
2046
2061
2062
2063
2085
SIC
Description
Wet Corn
Jviiiiing
Cane sugar,
except refining
Cane sugar
refining
Beet sugar
Distilled and
blended liquors
Important Products Manufactured
Corn oil cake and meal; com starch; com
syrup; dextrose, fructose; glucose; high
fructose syrup; starches
Cane sugar; molasses; granulated sugar;
powdered sugar; raw sugar; cane syrup (all
made from sugarcane)
Molasses, blackstrap; granulated sugar;
powdered sugar; refined sugar; syrup (all
made from purchased raw cane or sugar
syrup)
Beet sugar; molasses; granulated sugar;
liquid sugar; powdered sugar; syrup (all
made from sugar beets)
Distilled and blended liquors, except brandy;
gin; rum; vodka; whiskey; cocktails;
cordials; eggnog; grain alcohol for medicinal
and beverage purposes
Total SIC Code 20
Potentially
Regulated
Facilities
12
2
12
6
3
37
Subject to
SO MGD
All Option
6
0
0
0
3
9
Subject to
200 MGD
Ail Option
3
0
o
0
o
3
Subject to
100 MGD
CWB
Option
3
0
o
0
3
6
Source: Executive Office of the President, 1987; U.S. EPA 2000; U.S. EPA analysis, 2006.
The Food and Kindred Products industry includes facilities that process or manufacture food and beverages for
human consumption, feed for animals, and other related products. Statistics for the industry were previously
recorded under the Standard Industry Classification (SIC) code of 20, for Food and Kindred Products. SIC 20
included 9 industry groups at the 3-digit SIC level, and 48 industries at the 4-digit SIC level. Under the SIC
system, beverage manufacturing was included in SIC 20, the Food and Kindred Products sector. In 1997, the U.S.
Census Bureau began reporting economic activity in the North American Industry Classification System
(NAICS), which replaced the SIC system (U.S. DOC, 1997a). Under NAICS, the previous SIC 20 sector is
recorded in two 3-digit NAICS sectors: (1) NAICS 311, Food Manufacturing, and (2) NAICS 312, Beverage and
Tobacco Product Manufacturing. This profile focuses on NAICS 311, Food Manufacturing, and NAICS 3121,
the Beverage Manufacturing subsector within NAICS 312, and excludes consideration, to the extent possible, of
the tobacco-manufacturing sector. Because the analysis period for this profile extends across the SIC-to-NAICS
transition, most of the data series presented in the profile include data from both the SIC system and NAICS: for
years before 1997, data are from the SIC system; for 1997 and after, data are from NAICS. Table C2F-2,
following page, summarizes the relationship between SIC and NAICS codes used for this profile and provides
summary information on the relevant NAICS sectors from the 2002 Economic Census.
C2F-2
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§ 316(b) Final Rule: Phase 111 - EA, Pert C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
Table C2F-2: Relationship between SIC and NAICS Codes for the Food Manufacturing and Beverage
Manufacturing Segments (2002*)
SIC Code
20-
(excluding
2082, 2084,
2085, 2086,
and 2097)
2082
2084
2085
2086
2097
SIC Description
Food and Kindred Products
Matt Beverages
Wines, Brandy, and Brandy
Spirits
Distilled and Blended Liquors
Bottled and Canned Soft
Drinks and Carbonated Waters
Manufactured Ice
NAICS
Code
311
3121
NAICS
Description
Food
Manufacturing
Beverage
Manufacturing
Establishments
27,897
2,903
Value of
Shipments
($000)
456,586,656
65,153,490
Employment
1,505,776
136,074
* Industry data for relevant NAICS cedes from the 2002 Economic Census.
Source: U.S. DOC, 1997; U.S. DOC 1987, 1992,1997, and 2002.
C2F-1 SUMMARY INSIG HTS FROM THIS PROFILE
A key purpose of this profile is to provide insight into the ability of firms in the Food and Kindred Products
industry to absorb compliance costs from the regulatory analysis options without material adverse
economic/financial effects. The ndustry's ability to withstand compliance costs is primarily influenced by two
factors: (1) the extent to which the industry may be expected to shift compliance costs to its customers through
price increases and (2) the financial health of the industry and its general business outlook.
Likely Ability to Pass Compliance Costs Through to Customers
As reported in the following sections of this profile, the Food Manufacturing and Beverage Manufacturing
segments face somewhat limited foreign competitive pressures, and, based on this factor, would have some
latitude to pass through to customers any increase in production costs resulting from regulatory compliance.
However, within the U.S. market, the Food Manufacturing and Beverage Manufacturing segments have relatively
low concentrations. Although niche product and/or regional segments are likely to face lighter overall
competition, the lack of industry concentration, as described later in this profile, suggests that firms in this
industry may have little ability to recover compliance costs through increased prices - particularly if the increased
costs do not occur in a relatively uniform way throughout the industry. Given the likelihood that only a relatively
small subset of facilities and firms in this industry will face additional costs as a result of the regulatory options
considered for the section 316(b) Phase III regulation, EPA believes that a conservative assumption of no-cost-
pass-through is appropriate for analysis of the impact on this industry. For the facility impact analysis, EPA
therefore assumed that Food and Kindred Products facilities would not be able to pass on to customers any
increases in production costs incurred through compliance with the regulatory options considered for the section
316(b) Phase III regulation - i.e., the firms would absorb all regulatory compliance costs.
Financial Health and General Business Outlook
Unlike the more cyclical sectors in the Primary Manufacturing Industries, the Food and Kindred Products
industry, being a consumer staples industry, was not as strongly affected by the economic downturn that occurred
in the early 2000s. The industry was able to maintain a moderate level of positive financial performance over the
data period, and recent trends suggest the industry should be able to continue the moderate, steady growth,
June 1, 2006
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C2F-3
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/ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
accompanied by moderate financial performance, that it has historically achieved. In an effort to increase sales,
profits, and market share, Food and Kindred Products industry firms have pursued mergers and acquisitions,
looked into foreign market opportunities, reduced costs, and introduced new products (Harris, 2002). In addition,
the industry has exhibited substantially less fluctuation in capacity utilization and financial performance than
more cyclical industries, such as the five Primary Manufacturing Industries. Though foreign competition is
growing, the industry also experiences less international competition than firms in the Primary Manufacturing
Industries, as indicated by the industry's lower reliance on export sales and the lower extent of import penetration
in domestic markets. On the whole, the Food and Kindred Products industry has maintained a steadily increasing
level of capital expenditures over the data period and has correspondingly recorded moderately increasing labor
productivity. These factors suggest that the industry's capital equipment base has been maintained and regularly
improved over the analysis period, and that the business faces no inordinate needs for capital expenditure due, for
example, to offset a period in which capital expenditure substantially retrenched because of declining business
performance. Within the broader Food and Kindred Products industry, the Food Manufacturing segment has
generally achieved more stable growth and financial performance than the Beverage segment. Nevertheless, the
general financial health and outlook for the overall industry appear positive. Favorable product demand trends,
efficient production capability, and effective management of production costs and supply chains all point to a
favorable industry outlook, both near and longer term. As a result, EPA concludes that the Food and Kindred
Products industry should be able to withstand the cost of section 316(b) Phase III compliance requirements under
the regulatory options without material adverse financial impact. Indeed, EPA judges overall that the Food and
Kindred Products industry is currently in better economic/financial condition overall than the Primary
Manufacturing Industries.
C2F-2 DOMESTIC PRODUCTION
The Food and Kindred Products industry is one the largest manufacturing industries in the United States, with the
Food Manufacturing and Beverage segments accounting for approximately one-sixth of U.S. industrial activity
{McGraw-Hill, 2000). The Food Manufacturing segment alone accounts for over 10 percent of all manufacturing
shipments (U.S. DOC, undated). The industry is considered mature, however, and firms are seeking new avenues
for increased sales. With total food industry shipments growing more slowly than GDP, U.S. producers have
actively sought growth opportunities in overseas markets. Although exports still represent a small share of
domestic shipments, changes in global food consumption could lead to increased demand and trade for processed
food products. As developing countries experience growth in income, the demand for higher quality food
products, such as meat products, present an opportunity for U.S. firms to increase exports. In developed
countries, consumer demand for food is based more on tastes, quality, convenience, and value added, again
providing an avenue for firms to expand sales (U.S. DOC, undated).
C2F-2.1 Output
Figure C2F-1 and Figure C2F-2, following pages, show trends in constant dollar value of shipments and
value added for the Food Manufacturing and Beverage Manufacturing segments.1 Change in these values over
time provides insight into the overall economic health and outlook for an industry. Value of shipments is the sum
of receipts earned from the sale of outputs; it indicates the overall size of a market or the size of a firm in relation
to its market or competitors. Value added, defined as the difference between the value of shipments and the value
of inputs used to make the products sold, measures the value of production activity in a particular industry.
The trends over time in value of shipments and value added show that both the Food Manufacturing and Beverage
Manufacturing segments have achieved generally stable performance over the 1987-2004 period: these industries
Terms highlighted in bold and italic font are further explained in the glossary.
