Economic Impact Analysis (EIA) for the
Proposed Revision Standards of Performance
for Particulate Matter, Sulfur Dioxide, and
Nitrogen Dioxide Emissions from New Fossil-
Fuel Fired Steam Generating Units
-------
EPA-452/P-05-001
February 2005
ECONOMIC IMPACT ANALYSIS (EIA) FOR THE PROPOSED REVISION OF
STANDARDS OF PERFORMANCE FOR PARTICULATE MATTER, SULFUR
DIOXIDE, AND NITROGEN DIOXIDE EMISSIONS FROM NEW FOSSIL-FUEL FIRED
STEAM GENERATING UNITS
Prepared by
Arturo Rios
Darryl Weatherhead
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
February 2005
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Air Quality Strategies and Standards Division
Innovative Strategies and Economics Group
-------
TABLE OF CONTENTS
Section Page
1 Introduction 1-1
1.1 Agency Requirements for an EIA 1-1
1.2 Scope and Purpose 1-1
1.3 Organization of the Report 1-2
2 Industrial Boiler and Utility Boiler Technologies and Costs 2-1
2.1 PM Control Technologies 2-1
2.1.1 Electrostatic Precipitator 2-2
2.1.2 Fabric Filters 2-2
2.2 SO2 Control Technologies 2-3
2.2.1 Coal Pre-Treatment 2-3
2.2.2 Alkali Wet Scrubbing 2-3
2.2.3 Limestone Scrubbing with Forced Oxidation 2-4
2.2.4 Spray Dryer Adsorption 2-4
2.2.5 Dry Injection 2-5
2.2.6 Fluidized-bed Combustion with Limestone 2-5
2.3 NOx Control Technologies 2-5
2.3.1 NOx Combustion Controls 2-6
2.3.2 SCR Technology 2-6
2.3.3 SNCR Technology 2-7
2.4 Costs of Proposed NSPS 2-7
2.4.1 Costs for Utility Boilers 2-7
2.4.2 Costs for Industrial Boilers 2-8
3 Background on Health Effects and Regulatory Alternatives 3-1
3.1 Background 3-1
3.1.1 Summary of the Proposed NSPS 3-1
3.1.1.1 Discussion of Revisions to the Current Standards 3-1
11
-------
3.2 Health Effects Associated with NOX, SO2 and PM Emissions 3-2
3.3 Summary of the Rule 3-6
4 Projection of Units and Facilities in Affected Sectors 4-1
4.1 Projected Number of New Affected Facilities 4-1
4.1.1 Industrial Boilers 4-1
4.1.2 Utility Boilers 4-1
4.2 Profile of Projected Utility and Industrial Boiler Units 4-2
4.2.1 Technical Characteristics of Projected Units 4-2
4.2.2 Distribution and Details of Projected Units by Industry 4-2
5 Profiles of Affected Industries 5-1
5.1 Electric Utilities 5-1
5.1.1 The Supply Side: Production and Costs 5-1
5.1.1.1 Generation 5-1
5.1.1.2 Transmission 5-2
5.1.1.3 Distribution 5-4
5.1.1.4 Production Costs 5-4
5.1.2 The Demand Side 5-5
5.1.3 Industry Organization: Market Structure and Plants 5-6
5.1.4 Markets and Trends 5-10
5.2 Lumber and Wood Products 5-10
5.2.1 The Supply Side: Production and Costs 5-11
5.2.1.1 Production Processes 5-11
5.2.1.2 Types of Output 5-11
5.2.1.3 Major By-Products and Co-Products 5-12
5.2.1.4 Production Costs 5-12
5.2.2 The Demand Side 5-12
5.2.3 Organization of the Industry:
Market Concentration, Plants, and Firms 5-13
5.2.4 Markets and Trends 5-15
5.3 Paper and Allied Products 5-16
5.3.1 The Supply Side: Production and Costs 5-16
5.3.1.1 Production Process 5-16
5.3.1.2 Types of Output 5-17
5.3.1.3 Major By-Products and Co-Products 5-17
5.3.1.4 Production Costs 5-17
5.3.2 The Demand Side 5-17
in
-------
5.3.3 Organization of the Industry: Market Concentration,
Plants, and Firms 5-18
5.3.4 Markets and Trends 5-21
6 Economic Analysis Methods 6-1
6.1 Agency Requirements for Conducting an EIA 6-1
6.2 Wood Fueled Industrial Boilers Impact 6-2
6.2.1 Overview of Economic Modeling Approaches 6-2
6.2.1.1 Modeling Dimension 1:
Scope of Economic Decision making 6-2
6.2.1.2 Modeling Dimension 2:
Interaction Between Economic Sectors 6-3
6.2.2 Selected Modeling Approach Used for
Wood Fueled Industrial Boilers 6-4
6.2.3 Summary of the Economic Impact Model (FAST) 6-5
6.3 Utility Boilers Impact 6-5
6.3.1 Analytical Approach 6-5
6.3.2 Overview of Partial Equilibrium Model 6-8
7 Economic Impact Analysis 7-1
7.1 Wood Fueled Industrial Boilers Economic Impact 7-2
7.1.1 Engineering Control Cost Inputs 7-2
7.1.2 Market-Level 7-2
7.1.3 Social Cost Estimates 7-3
7.2 Electric Utility Steam Generating Units Economic Impact 7-5
7.2.1 Market-Level 7-5
7.2.2 Social Cost Estimates 7-5
7.3 Energy Impact Analysis 7-6
8 Small Business Impacts 8-1
8.1 Small Entity Impacts 8-1
8.1.1 Baseline Data Set 8-2
8.2 Wood Fueled Industrial Boilers 8-3
8.2.1 Wood Products Manufacturing (NAICS: 321) 8-3
8.2.2 Paper Manufacturing (NAICS: 322) 8-3
8.2.3 Cost to Sales Ratio 8-3
IV
-------
8.3 Utility Boilers 8-5
References R-l
v
-------
LIST OF FIGURES
Number Page
5-1 Traditional Electric Power Industry Structure 5-3
6-1 Baseline Equilibrium without Regulation 6-6
6-2 Market for Baseload Electricity 6-7
VI
-------
LIST OF TABLES
Number Pat
2-1 National Emissions Reductions and Cost Impacts for Electric Utility Steam
Generating Units Subject to Amended Standards
Under Subpart Da of 40 CFR part 60 (2010) 2-8
2-2 National Cost and Emission Impacts for Industrial Steam Generating
Units (5 year impacts) 2-8
3-1 Human Health and Welfare Effects of Pollutants Affected by the Proposed Utility
and Industrial Boiler NSPS 3-3
4-1 Number of Projected Units by Subpart and Industry 4-2
4-2 Projected New Coal Electric Utility Steam Generating Units (2005-2010) 4-3
5-1 Net Generation by Energy Source, 2001 (103 MegaWatt Hours) 5-4
5-2 Revenue and Expense Statistics for Major U.S. Publicly Owned Electric Utilities
(With Generation Facilities), 1999-2001 5-5
5-3 Fuel Expenses for Major U.S. Investor-Owned Electric Utilities, 1999 through 2001
(Mills per Kilowatt hour) 5-6
5-4 Retail Sales of Electricity to Ultimate Customers by Sector, by Provider, 1999
through 2001 (Megawatt hours) 5-6
5-5 Existing Capacity by Producer Type, 2001 5-9
5-6 Electricity Market Statistics: 1999-2001 5-10
5-7 Inputs for the Lumber and Wood Products Industry (NAICS 321), 1997-2001 . . 5-13
5-8 Measures of Market Concentration for Lumber and Wood Products Markets,
1997 5-13
5-9 Size of Establishments and Value of Shipments for the Lumber and Wood
Products Industry (SIC 24/NAICS 321) 5-14
5-10 Capacity Utilization Ratios for Lumber and Wood Products Industry,
1997-2001 5-15
5-11 Value of Shipments for the Lumber and Wood Products Industry
(SIC 24/NAICS 321), 1997-2001 5-15
5-12 Inputs for the Paper and Allied Products Industry (NAICS 322), 1997-2001 ... 5-18
5-13 Measures of Market Concentration for Paper and Allied Products Markets, 1997 5-19
5-14 Size of Establishments and Value of Shipments for the Paper and Allied Products
Industry (NAICS 322) 5-20
5-15 Capacity Utilization Ratios for the Paper and Allied Products Industry,
vn
-------
1997-2001 5-20
5-16 Value of Shipments for the Paper and Allied Products Industry (NAICS 322),
1997-2001 5-21
6-1 Comparison of Modeling Approaches 6-3
6-2 Utility Emission Standards 6-10
7-1 Compliance Cost of Affected Units for Each Subpart 7-2
7-2 Market-Level Impacts of Wood Fueled Industrial Boiler NSPS, Aggregated Subpart:
2010 7-4
7-3 Economic Impact Results for Proposed Utility Boilers NSPS: 2010 7-6
7-4 Potential Delays in Unit Construction Under the Proposed Utility
Boilers NSPS: 2010 7-6
8-1 Potentially Regulated Categories and Entities 8-2
8-2 Cost-to-Sales Ratio (%) by Employment Size Category for Wood
Products Manufacturing (NAICS: 321) and Paper Manufacturing
(NAICS: 322) 8-4
Vlll
-------
SELECT LIST OF ACRONYMS AND ABBREVIATIONS
CAA: Clean Air Act
DOE: Department of Energy
EO: Executive Order
EPA: Environmental Protection Agency
FAST Fast Analysis Screening Tool
HAP: Hazardous Air Pollutant
Ib: Pound
mmBTU: Millions of British Thermal Units
MACT: Maximum Achievable Control Technology
MW: Megawatts
Mwh: Megawatt Hours
NAAQS: National Ambient Air Quality Standards
NAICS: North American Industrial Classification System
NESHAP: National Emission Standards for Hazardous Air Pollutants
NPR: Notice of Proposed Rulemaking
NSPS: New Source Performance Standards
OMB: Office of Management and Budget
O&M: Operation and Maintenance
PM: Paniculate Matter
ppm: Parts Per Million
RFA: Regulatory Flexibility Act
SBA: Small Business Administration
SBREFA: Small Business Regulatory Enforcement Fairness Act of 1996
SIC: Standard Industrial Classification
tpy: Tons Per Year
UMRA: Unfunded Mandates Reform Act
IX
-------
SECTION 1
INTRODUCTION
The U.S. Environmental Protection Agency (referred to as EPA or the Agency)
is developing regulations under Section 111 of the Clean Air Act (CAA) for new electric
utility steam generating units, industrial-commercial-institutional steam generating units, and
small industrial-commercial-institutional steam generating units. To inform this rulemaking,
the Innovative Strategies and Economics Group (ISEG) of EPA's Office of Air Quality
Planning and Standards (OAQPS) has developed an economic impact analysis (EIA) to
estimate the potential social costs of the regulation. This report presents the results of this
analysis in which a market model was used to analyze the impacts of the air pollution rule on
society.
1.1 Agency Requirements for an EIA
Congress and the Executive Office have imposed statutory and administrative
requirements for conducting economic analyses to accompany regulatory actions. Section
317 of the CAA specifically requires estimation of the cost and economic impacts for
specific regulations and standards proposed under the authority of the Act. In addition,
Executive Order (EO) 12866 requires a more comprehensive analysis of benefits and costs
for significant regulatory actions.1 Other statutory and administrative requirements include
examination of the composition and distribution of benefits and costs. For example, the
Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory
Enforcement and Fairness Act of 1996 (SBREFA), requires EPA to consider the economic
impacts of regulatory actions on small entities. Also, Executive Order 13211 requires EPA to
consider for particular rules the impacts on energy markets.
1.2 Scope and Purpose
The CAA's purpose is to protect and enhance the quality of the nation's air
resources (Section 101(b)). Section 111 of the CAA establishes the authority of EPA to set
new source performance standards (NSPS) for criteria pollutants. This report evaluates the
economic impacts of pollution control requirements placed on electric utility steam
'Office of Management and Budget (OMB) guidance under EO 12866 stipulates that a full benefit-cost analysis
is required only when the regulatory action has an annual effect on the economy of $100 million or more.
1-1
-------
generating units, industrial-commercial-institutional steam generating units, and small
industrial-commercial-institutional steam generating units under these amendments.
1.3 Organization of the Report
The remainder of this report is divided into six sections that describe the
methodology and present results of this analysis:
• Section 2 provides background information on industrial boiler and utility boiler
control technologies and costs.
• Section 3 provides background information on the regulatory alternatives
examined and health effect associated with NOX, SO2 and PM Emissions.
• Section 4 provides projections of new industrial boilers and utility boilers
through the fifth year after promulgation.
• Section 5 profiles the electric utilities, lumber and wood products industry, and
the paper and allied products industry.
• Section 6 presents the methodology for assessing the economic impacts of the
NSPS and describes the market models used.
• Section 7 presents the economic impact estimates for the NSPS.
• Section 8 provides the Agency's analysis of the regulation's impact on small
entities.
1-2
-------
SECTION 2
INDUSTRIAL BOILER AND UTILITY BOILER TECHNOLOGIES AND COSTS
This section provides background information on industrial boiler and utility
boiler control technologies. Control technologies for steam generating units are based on
either pre-combustion controls, combustion controls, or post-combustion controls. Pre-
combustion controls remove contaminants from the fuel before it is burned, and combustion
controls reduce the amount of pollutants formed during combustion. Post-combustion
controls remove pollutants formed from the flue gases before the gases are released to the
atmosphere. Selecting control technologies to reduce emissions of PM, SO2, and NOx from
a new steam generating unit is a function of the type of fuel burned in the unit, size of the
unit, and other site-specific factors (e.g., type of unit, firing and loading practices used,
regional and local air quality requirements). All new steam generating units incorporate
control technologies to reduce NOx emissions. Accordingly, PM and SO2 emissions from
steam generating units firing natural gas are inherently low and generally do not require the
use of additional PM or SO2 control technologies. For new steam generating units firing fuel
oils, PM and SO2 controls may be required depending on the grade and composition of the
fuel oil being burned in the unit. New steam generating units firing coal use PM and SO2
controls.
2.1 PM Control Technologies
Filterable PM emissions from a steam generating unit are predominately fly ash
and carbon. Carbon particles are generated from incomplete combustion of the fuel, and fly
ash from burning fuels containing ash materials (the mineral and other incombustible matter
portion of a fuel). These incombustible solid materials are released during the combustion
process and are entrained in the flue gases. Distillate oils contain insignificant levels of ash,
but residual fuel oils have higher ash contents, up to 0.5 percent. While different ranks of
coals vary in ash content, all coals contain significant quantities of ash. The percentage of
ash in a given coal can vary from less than 5 percent to greater than 20 percent depending on
the coal source and level of coal cleaning.
