United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington DC 20460
EPA-440/2-82-012
October 1982
Water
oEPA
Economic Impact Analysis of
Proposed Effluent Standards
and Limitations for the
Battery Manufacturing Industry
QUANTITY
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ECONOMIC IMPACT ANALYSIS
OF PROPOSED
EFFLUENT STANDARDS AND LIMITATIONS
FOR THE BATTERY MANUFACTURING INDUSTRY
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
401 M Street, Southwest
Washington, D.C. 20460
Submitted by:
JRB Associates
8400 Westpark Drive
McLean, Virginia 22102
October 25, 1982
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PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA). The
purpose of the study is to analyze the economic impacts which could result
from the application of effluent standards and limitations issued under
Sections 301, 304, 306, 307, 308, and 501 of the Clean Water Act to the
battery manufacturing industry.
The study supplements the technical study (EPA Development Document)
supporting the issuance of these regulations. The Development Document sur-
veys existing and potential waste treatment control methods and technology
within particular industrial source categories and supports certain standards
and limitations based upon an analysis of the feasibility of these standards
in accordance with the requirements of the Clean Water Act. Presented in the
Development Document are the investment and operating costs associated with
various control and treatment technologies. The attached document supplements
this analysis by estimating the broader economic effects which might result
from the application of various control methods and technologies. This study
investigates the effects in terras of product price increases, effects upon
employment and the continued viability of affected plants, effects upon foreign
trade, and other competitive effects.
The study has been prepared with the supervision and review of the Office
of Water Regulations and Standards of EPA. This report was submitted in
accordance with Contract No. 68-01-6348, Work Assignment 14, by JRB Associates
and was completed in October 1982.
This report is being released and circulated at approximately the same
time as publication of a notice of proposed rulemaking in the Federal Register.
It will be considered along with the information contained in the Development
Document and any comments received by EPA on either document before or during
final rulemaking proceedings.
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TABLE OF CONTENTS
Chapter Title
SUMMARY
1 INTRODUCTION
1 . 1 PURPOSE
1.2 INDUSTRY COVERAGE
1.3 INDUSTRY SEGMENTATION
1.4 ORGANIZATION OF REPORT
2 STUDY METHODOLOGY
2 . 1 OVERVIEW
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
2.3 STEP 2: SUPPLY-DEMAND ANALYSIS
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES
2.5 STEP 4: PLANT LEVEL SCREENING ANALYSIS
2.6 STEP 5: PLANT LEVEL PROFITABILITY ANALYSIS
2.7 STEP 6: CAPITAL REQUIREMENTS ANALYSIS
2.8 STEP 7: PLANT CLOSURE ANALYSIS
2.9 STEP 8: ASSESSMENT OF OTHER IMPACTS
2.10 STEP 9: ESTIMATION OF SOCIAL COSTS
2.11 STEP 10: SMALL BUSINESS ANALYSIS
2.12 STEP 11: ASSESSMENT OF NEW SOURCE IMPACTS
2.13 LIMITATIONS TO THE ACCURACY OF THE ANALYSIS
3 INDUSTRY DESCRIPTION
3 . 1 OVERVIEW
3.2 FIRM CHARACTERISTICS
3.3 FINANCIAL STATUS OF COMPANIES
3.4 PLANT CHARACTERISTICS