C2F-4
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June I, 2006
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§ 3i6(b) Fatal Rule: Phase 111-EA, PartC: Economic Analysis for Phase III Existing t"acililiesChapterC2F: Food and Kindred Products
have not been substantially affected by fluctuations in the performance trend of the aggregate U.S. economy. The
lack of major swings in shipment and value added results largely from the consumer staple-character of the
industry. Over the 1987-2004 period, both segments ended with a higher total value of shipments and value
added (in inflation-adjusted dollars) than in 1987. In 2003,40 percent of respondents to Food Engineering's State
of Food Manufacturing Survey expected output to increase by over 6 percent, with almost 20 percent forecasting
an increase of up to 6 percent in output (Higgins, 2003)] In 2004, the value of shipments rose by 3.1 and 2.5
percent for the Food Manufacturing and Beverage Manufacturing industries, respectively. Over the 18-year time
period analyzed, Food Manufacturing and Beverage Manufacturing segments increased their value of shipments
by 44 percent and 16 percent, respectively. Increases in value added over the period were 89 percent for Food
Manufacturing, and 33 percent for Beverage Manufacturing. The general trends suggest that firms in these
industries have been able to increase shipments and value added, a sign that the industries are able to find ways to
expand their market and continue to grow.
Figure C2F-1 : Value of Shipments for Food Manufacturing and Beverage Manufacturing Segments
(millions, S2005)
600,000 1
570,000
540,000
.»
510,000 ^-'
-*"*-* *-**
480,000 > *'
** 450,000 t~~*\* -'"
" 420,000 / y-"\,» ""* '
390,000 / J
360,000 ~-M x*--^/
330 000
300,000
s£t£tQ^>c>6*£>>O^O'C*£*C*OOOGOO
OOOeOO'C^O'O^^'O^'04'OQOOOO
-o 35 <£ o s»u*£wi*--i»3S NJUJ^
r 90,000
- 87,000
84,000
81,000
78,000 g>
- 75.000 £
. 72,000 ^
69,000
66,000
- 63 000
60,000
» Food Mfg. SIC
Beverage Mfg. SIC
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NA1CS classification data to
the SIC code classifications using lie 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.
June 1, 2006
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C2F-5
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§ 3l6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
Figure C2F-2: Value Added for Food Manufacturing and Beverage Manufacturing Segments
(millions, $2005)
"MO 000 53 000
220,000 -" -- 50,000
200,000 »-*''* - 47,000
180,000 J*-"*"''^*'' - 44,000
tf 160,000 «^,/*^-* .-41,000 n
| 140,000 / / 3S,000 S
120,000 * P-*' "' "'" 35,000
/
100,000 --" 32,000
80 000 ' * '"'' ^9 000
60,000 -L 26,000
38i8*S3l»ISS8§SS88
« Food Mfg. SIC
------- Beverage Mfg NAICS
Beverage Mfg. SIC
Note: Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991, 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and 2002.
Table C2F-3, following page, provides the Federal Reserve System's index of industrial production for the
profiled Food Manufacturing and Beverage Manufacturing segments, showing trends in production between 1989
and 2005. This index more closely reflects total output in physical terms, whereas value of shipments and value
added reflect the economic value of production. The production index is expressed as a percentage of output in
the base year, 2002. With the exception of modest decreases in production during 1995 to 1996 and 2002 to
2003, the Food Manufacturing segment has seen year-to-year production increases over the period, with an
overall increase in production of approximately 30 percent from 1989 to 2005. The Beverage Manufacturing
segment, on the other hand, saw production mostly rising from 1989 through the 1990s, before hitting a peak in
1998 and decreasing slightly for the next few years. Production then rebounded in 2002, and has since continued
to increase. Over the entire period, the segment achieved an increase in production of over 23 percent. Going
forward, businesses in these sectors are turning towards automation of plant processes to increase production
(Higgins, 2004).
C2F-6
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§ 316(b) Final Rule: Phase 1II-EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F; Food and Kindred Products
Table C2F-3: U.S. Food and Beverage
Year
1989
Manufacturing Industry Industrial
Food Manufacturing (NAICS 311)
Index 2002=100 Percent Change
79.7
1990 8:>.l
1991 8X6
1992 85.2
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Total Percent Change
1989-2005
Average Annual
Growth Kate
87.5
8K.O
9(1.2
8f:.4
90.8
94.8
9i.8
97.5
97.5
100.0
99.6
100.8
10X3
29.i5%
1.6%
Source: Economagic, 2006
3.1%
1.8%
1.9%
2.7%
0.6%
2.6%
-2.1%
2.8%
4.4%
1.0%
1.7%
0.1%
2.5%
-0.4%
1.3%
2.5%
Production Index
Beverage Manufacturing (NAICS 3121)
Index 2002=100 Percent Change
89.7
90.9
92.1
92.6
92.4
96.3
96.9
101.2
102.8
104.3
99.1
98.9
98.8
100.0
101.7
104.6
110.5
23.2%
1.3%
1.3%
1.3%
0.6%
-0.2%
4.2%
0.7%
4.4%
1.6%
1.5%
-5.0%
-0.3%
-0.1%
1.3%
1.7%
2.8%
5.7%
The producer price index (PPI) measures price changes, by segment, from the perspective of the seller, and
indicates the overall trend of procuct pricing, and thus supply-demand conditions, within a segment.
As shown in Figure C2F-3, price levels in the U.S. Food Manufacturing and Beverage Manufacturing Segments
have risen steadily from 1987 to 2005, with both segments seeing a Compound Annual Growth Rate of
approximately 2%. It is estimated that consumers spend only 10 percent of their disposable income on food
purchases. Of this 10 percent, 6 percent is for food to be consumed in the home and 4 percent for food consumed
away from home. As disposable income rises with sustained economic growth, consumer demand is also
expected to increase (U.S. DOC, undated).
June 1, 2006
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£ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing FacilitiesChapter C2F: Food and Kindred Products
Figure C2F-3: Producer Price Indexes for Food Manufacturing and Beverage Manufacturing
Segments
Ifift
I V V T "
- Beverage Mfg. NAICS
-FoodMfg. NAICS
100
Source: BLS, 2006.
C2F -2.2 Number of Facilities and Firms
As reported in the Statistics of U.S. Businesses, the number of facilities in the Food Manufacturing segment
increased by 19% between 1990 and 2003. The number of firms in this segment grew by about 24% during this
time period. In the Beverage Manufacturing segment, the number of facilities and number of firms increased
even more dramatically. Between 1990 and 2001, the number of facilities in the Beverage Manufacturing
segment grew by just over 40%, from 2,200 facilities in 1990 to 3,082 facilities in 2003. The number of firms in
Beverage Manufacturing grew more rapidly, with an increase of 44% over the analysis period. Table C2F-4, and
Table C2F-5, following page, present the number of facilities and firms for the Food Manufacturing and Beverage
Manufacturing segments between 1990 and 2003.
C2F-8
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£ 3I6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase Hi Existing r'acililiesChapter C2F: Food and Kindred Products
Table C2F-4: Number of Facilities Owned by Firms in the Food and Beverage Manufacturing Segments
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998"
1999"
2000'
2001'
2002'
2003'
Total Percent Change 1990-2003
Average Annual Growth Kate
Food
Number of
Facilities
16,740
16,790
17,824
18,114
17,795
17,726
18,587
18,558
20,088
19,954
19,902
20,340
19,136
19,873
18.7%
1.3%
Manufacturing
Percent Change
0.3%
6.2%
1.6%
-1.8%
-0.4%
4.9%
Beverage Manufacturing
Number of
Facilities
2,200
2,211
2,287
2,281
2,293
2,333
2,576
-0.2% '. 2,660
8.2%
-0.7%
-0.3%
2.2%
-5.9%
3.9%
2,601
2,671
2,748
3,033
3,099
3,082
40.1%
] 2.6%
Percent Change
0.5%
3.4%
-0.3%
0.5%
1.7%
10.4%
3.3%
-2.2%
2.7%
2.9%
10.4%
2.2%
-0.5%
* Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry
Classification System (NAICS). For tliis analysis, EPA converted the NA1CS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
Table C2F-5: Number of Firms in the Food and Beverage Manufacturing Segments
Year
1990
1991
1992
1993
1994
Food Manufacturing
Number of Firms
13,346
13,418
14,409
14,698
14,378
1995 : 14,330
1996
1997
1998'
1999'
2000'
2001'
2002"
2003'
Total Percent Change 1990-2003
Average Annual Growth Rate
15,189
15,189
16,656
16,559
16,533
16,960
15,796
!6,561
24.1%
1.7%
Percent Change
0.5%
7.4%
2.0%
-2.2%
-0.3%
6.0%
0.0%
9.7%
-0.6%
-0.2%
2.6%
-6.9%
4.8%
Beverage Manufacturing
Number of Firms
,789
,818
,875
,867
,893
,954
2,192
2,235
2,137
2,196
2,267
2,558
2,616
2,576
44.0%
2.8%
Percent Change
1.6%
3.1%
-0.4%
1.4%
3.2%
12.2%
2.0%
-4.4%
2.8%
3,2%
12.8%
2.3%
-1.5%
Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry
Classification System (NAICS). For tf is analysis, EPA converted the NAICS classification data to the SIC code classifications using
the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
June I. 2006
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1316(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
C2F -2.3 Employment and Productivity
The U.S. Food and Kindred Products industry is among the most modern in the world. A steady trend of industry
growth and accompanying capital outlays have both increased production capacity and led to installation of
increasingly modern and more efficient, higher technology, production equipment (see Section C2F -2.4, below).
The higher technology production equipment requires a more skilled labor force (Higgins, 2003). At the same
time, the higher technology equipment reduces the number of employees needed per dollar of production
(Higgins, 2004).