Control of PM emissions from steam generating units relies on the use of post-
combustion controls to remove solid particles from the flue gases. Electrostatic precipitators
(ESP) and fabric filters (also called baghouses) are the predominant technologies used to
control PM from coal-fired steam generating units. Either of these PM control technologies
2-1
-------
can be designed to achieve overall PM collection efficiencies in excess of 99 percent.
Control of PM emissions from oil-fired steam generating units can be achieved by using oil
burner designs with improved atomization and fuel mixing characteristics, by implementing
better maintenance practices, and by using an ESP.
2.1.1 Electrostatic Precipitator
An ESP operates by imparting an electrical charge to incoming particles, and
then attracting the particles to oppositely charged metal plates for collection. Periodically,
the particles collected on the plates are dislodged in sheets or agglomerates (by rapping the
plates) and fall into a collection hopper. The fly ash collected in the ESP hopper is a solid
waste that is either recycled for industrial use or disposed of in a landfill.
The effectiveness of particle capture in an ESP depends primarily on the
electrical resistivity of the particles being collected. The size requirement for an ESP
increases with increasing coal ash resistivity. Resistivity of coal fly ash can be lowered by
conditioning the particles upstream of the ESP with sulfur trioxide, sulfuric acid, water, or
sodium. In addition, collection efficiency is not uniform for all particle sizes. Collection
efficiencies greater than 99 percent are achievable for fine particles (less than 0.1 micrometer
(|im) and coarse particles (greater than 10 |im). Collection efficiencies achieved by ESP for
the portion of particles having sizes between 0.1 and 10 |im tend to be lower.
2.1.2 Fabric Filters
A fabric filter collects PM in the flue gases by passing the gases through a
porous fabric material. The buildup of solid particles on the fabric surface forms a thin,
porous layer of solids, which further acts as a filtration medium. Gases pass through this
cake/fabric filter, and all but the finest-sized particles are trapped on the cake surface.
Collection efficiencies of fabric filters can be as high as 99.9 percent.
A fabric filter must be designed and operated carefully to ensure that the bags
inside the collector are not damaged or destroyed by adverse operating conditions. The
fabric material must be compatible with the gas stream temperatures and chemical
composition. Because of the temperature limitations of the available bag fabrics, location of
a fabric filter for use by a coal-fired electric steam generating unit is restricted to locations
downstream of the air heater.
2-2
-------
2.2 SO2 Control Technologies
During combustion, sulfur compounds present in a fuel are predominately
oxidized to gaseous SO2. A small portion of the SO2 oxidizes further to SOS. One approach
to controlling SO2 emissions from steam generating units is to limit the maximum sulfur
content in the fuel. This can be accomplished by burning a fuel that naturally contains low
amounts of sulfur or a fuel that has been pre-treated to remove sulfur from the fuel. A
second approach is use a post-combustion control technology that removes SO2 from the flue
gases. These technologies rely on either absorption or adsorption processes that react SO2
with lime, limestone, or another alkaline material to form an aqueous or solid sulfur by-
product.
2.2.1 Coal Pre- Treatment
Sulfur in coal occurs as either inorganic sulfur or organic sulfur that is
chemically bonded with carbon. Pyrite is the most common form of inorganic sulfur. There
are two ways to pre-treat coal before combustion to lower sulfur emissions: physical-coal
cleaning and gasification. Physical cleaning removes between 20 to 90 percent of pyritic
sulfur, but is not effective at removing organic sulfur. The amount of pyritic sulfur varies
with different coal types, but it is typically half of the total sulfur for high-sulfur coals.
Coal gasification breaks coal apart into its chemical constituents (typically a
mixture of carbon monoxide, hydrogen, and other gaseous compounds) prior to combustion.
The product gas is then cleaned of contaminants prior to combustion. Gasification reduces
SO2 emissions by over 99 percent.
2.2.2 Alkali Wet Scrubbing
The SO2 in a flue gas can be removed by reacting the sulfur compounds with a
solution of water and an alkaline chemical to form insoluble salts that are removed in the
scrubber effluent. The most commonly used wet flue gas desulfurization (FGD) systems for
coal-fired steam generating units are based on using either limestone or lime as the alkaline
source. In a wet scrubber, the flue gases enter a large vessel located downstream of the
particle control device where it contacts the lime or limestone slurry. The calcium in the
slurry reacts with the SO2 to form reaction products that are predominately calcium sulfite.
Because of its high alkalinity, fly ash is sometimes mixed with the limestone or lime. Other
alkaline solutions can be used for scrubbing including sodium carbonate, magnesium oxide,
and dual alkali.
2-3
-------
The SO2 removal efficiency that a wet FGD system can achieve for a specific
steam generating unit is affected by the sulfur content of the fuel burned, which determines
the amount of SO2 entering the wet scrubber, and site-specific scrubber design parameters
including liquid-to-gas ratio, pH of the scrubbing medium, and the ratio of the alkaline
sorbent to SO2. Annual SO2 removal efficiencies have been demonstrated above 98 percent.
Advanced wet scrubber designs include limestone scrubbing with forced oxidation (LSFO)
and magnesium enhanced lime scrubbing FGD systems.
2.2.3 Limestone Scrubbing with Forced Oxidation
Limestone scrubbing with forced oxidation is a variation of the wet scrubber
described above and can use either limestone or magnesium enhanced lime. In the LSFO
process, the calcium sulfite initially formed in the spray tower absorber is oxidized to form
gypsum (calcium sulfate) by bubbling compressed air through the sulfite slurry. The
resulting gypsum by-product has commercial value and can be sold to wallboard
manufacturers. Also, because of their larger size and structure, gypsum crystals settle and
dewater better than calcium sulfite crystals, reducing the required size of by-product
handling equipment. The high gypsum content also permits disposal of the dewatered waste
without fixation.
2.2.4 Spray Dryer Adsorption
An alternative to using wet scrubbers is to use spray dryer adsorber technology.
A spray dryer adsorber operates by the same principle as wet lime scrubbing, except that
instead of a bulk liquid (as in wet scrubbing) the flue gas containing SO2 is contacted with
fine spray droplets of hydrated lime slurry in a spray dryer vessel. This vessel is located
downstream of the air heater outlet where the gas temperatures are in the range of 120 to 180
°C (250 to 350 °F). The SO2 is absorbed in the slurry and reacts with the hydrated lime
reagent to form solid calcium sulfite and calcium sulfate. The water is evaporated by the hot
flue gases and forms dry, solid particles containing the reacted sulfur. Most of the SO2
removal occurs in the spray dryer vessel itself, although some additional SO2 capture has
also been observed in downstream particulate collection devices. This process produces a
dry waste product, which is mostly disposed of in a landfill.
The primary operating parameters affecting SO2 removal are the calcium-
reagent-to-sulfur stoichiometric ratio and the approach to saturation in the spray dryer. To
decrease sorbent costs, a portion of the solids collected in the spray dryer and the PM
collection device may be recycled to the spray dryer. The SO2 removal efficiencies of new
lime spray dryer systems are generally greater than 90 percent.
2-4
-------
2-5
-------
2.2.5 Dry Injection
For the dry injection process, dry hydrated or slaked lime (or another suitable
sorbent) is directly injected into the ductwork or boiler upstream of a PM control device.
Some systems use spray humidification followed by dry injection. The SO2 is adsorbed and
reacts with the powdered sorbent. The dry solids are entrained in the combustion gas stream,
along with fly ash, and then collected by the downstream PM control device.
The dry injection process produces a dry, solid by-product that is easier to
dispose. However, the SO2 removal efficiencies for existing dry injection systems are lower
than for other the other FGD technologies ranging from approximately 40 to 60 percent when
using lime or limestone, and up to 90 percent using other sorbants (e.g., sodium bicarbonate).
2.2.6 Fluidized-bed Combustion with Limestone
One of the features of selecting a steam generating unit that uses a fluidized-bed
combustor (FBC) is the capability to control SO2 emissions during the combustion process.
This is accomplished by adding finely crushed limestone along with the coal (or other solid
fuel) to the fluidized bed. During combustion, calcination of the limestone (reduction to lime
by subjecting to heat) occurs simultaneously with the oxidation of sulfur in the coal to form
SO2. The SO2, in the presence of excess oxygen, reacts with the lime particles to form
calcium sulfate. The sulfated lime particles are removed with the bottom ash or collected
with the fly ash by a downstream PM control device (for most existing FBC steam generating
unit applications, a fabric filter is used as the PM control device). Fresh limestone is
continuously fed to the bed to replace the reacted limestone. The SO2 removal efficiencies
for some FBC units are in the range of approximately 80 to 98 percent.
2.3 NOx Control Technologies
Nitrogen oxides (NOx) are formed in a steam generating unit by the oxidation
of molecular nitrogen in the combustion air and any nitrogen compounds contained in the
fuel. The formation of NOx from nitrogen in the combustion air is dependent on two
conditions occurring simultaneously in the unit's combustion zone: high temperature and an
excess of combustion air. Under these conditions, significant quantities of NOx are formed
regardless of the fuel type burned. New steam generating units being installed today in the
United States routinely include burners and other features designed to reduce the amounts of
NOx formed during combustion.
Beyond the lower levels of NOx emissions achieved using combustion controls,
additional NOx emission control can be achieved for steam generating units by installing
2-6
-------
post-combustion control technologies. These technologies involve converting the NOx in the
flue gas to molecular nitrogen (N2) and water using either a process that requires a catalyst
(called selective catalytic reduction (SCR)) or a process that does not use a catalyst (called
selective noncatalytic reduction (SNCR)). Both SCR and SNCR technologies have been
applied widely to gas-, oil-, and coal-fired steam generating units.
2.3.1 NOx Combustion Controls
Combustion controls reduce NOx emission formation by controlling the peak
flame temperature and excess air in and around the combustion zone through staged
combustion. With staged combustion, the primary combustion zone is fired with most of the
air needed for complete combustion of the fuel. The remaining air is introduced into the
products of the partial combustion in a second combustion zone. Air staging lowers the
peak-flame temperature, thereby reducing thermal NOx, and reduces the production of fuel
NOx by reducing the oxygen available for combination with the fuel nitrogen. Staged
combustion may be achieved internally in the fuel burners using specially designed burner
configurations (often referred to as low-NOx burners), or external to the burners by diverting
a portion of the combustion air from the burners and introducing it through separate ports
and/or nozzles, mounted above the burners (often referred to as overfire air (OFA)). The
actual NOx reduction achieved with a given NOx combustion control technology varies from
unit to unit. Use of low-NOx burners can reduce NOx emissions by approximately 35 to 55
percent. Use of OF A reduces NOx emissions levels in the range of 15 to 30 percent. Higher
NOx emissions reductions are achieved when combustion control technologies are combined
(e.g., combining OFA with low-NOx burners can achieve NOx emissions reductions in the
range of 60 percent).
Other NOx combustion control techniques include reburning, cofiring natural
gas, and flue gas recirculation. In reburning, coal, oil, or natural gas is injected above the
primary combustion zone to create a fuel-rich zone to reduce burner-generated NOx to N2
and water vapor. Overfire air is added above the reburning zone to complete combustion of
the reburning fuel. Natural gas cofiring consists of injecting and combusting natural gas near
or concurrently with the main oil or coal fuel. Flue gas recirculation
2.3.2 SCR Technology
The SCR process uses a catalyst with ammonia gas (NH3) to reduce the
nitrogen oxide (NO) and nitrogen dioxide (NO2) in the flue gas to molecular nitrogen and
water. The ammonia gas is diluted with air or steam, and this mixture is injected into the flue
gas upstream of a metal catalyst bed that typically is composed of vanadium, titanium,
2-7
-------
platinum, or zeolite. The SCR catalyst bed reactor is usually located between the economizer
outlet and air heater inlet, where temperatures range from 230 to 400 °C (450 to 750 °F). The
SCR technology is capable of NOx reduction efficiencies in the range of approximately 70 to
90 percent.
2.3.3 SNCR Technology
A SNCR process is based on the same basic chemistry of reducing the NO and
NO2 in the flue gas to molecular nitrogen and water but does not require the use of a catalyst
to promote these reactions. Instead, the reducing agent is injected into the flue gas stream at
a point where the flue gas temperature is within a specific temperature range of 870 to 1,090
°C (1,600 to 2,000 °F). Currently, two SNCR processes are commercially available; one uses
ammonia as the reagent, and the other process uses an aqueous urea solution in place of
ammonia. The NOx reduction levels for SNCR are in the range of approximately 30 to 50
percent.
2.4 Costs of Proposed NSPS
2.4.1 Costs for Utility Boilers
The primary environmental impacts resulting from the proposed standards to
subpart Da of 40 CFR part 60 for electric utility steam generating units are further reductions
in the amounts of PM, SO2, and NOx that would be emitted from new units subject to
subpart Da of 40 CFR part 60. Achieving these additional emissions reductions would
increase the costs of installing and operating controls on a steam generating unit subject to
the proposed standards above those costs for the unit to comply with the applicable existing
standards under subpart Da of 40 CFR part 60. In general, the same types of the PM, SO2,
and NOx controls would be installed on a given unit to comply with either of the applicable
existing or proposed standards. However, there would be an increase in the capital and
annual costs for these controls to achieve the higher performance levels needed for the
proposed standards due to design modifications and operating changes to the controls. The
estimated nationwide 5-year incremental cost impacts for the proposed standards beyond
those estimated for the regulatory baseline are summarized in Table 2-1.
2-8
-------
Table 2-1. National Emissions Reductions and Cost Impacts for Electric Utility Steam
Generating Units Subject to Amended Standards Under Subpart Da of 40 CFR part 60
(2010)
Pollutant
PM
SO2
NOx
Annual Emissions
Reductions
530 tons
8,391 tons
1,400 tons
Total Capital
Investment Cost
$10.0 mil
$0.9 mil
$4.9 mil
Annualized
Cost
$2.2 mil
$0.7 mil
$1.5 mil
2.4.2 Costs for Industrial Boilers
The nationwide increase in annualized costs for new industrial-commercial-
institutional steam generating units greater than 100 MMBtu/hr heat input is about $2.1
million in the 5th year following proposal (Table 2-2). This cost reflects the cost for wood-
fired and other fuel co-fired units to comply with the proposed PM limit. The cost
effectiveness for affected boilers under the proposed PM standard was $2,400 per ton
removed. The proposed standard would impose no additional costs on fossil fuel-fired
boilers.