3.4.1 Storage Batteries
3.4.2 Primary Batteries
4 MARKET STRUCTURE
4.1 OVERVIEW
4.2 END-USE MARKETS AND SUBSTITUTES
4.2.1 Storage Batteries
4.2.2 Primary Batteries
4.3 RECENT CONSUMPTION AND PRICE TRENDS
4.4 IMPORTS AND EXPORTS
4.5 UNIT VALUE OF BATTERY PRODUCTS
4.6 BATTERY INDUSTRY PRICEDETERMINATION
4.6.2 Industry Competitiveness
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TABLE OF CONTENTS (Continued)
Chapter Title Page
5 BASELINE PROJECTIONS OF INDUSTRY CONDITIONS 5-1
5.1 DEMAND RELATED FACTORS 5-2
5.1.1 Time Series Analysis 5-3
5.1.2 Regression Analysis 5-5
5.1.3 Forecasts of Other Authors 5-7
5.1.4 Concensus of Demand Projections 5-11
5.2 SUPPLY FACTORS 5-13
5.2.1 Employment 5-13
5.2.2 Number of Industry Establishments 5-14
in 1990
5.2.3 New Battery Plants 5-16
5.2.4 Prices 5-17
5.2.5 Profitability 5-17
5.3 SUMMARY OF BASELINE CONDITIONS 5-17
6 COST OF COMPLIANCE 6-1
6.1 OVERVIEW 6-1
6.2 COST ESTIMATION METHODOLOGY 6-2
6.3 COST FACTORS, ADJUSTMENTS, AND ASSUMPTIONS 6-3
6.4 POLLUTANT PARAMETERS 6-4
6.5 CONTROL AND TREATMENT TECHNOLOGY FOR EXISTING 6-4
DISCHARGERS
6.6 CONTROL AND TREATMENT TECHNOLOGIES FOR NEW 6-12
SOURCES
6.7 INDUSTRY COMPLIANCE COSTS 6-12
6.8 COST FOR SOLID AND HAZARDOUS WASTES 6-15
7 ECONOMIC IMPACT ASSESSMENT 7-1
7.1 PRICE AND QUANTITY CHANGES 7-1
7.2 RESULTS OF SCREENING ANALYSIS . 7-3
7.3 PLANT LEVEL PROFITABILITY ANALYSIS 7-6
7.4 CAPITAL REQUIREMENTS ANALYSIS 7-10
7.5 PLANT CLOSURE POTENTIAL 7-12
7.6 OTHER IMPACTS 7-18
7.6.1 Employment, Community and Regional Effects 7-18
7.6.2 Foreign Trade Impacts 7-21
7.6.3 Industry Structure Effects 7-21
7.7 SOCIAL COST ESTIMATES 7-22
7.7.1 Conceptual Framework 7-23
7.7.2 Social Cost Analysis 7-23
7.8 NEW SOURCE IMPACTS 7-24
T7871 "New "Source 'CompITance"Cbs"t"s ~ ~™ ~ 7-26
7.8.2 Economic Impacts on New Sources 7-27
7.8.3 Total New Source Complance Costs 7-28
7.9 LIMITATIONS TO THE ACCURACY OF THE ANALYSIS 7-29
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TABLE OF CONTENTS (Continued)
Chapter Title Page
8 REGULATORY FLEXIBILITY ANALYSIS 8-1
8.1 INTRODUCTION 8-1
8.2 ANALYTICAL APPROACH 8-2
8.2.1 Overview 8-2
8.2.2 Definition of Small Entities 8-2
8.3 BASELINE CONDITIONS 8-3
8.4 COMPLIANCE COSTS 8-6
8.5 ECONOMIC IMPACTS ON SMALL ENTITIES 8-7
8.6 POTENTIAL EFFECTS OF SPECIAL CONSIDERATIONS 8-8
FOR SMALL' ENTITIES
APPENDIX A: PROFITABILITY ANALYSIS METHODOLOGY A-l
ill
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LIST OF TABLES
Table Title Page
1-1 RELATIONSHIP OF TECHNICAL INDUSTRY SUBCATEGORIES 1-3
TO ECONOMIC INDUSTRY SEGMENTS
3-1 NUMBER OF FIRMS THAT MANUFACTURE BATTERIES BY 3-3
TYPE OF FIRM, 1977
3-2 CONCENTRATION RATIOS OF BATTERY MANUFACTURING 3-4
INDUSTRY
3-3 FINANCIAL CHARACTERISTICS OF SELECTED BATTERY 3-7
MANUFACTURERS
3-4 NUMBER OF FIRMS AND PRODUCTINO FACILITIES 3-9
MANUFACTURING BATTERIES IN EACH PRODUCT GROUP
3-5 DISTRIBUTION OF BATTERY MANUFACTURING ESTABLISHMENTS 3-10
BY EMPLOYMENT SIZE, 1977
3-6 GEOGRAPHIC DISTRIBUTION OF BATTERY PLANTS 3-11
3-7 COMPARISON OF SINGLE AND MULTI-PRODUCT NON-LEAD-ACID . 3-14
BATTERY PLANTS
4-1 VALUE OF BATTERY SHIPMENTS BY END-USE MARKET 1967-1977 4-2
4-2 PRIMARY BATTERY PRODUCTION 1973-1977 4-8
4-3 HISTORICAL TRENDS IN THE BATTERY INDUSTRY 4-13
4-4 BATTERY INDUSTRY IMPORTS AND EXPORTS, 1967-1977 4-17
4-5 AVERAGE VALUE PER POUND OF PRODUCTION 4-19
4-6 MAJOR END-USE MARKETS, SUBSTITUTES, AND PRICE 4-21