Employment has followed different profiles in the two segments between 1987 and 2003. After a sharp
increase from 1987 to 1988, Food Manufacturing segment employment followed a relatively stable profile from
year to year, decreasing by no more than 2.5 percent and increasing by no more than 3.5 percent. Over the entire
period, segment employment increased by 37 percent. The Beverage Manufacturing segment, however, has
experienced more volatility over the period, with both a year-to-year increase and decrease in employment of
greater than 5 percent at times. Overall, the Beverage Manufacturing segment faced decreasing employment
almost every year from 1987 through 1994, before reversing course and experiencing gains from 1994 through
2001. These gains, however, were followed by consecutive declines in 2002 and 2003, with 11 and 8 percent
decreases, respectively. This most recent two-year period alone has largely accounted for the total decline of 21%
in the Beverage Manufacturing segment over the entire period. Recent trends towards more automated production
and out-sourcing of some tasks could lead to even further reduced employment in these segments in future years
(Higgins, 2004).
Figure C2F-4 presents employment for the two profiled segments between 1987 and 2001.
Figure C2F-4: Employment for Food Manufacturing and Beverage Manufacturing Segments
1,600,000 -1-200,000
1,520,000 190,000
..».
1,440,000 «,,».-«'** * 180,000
1.360,000 * *~*~"^~* .. 170.000
1,280,000 1*"^ -160,000?
I > . i
^ 1,200,000 / \ .", - 150,000 'g
1 / V -f ', Si
1,120,000 / *-».., ,« .-""-.,-' . - 140.000 $
1 V^*'
1,040,000 * r : 130.000
'
960,000 - 120.000
800,000 -L 100.000
OOQOOO*OVC>v£l£>>ChO«*Csa
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§ 3l6(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Phase III Existing FacilitiesChapter C2F: Food and Kindred Products
Table C2F-6, following page, presents the change in value added per labor hour, a measure of labor
productivity, for the two profiled industry segments between 1987 and 2004. As shown in the table, labor
productivity in the Food Manufacturing segment has generally grown steadily and at a modest rate, with only four
years showing declines in productivity between 1987 and 2004. Similarly, the Beverage Manufacturing segment
also experienced four years in which productivity declined. However, year-to-year changes have shown greater
volatility, with both increases and decreases in productivity nearing 12 percent at several points during the 1987
to 2004 time period. Overall, productivity in both Food Manufacturing and Beverage Manufacturing increased by
29 and 48 percent over the observed time period, respectively, with substantial gains occurring in the years since
2001. Technology improvement in the industry is playing an important role in increasing production, as
automation allows output levels to increase without significant increases in employment (U.S. DOC, undated).
Table C2F-6; Productivity Trends for Food and Beverage Manufacturing Segments ($2005)
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997'
19981
1999*
2000'
2001"
2002"
2003"
2004"
Total Percent
Change, 1987-2004
Average Annual
Growth Rate
Value
Added
(S millions)
120,746
160.316
156,284
164.558
160,577
172,835
179,335
181,319
187,669
178,850
190,869
199,089
200,928
205,427
209,742
216,737
221,351
227,654
88.5%
3.8%
Food Manufacturing
Production Value Added/Hour
Hours ... Percent
(millions) Change
1,522
1,916
1,917
1,999
1,996
2,105
2,133
2,161
2,181
2,162
2,200
2,232
2,270
2,284
2,266
2,261
2,262
2,229
46.4%
2.3%
79
84
82
82
80
82
84
84
86
83
87
89
89
90
93
96
98
102
28.7%
1.5%
n/a
5.5%
-2.6%
1.0%
-2.3%
2.0%
2.4%
-0.2%
2.6%
-3.9%
4.9%
2.8%
-0.7%
1.6%
2.9%
3.6%
2.1%
4.4%
Value
Added
($ millions)
29,624
30,410
29,797
29,134
30,240
31,231
30,800
32,301
32,604
34,711
34,947
35,991
34,758
33,641
34,642
35,399
39,420
39,315
32.7%
1.7%
Beverage Manufacturing
Production Value Added/Hour
Hours ,. Percent
(millions) Change
148
145
142
140
139
140
144
138
139
139
149
148
140
153
150
139
138
133
-10.1%
-0.6%
200
209
211
208
217
223
214
234
235
250
235
244
248
220
231
255
285
295
47.6%
2.3%
n/a
4.6%
0.7%
-1.3%
4.5%
2.7%
-4.0%
9.1%
0.4%
6.5%
-6.0%
3.7%
1.9%
-11.4%
5.2%
10.1%
11.9%
3.6%
* Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American
Industry Classification System (NAICS). For this analysis, EPA converted the NA1CS classification data to the SIC code
classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC. 1988-1991, 1993-1996, 1998-2001; and2003-2004; U.S. DOC, 1987, 1992, 1997, and2002.
C2F -2.4 Capital Expenditures
The Food Manufacturing and Beverage Manufacturing industries are capital intensive, and need to invest in new
machinery, retrofit older equipment, or expand their plants in order to increase production (Higgins, 2002).
Capital-intensive industries are characterized by a large value of capital equipment per dollar value of production.
In order to modernize, expand, and replace existing capacity, new capital expenditures are needed. In 2004,
the total level of capital expenditures for the Food Manufacturing and Beverage Manufacturing segments was $14
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§ 316(b) Final Rule: Phase HI- EA, Part C: Economic Analysis for Phase III Existing FacilitiesChapter C2F: Food and Kindred Products
billion ($2005). Approximately 82% of that spending (see Table C2F-7) occurred in the Food Manufacturing
segment.
From 1987 to 2004, capital expenditures in the Food Manufacturing increased by almost 58 percent, with a high
of $14.5 billion ($2005) in 1999. In the years that followed, expenditures decreased substantially, at nearly 7% a
year on average, before eventually increasing again in 2004. The Beverage Manufacturing segment has also seen
substantial growth in the level of capital expenditures. Over the same time period, expenditures in this segment
increased by nearly 42 percent, with a peak of $3.3 billion in 2002. Expansion or retrofitting of facilities is a
priority to keep production trending upward (Higgins, 2002). In 2003, food manufacturers operated at capacities
above 80 percent, the Institute for Supply Management's threshold indicating need for increased capital
investment (Higgins, 2003). Recent years have seen increased capital expenditure budgets, with budgeting for
2004 being the strongest in several years (Higgins, 2004).
Table C2F-7: Capital Expenditures for Food and Beverage Manufacturing Segments
(millions, $2005)
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997'
1998'
1999'
2000"
2001"
2002"
2003'
2004'
Total Percent
Change 1987- 2004°
Average Annual
Growth Rate
Food Manufacturing
Capital Expenditures Percent Change
7,293
9,194
9,939
10,554
10,478
10,967
10,254
10,601
12,294
11,827
12,600
13,286
14,496
13,434
12,525
11,677
11,234
11,499
57.7%
2.7%
n/a
26.1%
8.1%
6.2%
-0.7%
4.7%
-6.5%
3.4%
16.0%
-3.8%
6.5%
5.4%
9.1%
-7.3%
-6.8%
-6.8%
-3.8%
2.4%
Beverage Manufacturing
Capital Expenditures Percent Change
,839
,904
,839
,617
,825
,880
1,655
1,936
2,226
2,170
2,799
2,582
2,617
2,946
2,750
3,311
2,501
2,605
41.7%
2.1%
n/a
3.6%
-3.4%
-12.0%
12.8%
3.0%
-11.9%
16.9%
15.0%
-2.5%
29.0%
-7.7%
1.4%
12.6%
-6.6%
20.4%
-24.5%
4.2%
' Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American
Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code
classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 1988-1991. 1993-1996, 1998-2001; and 2003-2004; U.S. DOC, 1987, 1992, 1997, and2002.
C2F -2.5 Capacity Utilization
Capacity utilization measures output as a percentage of total potential output from available capacity.
Capacity utilization reflects excess or insufficient capacity in an industry and is an indication of whether new
C2F-12
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing FacilitiesChapter C2F: Food and Kindred Products
investment is likely. The degree of fluctuation in capacity utilization is also an indicator of the relative stability of
demand and business conditions in an industry.
As shown in Figure C2F-5, following page, capacity utilization in the Food Manufacturing and Beverage and
Tobacco Manufacturing2 industries has generally trended downward over the period 1986 to 20053. The food
manufacturing industry, however, has not experienced the volatility that the beverage and tobacco manufacturing
industry has experienced over this period. Food manufacturing capacity utilization rates have generally remained
between 80 and 85 percent, while the beverage and tobacco industry has experienced a high of roughly 85 percent
in 1996, followed by a significant decline to below 70 percent by 2002. Looking at both segments together, after
peaking in 1988 at about 85 percent, capacity utilization generally trended downward to a low of approximately
77 percent in 2002. Over the following two years, capacity utilization increased significantly, rising to nearly 81
percent by 2004. The recent uptrend in utilization suggests overall improving financial performance in these
industries. At the same time, the fact that capacity utilization has remained at a moderate level - lows 70s to mid
80s percent -implies that the industries do not face requirements for large outlays near-term to increase
production capacity.
Figure C2F-5: Capacity Utilization for Food Manufacturing and Beverage and Tobacco
Manufacturing*
90 -,
70
65
- Food Manufacturing (NAICS
311)
- Beverage and Tobacco
Manufacturing (NAICS 312)
" The Federal Reserve provides capacity utilization data for the combined NAICS 312 (Beverage and Tobacco Manufacturing)
sectors. The Federal Reserve does not provide capacity utilization data for just the Beverage Manufacturing sector.