The nationwide increase in annualized costs for new industrial-commercial-
institutional units operating between 10 and 100 MMBtu/hr is about $140,000 in the fifth
year following proposal. This cost reflects the control and monitoring cost for wood units to
comply with the proposed PM limit. The range in cost effectiveness for affected boilers
under the proposed PM standard for 40 CFR part 60, subpart DC was about $3,200 per ton for
high moisture wood units to about $3,500 per ton for dry wood-fired units.
Table 2-2. National Cost and Emission Impacts for Industrial Steam Generating Units
(5 year impacts)
Cost Effectiveness ($/ton)
Sub-
part
Db
DC
Projected
units in
2005-2010
13
4
Emission
Reductio
n (tpy)
888
43
Total Capital
Cost
($million/yr)
12.78
0.90
Annualized
Cost
($million/yr)
2.11
0.14
Incremental
Average
582
893
Overall
2,372
3.227
Range
2,352-2,577
3.142- 3.479
The range represents the difference in cost-effectiveness between wet and dry wood fuels.
2-1
-------
SECTION 3
BACKGROUND ON HEALTH AFFECTS AND REGULATORY ALTERNATIVES
3.1 Background
Section 111 of the CAA requires EPA to establish NSPS for major and area
sources within various source categories.
3.1.1 Summary of the Proposed NSPS
3.1.1.1 Discussion of Revisions to the Current Standards
The current standards for steam generating units are contained in the new
source performance standards for electric utility steam generating units (40 CFR part 60,
subpart Da), industrial-commercial-institutional steam generating units (40 CFR part 60,
subpart Db), and small industrial-commercial-institutional steam generating units (40 CFR
part 60, subpart DC).
The NSPS for electric utility steam generating units (40 CFR part 60, subpart
Da) were originally promulgated on June 11, 1979 (44 FR 33580) and apply to units capable
of firing more than 73 megawatts (MW) (250 million Btu per hour(MMBtu/hr)) heat input of
fossil fuel that commenced construction or modification after September 18, 1978. The
NSPS also apply to industrial-commercial-institutional cogeneration units that sell more than
25 MW and more than one-third of their potential output capacity to any utility power
distribution system. The most recent amendments to emission standards under 40 CFR part
60, subpart Da were promulgated in 1998 (63 FR 49442) resulting in new NOx limitations
for 40 CFR part 60, subpart Da units. Furthermore, in the 1998 amendments, we
incorporated the use of output-based emission limits.
The NSPS for industrial-commercial-institutional steam generating units (40
CFR part 60, subpart Db) apply to units for which construction, modification, or
reconstruction commenced after June 19, 1984 that have a heat input capacity greater than 29
MW (100 MMBtu/hr). Those standards were originally promulgated on November 25, 1986
(51 FR 42768) and have also been amended since the original promulgation to reflect
changes in BDT for these sources. The most recent amendments to emission standards under
40 CFR part 60, subpart Db were promulgated in 1998 (63 FR 49442) resulting in new NOx
limitations for 40 CFR part 60, subpart Db units.
The NSPS for small industrial-commercial-institutional steam generating units
(40 CFR part 60, subpart DC) were originally promulgated on September 12, 1990 (55 FR
3-2
-------
37674) and apply to units with a maximum heat input capacity greater that or equal to 2.9
MW (10 MMBtu/hr) but less than 29 MW (100 MMBtu/hr). Those standards apply to units
that commenced construction, reconstruction, or modification after June 9, 1989.
Section 11 l(b)(l)(B) of the CAA requires the EPA periodically to review and
revise the standards of performance as necessary to reflect improvements in methods for the
reducing emissions. Furthermore, section 403 of the Clean Air Act Amendments of 1990
amended the definition of "standards of performance" to repeal the percentage reduction
requirement for fossil fuel-fired sources and required us to remove the SO2 percent reduction
requirement for electric utility steam generating units.
3.2 Health Effects Associated with NOX, SO2 and PM Emissions
A wide range of human health and welfare effects are linked to the emissions of
NOx and SOx from EGUs and industrial boilers and the resulting impact on ambient
concentrations of PM. Potential human health effects linked to PM2.5 range from mortality
linked to long-term exposure to PM, to a range of morbidity effects linked to long-term
(chronic) and shorter-term (acute) exposures (e.g., respiratory and cardiovascular symptoms
resulting in hospital admissions, asthma exacerbations, and acute and chronic bronchitis
[CB]). Welfare effects potentially linked to PM include materials damage and visibility
impacts. Although methods exist for quantifying the benefits associated with many of these
human health and welfare categories, not all can be evaluated at this time due to limitations
in methods and/or data. Table 3-1 lists the full complement of human health and welfare
effects associated with PM and identifies those effects that can be quantified for a primary
benefits estimate, can be quantified as part of a sensitivity analysis, and remain unquantified
because of current limitations in methods or available data. It should be noted that no
benefits analysis associated with these NSPSes took place since none of these rules are major
under Executive Order 12866. Also, ozone concentrations are reduced as a result of NOx
emission reductions, but no estimates of reductions in ozone concentrations have been made
for these NSPSes. Finally, mercury reductions occur as a result of the controls applied to
utility boilers as part of that NSPS, but no estimates of these reductions have been made for
thatNSPS.
Table 3-1. Human Health and Welfare Effects of Pollutants Affected by the Proposed
Utility and Industrial Boiler NSPS
3-3
-------
Pollutant/Effec
t
Quantified and
Monetized in a Primary
Estimate3
Quantified and/or
Monetized Effects
in Sensitivity
Analyses
Unquantified Effects
Ozone/Health
Ozone not evaluated due
to limitations
Hospital admissions:
respiratory
Emergency room
visits for asthma
Minor restricted
activity days
School loss days
Asthma attacks
Cardiovascular
emergency room
visits
Premature mortality:
acute exposures'5
Acute respiratory
symptoms
Increased airway responsiveness to
stimuli
Inflammation in the lung
Chronic respiratory damage
Premature aging of the lungs
Acute inflammation and respiratory
cell damage
Increased susceptibility to
respiratory infection
Nonasthma respiratory emergency
room visits
Ozone/Welfare
Ozone not evaluated due
to limitations
Decreased outdoor
worker productivity
Decreased yields for
commercial crops
(selected species)
Decreased eastern
commercial forest
productivity
(selected species)
Decreased western commercial
forest productivity
Decreased eastern commercial
forest productivity (other species)
Decreased yields for fruits and
vegetables
Decreased yields for other
commercial and noncommercial
crops
Damage to urban ornamental plants
Impacts on recreational demand
from damaged forest aesthetics
Damage to ecosystem functions
3-4
-------
Table 3-1. Human Health and Welfare Effects of Pollutants Affected by the Proposed
Utility and Industrial Boilers NSPS (continued)
Pollutant/Effect
Quantified and
Monetized in a
Primary Estimate3
Quantified and/or
Monetized Effects in
Sensitivity Analyses
Unquantified Effects
PM/Health
Premature mortality:
long-term exposures
Bronchitis: chronic
and acute
Hospital admissions:
respiratory and
cardiovascular
Emergency room
visits for asthma
Non-fatal heart
attacks (myocardial
infarction)
Lower and upper
respiratory illness
Minor restricted
activity days
Work loss days
Asthma exacerbations
(asthmatic
population)
Respiratory
symptoms (asthmatic
population)
Infant mortality
Premature mortality:
short-term exposures
Low birth weight
Changes in pulmonary function
Chronic respiratory diseases other
than chronic bronchitis
Morphological changes
Altered host defense mechanisms
Nonasthma respiratory emergency
room visits
PM/Welfare
Visibility in
Southeastern Class I
areas
Visibility in
northeastern and
Midwestern Class I
areas
Visibility in residential
and non-Class I areas
Household soiling
Visibility in western U.S. Class I
areas
(continued)
3-5
-------
Table 3-1 Human Health and Welfare Effects of Pollutants Affected by the Proposed
NSPS (continued)
Pollutant/Effect
Nitrogen and Sulfate
Deposition/ Welfare
SO2/Healths
NOX/Health
Quantified and Monetized
in a Primary Estimates3
Quantified
and/or
Monetized
Effects in
Sensitivity
Analyses
Unquantified Effects
Impacts of acidic sulfate and
nitrate deposition on
commercial forests
Impacts of acidic deposition
on commercial freshwater
fishing
Impacts of acidic deposition
on recreation in terrestrial
ecosystems
Impacts of nitrogen deposition
on commercial fishing,
agriculture, and forests
Impacts of nitrogen deposition
on recreation in estuarine
ecosystems
Reduced existence values for
currently healthy ecosystems
Hospital admissions for
respiratory and cardiac
diseases
Respiratory symptoms in
asthmatics
Lung irritation
Lowered resistance to
respiratory infection
Hospital admissions for
respiratory and cardiac
diseases
(continued)
3-6
-------
Table 3-1. Human Health and Welfare Effects of Pollutants Affected by the Proposed
NSPS (continued)
Pollutant/Effect
Mercury
Deposition/
Health
Mercury
Deposition/
Welfare
Quantified and Monetized in
a Primary Estimate3
Quantified
and/or
Monetized
Effects in
Sensitivity
Analyses
Unquantified Effects
Neurological disorders
Learning disabilities
Retarded development
Potential cardiovascular effects *
Altered blood pressure regulation *
Increased heart rate variability *
Myocardial infarctions *
Potential reproductive effects *
Impacts on birds and mammals
(e.g., reproductive effects)
Impacts to commercial, subsistence,
and recreational fishing
Reduced existence values for
currently healthy ecosystems
^; These are potential effects as the literature is either contradictory or incomplete.
a Primary quantified and monetized effects are those included when determining a primary estimate of total monetized
benefits.
b Premature mortality associated with ozone is not currently included in a primary benefits analysis. Recent evidence
suggests that short-term exposures to ozone may have a significant effect on daily mortality rates, independent of
exposure to PM. The EPA is currently conducting a series of meta-analyses of the ozone mortality epidemiology
literature and will reevaluate inclusion of ozone-related mortality in the primary analysis once the meta-analyses have
been completed.
3.3 Summary of the Rule
For electric generating units, EPA is considering an output-based emission limits for SO2
and NOx. For PM, EPA proposing an amended input-based emission limit of 6.4 nanograms
per joule (ng/J) (0.015 pound per million British thermal units (Ib/MMBtu) heat input)
regardless of the type of fuel burned. Fabric filters and electrostatic precipitators represent
best demonstrated technology for continuous reduction of PM emissions from coal-fired
electric utility steam generating units. The proposed SO2 emission limit for electric utility
steam generating units is 180 ng/J (1.4 pound per megawatt hour (lb/MWh)) gross-energy
3-7
-------
output regardless of the type of fuel burned with one exception. The proposed SO2 emission
limit for electric utility steam generating units that burn over 90 percent coal refuse is 300
ng/J (2.3 Ib SO2/MWh) gross-energy output. The best demonstrated technology
determination for development of an amended SO2 standard on application of SO2 control
technologies to pulverized coal-fired steam generating units was used and EPA concluded
that flue gas desulfurization is best demonstrated technology for these units. The proposed
NOx emission limit for electric utility steam generating units is 130 ng/J (1.0 Ib NOx/MWh)
gross-energy output regardless of the type of fuel burned in the unit. SCR remains the best
demonstrated technology for continuous reduction of NOx emissions from these sources.
EPA is proposing an amended emission limit for PM under subparts Db and DC, and no
change to the emission limits for SO2 and NOx. The proposed PM emission limit for
industrial-commercial-institutional steam generating units is 13 ng/J (0.03 Ib/MMBtu heat
input) for units that burn coal, oil, wood, or a mixture of these fuels with other fuels. This
limit would apply to units larger than 29 MW (100 million Btu per hour). The proposed PM
emission limit for small industrial-commercial-institutional steam generating units is 13 ng/J
(0.03 Ib/MMBtu heat input) for units that burn coal, oil, wood, or a mixture of these fuels
with other fuels. This limit would apply to units between 8.7 MW and 29 MW (30 to 100
million Btu per hour). The emission limit is based on the use of fabric filters, which
represents best demonstrated technology.
-------
SECTION 4
PROJECTION OF UNITS AND FACILITIES IN AFFECTED SECTORS
The regulation will affect utility boilers (Da), wood fueled industrial boilers greater than
100 MMBtu/Hr (Db), and wood fueled industrial boilers 10-100 MMBtu/Hr. As a result, the
economic impact estimates presented in Section 7 and the small entity screening analysis
presented in Section 8 are based on the population of existing units and the projection of new
combustion units fitting these categories for the next 5 years. This section presents projected
growth estimates for wood-fired industrial boilers Db and DC as well as Department of
Energy projections on megawatt (MW) additions to the electric utility industry. It also
presents the technical characteristics of the projected new units.
4.1 Projected Number of New Affected Facilities
4.1.1 Industrial Boilers
The Agency estimates there will be a total of 17 new stationary wood-fired industrial
boilers over the next 5 years (see Table 4-1). This projection is based on the number of
biomass or wood-fired units that had been issued permits during four consecutive 5-year
periods from 1986-2005 according to the RACT/BACT/LAER Clearinghouse (RBLC). The
EPA utilized this pattern of steady growth during the aforementioned periods to project a
growth of 17 new wood-fired industrial boilers from 2006-2010. Of the 17 new units, 4
boiler units will be categorized as 10-100 MMBtu/Hr (Dc).
4.1.2 Utility Boilers
According to the draft version of The Annual Energy Outlook 2005 from the Department
of Energy's Energy Information Administration (EIA), 23 thousand MW of new electric
generating capacity are projected from 2005-2009. Of the projected 23 thousand MW, coal
capacity additions are expected to account for 1,300 MW. Based on information from
evaluated model plants, the Agency projects the additional 1,300 MW will be provided by 5
units with varying capacity and coal type (Table 4-2).
4-1
-------
4.2 Profile of Projected Utility and Industrial Boiler Units
4.2.1 Technical Characteristics of Projected Units
This section characterizes the population of projected units by MMBtu/Hr capacity and
fuel type.
• Capacity (MMBtu/Hr.): Unit capacities are different for each subpart of the
standard. For subpart Da (Fossil Fuel Utility Boilers) the 5 units have a capacity
greater than 250 MMBtu/Hr each. Under the subpart Db, the capacity is greater
than 100 MMBtu/Hr for industrial boilers. Subpart DC targeted smaller industrial
boilers with a capacity ranging from 10-100 MMBtu/Hr.
• Fuel Type: Coal is the fossil fuel used by the utility boilers (subpart Da) while the
industrial boilers (subpart Db & DC) are all wood fueled.