ELASTICITIES FOR BATTERY SUBCATEGORIES
5-1 REGRESSION FORECASTING EQUATIONS 5-8
5-2 SUMMARY OF DEMAND PROJECTIONS OF THE VALUE OF 5-9
SHIPMENTS OF BATTERY PRODUCTS
5-3 SUMMARY OF BASELINE PROJECTIONS 5-18
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LIST OF TABLES (Continued)
Table Title Page
6-1 COST PROGRAM POLLUTANT PARAMETERS 6-5
6-2 RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY 6-6
FOR CALCIUM SUBCATEGORY"
6-3 RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY 6-7
FOR CADMIUM SUBCATEGORY
6-4 RECOMMENDED CONTROL AND TREATMENT .TECHNOLOGY 6-8
FOR LEAD SUBCATEGORY
6-5 RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY 6-9
FOR LITHIUM SUBCATEGORY
6-6 RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY 6-10
FOR MAGNESIUM SUBCATEGORY
6-7 RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY 6-11
FOR ZINC SUBCATEGORY
6-8 BATTERY INDUSTRY TOTAL COMPLIANCE COSTS EXISTING 6-13
SOURCES 1978 DOLLARS
6-9 BATTERY INDUSTRY TOTAL COMPLIANCE COSTS EXISTING 6-14
SOURCES 1982 DOLLARS
6-10 TOTAL ANNUAL RCRA COMPLIANCE COSTS 6-17
7-1 PRICE AND PRODUCTION CHANGES (Percent) 7-2
7-2 NUMBER OF PLANTS BY TOTAL ANNUAL COMPLIANCE COST 7-4
TO REVENUES RATIO
7-3 NUMBER OF PLANTS BY ESTIMATED CHANGE IN RETURN 7-5
ON SALES
7-4 POST-COMPLIANCE RETURNS ON TOTAL ASSETS (Percent) 7-7
7-5 POST-COMPLIANCE INTERNAL RATES OF RETURNS (Percent) 7-9
7-6 COMPLIANCE CAPITAL COSTS RELATIVE TO FIXED ASSETS 7-11
- AND- ANNUAL--GAP-I-IAL -EX2E-ND I.TURES_(£ereen.tl
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LIST OF TABLES (Continued)
Table Title Page
7-7 SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT 7-13
CLOSURES DUE TO THE REGULATION
7-8 SUMMARY OF POTENTIAL PLANT CLOSURES BEFORE 7-19
CONSIDERATION OF BASELINE CLOSURES
7-9 SUMMARY OF POTENTIAL EMPLOYMENT IMPACTS 7-20
7-10 SELECTED REGULATORY ALTERNATIVES AND INCREMENTAL 7-25
COMPLIANCE COSTS FOR NEW SOURCES IN BATTERY
MANUFACTURING
8-1 COMPLIANCE COSTS OF LEAD ACID BATTERY MANUFACTURING 8-4
FACILITIES BY SIZE OF FACILITY
8-2 COMPLIANCE COSTS OF NON-LEAD ACID BATTERY MANU- 8-5
FACTURING FACILITIES BY SIZE OF FACILITY
8-3 NUMBER OF PLANT CLOSURES BY SIZE OF PLANT 8-9
vi
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LIST OF FIGURES
Figure Title P_a_ge_
2-1 ECONOMIC ANALYSIS STUDY OVERVIEW 2-2
4-1 VALUE OF IMPORTS AND EXPORTS, 1967-1981 4-16
vii
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S. SUMMARY
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SUMMARY
PURPOSE
This report identifies and analyzes the economic impacts of water pollu-
tion control regulations on the battery manufacturing industry. These regula-
tions include effluent limitations and standards based on BPT (Best Practical
Control Technology currently available), BATEA (Best Available Technology Eco-
nomically Achievable), PSES (Pretreatment Standards Existing Sources), NSPS
(New Source Performance Standards), and PSNS (Pretreatment Standards New Sources),
which are being proposed under authority of Sections 301, 304, 306, 307, 308,
and 501 of the Federal Water Pollution Control Act, as Amended (the Clean Water
Act). The primary economic impact variables of interest include price changes,
plant closures, substitution effects, changes in employment, shifts in the
balance of foreign trade, changes in industry profitability, structure, and
competition, and impacts on small business.