Source: Federal Reserve Board, 2005.
2 The Federal Reserve provides capacity utilization data for the combined NAICS 312 (Beverage and Tobacco
Manufacturing) sector. The Federal Reserve does not provide capacity utilization data for just the Beverage Manufacturing
sector.
3 More recent capacity utilization data is available than for other metrics, and is therefore presented to the latest complete
year of available data.
June /, 2006
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§ 3!6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase HI Existing Facilities Chapter C2F: Food and Kindred Products
C2F-3 STRUCTURE AND COMPETITIVENESS
Food Manufacturing and Beverage Manufacturing companies range in size from multi-billion dollar corporations
to small producers with revenues a fraction of the size of the large producers. Many of the companies in these
segments are diversified producers of multiple food or beverage products. Since food is a necessary purchase,
demand is less affected by the ups and downs of the economy than for other industries.
The Food Manufacturing and Beverage Manufacturing segments have consolidated over the profile time period as
companies moved to diversify their product offerings and gain market share. The segments have also looked
abroad to tap into the emerging markets of foreign countries. In the Food Manufacturing industry, 415 merger
and acquisition transactions were reported in 2003, down from a high of 813 in 1998. These acquisitions and
mergers permit companies to acquire more efficient manufacturing plants, close inefficient plants, expand product
lines, and increase market share in a mature market (U.S. DOC, undated). Some recent mega-mergers in the Food
Manufacturing segment include the Kraft Foods' acquisition of Nabisco, General Mills' acquisition of Pillsbury,
and Tyson's bringing beef and pork firm IBP into its lineup. One aspect of current consumption trends that might
be beneficial to the Food Manufacturing firms is the fact that consumers are cooking less, with half of every food
dollar being spent on food away from home. Devoting resources to products geared towards restaurants, vending
machines, and other food service providers could reward firms with higher profit margins (Yahoo, 2005b).
The Beverage Manufacturing segment has also recorded a number of acquisitions and mergers. Pepsi added the
Quaker Oats Company and Gatorade. Cadbury Schweppes acquired the Snapple line, following the industry trend
towards non-carbonated beverages, the area of the market that non-alcoholic manufacturers are looking to for
growth opportunities (Value Line, 2004). Product differentiation is a key strategy for larger firms to increase
brand awareness and market share (Yahoo, 2005a). As sales in the United States slow, firms in the non-alcoholic
beverage industry are seeing their largest gains from non-U.S. markets (Value Line, 2004).
Alcoholic beverage manufacturers have also consolidated during this time period. Anheuser-Busch lost the rank
of world's largest brewer due to the merger of Inbrew and Brazil's Ambev. The merger between Adolph Coors
and Molson further consolidated the industry. Brewers are also looking for acquisitions in China, which is seen
as an untapped market. Spirits and wine manufacturers have also moved to consolidate, with Constellation
Brands purchasing The Robert Modavi Corporation, a leader in wine making, as well as working in a joint
venture with the French vintner Domaines Barons de Rothschild. Diageo and France's Pernod Ricard bought
Seagrams Company, after outbidding the tandem of Bacardi and Brown-Forman (Yahoo, 2005a).
C2F -3.1 Firm and Facility Size
For almost all NA1CS codes in the Food Manufacturing and Beverage Manufacturing segments, the Small
Business Administration defines a small firm as having fewer than 500 employees. The exceptions are NAICS
codes 311221, 311312, 311313, 311821, and 312140, which are considered smal 1 if the firm has fewer than 750
employees, and NAICS codes 311223, 311225, 311230, and 311422, which are deemed small if the firm employs
fewer than 1,000 employees. The size categories reported in Statistics of U.S. Businesses (SUSB) do not
correspond with the SB A size classifications, therefore preventing precise use of the SB A size threshold in
conjunction with SUSB data. Table C2F-8, following page, reports the size distribution of firms and facilities in
the Food Manufacturing and Beverage Manufacturing segments for 2003. As shown in the table, small
establishments dominate both segments:
»> 15,448 of 16,561 (93%) firms in the Food Manufacturing segment had fewer than 500 employees. These
small firms owned 16,105 facilities, or 81% of all facilities in the segment.
> 2,500 of 2,576 (97%) firms in the Beverage Manufacturing segment had fewer than 500 employees.
These small firms owned 2,587 facilities, or 84% of all Beverage Manufacturing facilities.
C2F-I4
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§ 3J6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing FacilitiesChapter C2F: Food and Kindred Products
Because some six-digit NAICS codes within the Food Manufacturing and Beverage Manufacturing segments
have small business size thresholds of greater than 500 employees, the reported numbers and percentages of
businesses with fewer than 500 employees represent lower bounds of the number and percentage of small
businesses in these industry segments.
Comparing the two sectors to manufacturing industries in general, the percentage of small firms in the food and
beverage industry is comparable to the percentage of small firms in all manufacturing industries combined. In
2003, approximately 94 percent of the firms in NAICS 311 and 3121 had fewer than 500 employees, compared to
almost 99 percent for all manufacturing firms (U.S. SBA, 2002). However, compared to the Primary
Manufacturing Industries, the Food Manufacturing and Beverage Manufacturing industries have a significantly
higher percentage of firms within the industry identified as small. As noted below, however, the larger companies
within each segment dominate in terms of producing the majority of shipments for each segment, with the 50
largest firms in Food Manufacturing accounting for 51 percent of shipments, while the 50 largest companies in
Beverage Manufacturing producing an even greater share of shipments, at 79 percent of the total (see Table
C2F-8, following page).
Table C2F-8: Number of Firms and Facilities by Size Category for Food and Beverage
Manufacturing Segments, 2003*
Employment Size
Category
0-19
20-99
100-499
500+
Total
Food Manufacturing (NAICS 311)
No. of Firms No. of Facilities
10,519
3,509
1,420
1,113
16,561
10,548
3,703
1,854
3,768
19,873
Beverage Manufacturing (NAICS 3121)
No. of Firms No. of Facilities
1,934
435
131
76
2,576
1,936
464
187
495
3,082
* Before 1998, data were compiled in the SIC system; since 1997, these data have been compiled in the North American
Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code
classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. SBA, 1989-2003.
C2F -3.2 Concentration Ratios
Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely
related to entry barriers, with more concentrated industries generally having higher barriers.
The four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI) are common
measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a
CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry's total
value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things
being equal.4 An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI
indicates concentration based on the largest 50 firms in the industry. It is equal to the sum of the squares of the
market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with
market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (3,600 +
4 Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry
with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it
competes with foreign producers or if it competes with products produced by other industries (e.g., plastics vs. aluminum in
beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the
extent of competition in an industry.
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§3t6(b) Final Rule: Phase IH-EA, PartC: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
900 + 100). The higher the index, the fewer the number of firms supplying the industry and the more
concentrated the industry. Based on the U.S. Department of Justice's guidelines for evaluating mergers, markets
in which the HHI is under 1000 are considered unconcentrated, markets in which the HHI is between 1000 and
1800 are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 are
considered to be concentrated.
As shown in Table C2F-9, following page, the Food Manufacturing segment has an HHI of 91, and the Beverage
Manufacturing segment has an HHI of 532. At these HHI levels, the two industry segments, especially the Food
Manufacturing segment, appear quite unconcentrated. With relatively low concentration in the affected
industries, firms are unlikely to possess the market power to recover regulatory compliance costs through price
increases, particularly if those costs do not apply relatively uniformly and broadly throughout the industry.
The concentration ratios also show that each segment operates in unconcentrated markets. The Beverage
Manufacturing segment has the higher concentration of the two segments, with a CR4 of 41 percent. This is
slightly lower than the 50 percent threshold, which would begin to indicate concentration in the market. The CR4
for the Food Manufacturing segment is considerably lower at only 14 percent. In this segment, the top 50
companies control roughly half of the market, indicating a rather unconcentrated market segment. As noted
above, however, mergers and acquisitions are occurring in both segments, which will likely lead to increased
concentration. Also, certain subsectors within each segment can be highly concentrated. For example, within the
soft drink market, Coca-Cola claims around 50% of the global market, followed by Pepsi with roughly 21% and
Cadbury-Schweppes with 7% (Yahoo, 2005a).
Table C2F-9: Selected Concentration Ratios for Food Manufacturing and Beverage Manufacturing
Segments, 1997*
NAICS Code
311
3121
Year
1997
199?
Total
Number of
Firms
21,958
2,169
Concentration Ratios
4 Firm (CR4)
14%
41%
8 Firm (CR8)
22%
52%
20 Firm
(CR20)
35%
66%
50 Firm
CR50)
51%
79%
Herfmdahl-
Hirschman
Index
91
532
* The 7997 Census of Manufactures is the most recent concentration ratio data available by NAICS code.
Source: U.S. DOC, 1987, 1992, 1997, and2002.
C2F -3.3 Foreign trade
This profile uses two measures of foreign competition: export dependence and import penetration.
Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic
markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that
industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests
that higher import penetration levels will reduce market power and pricing discretion because foreign competition
limits domestic firms' ability to exercise such power. Firms belonging to segments in which imports account for
a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to pass-
through costs because foreign producers would not incur costs as a result of the Phase III regulation. The
estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31-33) for 2001 is 22 percent.
For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with
import ratios close to or above 22 percent would more likely face stiff competition from foreign firms and thus be
less likely to succeed in passing compliance costs through to customers.