Table 4-1. Number of Projected Units By Subpart and Industry
Subpart
Da
Db
DC
NAICS
221
321
322
321
322
Total
Description
Utilities
Wood Products Manufacturing
Paper Manufacturing
Wood Products Manufacturing
Paper Manufacturing
# Units
5
4
9
3
1
22
Source: EPA, Emissions Standards Division
4.2.2 Distribution and Details of Projected Units by Industry
Table 4-1 presents the number of industrial boiler and utility boiler units that will be
affected by the NSPS by NAICS code. Five of these facilities are in Utilities (NAICS 221).
Among the industrial boiler units, roughly 24 percent are in wood products manufacturing
industry and contain units that are greater than 100 MMBtu/Hr (NAICS 321). Almost 53
percent of industrial boiler units are in the paper products manufacturing industry (NAICS
322) and categorized under subpart Db. Only 4 units are covered under subpart DC with
three of them being producers in the wood products manufacturing industry.
Among the 5 projected utility boilers from 2005-2010, 2 are projected to be roughly 500
MW PC in capacity while the remaining 3 are estimated to be 100 MW PC in capacity (Table
4-2). One of the 500 MW units is expected to burn subbituminous coal while the other will
burn bituminous coal. The three 100 MW units will burn, subbituminous coal, bituminous
coal, and coal refuse, respectively.
4-2
-------
Table 4-2. Projected New Coal Electric Utility Steam Generating Units (2005-2010)
Plant Description
Coal Burned
Control Devices
100MWPC
100MWPC
500 MW PC
500 MW PC
100MWPC
Subbituminous
Bituminous
Subbituminous
Bituminous
Coal Refuse
FF, SCR, SD
FF, SCR, LSFO
FF, SCR, LSFO
FF, SCR, LSFO
FF, SNCR. LI
4-3
-------
SECTION 5
PROFILES OF AFFECTED INDUSTRIES
This section contains profiles of the major industries affected by the regulation of electric
utility steam generating units, industrial-commercial-institutional steam generating units, and
small industrial-commercial-institutional steam generating units. The Agency anticipates
that most of the direct costs of the regulation for utility steam generating units will be borne
by the electric services (NAICS 22111) sector. The most direct costs of the regulation for
industrial-commercial-institutional steam generating units, and small industrial-commercial-
institutional steam generating units will be borne by the lumber and wood products industry
(NAICS 321) and the paper and allied products industry (NAICS 322).
5.1 Electric Utilities
The ongoing process of deregulation of wholesale and retail electric markets is changing
the structure of the electric power industry. Deregulation is leading to the functional
unbundling of generation, transmission, and distribution and to competition in the generation
segment of the industry. This section provides background information on the U.S. electric
power industry and discusses current industry characteristics and trends that will influence
the future generation and consumption of electricity.
5.1.1 The Supply Side: Production and Costs
Even with the technological and regulatory changes in the 1970s and 1980s, at the
beginning of the 1990s the structure of the electric utility industry could still be characterized
in terms of generation, transmission, and distribution. Commercial and retail customers were
in essence "captive," and rates and service quality were primarily determined by public
utility commissions. Figure 5-1 illustrates the typical structure of the electric utility market.
The majority of utilities are interconnected and belong to a regional power pool. Pooling
arrangements enable facilities to coordinate the economic dispatch of generation facilities
and manage transmission congestion. In addition, pooling diverse loads can increase load
factors and decrease costs by sharing reserve capacity.
5.1.1.1 Generation
Coal-fired plants have historically accounted for the bulk of electricity generation in the
United States (see Table 5-1). With abundant national coal reserves and advances in
5-1
-------
pollution abatement technology, such as advanced scrubbers for pulverized coal and flue gas-
desulfurization systems, coal will likely remain the fuel of choice for most existing
generating facilities over the near term.
Natural gas accounts for approximately 20 percent of current generation capacity and is
expected to grow; advances in natural gas exploration and extraction technologies and new
coal gasification have contributed to the use of natural gas for power generation. Nuclear
plants and renewable energy sources (e.g., hydroelectric, solar, wind) provide approximately
21 percent and 6 percent of current generating capacity, respectively.
5.1.1.2 Transmission
Transmission refers to high voltage lines used to link generators to substations where
power is stepped down for local distribution. Transmission systems have been traditionally
characterized as a collection of independently operated networks or grids interconnected by
bulk transmission interfaces.
Within a well-defined service territory, the regulated utility has historically had
responsibility for all aspects of developing, maintaining, and operating transmissions. These
responsibilities included
• system planning and expanding,
• maintaining power quality and stability, and
• responding to failures.
5-2
-------
Electricity
Generation
Power Plants
Trans-
mission
High Voltage Lines
Transformer
Distribution
Residential
Customers
Small C/l
Customers
Large C/l
Customers
Figure 5-1. Traditional Electric Power Industry Structure
5-3
-------
Table 5-1. Net Generation by Energy Source, 2001 (103 MegaWatt Hours)
Electricity Combined
Total Electricity Generators, Heat and Combined Combined
Electric Generators, Independent Power, Heat and Heat and
Power Electric Power Electric Power, Power,
Industry Utilities Producers Power Commercial Industrial
Coal
Petroleum
Natural Gas
Other Gases
Nuclear
Hydro-electric
Other Renewables
Other
Total
1,903,380
127,629
629,201
13,767
768,826
207,548
78,916
4,254
3,733,521
1,560,146
78,919
264,434
0
534,207
190,105
2,152
0
2,629,962
290,429
35,534
156,093
47
234,619
14,434
41,361
0
772,517
31,087
6,785
125,380
2,410
NA
NA
4,376
113
170,151
978
427
4,492
0
NA
66
1,480
0
7,443
20,740
5,964
78,802
11,310
NA
2,943
29,548
4,141
153,448
Source: U.S. Department of Energy, Energy Information Administration. 2003. Electric Power Annual, 2001.
Vol.1. DOE/EIA-0348(2001). Washington, DC: U.S. Department of Energy.
Isolated systems were connected primarily to increase (and lower the cost of) power
reliability. Most utilities maintained sufficient generating capacity to meet customer needs,
and bulk transactions were initially used only to support extreme demands or equipment
outages.
5.1.1.3 Distribution
Low-voltage distribution systems that deliver electricity to customers comprise integrated
networks of smaller wires and substations that take the higher voltage and step it down to
lower levels to match customers' needs. The distribution system is the classic example of a
natural monopoly because it is not practical to have more than one set of lines running
through neighborhoods or from the curb to the house.
5.1.1.4 Production Costs
Generation accounts for approximately 60 percent of the cost of delivered electric power
(see Table 5-2). Transmission and distribution account for 4 percent. Administrative and
maintenance costs each account for 6 percent of the cost of delivered power, while
depreciation and taxes account for the remaining 15 percent of operating expenses.
5-4
-------
Table 5-2. Revenue and Expense Statistics for Major U.S. Publicly Owned Electric
Utilities (With Generation Facilities), 1999-2001
Description
Production
Transmission
Distribution
Customer Accounts
Customer Service
Sales
Administrative and General
Maintenance
Depreciation and Amortization
Taxes and Tax Equivalents
Operating Expenses, Total
1999
11,923
732
516
415
160
49
1,591
1,686
3505
697
21,274
2000
15,742
781
574
507
211
66
1,695
1,815
3919
936
26,244
2001
21,783
785
605
600
263
73
1,832
1,905
4,009
954
32,811
Source: U.S. Department of Energy, Energy Information Administration. 2003. Electric Power Annual, 2001.
DOE/EIA-0348(2001). Washington, DC: U.S. Department of Energy.
Fuel is one of the most important inputs for electricity generation and changes in its cost
impact generation decisions. The EIA notes that the high price of spot market natural gas
during 2001 may be one factor explaining why natural gas generation increased only slightly
even as many new natural gas-fired plants entered the market (EIA, 2003). As shown in
Table 5-3, the cost of fuel for natural gas plants increased by 50 percent from 1999 to 2001.
5.1.2 The Demand Side
Electricity is used by three broad classes of customers: residential, commercial, and
industrial (see Table 5-4). The EIA reports that residential retail sales consumed 36 percent
of 3.3 billion megawatt hours in 2001 followed by commercial (32 percent), industrial
customers (29 percent), and other (3 percent).
Electricity consumers are generally unable or unwilling to forego a large amount of
consumption as the price increases; therefore, electricity consumption is considered price
inelastic. Numerous studies have investigated the short-run elasticity of demand for
electricity. However, elasticities vary greatly, depending on the demand characteristics of
end users and the price structure. The EIA analysis of competitive pricing (DOE, EIA, 1997)
used a range from a -0.05 percent elasticity of demand for a "flat rates" case (i.e., no time-of-
5-5
-------
use assumption) up to a -0.50 percent demand elasticity for a "high consumer response"
case.
Table 5-3. Fuel Expenses for Major U.S. Investor-Owned Electric Utilities, 1999
through 2001 (Mills per Kilowatt hour)
Plant Type 1999 2000 2001
Nuclear 5.17 4.95 4.67
Fossil Steam 15.62 17.69 18.13
Gas Turbine and Small Scale 28.72 39.19 43.56
Notes: Expenses are average expenses weighted by net generation.-A mill is a monetary cost and billing unit
equal to 1/1,000 of the U.S. dollar (equivalent to 1/10 of one cent).-Totals may not equal sum of
components because of independent rounding.
Source: U.S. Department of Energy, Energy Information Administration. 2003. Electric Power Annual, 2001.
DOE/EIA-0348(2001). Washington, DC: U.S. Department of Energy.
Table 5-4. Retail Sales of Electricity to Ultimate Customers by Sector, by Provider,
1999 through 2001 (Megawatt hours)
Year Residential Commercial Industrial Others All Sectors
1999 1,144,923,069 1,001,995,720 1,058,216,608 106,951,684 3,312,087,081
2000 1,192,446,491 1,055,232,090 1,064,239,393 109,496,292 3,421,414,266
2001 1,202,646,738 1,089,153,700 964,224,282 113,756,089 3,369,781,529
5.1.3 Industry Organization: Market Structure and Plants
Beginning in the latter part of the 19th century and continuing for about 100 years, the
prevailing view of policy makers and the public was that the government should use its
power to require or prescribe the economic behavior of "natural monopolies" such as electric
utilities. The traditional argument is that it does not make economic sense for there to be
more than one supplier—running two sets of wires from generating facilities to end users is
more costly than one set. However, because monopoly supply is not generally regarded as
likely to provide a socially optimal allocation of resources, regulation of rates and other
economic variables was seen as a necessary feature of the system.
Beginning in the 1970s, the public policy view shifted against traditional regulatory
approaches and in favor of deregulation for many important industries including
5-6
-------
transportation, communications, finance, and energy. The major drivers for deregulation of
electric power included the following:
• existence of rate differentials across regions offering the promise of benefits from
more efficient use of existing generation resources if the power can be transmitted
across larger geographic areas than was typical in the era of industry regulation;
• the erosion of economies of scale in generation with advances in combustion
turbine technology;
• complexity of providing a regulated industry with the incentives to make socially
efficient investment choices;
• difficulty of providing a responsive regulatory process that can quickly adjust
rates and conditions of service in response to changing technological and market
conditions; and
• complexity of monitoring utilities' cost of service and establishing cost-based
rates for various customer classes that promote economic efficiency while at the
same time addressing equity concerns of regulatory commissions.
Viewed from one perspective, not much changes in the electric industry with
restructuring. The same functions are being performed, essentially the same resources are
being used, and in a broad sense the same reliability criteria are being met. In other ways,
the very nature of restructuring, the harnessing of competitive forces to perform a previously
regulated function, changes almost everything. Each provider and each function become
separate competitive entities that must be judged on their own.
This move to market-based provision of generation services is not matched on the
transmission and distribution side. Network interactions on AC transmission systems have
made it impossible to have separate transmission paths compete. Hence, transmission and
distribution remain regulated. Transmission and generation heavily interact, however, and
transmission congestion can prevent specific generation from getting to market.
Transmission expansion planning becomes an open process with many interested parties.
This open process, coupled with frequent public opposition to transmission expansion, slows
transmission enhancement. The net result is greatly increased pressure on the transmission
system.
Restructuring of the electric power industry could result in any one of several possible
market structures. In fact, different parts of the country will probably use different
structures, as the current trend indicates. The eventual structure may be dominated by a
power exchange, bilateral contracts, or a combination. A strong Regional Transmission
5-7
-------
Organization (RTO) may operate in the area, or a vertically integrated utility may continue to
operate a control area. In any case, several important characteristics will change:
• Commercial provision of generation-based services (e.g., energy, regulation, load
following, voltage control, contingency reserves, backup supply) will replace
regulated service provision. This drastically changes how the service provider is
assessed.
• Individual transactions will replace aggregated supply meeting aggregated
demand. It will be necessary to continuously assess each individual's
performance.
• Transaction sizes will shrink. Instead of dealing only in hundreds and thousands
of MW, it will be necessary to accommodate transactions of a few MW and less.
• Supply flexibility will greatly increase. Instead of services coming from a fixed
fleet of generators, service provision will change dynamically among many
potential suppliers as market conditions change.
The EIA (2003) notes that the pace of restructuring in the electric power industry slowed
significantly in response to market volatility and financial turmoil associated with
bankruptcy filings of key energy companies in California. By the end of 2001, restructuring
had either been delayed or suspended in eight states that previously enacted legislation or
issued regulatory orders for its implementation (EIA, 2003). Another 18 other states that had
seriously explored the possibility of deregulation in 2000 reported no legislative or
regulatory activity in 2001 (EIA, 2003).
In 2001, over 15,000 electric power generators operated in the United States (see Table 5-
5). Approximately 80 percent were electricity generators (utilities and independent power
producers), and the remaining 20 percent are combined heat and power (CHP) producers.
5-S
-------
Table 5-5. Existing Capacity by Producer Type, 2001
Generator
Nameplate Net Summer Net Winter
Number of Capacity Capacity Capacity
Producer Type
Electricity Generators
Electricity Generators, Electric Utilities
Electricity Generators, Independent Power
Producers
Electricity Generators, Total
Combined Heat and Power
Combined Heat and Power, Electric Power
Combined Heat and Power, Commercial
Combined Heat and Power, Industrial
Combined Heat and Power, Total
Total Electric Power Sector
Generators
8,798
3,803
12,601
541
626
2,097
3,264
15,865
(MW)
584,574
265,503
850,077
31,084
3,463
29,500
64,047
914,124
(MW)
549,920
242,314
792,234
26,555
2,912
26,553
56,020
848,254
(MW)
561,382
253,287
814,669
28,543
3,179
27,947
59,669
874,338
Source: U.S. Department of Energy, Energy Information Administration. 2003. Electric Power Annual, 2001.
DOE/EIA-0348(2001). Washington, DC: U.S. Department of Energy.