INDUSTRY COVERAGE
Batteries store electrical energy through the use of one or more electro-
chemical cells in which chemical energy is converted to electrical current. A
typical battery cell consists of two dissimilar materials (called cathodes and
anodes) immersed in an electrolyte (a substance which in solution is capable
of conducting an electric current). When the metal electrodes are connected
to an electric circuit, current flows.
There are at least two dozen battery types, as defined by their basic
electrolyte couple type, and many variations of each, depending on battery
structure, variations in chemistry, and production methods. Sixteen of these
battery types represent at least 98 percent of the volume of shipments of bat-
teries in the U. S. For purposes of this study, the battery industry consists
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of establishments that manufacture these 16 types of batteries. A list of
these appears in Table S-l. The remaining battery types were omitted from
detailed analysis in this study because they are either no longer in production,
are of little commercial significance, or are experimental (e.g., nickel-zinc
and fuel cells).
There are a number of ways in which battery types may be classified for
study and different portions of the study use different classification schemes
depending upon data availability and analytical requirements. The companion
technical study categorized the industry according to the basic anode material
used and, to some extent, according to whether the electrolyte was acid or
alkaline. The basic groupings are: Cadmium, Calcium, Lead, Leclanche, Zinc,
Lithium, and Magnesium. This categorization seems appropriate since the
primary purpose of the study was an evaluation of production processes and
their effluents.
While the anode classification scheme may be appropriate from a technical
viewpoint, it is expected that economic and financial impacts of the regula-
tions will vary with the type of product, end use, and industry organization.
This is because the determinants of demand, availability of substitutes, and
pricing latitude will vary with these factors. For this reason, battery type
as described by their cathode-anode pair is the primary segmentation scheme
used in the economic study, wherever the data allowed. Table S-l shows the
relationship between the technical and economic industry classification schemes.
STUDY APPROACH
The basic approach used to assess the economic impacts likely to occur as
a result of the costs of each regulatory alternative was to develop a model of
the operational characteristics of the industry and to use the model to compare
industry conditions before and after compliance with the proposed regulations.
Side analyses were used to assess linkages of industry conditions to other
effects such as employment, community and foreign trade impacts. For the lead-
acid, zinc and cadmium battery industry segments there were five alternative
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3LE S-l. RELATIONSHIP OF TECHNICAL INDUSTRY Sl'BCATEGORIES
TO ECONOMIC INDUSTRY SEGMENTS
Batterv Product Grouos
Lead Acid
Technical Subcaceeorv
Lead
Carbon Zinc ana
Related Types
Alkaline Manganese
Carbon Zinc-Air
Mercury Ruben
Nickel Zinc
Mercury Cadmium Zinc
Nickel Cadmium
Mercury Cadraium
Silver Oxide Cadmium
Magnesium Carbon
Magnesium Reserve
Thermal
Lithium
C a 1 c i urn
Leelanche
Zinc Anode, Alkaline Electrolvte
Cadmium Anode
Magnesium Anode.
Lithium Anode
Calcium.
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regulatory options considered in the economic study; each option represents
increasing levels of compliance costs and, generally, pollution abatement.