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§ 3!6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
Export dependence, calculated as exports divided by value of shipments, measures the share of a segment's sales
that is presumed subject to strong foreign competition in export markets. The Phase 111 regulation would not
increase the production costs of foreign producers with whom domestic firms must compete in export markets.
As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing
prices to recover cost increases resulting from regulation-induced increases in production costs. The estimated
export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the
ability of industries to withstand compliance cost burdens, EPA judges that industries with export ratios close to
or above 15 percent are at a relatively greater disadvantage in potentially recovering compliance costs through
price increases since export sales are presumed subject to substantial competition from foreign producers.
Table C2F-10, following page, presents trade statistics for the combined Food Manufacturing and Beverage
Manufacturing segments. Due to data limitations, it is not possible to accurately separate the two segments;
therefore, they are presented together. Imports and exports play a small role in these two segments, with import
penetration and export dependence ratios of 6.2 and 6.3 percent, respectively, in 2001. Both measures of foreign
competition are well below the U .S. manufacturing averages for 2001. Given just these measures, it would be
reasonable to assume that these segments do not face significant foreign competitive pressures, and would have
more latitude in passing through to customers any increase in production costs resulting from regulatory
compliance. However, as noted above, the HHI of the Food Manufacturing and Beverage Manufacturing
segments is 91 and 532 respectively, suggesting firms in these segments have low market power, limiting their
ability to pass through any increase in production costs.
Table C2F-10: Trade Statistics for Combined Food and Beverage Manufacturing Segments
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997'
1998d
1999d
2000*
200 ld
2002d
Total Percent
Change 1989-2002
Compound Annual
Growth Rate
Value of Imports
(millions, $2005)
20,426
21,177
19,893
20,723
20,019
21,243
22,044
24,652
26,188
27,241
29,082
30,036
30,539
32,661
59.9%
3.7%
Value of Exports
(millions, $2005)
20,917
21,191
22,437
24,833
25,312
27,846
30,604
31,071
32,229
30,511
28,779
29,728
30,749
28,822
37.8%
2.5%
Value of Shipments
(millions, $2005)
451,370
463,736
445,213
462,462
470,713
468,573
477,200
479,552
493,238
494,083
485,511
484,977
491,424
489,876
8.5%
0.6%
Implied Domestic
Consumption*
450,879
463,722
442,669
458,352
465,420
461,970
468,640
473,132
487,196
490,813
485,815
485,284
491,214
493,715
9.5%
0.7%
Import
Penetration1"
4.5%
4.6%
4.5%
4.5%
4.3%
4.6%
4.7%
5.2%
5.4%
5.6%
6.0%
6.2%
6.2%
7.0%
Export
Dependence'
4.6%
4.6%
5.0%
5.4%
5.4%
5.9%
6.4%
6.5%
6.5%
6.2%
5.9%
6.1%
6.3%
6.0%
* Calculated by EPA as shipments + imports - exports.
b Calculated by EPA as imports divided by implied domestic consumption.
e Calculated by EPA as exports divided by shipments.
4 Before 1997, data were compiled in the SIC system; since 1997, these data have been compiled in the North American Industry
Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the
1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 2006; U.S. DOC, 1988-1991, 1993-1996, 1998-2001: and2003-2004; U.S. DOC, 1987, 1992. 1997, and2002.
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f 316(b) Final Rule: Phase Hi - EA. Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
As shown in Figure C2F-6, following page, Food and Beverage Manufacturing imports remained relatively
constant from 1989 through 1995, before beginning a steady climb through 2002. Over these seven years, Food
and Beverage Manufacturing imports grew by approximately 48 percent, from $22.0 billion ($2005) in 1995 to
$32.7 billion in 2002. Food and Beverage Manufacturing exports increased from 1989 through 1997, with a high
of approximately $32.2 billion in that year. Since then, Food and Beverage Manufacturing exports have remained
relatively stable, averaging $30 billion from 1998 to 2002. For most of this period, the Food and Beverage
Manufacturing segments recorded a positive trade balance, even though the value of imports was growing.
However, in 1999, imports exceeded exports by just over $300 million. By 2002, this trade deficit widened to
over $3.5 billion.
Figure C2F-6: Value of Imports and Exports for Food Manufacturing and Beverage
Manufacturing Segments (millions, $2005)
40,000
37,500
35,000 -
32,500
30.000
27,500
25.000
22,500
20,000
17,500
15,000
-» Food & Beverage Imports NAICS
»- Food & Beverage Imports SIC
- - Food & Beverage Exports NAICS
Food & Beverage Exports SIC
8 8
* Before 1997, the Department of Commerce compiled data in the SIC system; since 1997, these data have been compiled in
the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to
the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.
Source: U.S. DOC, 2006.
C2F-4 FINANCIAL CONDITION AND PERFORMANCE
Financial performance in the Food Manufacturing and Beverage Manufacturing segments is not as closely linked
to macroeconomic cycles as it is in other, more cyclical manufacturing industries. As products from these
segments are generally "consumer staples," they are not as affected by swings in the U.S. economy as other
manufactured products, such as those from the five Primary Manufacturing Industries. As a result, businesses in
these segments have been able to maintain a moderate level of positive financial performance over the profile
time period, including the U.S. recession of the early 2000s, which more substantially affected other
manufacturing industries such as pulp and paper and steel. Although the Food Manufacturing segment
experienced some business weakness from the economic slowdown of the early 2000s, the effects were milder
compared to other manufacturing industries. By 2002, business conditions improved and the Food Manufacturing
segment returned to positive growth (Higgins, 2002). In 2003, the food and beverage companies were expected to
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§ 3I6(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
fare much better than U.S. manufacturers generally in overall revenue growth, being ranked third out of major
U.S. manufacturing industries in revenue growth expectations (Higgins, 2003).
This profile uses two measures of financial condition and performance: Net Profit Margin and Return on
Total Capital.
Net profit margin is calculated a> after-tax income before nonrecurring gains and losses as a percentage of sales or
revenue, and measures profitability, as reflected in the conventional accounting concept of net income. Over
time, the firms in an industry, and the industry collectively, must generate a sufficient profit margin if the industry
is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from several
factors, including: variations in aggregate economic conditions (including international and U.S. conditions),
variations in industry-specific m;irket conditions (e.g., short-term capacity expansion resulting in overcapacity), or
changes in the pricing and availability of inputs to the industry's production processes (e.g., the cost of energy to
the manufacturing process). The extent to which these fluctuations affect an industry's profitability, in turn,
depends heavily on the fixed vs. variable cost structure of the industry's operations. In a capital intensive industry
such as the food and beverage industry, the relatively high fixed capital costs as well as other fixed overhead
outlays, can cause even small fluctuations in output or prices to have a large positive or negative affect on profit
margin.
Return on total capital is calculated as annual net profit, plus one-half of annual long-term interest, divided by the
total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the
capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or
liability element). As such, the return on total capital provides insight into the profitability of a business' assets
independent of financial structure and is thus a "purer" indicator of asset profitability than return on equity. In the
same way as described for net profit margin, the firms in an industry, and the industry collectively, must generate
over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The
factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in
return on total capital.
EPA calculated net profit margin and return on total capital using data from the Value Line Investment Survey for
U.S. firms identified by Value Line as operating primarily in the Food and Kindred Products industry and
specifically in the following business segments: Food Ptocessing (112 firms). Beverage-soft drink (15 firms), and
Beverage-alcoholic (20 firms). The data series were calculated on a revenue-weighted basis using the Value
Line-reported items: Net Profit Margin, Return on Total Capital, and Revenue. These data series thus represent
the performance of a broad, but not exhaustive, set of publicly traded firms in these business segments over the
analysis period. The data series excludes privately held firms and publicly held firms not reported in the Value
Line database. The Value Line-based Food Processing data series may be taken to align approximately with the
NAICS 311 sector, Food Manufacturing; the Beverage-soft drink and Beverage-alcoholic data series align
approximately with the NAICS 3121 sector, Beverage Manufacturing.
Figure C2F-7, following page, shows trends in net profit margins for food processing, alcoholic beverage, and
soft drink beverage firms between 1992 and 2005. All three business segments reported positive margins over the
entire period. Being a lower risk segment of the overall Food and Kindred Products industry, the food-processing
segment has the lowest net profit margin of the three groups, roughly 5 percent, but its margin remained the most
stable over the time period. Margins in both beverage segments rose from approximately 8 percent in 1992 to just
over 12 percent by 2005. However, the soft drink segment exhibited greater year-to-year volatility while the
alcoholic beverage segment's margin experienced relatively steady growth over the period.
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§ 316(b) Final Rule: Phase III-EA. Part C: Economic Analysis for Phase HI Existing Facilities Chapter C2F: Food and Kindred Products
Figure C2F-7; Net Profit Margin for Food and Beverage Manufacturers
15%
12%
9%
6% -
3%
0%
Beverage (Soft Drink)
Beverage (Alcoholic)
Food Processing
15%
12% -
9% -
6% -
3%
0%
- Beverage (Soft Drink)
- Beverage (Alcoholic)
- Food Processing
g g g
to u»
Source: Value Line. 2003: Value Line, 2006.