Approximately 8,800 of electric power generators are electric utilities. Included are
investor-owned electric utilities, municipal and state utilities, federal electric utilities, and
rural electric cooperatives. In 2001, these generators accounted for 64 percent of nameplate
generation capacity in the United States. There were 3,800 independent power producers
that own or operate facilities for the generation of electricity for use primarily by the public
and are not an electric utilities. These generators accounted for 29 percent of nameplate
generation capacity in the United States. Finally, 3,200 generators are classified as CHP
producers designed to produce both heat and electricity from a single heat source. This term
is being used in place of the term "cogenerator" the EIA used in the past. These generators
accounted for the remaining 7 percent of nameplate generation capacity in the United States
in 2001.
Summer capacity utilization rates in the contiguous United States have increased by 7
percent over the past 12 years. This trend continued with nationwide utilization rates at 86
percent in 2001.
5.1.4 Markets and Trends
U.S. generation of electricity remained steady at approximately 3,700 million megawatt
hours (see Table 5-6). However, there was a small decline in generation from 2000 to 2001.
5-9
-------
The EIA notes this is only the second time in over 50 years that there has been a decrease in
net generation and attributes it partially to the slowdown of the national economy.
International trade of electricity in the United States is not significant—imports and exports
account for less than 1 percent of consumption and generation.
Table 5-6. Electricity Market Statistics: 1999-2001
Description
Net Generation (thousand megawatt hours)
Net Summer Generating Capacity (megawatts)
Demand and Capacity — Summer
Capacity Resources (megawatts)
Capacity Utilization (percent)
Retail Sales (thousand megawatt hours)
International Imports and Exports
(thousand megawatt hours)
Imports
Exports
Average Revenue per Kilowatt hour (cents)
1999
3,694,810
785,927
765,744
85%
3,312,087
42,923
14,000
6.64
2000
3,802,105
811,719
808,054
84%
3,421,414
48,879
14,829
6.81
2001
3,733,521
848,254
788,990
86%
3,369,782
38,478
18,173
7.32
Source: U.S. Department of Energy, Energy Information Administration. 2003. Electric Power Annual, 2001.
DOE/EIA-0348(2001). Washington, DC: U.S. Department of Energy.
Growth in electricity consumption has traditionally paralleled gross domestic product
growth. Total retail sales in 2001 reflect this trend as they fell from 2000 levels to 3,370
million megawatt hours (0.6 percent). The EIA notes the biggest decreases in retail sales
occurred on the West Coast, as a result of California's electricity crisis. The average revenue
per kilowatt hour increased from 6.6 cents in 1999 to 7.3 in 2001. This partially reflects
higher costs of production (i.e., higher natural gas costs) during the period.
5.2 Lumber and Wood Products
The lumber and wood products industry (NAICS 321) comprises a large number of
establishments engaged in logging; operating sawmills and planing mills; and manufacturing
structural wood panels, wooden containers, and other wood products. Most products are
produced for the domestic market, which is primarily supported by the housing market
(Twarok, 1999). The largest consumers of lumber and wood products are the remodeling
and construction industries.
5-10
-------
5.2.1 The Supply Side: Production and Costs
5.2.1.1 Production Processes
Lumber is prepared at mills using a four-step process. First, logs are debarked and
trimmed into cants, or partially finished lumber. The cants are then cut to specific lengths.
Logs are generally kept wet during storage to prevent cracking and to keep them supple.
However, after being cut, the boards undergo a drying process, either in open air or in a kiln,
to reduce the moisture content. The drying process may take several months and varies
according to the plant's climate and the process used. Finally, the lumber may be treated
with a surface protectant to prevent sap stains and prepare it for export (EPA, 1995a).
Reconstituted wood products, such as particleboard, medium density fiberboard,
hardboard, and oriented strandboard, are made from raw wood that is combined with resins
and other additives and processed into boards. The size of the wood particles used varies
from sawdust to strands of wood. Once combined, the ingredients are formed into a mat and
then, at high temperatures, pressed into a board. A final finishing process prepares the
boards for delivery.
Wood is treated with preservative to protect it from mechanical, physical, and chemical
influences (EPA, 1995a). Treatment agents are either water-based inorganics, such as copper
arsenate (78 percent), or oil-borne organics, such as creosote (21 percent) (EPA, 1995a).
Wood preservatives are usually applied using a pressure treatment process or a dipping tank.
Producers achieve the best results when the lumber's moisture content is reduced to a point
where the preservative can be easily soaked into the wood. Treated wood is then placed in a
kiln or stacked in a low-humidity climate to dry.
5.2.1.2 Types of Output
The lumber and wood products industry produces essential inputs into the construction,
remodeling, and furniture sectors. Lumber and reconstituted wood products are produced in
an array of sizes and can be treated to enhance their value and shelf-life. These products are
intermediate goods; they are purchased by other industries and incorporated into higher
value-added products. In addition to sawmills, the lumber and wood products industry
includes kitchen cabinets, wood containers, and other wooden products used for fabricating
finished goods for immediate consumption.
5.2.1.3 Major By-Products and Co-Products
Shavings, sawdust, and wood chips are the principal co-products of sawn lumber. Paper
mills and makers of reconstituted wood products frequently purchase this material as an
5-11
-------
input. By-products are limited to emissions from the drying process and from use of
preservatives.
Very little solid waste is generated by reconstituted wood products manufacturing.
Because the production process incorporates all parts of the sawn log, little is left over as
waste. However, air emissions from dryers are a source of emissions.
Wood preserving results in two types of by-products: air emissions and process debris.
As preservatives dry, either in a kiln or outside, they emit various chemicals into the air. At
plants with dipping processes, wood chips, stones, and other debris build up in the dipping
tank. The debris is routinely collected and disposed of.
5.2.1.4 Production Costs
The total costs of production for the wood products industry fluctuate with the demand for
the industry's products. Most notably, the costs of production rose then declined between
1997 and 2001 as recession stifled furniture purchases and new housing starts (see
Table 5-7). Overall, employment in the lumber and wood products industry decreased
approximately 2.5 percent from 1997 to 2001. During this same period, payroll costs
increased 8 percent, indicating an increase in average annual income per employee. Total
capital investment and costs of materials generally moved in tandem over the 5-year period,
increasing from 1997 to 1999 and decreasing from 1999 to 2001.
5.2.2 The Demand Side
Lumber and wood products are valued both for their physical attributes and their relative
low cost. Wood is available in varying degrees of durability, shades, and sizes and can be
easily shaped. Lumber and wood products have long been the principal raw materials for the
residential and light commercial construction industries, the remodeling industry, and the
furniture industry. Wood is readily available because over one-third of the United States is
forested. The ready supply of wood reduces its costs.
5-12
-------
Table 5-7. Inputs for the Lumber and Wood Products Industry (NAICS 321),
1997-2001
Labor
Year
1997
1998
1999
2000
2001
Quantity (103)
570.0
577.9
588.6
586.5
555.9
Payroll ($106)
14,319.2
15,112.6
15,988.6
16,127.6
15,431.0
Materials ($106)
55,299.6
56,621.6
59,769.1
57,867.9
53,788.7
Total Capital
Expenditures ($106)
2,869.2
2,799.2
3,109.6
3,078.5
2,712.0
Source: U.S. Department of Commerce, Bureau of the Census. 2003a. Annual Survey of Manufactures 2001.
Washington, DC: Government Printing Office.
Lumber and wood products are used in a wide range of applications, including
residential and nonresidential construction; repair/remodeling and home improvement
projects; manufactured housing; millwork and wood products; pulp, paper, and paperboard
mills; toys and sporting goods; kitchen cabinets; crates and other wooden containers; office
and household furniture; and motor homes and recreational vehicles (Willis, 1998).
5.2.3 Organization of the Industry: Market Concentration, Plants, and Firms
The lumber and wood products industry is considered unconcentrated (see
Table 5-8). The CR4 for NAICS code 321 was 10.5 in 1997, meaning that the top four
firms' combined sales were 10.5 percent of the industry's total sales. The CR8 was 16.7 and
the HHI was 52.7.
In 1992, 33,878 companies produced lumber and wood products and operated
35,807 facilities, as shown in Table 5-9. By way of comparison, in 1987, 32,014 companies
controlled 33,987 facilities. About two-thirds of all establishments have nine or fewer
employees. These figures correspond to SIC 24, which does not perfectly correspond to
NAICS 321. The breakdown of value of shipments across employee levels in 1997 is
presented in Table 5-9 as well.
Table 5-8. Measures of Market Concentration for Lumber and Wood Products
Markets, 1997
Number of Number of
NAICS Description CR4 CR8 HHI Companies Facilities
5-13
-------
321 Wood Product Manufacturing 10.5 16.7 52.7
15,621
17,367
Source: U.S. Department of Commerce, Bureau of the Census. 2001. 1997 Economic Census,
Manufacturing Subject Series, Concentration Ratios in Manufacturing. Washington, DC:
Government Printing Office.
Table 5-9. Size of Establishments and Value of Shipments for the Lumber and Wood
Products Industry (SIC 24/NAICS 321)
1992 SIC 24
Average Number of
Employees in Establishment
1 to 4 employees
5 to 9 employees
10 to 19 employees
20 to 49 employees
50 to 99 employees
100 to 249 employees
250 to 499 employees
500 to 999 employees
1,000 to 2,499 employees
2,500 or more employees
Total
Number of
Facilities
15,921
7,669
5,331
3,924
1,615
1,082
219
39
4
3
35,807
Value of
Shipments
(1992 $106)
3,288.9
5,030.4
6,902.8
26,964.9
(D)
34,051.4
(D)
3,331.4
598.6
1,396.4
81,564.8
1997 NAICS 321
Number of
Facilities
5,450
2,980
3,128
3,003
1,433
1,048
267
47
7
4
17,367
Value of
Shipments
($106)
1,299.7
2,214.6
(D)
12,843.5
16,084.4
(D)
14,997.7
4,415.0
1,353.5
(D)
88,470.2
(D) = undisclosed
Sources: U.S. Department of Commerce, Bureau of the Census. 2002a. 1997 Economic Census,
Manufacturing, Subject Series: General Summary. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 1996. 1992 Census of Manufactures, Subject
Series: General Summary. Washington, DC: Government Printing Office.
The capacity utilization ratio for the industry in 2001 was 66, and the average over
the last 5 years was 71.6 percent (see Table 5-10). The varying capacity utilization ratios
reflect adjusting production levels and new production facilities going on- or off-line.
5-14
-------
Table 5-10. Capacity Utilization Ratios for Lumber and Wood Products Industry,
1997-2001
1997 1998 1999 2000 2001
74 74 75 69 66
Note: All values are percentages.
Source: U.S. Department of Commerce, Bureau of the Census. 2003b. Current Industrial Reports, Survey of
Plant Capacity: 2001. Washington, DC: Government Printing Office.
5.2.4 Markets and Trends
In 2001, the lumber and wood products industry's total value of shipments was
$87,250.0 million. As seen in Table 5-11, shipment values increased before declining in the
second half of the five year period shown above. In the previous years, the value of
shipments increased steadily through the late 1980s before declining slightly through the
early 1990s as new construction starts and furniture purchases declined (EPA, 1995a).
Shipment values recovered, however, as the economy expanded in the mid-1990s.
Table 5-11. Value of Shipments for the Lumber and Wood Products Industry
(SIC 24/NAICS 321), 1997-2001.
Year Value of Shipments ($106)
1997 88,470.2
1998 91,174.5
1999 97,311.5
2000 92,668.6
2001 87,250.0
Source: U.S. Department of Commerce, Bureau of the Census. 2003a. Annual Survey of Manufactures 2001.
Washington, DC: Government Printing Office.
The U.S. market for lumber and wood products is maturing, and manufacturers are
looking to enter other markets. Although 91 percent of the industry's products are consumed
by the U.S. domestic market, the export market is still vital to the industry. While export
markets grew rapidly in the late 1980s and early 1990s, the Asian financial crisis resulted in
a weakening of exports. Although the domestic market is relatively secure, new housing
starts are projected to decline 9.1 percent annually from 2000 to 2005. This decrease should
5-15
-------
be more than offset by the forecast expansion of the remodeling and repair markets (Twarok
1999).
5.3 Paper and Allied Products
The paper and allied products industry (NAICS 322) is one of the largest
manufacturing industries in the United States. In 2001, the industry shipped nearly
$156 billion in paper commodities. The industry produces a wide range of wood pulp,
primary paper products, and paperboard products such as printing and writing papers,
industrial papers, tissues, container board, and boxboard. The industry also includes
manufacturers that "convert" primary paper and paperboard into finished products like
envelopes, packaging, and shipping containers (EPA, 2002a).
5.3.1 The Supply Side: Production and Costs
5.3.1.1 Production Process
The manufacturing paper and allied products industry is capital- and resource-
intensive, consuming large amounts of pulp wood and water in the manufacturing process.
Approximately half of all paper and allied products establishments are integrated facilities,
meaning that they produce both pulp and paper on-site. The remaining half produce only
paper products; few facilities produce only pulp (EPA, 2002a).
The paper and paperboard manufacturing process can be divided into three general
steps: pulp making, pulp processing, and paper/paperboard production. Paper and
paperboard are manufactured using what is essentially the same process. The principal
difference between the two products is that paperboard is thicker than paper's 0.3 mm.
Producers manufacture pulp mixtures by using chemicals, machines, or both to
reduce raw material into small fibers. In the case of wood, the most common pulping
material, chemical pulping actions release cellulose fibers by selectively destroying the
chemical bonds that bind the fibers together (EPA, 2002a). Impurities are removed from the
pulp, which then may be bleached to improve brightness. Only about 20 percent of pulp and
paper mills practice bleaching (EPA, 2002a). The pulp may also be further processed to aid
in the paper-making process.
During the paper-making stage, the pulp is strengthened and then converted into
paper. Pulp can be combined with dyes, resins, filler materials, or other additives to better
fulfill specifications for the final product. Next, the water is removed from the pulp, leaving
the pulp on a wire or wire mesh conveyor. The fibers bond together as they are carried
through heated presses and rollers. The paper is stored on large rolls before being shipped
5-16
-------
for conversion into another product, such as envelopes and boxes, or cut into paper sheets for
immediate consumption.
5.3.1.2 Types of Output
The paper and allied products industry's output ranges from writing papers to
containers and packaging. Paper products include printing and writing papers; paperboard
boxes; corrugated and solid fiber boxes; fiber cans, drums, and similar products; sanitary
food containers; building paper; packaging; bags; sanitary paper napkins; envelopes;
stationary products; and other converted paper products.