For the other industry segments four regulatory options were considered.
Specifically, the study proceeded in the following steps:
Step 1 Description of Industry Characteristics
The first step in the analysis is.to develop a description of the basic
industry characteristics. The characteristics of interest are those that
would enable estimation of key parameters which describe the initial impacts
of the regulation. These include the determinants of demand (e.g., demand
elasticities), market structure, the degree of intra-industry competition,
and financial performance. These basic characteristics are described in
Chapters 3, 4 and 5 of the report.
The sources for this information are many. They include government
reports, proprietary market research studies, text books, trade association
data, The trade press, discussions with various trade association representa-
tives and individuals associated with the industry, visits to a number of
battery manufacturing plants and an industry survey and plant-by-plant
compliance cost estimates conducted by EPA's Effluent Guidelines Division.
From the first step, several observations were made which influenced the
remainder of the analysis. These are:
• generally low demand elasticity for the total industry,
due primarily to a lack of substitutes for batteries
• somewhat higher demand elasticities (although still generally
inelastic) for individual battery product groups, due
to the ability to substitute one battery type for another
• low estimated compliance costs for most plants
• a wide variation in estimated unit compliance costs among plants
• a lack of plant-level data on a number of key variables,
such as profitability.
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These observations indicated the need for an analytical methodology that would
account for variations in conditions among plants and firms within the
industry.
Step 2 Industry Supply and Demand Analysis
The second step in the analysis is a determination of expected changes
in market prices and industry production levels for each battery product
group and for each regulatory option. If prices can be successfully raised
without significantly reducing product demand and companies are able to
maintain their current financial status, the potential for plant closings
will be minimal. If prices cannot be raised to fully recover compliance
costs, because of significant intra-industry competition, for example, the firms
may attempt to maintain their financial status by closing higher cost/less
efficient plants.
The price/output model assumes a full-cost pricing strategy. Full-cost
pricing appears to characterize the long-term behavior of battery firms in
normal years in which price is assumed to cover average total cost. In
this context, average total cost equals average variable cost plus average
fixed cost plus a target rate of return of investment.
Using the pricing strategy outlined above and externally developed
elasticity estimates, the model was used to calculate a range of expected
output changes. (Output changes result from application of the estimated
price changes and elasticity estimates.)
Step 3 Analysis of Cost of Compliance
Investment and annual compliance costs for 239 production facilities
were estimated by EPA's Effluent Guidelines Division. For three technical
subcategories (lead, zinc and cadmium) there are five sets of costs, corres-
ponding to increasing levels of pollution control. For the remaining sub-
categories four options were considered. For purposes of this report, the
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regulatory options are labeled "Alternative 1, Alternative 2, etc." A
description of the control and treatment technologies and the rationale
behind these compliance cost estimates appear in Chapter 6.
Step 4 Screening Analysis
The screening analysis uses several basic parameters to separate out
those plants with obviously small impacts from those with potentially
significant impacts. The primary variables are the ratio of total compliance
cost to revenue and degree of gross profit margin reduction. Those plants
with unit compliance costs significantly greater than industry unit price
increases were analyzed to assess the significance of the estimated profit
reduction. In general, if return on sales (ROS) fall by less than one
percent, these plants are not considered candidates for closure. Plants
with greater reductions in profits were subjected to a more detailed financial
analysis to determine if they are likely plant closures.
Step 5 Plant Level Financial Analysis
There are two basic financial characteristics which are examined:
profitability and capital requirements. Both characteristics are examined
through standard financial analysis techniques. That is, profitability is
measured by both return on investment (net assets) analysis and discounted
cash flow approaches. Capital requirements of the regulation are evaluated
in terms of the amount of the initial capital investment in relation to
normal new plant and equipment expenditures and in relation to fixed assets.
The use of these approaches was hampered by a lack of plant-specific data on
a number of input variables such as value of shipments, profit margins, asset
values and cash flow. However, using a number of industry-wide parameters
obtained from various published sources and company-wide data from corporate
annual reports, a range of plausible values was developed for each of the
key parameters (e.g. return on investment). Then, the majority of the
analysis was conducted using the most conservative end of the range of each
parameters (e.g., lowest ROI). Consequently, the resulting estimates are
considered "worst-case" scenarios of likely impacts.