Figure C2F-8, following page, presents trends in return on total capital for the three segments. Again, all three
business segments reported positive returns over the entire period. Of the three segments, the soft drink beverage
segment recorded the highest average return on capital over the analysis period, followed by the alcoholic
beverage segment and the food processing segments. Similar to the trend in net profit margin, the alcoholic
beverage segment has shown the least volatility of the three segments in return on total capital, increasing from 14
percent in 1992 to about 17 percent by 2005, without experiencing any substantial shifts in performance over the
time period. Since the onset of the U.S. recession in early 2000, the food-processing segment has shown the
lowest return on total capital, decreasing from a high of almost 18 percent in 1999 to a low of 10 percent in 2002.
The segment has rebounded since 2002, with returns to capital increasing to about 12 percent by 2005. Although
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2F: Food and Kindred Products
the soft drink beverage segment achieved higher overall returns than the other segments, this segment has also
exhibited substantial year-to-year volatility.
Figure C2F-8; Return on Total Capital for Food and Beverage Manufacturers
28%
24%
20%
16%
12%
8%
4%
0%
28%
24% -
20% -
16% -
12% -
4%
0%
to to to to to to
tO LO
so
Kj w
Beverage (Soft Drink)
Beverage (Alcoholic)
Food Processing
-Beverage (Soft Drink)
- Beverage (Alcoholic)
- Food Processing
Source: Valve Line, 2003; Yalue Line, 2006.
Overall, the business outlook for the Food and Kindred Products industry, both in aggregate and for the individual
segments, is generally positive. Over the past several years, the Food Processing Segment has enjoyed generally
stronger financial performance than the U.S manufacturing industry as a whole. Reflecting this strong
performance, securities market returns for the food-processing segment have substantially exceeded the
performance of the broader securities market. Between 2000 and mid-year 2005, the Standard & Poor's Packaged
Foods/Meats segment index gained nearly 80 percent, while the Standard & Poor's 500 Index recorded a loss of
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§ 316(b) Final Rule: Phase III - EA, Pan C: Economic Analysis for Phase HI Existing Facilities Chapter C2F: Food and Kindred Products
approximately 5 percent (Standard & Poor's, 2005a). Near-term, this segment is experiencing some margin
pressure from rising costs of energy and other input commodities, and from pension funding burdens. However,
the longer-term outlook remains positive as the segment has modernized its capital stock and achieved substantial
operating efficiencies through mergers and acquisitions and other restructurings to reduce operating costs.
Finally, rising global income and trade liberalization are also expected to contribute to growing demand and
additional market opportunities for U.S. producers (Standard & Poor's, 2005a).
The business outlook for the Soft Drink Segment is generally favorable. As shown in Figure C2F-7 and Figure
C2F-8, this segment has performed better financially than the Food Processing Segment in recent years. The
near-term business outlook remains generally positive for U.S. producers in this segment, in particular due to
improved productivity and general strengthening of domestic and international markets for this segment's
products (Standard & Poor's, 2005b).
The outlook for the Alcoholic Beverage Segment is also generally favorable. This segment is composed of two
sub-industry segments, the Brewers sub-segment and Distillers/Vintners sub-segment. Although the Brewers sub-
segment has achieved generally good financial performance over the past five years (increase of approximately 35
percent in the Standard & Poor's sub-segment index vs. Standard & Poor's 500 Index loss of approximately 5
percent), near-term this sub-segment is expected to record more modest gains, largely due to moderating growth
in demand for this segment's products. At the same time, this sub-segment has achieved substantial productivity
improvements and is positioned to achieve moderate growth and financial performance longer-term (Standard &
Poor's, 2005c). The outlook for the Distillers/Vintners sub-segment is generally more favorable. After recording
very strong financial performance since 2000 (increase of approximately 140 percent in the Standard & Poor's
sub-segment index vs. Standard & Poor's 500 Index loss of approximately 5 percent), this sub-segment remains
positioned to benefit from favorable demographic trends and a generally stable trend of modestly rising product
demand. Consolidation and increased productivity also contribute to a favorable financial outlook for this sub-
segment (Standard & Poor's, 2005d).
C2F-5 FACILITIES OPERATING COOLING WATER INTAKE STRUCTURES
Point source facilities that use or propose to use a cooling water intake structure that withdraws cooling water
directly from a surface water body of the United States are potentially subject to Section 316(b) of the Clean
Water Act. In 1982, the Food and Kindred products industry withdrew 272 billion gallons of cooling water,
accounting for approximately 5 percent of total manufacturing cooling water intake in the United States. The
industry ranked 6th in industrial cooling water use, behind the electric power generation industry, chemical,
primary metals, petroleum and coal products, and paper and allied products industries (U.S. DOC, 1982).
This section provides information for the facilities in the Food and Kindred Products industry that EPA estimates
to be subject to regulation under the regulatory analysis options. Existing facilities that meet all of the following
conditions would have been subject to regulation under the three regulatory analysis options:
> Have a National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one;
* Use or propose to use one or more cooling water intake structures to withdraw water from waters of the
United States;
> Use at least twenty-five (25) percent of the water withdrawn exclusively for contact or non-contact
cooling purposes; and
» Meet the applicability criteria for the specific regulatory analysis option in terms of design intake flow
and source waterbody type (i.e., 50 MOD for All Waterbodies, 100 MOD for Certain Waterbodies, or 200
MOD for All Waterbodies).
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£ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Phase III Existing FacilitiesChapter C2F: Food and Kindred Products
The regulatory options also cover substantial additions or modifications to operations undertaken at such
facilities. Although EPA initially identified the set of facilities that were estimated to be potentially subject to the
Phase HI regulation based on a minimum applicability threshold of 2 MOD, this section focuses on the facilities
nationwide in the profiled Food and Kindred Products industry segments that are estimated to be subject to
regulation based on the design intake flow and waterbody applicability criteria set forth in the regulatory analysis
options (see Table C2F-1, above for additional information on the broader set of facilities potentially subject to
regulation).
C2F -5.1 Waterbody and Cooling System Type
Table C2F-11, Table C2F-12, and Table C2F-16, following page, report the distribution of the Food and Kindred
Products industry facilities by type of water body and cooling system for each analysis option. All of the Section
316(b) Food and Kindred Products facilities withdraw cooling water from either a freshwater river or stream.
Table C2F-11: Number of Food and Kindred Products Facilities Estimated Subject to the 50 MGD All
Option by Waterbody Type and Cooling System
Waterbody Type
Freshwater River/ Stream
Recirculating
No. % of Total
0 0%
Combination
No. % of Total
3 33%
Once-Through
No. % of Total
3 33%
Other
No. % of Total
3 33%
Total
9
Source: Source: U.S. EPA, 2000; V.S. EPA analysis, 2006.
Table C2F-12: Number of Food and Kindred Products Facilities Estimated Subject to the 200 MGD All
Option by Waterbody Type and Cooling System
Waterbody Type
Freshwater River/ Stream j
Source: Source: U.S. EPA,
Recirculating
No. % of Total
0 0%
Combination
No. / of Total
0 100%
Once-Through
No. % of Total
3 100%
Other
No. % of Total
0 0%
Total
1 3
2000; US. EPA analysis, 2006.
Table C2F-13: Number of Food and Kindred Products Facilities Estimated Subject to the 100 MGD
CWB Option by Waterbody Type and Cooling System
Recirculating
Waterbody Type
No. % of Total
Freshwater River/ Stream 0 0%
Combination
No. % of Total
0 100%
Once-Through
No. % of Total
3 50%
Other
No. % of Total
3 50%
Source: Source: U.S. EPA. 2000: US. EPA analysis. 2006.
Total
6
C2F -5.2 Facility Size
Figure C2F-11, Figure C2F-10, and Figure C2F-11 below, show the employment size category for the Food and
Kindred Products industry facilities estimated subject to regulation under the regulatory analysis options. The
majority of the facilities have equal or greater than 100, but fewer than 500 employees. Three of the facilities (33
percent) have between 500 and 999 employees, with no facilities employing greater than 1,000 employees.
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§3l6(b) Final Rule: Phase IH-EA, PartC: Economic Analysis for Phase HJ Existing Facilities Chapter C2F: Food and Kindred Products
Figure C2F-9: Number of Facilities Estimated Subject to the 50 MGD All Option by Employment
Size for the Profiled Food Manufacturing and Beverage Segments
4i
3-
2-
I Food & Kindred Products (SIC 20)
<100 100-249 250-499 500-999 >=1000
Source: U.S. EPA, 2000; U.S. EPA analysis. 2006.
Figure C2F-10: Number of Facilities Estimated Subject to the 200 MGD AH Option by
Employment Size for the Profiled Food Manufacturing and Beverage Segments
4-,
3-
2-
1-
0-
/
3
n
<100 100-249 250-499 500-999 >=1000
Food & Kindred Products (SC20)
C2F-24
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§ 3!6(b) Final Rule: Phase HI - EA. Pen C: Economic Analysis for Phase 111 Existing facilities Chapter C2F: Food and Kindred Products
Figure C2F-11: Number of Facilities Estimated Subject to the 100 MGD CWB Option by
Employment Size for the Profiled Fobd Manufacturing and Beverage Segments
I Food & Kindred Products (SIC 20)
<100
100-249 250-499 500-996 >=1000
Source: U.S. EPA, 2000; U.S. EPA analysis, 2006.
C2F -5.3 Firm Size
EPA used the Small Business Administration (SBA) small entity size standards to determine the number of
facilities in the Food and Kindred Products facility dataset that are owned by small firms. Depending on their SIC
code, firms are defined as small based on either their revenues or number of employees. As shown in Table
C2F-14, Table C2F-15, and Table C2F-16, large firms own all of the Food and Kindred Products facilities
estimated to be subject to regulation, regardless of the analysis option considered.