5.3.1.3 Major By-Products and Co-Products
The paper and allied products industry is the largest user of industrial process water
in the United States. In 2000, a typical mill used between 4,000 and 12,000 gallons of water
per ton of pulp produced. The equivalent amount of waste water discharged per ton of pulp
ranges from 14 to 140 kg (EPA, 2002a). Most facilities operate waste water treatment
facilities on site to remove biological oxygen demand (BOD), total suspended solids (TSS),
and other pollutants before discharging the water into a nearby waterway.
5.3.1.4 Production Costs
Historical statistics for the costs of production for the paper and allied products
industry are listed in Table 5-12. From 1997 to 2001, industry payroll generally ranged from
approximately $22 to 23 billion. Employment peaked at 574,300 people in 1997 and
declined slightly to 530,200 people by 2001. Materials costs averaged $83.1 billion a year
and new capital investment averaged $7.7 billion a year.
5.3.2 The Demand Side
Paper is valued for its diversity in product types, applications, and low cost due to
ready access to raw materials. Manufacturers produce papers of varying durabilities,
textures, and colors. Consumers purchasing large quantities of papers may have papers
tailored to their specification. Papers may be simple writing papers or newsprint for personal
consumption and for the printing and publishing industry or durable for conversion into
shipping cartons, drums, or sanitary boxes. Inputs in the paper production process are
readily available in the United States because one-third of the country is forested, and
facilities generally have ready access to waterways.
5-17
-------
Table 5-12. Inputs for the Paper and Allied Products Industry (NAICS 322), 1997-2001
Labor
Year
1997
1998
1999
2000
2001
Quantity (103)
574.3
572.4
560.7
548.3
530.2
Payroll ($106)
22,312.0
22,529.5
22,837.4
22,680.1
22,188.3
Materials ($106)
80,189.5
82,419.4
82,720.9
87,346.6
82,823.0
Total Capital
Expenditures
($106)
8,595.1
8,546.7
7,081.1
7,383.5
6,797.4
Sources: U.S. Department of Commerce, Bureau of the Census. 2003a. Annual Survey of Manufactures 2001.
Washington, DC: Government Printing Office.
The paper and allied products industry is an integral part of the U.S. economy;
nearly every industry and service sector relies on paper products for its personal, education,
and business needs. Among a myriad of uses, papers are used for correspondence, printing
and publishing, packing and storage, and sanitary purposes. Common applications are all
manners of reading material, correspondence, sanitary containers, shipping cartons and
drums, and miscellaneous packing materials.
5.3.3 Organization of the Industry: Market Concentration, Plants, and Firms
For the paper and allied products industry, the CR4 equaled 18.5 in 1997 (see
Table 5-13). This means that the top four firms' combined sales were 18.5 percent of the
industry's total sales. This industry's unconcentrated nature is also indicated by its HHI of
173.3.
In 1997, 3,808 companies produced paper and allied products and operated 5,868
facilities. By way of comparison, 4,264 companies controlled 6,416 facilities in 1992. Even
though they account for only 46 percent of all facilities, those with 50 or more employees
contribute more than 92 percent of the industry's total value of shipments (see Table 5-14).
5-18
-------
Table 5-13. Measures of Market Concentration for Paper and Allied Products
Markets, 1997
NAICS
322
Description
Paper Manufacturing
CR4
18.5
CR8
31.1
HHI
173.3
Number of
Companies
3,808
Number of
Facilities
5,868
Source: U.S. Department of Commerce, Bureau of the Census. 2001. 1997 Economic Census, Manufacturing
Subject Series, Concentration Ratios in Manufacturing. Washington, DC: Government Printing
Office.
Capacity utilization measures are used to track a variety of economic conditions,
specific the path of the business cycle and employment and inflationary trends. Table 5-15
presents the trend in capacity utilization for the paper and allied products industry. The
varying capacities reflect changes in the industry and the economy as a whole. The average
capacity utilization ratio for the paper and allied products industry between 1997 and 2001
was approximately 81, with capacity declining in recent years.
5-19
-------
Table 5-14. Size of Establishments and Value of Shipments for the Paper and Allied
Products Industry (NAICS 322)
1987
Number of Employees in Number of
Establishment Facilities
1 to 4 employees
4 to 9 employees
10 to 19 employees
20 to 49 employees
50 to 99 employees
100 to 249 employees
250 to 499 employees
500 to 999 employees
1,000 to 2,499 employees
2,500 or more employees
Total
729
531
888
1,433
1,018
1,176
308
145
63
1
1,732
Value of
1992
Shipments Number of
(S106) Facilities
640.6
D
1,563.4
18,328.6
D
32,141.7
24,221.1
28,129.1
24,903.1
D
129,927.8
786
565
816
1,389
1,088
1,253
298
159
62
6,416
Value of
1997
Shipments Number of
(S106) Facilities
216
483
1,456.5
6,366.6
12,811.5
35,114.0
22,281.2
31,356.5
23,115.4
133,200.7
687
500
706
1,292
1,033
1,193
265
131
59
2
5,868
Value of
Shipments
(S106)
D
605.2
1,672.7
7,345.4
14,686.8
40,366.0
23,940.2
32,060.7
26,780.6
D
150,295.9
D = undisclosed
Sources: U.S. Department of Commerce, Bureau of the Census. 1991. 1987 Census of Manufactures, Subject
Series, General Summary. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 1996. 1992 Census of Manufactures, Subject
Series: General Summary. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 2002a. 1997 Economic Census,
Manufacturing Subject Series, General Summary. Washington, DC: Government Printing Office.
Table 5-15. Capacity Utilization Ratios for the Paper and Allied Products Industry,
1997-2001
1997
1998
1999
2000
2001
85
83
83
79
76
Note: All values are percentages.
Source: U.S. Department of Commerce, Bureau of the Census. 2003b. Current Industry Reports, Survey of
Plant Capacity: 2001. Washington, DC: Government Printing Office.
5-20
-------
5.3.4 Markets and Trends
The industry's performance is tied to raw material prices, labor conditions, and
worldwide inventories and demand (EPA, 2002a). Industry performance was strong until
2001, when the value of shipments decreased by 6 percent (see Table 5-16). Over the entire
5-year period from 1997 to 2001, the value of shipments increased by 3.7 percent.
Table 5-16. Value of Shipments for the Paper and Allied Products Industry
(NAICS 322), 1997-2001
Year Value of Shipments ($106)
1997 150,295.9
1998 154,984.2
1999 156,914.9
2000 165,297.4
2001 155,846.0
Source: U.S. Department of Commerce, Bureau of the Census. 2003a. Annual Survey of Manufactures, 2001.
Washington, DC: Government Printing Office.
The Department of Commerce projects that shipments of paper and allied products
will increase through 2004 by an annual average of 2.1 percent (Stanley, 1999). Because
nearly all of the industry's products are consumer related, shipments will be most affected by
the health of the U.S. and global economy. The United States is a key competitor in the
international market for paper products and, after Canada, is the largest exporter of paper
products. U.S. exports and imports are both expected to increase 3 percent annually through
2004.
5-21
-------
SECTION 6
ECONOMIC ANALYSIS METHODS
This section presents the methodology for analyzing the economic impacts of the
proposed NSPS. Implementation of this methodology will provide the economic data and
supporting information needed by EPA to support its regulatory determination. This analysis
is based on microeconomic theory and the methods developed for earlier EPA studies to
operationalize this theory. These methods are tailored to and extended for this analysis, as
appropriate, to meet EPA's requirements for an economic impact analysis (EIA) of controls
placed on wood fueled industrial boilers and utility boilers.
This methodology section includes a description of the Agency requirements for
conducting an EIA, background information on typical economic modeling approaches, the
conceptual approach selected for this EIA, and an overview of the computerized market
model used in the analysis of the Wood Fueled Industrial Boilers. The focus of this section
is on the approach for modeling the impacts on the wood fired industrial boiler sectors and
utility sectors. Since these sectors are not linked, this section will analyze the impacts
separately beginning with the industrial boilers.
6.1 Agency Requirements for Conducting an EIA
The CAA provides the statutory authority under which all air quality regulations and
standards are implemented by OAQPS. The 1990 CAA Amendments require that EPA
establish emission standards for sources releasing any of the listed HAPs.
Congress and the Executive Office have imposed requirements for conducting
economic analyses to accompany regulatory actions. The Agency has published its
guidelines for developing an EIA (EPA, 1999). Section 312 of the CAA specifically requires
a comprehensive analysis that considers benefits, costs, and other effects associated with
compliance. On the benefits side, it requires consideration of all the economic, public health,
and environmental benefits of compliance. On the cost side, it requires consideration of the
effects on employment, productivity, cost of living, economic growth, and the overall
economy. These effects are evaluated by measures of facility- and company-level production
impacts and societal-level producer and consumer welfare impacts. The RFA and SBREFA
require regulatory agencies to consider the economic impacts of regulatory actions on small
entities. Executive Order 12866 requires regulatory agencies to conduct an analysis of the
economic benefits and costs of all proposed regulatory actions with projected costs greater
6-1
-------
than $100 million. Also, Executive Order 13211 requires EPA to consider for particular
rules the impacts on energy markets. The Agency's draft Economic Analysis Guidelines
provide detailed instructions and expectations for economic analyses that support rulemaking
(EPA, 1999). The EIA provides the data and information needed to comply with the federal
regulation, the executive order, and the guidance manual.
6.2 Wood Fueled Industrial Boilers Impact
6.2.1 Overview of Economic Modeling Approaches
In general, the EIA methodology needs to allow EPA to consider the effect of the
different regulatory alternatives. Several types of economic impact modeling approaches
have been developed to support regulatory development. These approaches can be viewed as
varying along two modeling dimensions:
• the scope of economic decisionmaking accounted for in the model and
• the scope of interaction between different segments of the economy.
Each of these dimensions was considered in recommending our approach. The advantages
and disadvantages of each are discussed below.
6.2.1.1 Modeling Dimension 1: Scope of Economic Decisionmaking
Models incorporating different levels of economic decisionmaking can generally be
categorized as with behavior responses and without behavior responses (accounting
approach). Table 6-1 provides a brief comparison of the two approaches. The behavioral
approach is grounded in economic theory related to producer and consumer behavior in
response to changes in market conditions. In essence, this approach models the expected
reallocation of society's resources in response to a regulation. The behavioral approach
explicitly models the changes in market prices and production. Resulting changes in price
and quantity are key inputs into the determination of a number of important phenomena in an
EIA, such as changes in producer surplus, changes in consumer surplus, and net social
welfare effects. For example, a large price increase may imply that consumers bear a large
share of the regulatory burden, thereby mitigating the impact on producers' profits and plant
closures.
In contrast, the nonbehavioral/accounting approach essentially holds fixed all
interaction between facility production and market forces. In this approach, a simplifying
assumption is made that the firm absorbs all control costs, and discounted cash flow analysis
is used to evaluate the burden of the control costs. Typically, engineering control costs are
6-2
-------
Table 6-1. Comparison of Modeling Approaches
EIA With Behavioral Responses
Incorporates control costs into production function
Includes change in quantity produced
Includes change in market price
Estimates impacts for
• affected producers
• unaffected producers
• consumers
• foreign trade
EIA Without Behavioral Responses
• Assumes firm absorbs all control costs
• Typically uses discounted cash flow analysis to evaluate burden of control costs
• Includes depreciation schedules and corporate tax implications
• Does not adjust for changes in market price
• Does not adjust for changes in plant production
weighted by the number of affected units to develop "engineering" estimates of the total
annualized costs. These costs are then compared to company or industry sales to evaluate the
regulation's impact.
6.2.1.2 Modeling Dimension 2: Interaction Between Economic Sectors
Because only a small number of sectors may be affected by the wood fueled
industrial boiler regulation, the issue concerning the level of sectoral interaction to model is
irrelevant. However, for comparative purposes, details of the interactive approach is
provided in this section. In the broadest sense, all markets are directly or indirectly linked in
the economy; thus, all commodities and markets are to some extent affected by the
regulation. For example, if the control costs on the wood fueled industrial boilers were
significant then they could directly affect the production costs for paper and wood products.
As a result, the increased cost of production in these sectors (NAICS: 321999, 321212,
32211, 322122, 32213) would be passed onto consumers of their products.
The appropriate level of market interactions to be included in the EIA is determined
by the scope of the regulation across industries and the ability of affected firms to pass along
6-3
-------
the regulatory costs in the form of higher prices. Alternative approaches for modeling
interactions between economic sectors can generally be divided in three groups:
• Partial equilibrium model: Individual markets are modeled in isolation. The only
factor affecting the market is the cost of the regulation on facilities in the industry
being modeled.
• General equilibrium model: All sectors of the economy are modeled together.
General equilibrium models operationalize neoclassical microeconomic theory by
modeling not only the direct effects of control costs, but also potential input
substitution effects, changes in production levels associated with changes in
market prices across all sectors, and the associated changes in welfare
economywide. A disadvantage of general equilibrium modeling is that substantial
time and resources are required to develop a new model or tailor an existing
model for analyzing regulatory alternatives.
• Multiple-market partial equilibrium model: A subset of related markets are
modeled together, with intersectoral linkages explicitly specified. To account for
the relationships and links between different markets without employing a full
general equilibrium model, analysts can use an integrated partial equilibrium
model. In instances where separate markets are closely related and there are
strong interconnections, there are significant advantages to estimating market
adjustments in different markets simultaneously using an integrated market
modeling approach.
6.2.2 Selected Modeling Approach Used for Wood Fueled Industrial Boilers
Since the affected industrial boilers are so few in number, energy capacity, and
market share, interaction between markets is considered insignificant. Therefore, the Agency
used a partial equilibrium model as described above in order to capture the effect of the
regulation on the industry sectors containing the affected entities. The majority of the
regulation's control costs are projected to be associated with wood fueled boilers in the
sectors detailed above.
Partial equilibrium analysis provides a manageable approach to measure the impacts
on each of the affected sectors caused by the regulation. This approach involves identifying
the affected industries within each sector and modeling the impact on the output and prices
resulting from the average annual compliance cost of the regulation. Since the NSPS
regulates wood fueled industrial boilers, the affected industries are major users of these
boilers such as kiln drying, softwood veneer and plywood, lumber and wood products,
paperboard mills, newsprint mills, and pulp mills producing paperboard.
6.2.3 Summary of the Economic Impact Model (FAST)
6-4
-------
Given the relatively small degree of total nationwide annualized costs and the
limited number of affected industry sectors, the Agency used the Fast Analysis Screening
Tool (FAST) to model the impacts of the regulation. FAST is used to perform screening-
level analysis of small entity impacts as well as broad market impacts. Supply shifts and
changes in equilibrium price as well as the resulting social impacts are conducted entirely
within the parameters of the model. Therefore, the model output provides market impacts
such as changes in price, output, and foreign trade quantities at the industry level as well as
any associated change in consumer and producer surplus resulting from compliance cost
inputs.