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Step 6 Assessment of Plant Level Impacts
The sixth step involved the assessment of the degree of impacts on
individual plants. These assessments were made by evaluating the above
financial variables in conjunction with non-financial factors and non-
quantifiable factors such as substitutability of products, plant and firm
integration, the existence of specialty markets and expected market growth
rates.
Step 7 Assessment of Other Impacts
Once the assessment of plant closure and price and quantity changes are
made, other variables which flow from these were analyzed. The primary vari-
ables considered include employment, industry structure, the special case of
small entities, and imports and exports. These impacts are assessed through
the use of industry-wide and firm-wide ratios calculated from public data
sources, (e.g., value of shipments per employee) and associated trends.
Step 8 Estimation of Social Costs
Social costs measure the value of goods and services lost by society
because of the regulatory action. These costs generally include the use of
resources needed to comply with a regulation, the use of resources to implem-
ent or enforce a regulation, plus the value of the output that is forgone
because of the regulation. A reasonable estimate of these costs is provided
by the present value of direct compliance costs, which generally account for
most of the social costs.
Step 9 Small Business Analysis
The Regulatory Flexibility Act (RFA) requires Federal regulatory agencies
to consider small entities throughout the regulatory process. This analysis
addresses these objectives by identifying and evaluating the economic impacts
that are likely to result from the promulgation of BPT, BCT, BATEA, NSPS, PSES
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and PSNS regulations on small business in the battery manufacturing industry.
Most of the information and analytical techniques in the small business analysis
are drawn from the general economic impact analysis which is described above
and in the remainder of this report. The specific conditions of small firms
are evaluated against the background of general conditions in battery markets.
Step 10 Estimation of New Source Impacts
Newly constructed facilities and facilities that are substantially modified
are required to meet the New Source Performance Standards (NSPS) and/or the
Pretreatment Standards for New Soruces (PSNS).
The costs of the selected new source standard are defined as those that
are incremental over those for existing standards. These costs are estimated
for the period 1980 to 1990 under the assumption that all of the increases in
capacity during that period will be subject to new source standards. The assess-
ment of economic impacts on new sources is based upon the above cost estimates
and by analogy to the impact conclusions for similar existing sources described
above. The primary variables covered are identical to those for existing
plants plus the potential of the regulation for fostering barriers to entry or
causing intra-industry shifts in competitiveness.
Limitations
In performing these analyses a number of assumptions, empirical estimates,
and judgements were made. These factors are discussed in detail in various
appropriate sections of the report. The major limitations arise from a lack of
extensive time series data on industry characteristics and plant and firm-level
data on product mix, value of shipments, financial performance, employment, and
cyclical behavior. All assumptions and judgements were made in a very conserva-
tive manner. That is, if there is any bias in the analysis, it is to overesti-
mate the economic impacts of the proposed regulatory options.
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OVERVIEW OF INDUSTRY CHARACTERISTICS
The 1977 domestic production of both primary and secondary batteries
amounted to 2.6 billion dollars. Seventy-five percent of this amount
represented storage batteries used in a multitude of products and applications.
The storage battery market is dominated by the lead-acid and nickel-
cadmium type. The lead-acid battery accounts for 90 to 95 percent of storage
batteries. About 82 to 86 percent of lead-acid batteries are used for Start-
ing, Lighting and Ignition (SLI) applications, primarily for the automobile
market. The other 14 to 18 percent goes to the industrial and consumer market.
Nickel-cadmium batteries are used in a wide variety of consumer and industrial
products. There are two basic types of nickel-cadmium batteries — vented
and sealed. Vented nickel-cadmium batteries are large heavy products used
primarily for aircraft engines. Sealed nickel-cadmium batteries are smaller
and portable. They are used to power a variety of products such as calculators,
portable tools, toys and emergency lights.
Most primary batteries are used in consumer products such as flash-
lights, toys, games, watches, calculators, hearing aids, and electronic
equipment. Sales of primary batteries for use in consumer products generally
represent 70 to 75 percent of total primary battery shipments.