Table C2F-14: Number of Facilities Estimated Subject to the 50 MGD AH Option by Firm Size for the
Food and Kindred Products Industry
SIC Code
20
SIC Description
Food and Kindred Products
Large
Number % of SIC
9 100%
Small
Number % of SIC
0 0%
Total
9
Source: U.S. EPA, 2000; D&B, 2001, U.S. SBA 2006; U.S. EPA analysis, 2006.
Table C2F-15: Number of Facilities Estimated Subject to the 200 MGD All Option by Firm Size for the
Food and Kindred Products Industry
SIC Code
20
SIC Description
Food and Kindred Products
Large
Number % of SIC
3 100%
Small
Number % of SIC
0 0%
Total
3
Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
Table C2F-16: Number of Facilities Estimated Subject to the 100 MGD CWB Option by Firm Size for
the Food and Kindred Products Industry
SIC Code
20
SIC Description
Food and Kindred Products
Large
Number % of SIC
3 100%
Small
Number % of SIC
0 0%
Total
3
Source: U.S. EPA, 2000; D&B, 2001; U.S. SBA 2006; U.S. EPA analysis, 2006.
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U.S. Department of Commerce (U.S. DOC). Undated. 2004 Industry Outlook for Processed Foods.
International Trade Administration. Downloaded on May 6, 2005. Available at:
http://www.ita.doc.gov/td/ocg/outlook_food04.pdf
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling
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U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards. Available at:
http://www.sba.gov/size/sizetable2002.html.
U.S. Small Business Administration (U.S. SBA). 1989-2003. Statistics of U.S. Businesses. Available at:
http://www.sba.gOv/advo/researc:h/data.html. Downloaded February 4. 2006.
U.S. Small Business Administration (U.S. SBA). 2002. Employer Firms, and Employment by Employment Size
of Firm by NAICS Codes, 2002. Available at: http://www.sba.gov/advo/stats/us_02_n6.pdf
Value Line. 2006. Value Line 3.0 Investment Analyzer.
Value Line. 2004. Soft Drink Industry. February 6, 2004.
Value Line. 2003. Value Line Investment Survey.
Yahoo. 2005a. Beverages Industry Profile. Downloaded May 6, 2005. Available at:
http://biz.yahoo.com/ic/profile/bevalc_ 1042.html
Yahoo, 2005b. Food Industry Profile. Downloaded May 6, 2005. Available at:
http://biz.vahoo.com/ic/profile/fodmfg 1349.html
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§3l6(b) Final Rule: Phase IH-EA, PartC: Economic Analysis for Phase 111 Existing Facilities Chapter C2F: Food and Kindred Products
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§ 3I6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2G: Other Industries
Chapter C2G: Facilities in Other Industries
(Various SICs)
CHAPTER CONTENTS
Introduction C2G-1
C2G-1 Facilities Operating Cooling Water Intake
Structures C2G-2
C2G-1 1 Waterbody and Cooling System Types....
C2G-2
C2G-1.2 Facility Size C2G-3
C2G-1.3 Firm Size C2G-5
References C2G-6
INTRODUCTION
The preceding profile sections focus on the six Primary
Manufacturing Industries - Paper and Allied Products,
Chemicals and Allied Products, Petroleum Refining, Steel,
Aluminum, and Food and Kindred Products - identified,
after electric power generators, as using the largest amount
of cooling water in their operations and most likely, after
electric power generators, to be within the scope of the
316(b) Phase III regulation. However, facilities in other
industries use cooling water and would therefore also be
subject to the final regulation if they meet the regulation's
specifications. This section of the profile provides information on a sample of facilities in these Other Industries.
Although EPA targeted its Detailed Industry Questionnaire at the electric power industry and manufacturing
industries that use large amounts of cooling water, the Agency received 10 questionnaire responses from facilities
with business operations in industries other than these major cooling water-intensive industries. EPA originally
believed these facilities to be non-utility electric power generators; however, inspection of their responses
indicated that the facilities were better understood as cooling water-dependent facilities whose principal
operations lie in businesses other than the electric power industry or the Primary Manufacturing Industries.
Unlike the sample facility observations for the six Primary Manufacturing Industries, the sample of observations
from Other Industries is not based on a scientifically framed sample and the information from this sample of
observations may not be reliably extrapolated beyond these facilities. As a result, EPA's profile of information
for the Other Industries facilities is restricted to these 10 sample facilities and is not presented as national
estimates.
Of the 10 Other Industries facilities, 7 withdraw at least 50 million gallons of water a day and are thus would be
subject to regulation under the regulatory analysis options considered for existing facilities. These facilities fall in
a wide range of businesses, as defined by 2-digit SIC industry group. Table C2G-1, following page, presents the
number of responses received from facilities in the Other Industries by industry group. The information
summarized in the following sections focuses on these Other Industries facilities that EPA estimates will be
subject to regulation under the regulatory analysis options.
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C2G-1
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§ 316(b) Final Rule: Phase 111 - EA. Part C: Economic Analysis for Phase III Existing Facilities
Chapter C2G: Other Industries
Table C2G-1: Facilities in Other Industries by 2-digit SIC code Estimated Subject to Regulation Under
the Regulatory Analysis Options
No. of
Facilities
2
3
1
1
SIC
Code
10
34
37
49
SIC Description
Metal mining
Fabricated metal products,
except machinery and
transportation equipment
Transportation equipment
Electric, gas, and sanitary
services
Important Operations
Mining, developing mines, or exploring for metallic minerals (ores); ore dressing
and beneficiating operations, whether performed at mills operated in conjunction
with the mines served or at mills, such as custom mills, operated separately.
Ferrous and nonferrous metal products, such as metal cans, tinware, handtools.
cutlery, general hardware, nonelectric heating apparatus, fabricated structural
metal products, metal forgings, metal stampings, ordnance (except vehicles and
guided missiles), and a variety of metal and wire products, not elsewhere
classified.
Equipment for transportation of passengers and cargo by land, air, and water.
Generation, transmission, and/or distribution of electricity or gas or steam.
Water and irrigation systems, and sanitary systems engaged in the collection and
disposal of garbage, sewage and other wastes by means of destroying or
processing materials.
Source: U.S. EPA, 2000; Executive Office of the President, 1987.
C2G-1 FACILITIES OPERATING COOLING WATER INTAKE STRUCTURES
Section 316(b) of the Clean Water Act applies to point source facilities that use or propose to use a cooling water
intake structure and that withdraws cooling water directly from a surface waterbody of the United States. This
section provides information for facilities in Other Industries subject to regulation under the regulatory analysis
options. The regulatory analysis options apply to existing facilities that meet ali of the following conditions:
* Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or
arrangement with an independent supplier who has a cooling water intake structure; or their cooling water
intake structure(s) withdraw(s) cooling water from waters of the U.S., and at least twenty-five (25)
percent of the water withdrawn is used for contact or non-contact cooling purposes;
> Have an National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one;
and
» Meet the applicability criteria for the specific regulatory analysis option in terms of design intake flow
and source waterbody type (i.e., 50 MOD for All Waterbodies, 100 MOD for Certain Waterbodies, or 200
MOD for All Waterbodies).
The regulatory options also cover substantial additions or modifications to operations undertaken at such
facilities.
C2G-1.1 Waterbody and Cooling System Types
Table C2G-2, Table C2G-3, and Table C2G-7, following page, summarize information on the Other Industries
facilities by type of water body and cooling system for each option. All of these facilities have a once-through
system. Plants with once-through cooling water systems withdraw between 70 and 98 percent more water than
those with recirculating systems.
C2G-2
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§ 316(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2G: Other Industries
Table C2G-2: Other Industries Facilities Estimated Subject to the 50 MGD All Option by Water Body
and Cooling System Type
L
Cooling System
Water Body Type
Recirculating
K 1. % °f
Number
Total
Combination
V - % °f
Nurober Total
Once-Through
. , . % of
Numbcr Total
Other
v t. % of
Number
Total
Total1
Other Industries
Estuary/ Tidal River
Freshwater Stream/River
Great Lake
Ocean
Total*
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
0 0%
1 15%
3 40%
2 30%
1 15%
7 100%
0 0%
0 0%
0 0%
0 0%
0 0%
1
3
2
1
7
* Individual numbers may not sum to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA Analysis. 2006.
Table C2G-3: Other Industries Facilities Estimated Subject to the 200 MGD All Option by Water Body
and Cooling System Type
Water Body Type
Cooling System
Recirculating
v, u % Of
Numb*f Total
Combination
M K %0f
Number .
Total
Once-Through
« u % of
Number Total
Other
Number
%of
Total
Total"
Other Industries
Estuary/ Tidal
Great Lake
River
TotaP
0
0
0
0%
0%
0%
0
0
0
0%
0%
0% '
1
1
2
50%
50%
100%
0
0
0
0%
0%
0%
1
1
2
* Individual numbers may not sum to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA Analysis, 2006.
Table C2G-4: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by Water Body
and Cooling System Type
Water Body Type
Cooling System
Recirculating
V h %0f
Nnfflber Total
Combination
« u % «f
Number Tot,.
Once-Through
w u % of
Number _. . .
Total
Other
M t. %0f
Number Total
Total'
Other Industries
Estuary/ Tidal River
Freshwater Stream/River
Great Lake
Total"
0
0
0
0
0%
0%
0%
0%
0
0
0
0
0%
0%
0%
0%
1
1
2
4
25%
25%
50%
100%
0
0
0
0
0%
0%
0%
0%
1
I
2
4
* Individual numbers may not sum to total due to independent rounding.