For the purpose of capturing the contribution to price, quantity, and social welfare
changes resulting from each subpart, the Agency decided to run four simulations of FAST for
each of the affected sectors (NAICS: 321, 322). Each simulation was run with compliance
cost in 2002 prices. The first simulation took into account only the total annual compliance
cost of the firms categorized as a small business. The next set of simulations measured the
impact, on each sector, of total annual compliance cost for each subpart (Db and DC). The
final simulation aggregated the compliance costs for both subpart Db and DC and estimated
its projected impact on sectors 321 and 322.
6.3 Utility Boilers Impact
6.3.1 Analytical Approach
The competitive model of price formation with new and existing sources is
illustrated in Figure 6-1. In the figure, the willingness of existing suppliers to produce
alternative rates of output is represented by SE and the demand is shown as D0. The
equilibrium market price, P0, is determined by the intersection of these curves. If this price
exceeds the annualized capital costs
6-5
-------
Figure 6-1. Baseline Equilibrium without Regulation
$/kWh
N
kWh/year
discounted at the opportunity cost of capital for an investment divided by the profit-
maximizing output rate plus the unit cost of other inputs (i.e., the average total cost), the
producer commits to a new facility; otherwise no investment occurs. Figure 6-1 shows a
constant cost industry where market price is exactly equal to the unit cost of new source
units, SN.
In a growing industry, demand is shifting outward (e.g., to Dj), placing upward
pressure on prices and providing the incentive for investors to add new productive capacity.2
As new capacity enters the market, the new equilibrium price is Pl3 which is exactly equal to
the unit cost of supply from new facilities. In this example, it is the same value as the old
price, P0. The new equilibrium quantity, Ql3 includes the additional output supplied by new
sources: (Qx - Q0).
The NSPS will increase new source costs of production and will place upward
pressure on prices. In contrast, existing sources will not face additional costs associated with
the NSPS. As shown in Figure 6-2, one potential outcome of the rule is that capacity
2For simplicity, impacts are considered for a single future time period (year =2010).
-------
Figure 6-2. Market for Baseload Electricity
Price
(S/kWh)
D
(Projected
Demand)
kWh
-Projected new source growth -
B = Increase in supply from existing units
C = Decreased quantity demanded due to price increase
D = Affected supply that delays entry into the market until
demand sufficiently grows
a = Supply shift for affected new units
expansion may be delayed because per-unit compliance costs at new facilities (a) exceed the
change in equilibrium market price. In this situation, investors will delay construction of
new facilities until the price increases just enough to cover all the costs of production.3
This situation will most likely occur when affected market share is small and the
supply shifts for affected units are large. The data below are consistent with these
conditions.
• Affected supply as a share of total electricity revenue: Using capacity data
projections for the year 2010 reported in the Annual Energy Outlook 2005, we
3The model is not a multiperiod model and therefore does not project when demand growth will be sufficient to
induce construction of new sources.
6-7
-------
estimate new units (approximately 1,300 MW) would account for approximately
0.1 percent of U.S. electric generation capacity.
• Estimated supply shift for affected boiler units: We estimate total revenue for
affected units to be approximately $405 million ($2004).4 Using the total annual
cost estimates provided by the engineering cost analysis, we estimate the average
supply shift for affected units to be approximately 0.9 percent under Option 1 and
1.6 percent under Option 2.
We developed a single partial equilibrium model to investigate possible market-level and
welfare impacts. The approach is a simplified version of the multimarket model used to
analyze the economic impacts of the turbines NSPS. We describe the model and numerical
simulation results below.
6.3.2 Overview of Partial Equilibrium Model
First, we consider the formal definition of the elasticity of supply for existing units
with respect to changes in price:
dpi p
Next, we use "hat" notation to transform Eq. (1) to proportional changes and rearrange terms:
0: = e.p (la)
Ql = percentage change in the existing unit supply,
es = elasticity of supply for existing units (value = 0.75), and
p = percentage change in market price.
For new sources, we assume the following supply decision rule. If the change in the new
equilibrium price exceeds unit costs of the NSPS, the new units remain in the market and are
willing to supply output up to their capacity level. If the change in equilibrium price is less
than the unit costs of the NSPS, investpxsjwjll^daj^construction of these facilities, and
supply from these units is zero. Qf = j _ nN r A p >
[~ (^capacity V ^* ~ C
(2)
4The revenue calculation is as follows: 1,300 MW * 8,760 hours/year x 0.85 x $41.82/MWh. =$405 million.
-------
Finally, we specify a demand equation as follows:
& = VdP (3)
ys
Qd = percentage change in the quantity of market demand,
r|d = market elasticity of demand (value = -0.2), and
p = percentage change in market price.
In response to the exogenous increase in production costs for new units, producer and
consumer behaviors described above, the new equilibrium satisfies the condition that the
change in supply equals the change in demand:
Given some uncertainty regarding the supply and demand elasticity of the parameter values,
we use a Monte-Carlo simulation5 and solve for the proportional price and quantity changes
and social cost estimates of the rule. The distribution of the supply elasticity is assumed to
be uniform between 0.5 and 1.0. The distribution of the demand elasticity parameter is
assumed to be lognormal with a median of |-0.2| and a geometric standard deviation of 1.1. 6
We consider two regulatory options in this analysis, each with different output-based
emission limits for PM, NOX and SO2. As Table 6-2 illustrates, Option 2 has the most
stringent standards of the two options.
Finally, the engineering cost analysis suggests that the regulatory program will not affect
peakload units. Therefore, the results described below reflect impacts on the baseload
electricity market.
5The software used for this model is Analytica®.
6Point estimates for electricity supply and demand elasticity parameters come from the turbines NSPS. We have
specified the distributions for these estimates so that draws for the Monte-Carlo simulation are consistent
with economic theory (e.g., demand elasticity values are not positive) and provide reasonable bounds for the
parameters.
6-9
-------
Table 6-2. Utility Emission Standards
Existing
NSPS Option T
NSPS Option 2a
PM1
0.03 Ib/MMBtu
0.018 Ib/MMBtu
(0.171b/MWh)
0.015 Ib/MMBtu
(0.141b/MWh)
NOX
SO2
1.61b/MWhc
(0.1 5 Ib/MMBtu)
0.6 lb/MMBtud
l.Olb/MWh
(0.11 Ib/MMBtu)
1.41b/MWh
(0.1 5 Ib/MMBtu)
0.7 Ib/MWh
(0.08 Ib/MMBtu)
1.1 Ib/MWh
(0.12 Ib/MMBtu)
a Assumes gross efficiency of 36% (proposed Hg MACT uses 35%); Refuse SO2 standard 0.25 & 0.15
Ib/MMBtu
bOnly includes filterable PM (does not include condensable PM).
°0.15 Ib/MMBtu for reconstructed units, assumes 32 percent gross efficiency.
d Seventy percent minimum and 90 percent maximum reduction requirement (2 to 6 Ib SO2/MMBtu coal = 0.6
Ib/MMBtu standard).
6-10
-------
SECTION 7
ECONOMIC IMPACT ANALYSIS
Control measures implemented to comply with the NSPS will impose regulatory costs on
affected facilities in the energy and manufacturing sectors. These costs will be distributed
between producers and consumers through changes in energy prices and changes in prices of
final products and services. This section describes the engineering control costs of the
regulatory alternatives and presents the economic impact estimates, including energy
impacts, of the NSPS for both electric utility steam generating units and manufacturers using
wood fired industrial boilers. Results are discussed for industrial boilers first, followed by
the economic analysis results of the regulation on electric utility steam generating units.
Based on economic impact analysis for industrial boilers, the final rule is expected to
have a negligible impact on the prices and production quantities for both the industry as a
whole and the 17 affected entities. The economic impact analysis shows that there would be
less than 0.01 percent expected price increase for output in the 17 affected entities as a result
of the final rule for wood fueled industrial boilers, Db and DC. The estimated change in
production of affected output is also negligible with less than a 0.01 percent change
expected. Therefore, it is likely that there is no adverse impact expected to occur for those
industries that produce output affected by the final rule, such as lumber and wood products
and paper and allied products manufacturing.
The analysis for utility boilers shows minimal changes in prices and output for the
industries affected by the final rule. The price increase for baseload electricity is 0.23
percent and the reduction in domestic production is 0.05 percent. The analysis also shows the
impact on the distribution of electricity supply. First, the construction of the five units with
add-on controls may be delayed; hence the engineering cost analysis of controls are not
incurred by society. Therefore the social costs of the proposed standard are approximately
$0.7 million and reflect costs associated with existing units bringing higher-cost capacity
online and consumers' welfare losses associated with the price increases and quantity
decreases in the electricity market. However, this estimate of social costs does not account
for the benefits of emissions reductions associated with this proposed New Source
Performance Standard (NSPS).
7-1
-------
7.1 Wood Fueled Industrial Boilers Economic Impact
7.1.1 Engineering Control Cost Inputs
Total capital costs of the regulation are available on Table 7-1 for both Db and DC
industrial boilers. For boilers categorized under subpart Db, annualized investment costs for
the four projected NAICS code 321 boilers and the 9 projected NAICS 322 boilers totaled
$630 thousand and $1.48 million, respectively, for a grand total of $2.11 million ($2004).
Total annualized investment costs under subpart DC were roughly $35 thousand for each of
the four projected affected entities for a grand total of about $140 thousand.
Table 7-1. Compliance Cost of Affected Units for Each Subpart
Subpart Db Projected Affected Units Compliance Cost (thousand)
Wood Products Manufacturing 4
Paper Manufacturing 9
Total 13 $2,110
Subpart DC
Wood Products Manufacturing 3
Paper Manufacturing 1
Total 4 $140
7.1.2 Market-Level
In the wood and paper products sectors, both the price increase and quantity decrease are
negligible, indicating that an increase in cost of production for the affected firms does not
result in an upward shift in the supply curve for the industry (Table 7-2). Price increases in
these markets are below 0.1 percent. Quantity decrease in both sectors is below 0.1 percent.
Market-level impacts on downstream product and service markets are essentially zero.
These results hold when compliance costs are aggregated for each sector, when they are
disaggregated by subpart, and when the compliance cost is measured for small business
exclusively.
7-2
-------
7.1.3 Social Cost Estimates
The social impact of a regulatory action is traditionally measured by the change in
economic welfare or producer and consumers surplus that it generates. The social costs of
the rule will be distributed across producers of wood and paper products and their
consumers. Producers experience welfare impacts resulting from changes in profits
corresponding with the changes in production levels and market prices. Consumers
experience welfare impacts due to changes in market prices and consumption levels.
However, it is important to emphasize that this measure does not include benefits that occur
outside the market, that is, the value of reduced levels of air pollution with the regulation.
The economic analysis conducted by the Agency accounts for behavioral responses by
producers and consumers to the regulation, as affected producers shift costs to other
economic agents due to increases in annual engineering costs. The engineering analysis
estimated annual costs of $737 thousand for wood products manufacturing and $1,513
million for paper manufacturing. Based on industry simulations run using FAST, the total
projected social cost (producer surplus plus consumer surplus) resulting from compliance
cost in the wood products and paper manufacturing industries, would be $2.2 million with
consumers and producers absorbing the impact in almost equal amounts. In the wood
products manufacturing industry, a slightly larger portion of the social cost would be
absorbed by consumers while the reverse would be true in the paper manufacturing
industries. When the social costs for each subpart were measured individually, subpart Db
showed the higher projected social cost at close to $2.0 million of consumer and producer
surplus. Subpart DC showed a negligible impact on consumer surplus in the wood products
manufacturing industry while the paper manufacturing industry may have a slight producer
surplus gain ($40 thousand) coupled with a $73 thousand loss in consumer surplus.
7-3
-------
Table 7-2. Market-Level Impacts of Wood Fueled Industrial Boiler NSPS, Aggregated
Subpart: 2010
Affected
Markets
Annual Compliance Cost ($,
thousand)
Percent Change
Price Quantity
Wood Product
Manufacturing
(NAICS: 321)
Paper
Manufacturing
(NAICS: 322)
737
1,513
Social Welfare Impact
0.00
0.00
0.00
0.00
Change ($1,000)
Producer Consume
Surplus r Surplus
Industry
Db
DC
Wood Product
Manufacturing
(NAICS: 321)
Paper
Manufacturing
(NAICS: 322)
Wood Product
Manufacturing
(NAICS: 321)
Paper
Manufacturing
(NAICS: 322)
Wood Product
Manufacturing
(NAICS: 321)
Paper
Manufacturing
(NAICS: 322)
(331)
(821)
(402)
(682)
(353) (282)
(733) (738)
(108) 0.00
40 (73)
7-4
-------
7.2 Electric utility steam generating units Economic Impact
7.2.1 Market-Level
The model projects the NSPS standard will increase the price of baseload electricity
by 0.23 percent (see Table 7-3). The standard error of this estimate is 0.04 percent.
Domestic production declines by 0.05 percent with a standard error of 0.008 percent. The
analysis also shows the impact on the distribution of electricity supply. First, it delays entry
of five affected new units with add-on controls because price does not sufficiently increase to
cover the costs of production for these units (see Table 7-4). Second, the increase in the
price of baseload electricity will make it profitable for unaffected existing sources to increase
supply. The remaining change in quantity results from decreased consumer demand as the
price of baseload electricity increases. However, all these effects are very small.
7.2.2 Social Cost Estimates
The national compliance cost estimates are often used to approximate the social cost
of the rule. The engineering analysis estimated annual costs of $3.7 million under Option 1
and $6.6 million under Option 2. In cases where the engineering costs of compliance are
used to estimate social cost, the burden of the regulation is measured as falling solely on the
affected producers, who experience a profit loss exactly equal to these cost estimates. Thus,
the entire loss is a change in producer surplus with no change (by assumption) in consumer
surplus, because no change in market price is estimated. This is typically referred to as a
"full-cost absorption" scenario in which all factors of production are assumed to be fixed and
firms are unable to adjust their output levels when faced with additional costs.
In contrast, the economic analysis attempts to account for behavioral responses by
producers and consumers to the regulation, as affected producers shift costs to other
economic agents. This approach results in a social cost estimate that may differ from the
engineering compliance cost estimate and also provides insights on how the regulatory
burden is distributed across stakeholders. The economic model estimates the total social cost
of the rule to be $0.7 million ($2004) with a standard error of $90,000 (see Table 7-3) and
falls primarily on consumers. The social cost estimate is less than 10 percent of the
estimated engineering costs as a result of behavioral changes of producers and consumers.
The major
7-5
-------
Table 7-3. Economic Impact Results for Proposed Utility Boilers NSPS: 2010a
Summary Statistics
Variable Option 1 Option 2
Percentage change
Price 0.23% (0.04%) 0.23% (0.04%)
Quantity -0.05% (0.008%) -0.05% (0.008%)
Social costs ($106) $0.700 ($0.09) $0.700 ($0.08)
"Standard errors are reported in parenthesis. This estimate of social costs does not account for the benefits of
emissions reductions associated with this proposed NSPS and are reported in $2004.
Table 7-4. Potential Delays in Unit Construction Under the Proposed Utility Boilers
NSPS: 2010
Projected
Number of New
Units Without
NSPS
New sources
5
(1,300 MW)
Change (Delay)
Absolute Relative
-5 -100%
(-1,300 MW) (-0.1%)
behavioral response is that the five units with add-on controls are crowded out of the market;
hence, these costs (i.e., the engineering cost analysis estimates of controls) are not incurred
by society. The social cost estimate reflects costs associated with existing units bringing
higher-cost capacity online. In addition, consumers experience losses associated with the
price increases and quantity decreases.
7.3 Energy Impact Analysis
Executive Order 13211, "Actions Concerning Regulations That Significantly Affect
Energy Supply, Distribution, or Use" (66 Fed. Reg. 28355 [May 22, 2001]), requires EPA to
prepare and submit a Statement of Energy Effects to the Administrator of the Office of
Information and Regulatory Affairs, Office of Management and Budget, for certain actions
7-6
-------
identified as "significant energy actions." Section 4(b) of Executive Order 13211 defines
"significant energy actions" as "any action by an agency (normally published in the Federal
Register) that promulgates or is expected to lead to the promulgation of a final rule or
regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices
of proposed rulemaking:
• that is a significant regulatory action under Executive Order 12866 or any
successor order, and is likely to have a significant adverse effect on the supply,
distribution, or use of energy; or
• that is designated by the Administrator of the Office of Information and
Regulatory Affairs as a significant energy action."
Given that this proposed NSPS has not been designated as a significant energy action, no
Statement of Energy Effects will be completed. However, to provide some information on
the impacts of the rule on affected energy markets, the following estimates have been
prepared.
Energy Price Effects. As described in the market-level results section, electricity prices
are projected to increase by less than 1 percent.
Impacts on Electricity Supply, Distribution, and Use. We project the increased
compliance costs for the electricity market will result in an annual production decline of
approximately 0.05 percent and a delay of new installed capacity of approximately
1,300 MW from 5 new sources. Note these effects have been mitigated to some degree in
two ways:
• The delay in installed capacity is offset by increased supply from unaffected
sources, implying that fewer older units may be retired as a result of the
regulation.
• Sectors previously using electricity in the baseline will switch to other energy
sources.
7-7
-------
SECTION 8
SMALL BUSINESS IMPACTS
Impact analysis is a general term used to describe various economic analyses that
supplement estimates of the benefits and costs of a rulemaking. These analyses are
conducted to meet the statutory and administrative requirements imposed by Congress and
the Executive Office. This chapter will address the requirements of the Regulatory
Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness
Act (SBREFA) and the Unfunded Mandates Reform Act (UMRA).
8.1 Small Entity Impacts
The Regulatory Flexibility Act (5 U.S.C. § 601 et seq.), as amended by the Small
Business Regulatory Enforcement Fairness Act (Public Law No. 104-121), provides that
whenever an agency is required to publish a general notice of proposed rulemaking, it must
prepare and make available an initial regulatory flexibility analysis, unless it certifies that the
proposed rule, if promulgated, will not have "a significant economic impact on a substantial
number of small entities." 5 U.S.C. § 605(b). Small entities include small businesses, small
organizations, and small governmental jurisdictions.
For purposes of assessing the impacts of the proposed standards on small entities, small
entity is defined as: (1) a small business that is identified by the North American Industry
Classification System (NAICS) Code, as defined by the Small Business Administration
(SBA); (2) a small governmental jurisdiction that is a government of a city, county, town,
school district or special district with a population of less that 50,000; and (3) a small
organization that is any not-for-profit enterprise which is independently owned and operated
and is not dominant in its field. Table 8-1 lists entities potentially impacted by the standard
with applicable NAICS code.
J-l
-------
Table 8-1. Potentially Regulated Categories and Entities3
Category
Industry
Industry
Industry
Industry
Industry
Industry
Federal
government
State/local/trib
al government
NAICS
Code"
321999
321212
32211
32213
322122
221112
22112C
221 12C
921150
Examples of Potentially Regulated Entities
All Other Miscellaneous Wood Products Manufacturing
Softwood Veneer and Plywood Manufacturing
Pulp Mills
Paperboard Mills
Newsprint Mills
Fossil fuel-fired electric utility steam generating units.
Fossil fuel-fired electric utility steam generating units owned
the Federal government.
by
Fossil fuel-fired electric utility steam generating units owned by
municipalities.
Fossil fuel-fired electric utility steam generating units in Indian
Country.
a Include NAICS categories for source categories that own and operate electric generating units only.
b North American Industry Classification System.
0 Federal, State, or local government-owned and operated establishments are classified according to the
activity in which they are engaged.
According to the SB A size standards for NAICS code 221112 (Utilities-Fossil Fuel
Electric Power Generation), a firm is small if, 1) including its affiliates, it is primarily
engaged in the generation, transmission, and or distribution of electric energy for sale and its
total electric output for the preceding fiscal year did not exceed 4 million megawatt hours, 2)
it is a small government jurisdiction that is a government of a city, county, town, school
district or special district with a population of less than 50 thousand, or 2) it is a small
organization that is a not-for-profit enterprise that is independently owned and operated and
is not dominant in its field.
8.1.1
Baseline Data Set
The engineering analysis conducted for the rulemaking identified 17 wood fired
industrial boiler units potentially affected by the standard along with 5 utility boiler units.
EPA used U.S. Census data along with a review of analyses done for recent past rules and
standards to estimate the number of facilities likely to be considered small entities among the
affected units. The following sections describe the results of the data collection and
8-2
-------
conclusions on the number of affected small entities. In accordance with previous sections of
this chapter, the contents of this section are split into wood fueled industrial boilers and
utility boilers.
8.2 Wood Fueled Industrial Boilers
As previously mentioned, the engineering analysis conducted for the rulemaking
identified 17 wood fired industrial boiler units potentially affected by the standard for both
subpart Db and DC. Among the 17 affected entities, 7 are projected to be in the wood
products manufacturing industry while the remaining 10 consist of paper manufacturing.
Company employment and ownership data was not available through the U.S. Census
Bureau in the detail required for a conclusive identification of the number of small
businesses.-Therefore, small entity analyses from previous recent MACT standards were
utilized for information regarding the proportion of companies in each sector that would be
considered small entities.
8.2.1 Wood Products Manufacturing (NAICS: 321)
As stated in the Economic Impact Analysis of the Plywood and Composite Wood
Products NESHAP, November 2002, for facilities falling under SIC code 24 (NAICS: 321),
"While over 35 percent of firms in the industry are considered small, 91 percent of facilities
are owned by large firms." The SB A treats a facility that has a substantial portion of its assets
and/or liabilities shared with a parent company as part of that company. Therefore, less than
10 percent of the affected industries in the wood product manufacturing sector can be
considered small businesses. The result of this is that the Agency estimates that at most one
of the wood product manufacturing affected facilities can be considered a small business.
8.2.2 Paper Manufacturing (NAICS: 322)
According to the Industrial Boilers and Process Heaters MACT Standard, February
2004, an estimated 25 percent of the sampled firms from the of paper and allied products
manufacturing industry is made up of small businesses. This translates into 2 to 3 paper
manufacturing firms which could be considered small businesses.
8.2.3 Cost to Sales Ratio
EPA assessed the economic and financial impacts of the rule using the ratio of annual
compliance costs to the value of sales (cost-to-sales ratio or CSR) using revenues and control
costs. The analysis assesses the burden of the rule by assuming the affected firms absorb the
control costs, rather than passing all or some portion of them on to consumers in the form of
higher prices.
8-3
-------
The cost to sales ratios were estimated using the Agency's FAST-Small Entity Impacts
Screening Tool which conducts assessment of small business impacts consistent with the
Small Business Regulatory Enforcement and Fairness Act (SBREFA) of 1996 using broad
industry level compliance cost inputs. Similar to the economic impact analysis section,
simulations were run aggregating the compliance cost to be absorbed by each sector
(NAICS: 321, 322), by the affected industries within each sector, and by the projected
number of small business within each sector. Table 8-2 displays the cost to sales ratios for
these three simulations.
Table 8-2 Cost-to-Sales Ratio (%) by Employment Size Category for Wood Products
Manufacturing (NAICS: 321) and Paper Manufacturing (NAICS: 322)
Employment Size Category
Industry NAICS 20-99 100-499 500+
Cost/Sales (%)
321
322
0.00
0.20
0.00
0.08
0.00
0.00
Affected Entities
Cost/Sales (%)
Projected Number
Cost/Sales (%)
321
322
of Small Business
321
322
3.48
2.44
0.77
0.52
0.71
0.97
0.16
0.21
0.09
0.03
0.02
0.01
According to U.S. Census Bureau data, the average employment size of the firms in the
wood products and paper manufacturing industries is greater than 20 employees per firm. As
a result cost to sales ratios for the projected 17 affected firms are stratified into three
employment size categories, two of which are considered small businesses. As expected, the
highest cost to sales ratios would be experienced in firms with 20-99 employees followed by
firms with employee numbers between 100 and 499. Based on these results, in all three
scenarios, the cost to sales ratios would be less than 3 percent with the possible exception of
the wood products manufacturing sector when measuring the total compliance cost of the 7
affected entities. In this case, the cost to sales ratio registered just under 3.5 percent.
However, given the low number of projected small entities, the Agency expects the small
business entity to be fueled by a 10-100 MMBtu/Hr boiler (Subpart DC). Therefore, cost to
sales ratios are likely to be less than 1 percent and consist of only 5 to 6 percent of the total
compliance cost. Given the low number of affected small entities and the insignificant to
8-4
-------
these entities, the Agency believes that there is not a significant impact to a substantial
number of small entities (or SISNOSE) for subparts Db and DC.
8.3 Utility Boilers
According to the Memorandum for the Regulatory Flexibility Act Analysis for Utility
MACTProposedRulemaking, which used plant level data from EGRID in the EGRDPLNT
table for the year 2000, among the universe of utility boilers in the United States, 38 were
considered small entities. Using the same plant level data (EGRID), the Agency determined
that there are currently 1,052 utility boiler units in operation. Thus, the ratio of small coal-
fired utility boilers to total boilers demonstrates that less than 4% of the utility boilers in
operation can be considered small businesses. Based on the low ratio of small business coal-
fired boilers to total US boilers, the Agency expects that at most one and likely none of the
five projected boilers will fall under the definition of small business. Given the low number
of affected small entities and the insignificant to these entities, the Agency believes that there
is not a significant impact to a substantial number of small entities (or SISNOSE) for subpart
Da.
-------
REFERENCES
Eastern Research Group (ERG). 2005. Memorandum to Christian Fellner, U.S.
Environmental Protection Agency. New Unit Analysis for
Industrial/Commercial/Institutional Boilers for New Source Performance Standards of
Nox, SO2, andPM. January, 2005.
Research Triangle Institute (RTI). 2005. Memorandum from Brooks Depro to Darryl
Weatherhead, U.S. Environmental Protection Agency. Final Economic Impact Analysis
for Utility Boilers New Source Performance Standards (NSPS). February 4, 2005.
Stanley, Gary. 1999. "Paper and Allied Products, Pulp Mills." U.S. Industry and Trade
Outlook 2000. United States: McGraw-Hill, pp 10-1 to 10-8.
T war ok, Chris. 1999. "Wood Products, Sawmills and Planing Mills." U.S. Industry and
Trade Outlook 2000. United States: McGraw-Hill, pp 7-1 to 7-7.
U.S. Department of Commerce, Bureau of the Census. 1991. 7957 Census of Manufactures,
Subject Series, General Summary. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 1996. 1992 Census of Manufactures,
Subject Series: General Summary. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 2001. 1997 Economic Census,
Manufacturing Subject Series, Concentration Ratios in Manufacturing. Washington,
DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 2002a. 1997 Economic Census,
Manufacturing, Subject Series: General Summary. Washington, DC: Government
Printing Office.
U.S. Department of Commerce, Bureau of the Census. 2002b. Industry Statistics Sampler,
2002 Economic Census Industry Series Report, [online]
www.census.gov/epcd/ec97/industry.
U.S. Department of Commerce, Bureau of the Census. 2003a. Annual Survey of
Manufactures 2001. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 2003b. Current Industrial Reports,
Survey of Plant Capacity: 2001 Washington, DC: Government Printing Office.
R-l
-------
U.S. Department of Energy, Energy Information Administration. 1997. Electricity Prices in
a Competitive Environment: Marginal Cost Pricing of Generation Services and
Financial Status of Electric Utilities—A Preliminary Analysis through 2015.
Washington, DC: U.S. Department of Energy.
U.S. Department of Energy, Energy Information Administration. 2003. Electric Power
Annual, 2001. Vol.1. DOE/EIA-0348(2001). Washington, DC: U.S. Department of
Energy.
U.S. Department of Energy, Energy Information Administration. December 2004. Annual
Energy Outlook 2005 (Early Release). [Online], .
Tables 8 and 9.
U.S. Environmental Protection Agency (EPA), EPA Office of Compliance. 1995a. Sector
Notebook Project: Profile of the Lumber and Wood Products Industry. Washington,
DC: U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA), EPA Office of Compliance. 1995b. Sector
Notebook Project: Profile of the Wood Furniture and Fixtures Industry. Washington,
DC: U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). 1999. Economic Impact Analysis of Air
Pollution Regulations: Portland Cement,
-------
U.S. Environmental Protection Agency (EPA), Office of Air Quality Planning and
Standards. 2004a. Industrial Boilers and Process Heaters MACT Standard. Research
Triangle Park, NC: U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA), Office of Air Quality Planning and Standards.
2004b. "Regulatory Impact Analysis of the Proposed Guidelines for Best Available
Retrofit Technology Determinations Under the Regional Haze Regulations. Research
Triangle Park, NC: U.S. Environmental Protection Agency.
U.S. Small Business Administration (SB A), Office of Size Standards. 2003. Table of Small
Business Size Standards Matched to North American Industry Classification System
Codes. Washington, DC: Government Printing Office.
Willis, Suzanne. 1998. "Wood Products, Sawmills and Planing Mills." U.S. Industry and
Trade Outlook '98. United States: McGraw-Hill, pp 7-3 to 7-5.
R-3
-------
•
^ J*
S-a <9
------- |