Source: U.S. EPA, 2000; U.S. EPA Analysis, 2006.
C2G-1.2 Facility Size
Figure C2G-3, Figure C2G-2, and Figure C2G-3 show the employment size category for the Other Industries
facilities that EPA estimates will be subject to the regulation under each analysis option.
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§ 316(b) Final Rule: Phase 111 - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2G: Other Industries
Figure C2G-1: Other Industries Facilities Estimated Subject to the 50 MGD All Option by
Employment Size
3-
2-
1-
Other Industries
<100 100-249 250-499 500-999 >=1000
Source: U.S. EPA. 2000; U.S. EPA Analysis, 2006.
Figure C2G-2: Other Industries Facilities Estimated Subject to the 200 MGD All Option by
Employment Size
4-,
3-
2-
1-
0-
/
1
|
0000 ^^^H
<100 100-249 250-499 500-999 >=1000
Other Industries
Source: U.S. EPA, 2000; U.S. EPA Analysis, 2006.
C2G-4
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase HI Existing Facilities
Chapter C2G: Other Industries
Figure C2G-3: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by
Employment Size
2-
1-
<100
100-249 250-499 500-999 >=1000
I Other Industries
Source: U.S. EPA, 2000; U.S. EPA Analysis, 2006.
C2G-1.3 Firm Size
EPA used the Small Business Administration (SB A) small entity size standards to determine the number of the
Other Industries facilities that are owned by small firms. Depending on their SIC code, firms are defined as small
based on either revenues or number of employees. As reported in Table C2G-5, Table C2G-6, and Table C2G-7,
large firms own all of the Other Industries facilities that EPA estimates will be subject to regulation.
Table C2G-5: Other Industries Facilities Estimated Subject to the 50 MGD All Option by
Firm Size
Large
Small
Total
Other Industries
0
Source: U.S. EPA, 2000; DAB, 2001; US. SBA 2006; U.S. EPA Analysis, 2006.
Table C2G-6: Other Industries Facilities Estimated Subject to the 200 MGD All Option by
Firm Size
Large
Small
Total
Other Industries
0
Source: U.S. EPA, 2000; D&B. 2001; U.S. SBA, 2006; U.S. EPA Analysis, 2006.
Table C2G-7: Other Industries Facilities Estimated Subject to the 100 MGD CWB Option by
Firm Size
Other Industries
Large
4
Source: U.S. EPA, 2000; D&B. 2001; U.S. SBA, 2006;
Small
0
U.S. EPA Analysis, 2006.
Total
4
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§ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Phase III Existing Facilities Chapter C2G: Other Industries
REFERENCES
Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum. August 2001.
Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification
Manual,
U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling
Water Intake Structures.
U.S. Small Business Administration (U.S. SBA). 2006. Small Business Size Standards. Available at:
http://www.sba.gov/size/sizetable2002.html.
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§ 316(b) Final Rule: Phase III - EA, Pa>-t C: Economic Analysis for Existing Facilities
Chapter C2: Profile of Manufacturers
GLOSSARY
Capital expenditures: As reported in the Economic Censuses, reflects permanent additions and major
alterations, as well as replacements and additions to capacity, for which depreciation, depletion, or Office of
Minerals Exploration accounts are ordinarily maintained. Reported capital expenditures include work done on
contract, as well as by the mine forces. Totals for expenditures include the costs of assets leased from other
concerns through capital leases. Excluded are expenditures for land and cost of maintenance and repairs charged
as current operating expenses. Also excluded are capital expenditures for mineral land and rights, which are
shown as a separate item.
Capacity utilization: Indicates the extent to which plant capacity is being used and shows potential excess or
insufficient capacity. This profile reports capacity utilization as published by the U.S. Bureau of Census in the
Survey of Plant Capacity published in the Current Industrial Reports. The utilization rate is equal to an output
index divided by a capacity index. Output is measured by seasonally adjusted indexes of industrial production,
and is based on actual output in 1992. The capacity indexes attempt to capture the concept of sustainable practical
capacity, which is defined as the greatest level of output that a plant can maintain within the framework of a
realistic work schedule, taking account of normal downtime, and assuming sufficient availability of inputs to
operate the machinery and equipment in place.
Concentration ratio: The combined percentage of total industry output accounted for by the largest producers
in the industry. For example, th« four-firm concentration ratio (CR4) refers to the market share of the four largest
firms. The higher the concentration ratio, the more concentrated the industry. A market is generally considered
highly concentrated if the CR4 is greater than 50 percent.
Coverage ratio: The ratio of primary products shipped by the establishments classified in the industry to the
total shipments of such products that are shipped by all manufacturing establishments, wherever classified. An
industry with a high coverage ratio accounts for most of the value of shipments of its primary products, whereas
an industry with a low coverage ratio produces a smaller portion of the total value of shipments of its primary
products produced by all sources.
Employment: Total number of full-time equivalent employees, including production workers and non-
production workers.
Export dependence: The share of shipments by domestic producers that is exported; calculated by dividing
the value of exports by the value of domestic shipments.
Herfindahl-Hirschman index (HHI): An alternative measure of concentration. Equal to the sum of the
squares of the market shares for the largest 50 firms in the industry. The higher the index, the more concentrated
the industry. The Department of Justice uses the HHI for antitrust enforcement purposes. The benchmark used
by DOJ is 1,000, where any industry with an HHI less than 1,000 is considered to be unconcentrated. The
advantage of the HHI over the concentration ratio is that the former gives information about the dispersion of
market share among all the firms in the industry, not just the largest firms (Arnold, 1989).
Import penetration: The share of all consumption in the U.S. that is provided by imports; calculated by
dividing imports by reported or apparent domestic consumption (the latter calculated as domestic value of
shipments minus exports plus imports).
Labor productivity: Amount of output produced per unit of labor input on average. Calculated in this profile
as real value added divided by production hours. This measure indicates how an industry uses labor as an input in
the production process. Changes over time in labor productivity may reflect changes in the relative use of labor
versus other inputs to produce output, due to technological changes or cost-cutting efforts. Changing patterns of
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£ 3l6(b) Final Rule: Phase III - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2: Profile of Manufacturers
labor utilization relative to output are particularly important in understanding how regulatory requirements may
translate into job losses, both in aggregate and at the community level.
Net Profit Margin: is calculated as after-tax income before nonrecurring gains and losses as a percentage of
sales or revenue, and measures profitability, as reflected in the conventional accounting concept of net income.
Nominal values: Dollar values expressed in current dollars.
Operating margin: Measure of the relationship between input costs and the value of production, as an
indicator of financial performance and condition. Everything else being equal, industries and firms with lower
operating margins will generally have less flexibility to absorb the costs associated with a regulation than those
with higher operating margins. Operating margins were calculated in this profile by subtracting the cost of
materials and total payroll from the value of shipments. Operating margin is only an approximate measure of
profitability, since it does not consider capital costs and other costs. It is used to examine trends in revenues
compared with production costs within an industry; it should not be used for cross-industry comparisons of
financial performance.
Primary product shipments: An establishment is classified in a particular industry (4-digit SIC codes) if its
shipments of the primary products of that industry exceed in value its shipments of the products of any other
single industry. An establishment=s primary product shipments are those products considered primary to its
industry.
Producer production indexes (PPI): A family of indexes that measures the average change over time in
selling prices received by domestic producers of goods and services (Bureau of Labor Statistics, PPI Overview).
Real values: Nominal values normalized using a price index to express values in a single year=s dollars.
Removes the effects of price inflation when evaluating trends in dollar measures.
Return on Total Capital: calculated as annual net profit, plus one-half of annual long-term interest, divided by
the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of
the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or
liability element).
Secondary product shipments: An establishment=s products that are considered secondary to the industry
in which the establishment is classified and primary to other industries. For example, a petroleum refinery
classified in SIC code 2911 would produce petroleum products as primary products, but might produce organic
chemicals as secondary products.
Value added: A measure of manufacturing activity, derived by subtracting the cost of purchased inputs
(materials, supplies, containers, fuel, purchased electricity, contract work, and contract labor) from the value of
shipments (products manufactured plus receipts for services rendered), and adjusted by the addition of value
added by merchandising operations (i.e., the difference between the sales value and the cost of merchandise sold
without further manufacture, processing, or assembly) plus the net change in finished goods and work-in-process
between the beginning-and end-of-year inventories. Value added avoids the duplication in value of shipments as
a measure of economic activity that results from the use of products of some establishments as materials by
others. Value added is considered to be the best value measure available for comparing the relative economic
importance of manufacturing among industries and geographic areas.
Value of shipments: Net selling values of all products shipped as well as miscellaneous receipts. Includes all
items made by or for an establishments from materials owned by it, whether sold, transferred to other plants of the
same company, or shipped on consignment. Value of shipments is a measure of the dollar value of production,
C2Ghs-2
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§ 316(b) Final Rule: Phase IH-EA, Part C: Economic Analysis for Existing Facilities
Chapter C2: Profile of Manufacturers
and is often used as a proxy for revenues. This profile uses value of shipments to indicate the size of a market and
how the size differs from year to year, and to calculate operating margins.
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§ 316(b) Final Rule: Phase HI - EA, Part C: Economic Analysis for Existing Facilities
Chapter C2: Profile of Manufacturers
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