In general, there is little or no ability to substitute other products
for batteries in most applications. However, some switching from one battery
type to another is possible. The amount of switching possible varies
among the 16 battery types studied. Thus, a separate treatment of each
battery type was included in the study. In this separate treatment, it was
found that there is little substitution potential among "wet cell" batteries
(e.g., the automobile lead acid battery) and significant substitution
potential among "dry cell" battery types (e.g., flashlight or calculator
batteries). Because of this substitution potential, some dry cell batteries
will experience greater reduction in demand due to price increases which
may be necessitated by the regulation, than others.
1977 Census of Manufacturers
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According to the 1977 Census of Manufacturers, there were 175 firms and
276 establishments in the industry. The firms are heterogeneous, consisting
of large diversified firms, large firms that specialize in battery manufac-
turing and small independent one-plant firms. The majority of establishments
are owned by small, private companies that deal primarily in one particular
aspect of the battery market. The production of primary batteries is highly
concentrated and that of storage batteries is less concentrated, but still
considerable.
The EPA data base used in the economic impact analysis identified 258
battery "production facilities". A production facility, in this context,
is defined differently than that of "establishment" used by the Census.
A production facility is a specific battery product line as defined by
cathode-anode pair. The number of production facilities identified by EPA
and the number of establishments reported by the Census differ (a) because
the definition of production facility differs from that of establishment
used in the Census, (b) because the EPA data base was assembled for a
different time period than that of the Census, and (c) because a number of
firms listed in directories as manufacturers did not perform a significant
amount of battery manufacturing activities (e.g. distributors). The primary
data base upon which the plant by plant impact analysis is based is the 258
production facilities identified by EPA (referred to as "plants" in this report)
The financial characteristics of specific battery operations were
difficult to determine because of the lack of detailed plant-level data.
However, it is estimated that the industry is generally financially sound
and growing at a rate slightly above that of the real GNP over the long run.
FINDINGS
The key findings reported are investment and annual costs, economic
impacts, social costs and the impacts on small entities.
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Compliance Cost
Table S-2 shows the estimated investment and total annual compliance cost
in 1977 dollars by technical subcategory for each regulatory alternative.
Descriptions of the technical characteristics of these options appear in
Chapter 6 and in the Development Document. The costliest control option
(Alternative 5) would add $9.5 million to the annual costs of battery manufac-
turing. This represents 0.37 percent of the value of shipments of batteries
($2.6 billion). Associated investment costs would be $32.9 million, represent-
ing 5 percent of fixed assets. The estimated compliance costs for most other
treatment options are significantly lower, as shown in the Table. Table S-3
shows the compliance costs in 1982 dollars.
Industry Impacts
The economic impacts expected to result from these compliance costs are
generally mild. The primary variables of interest are summarized in Table S-4.
The mild economic impacts result from the fact that compliance costs as a per-
cent of revenues are generally small and the demand for battery products is
not very sensitive to changes in relative prices.
The lead-acid and nickel-cadmium product groups are projected to experi-
ence the greatest impacts. In the lead-acid sector, there is a high potential
for two plant closures under the Alternative 5 option (out of 165 plants iden-
tified for which data was available). In addition, there will be some profit
reduction for many small lead-acid battery plants. Specifically, out of the
165 lead acid plants for which data was available, 152 will experience reduc-
tion in return on sales of less than 1 percent, eight will experience profit
reductions of 1-2 percent, four plants each will experience reductions of 2-4
percent, and one plant will experience reductions of 4 percent. However,
except for the aforementioned two closures, these changes in gross profit
margin are not enough to cause, by themselves, other plant shutdowns. More-
over, the lead-acid compliance costs, together with other Federal regulations
(OSHA lead standard, air pollution, solid waste), will reinforce the current
trend in the industry toward closings of small plants and increased industry
concentration. In fact, at least 20 small lead-acid plants will probably cease
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to
I
N>
SUBCATEGORY
Cadmium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Calc ium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lead
Direct Dischargers
Indirect Dischargers
Subcategory Total
Leclanche
Direct Dischargers
Indirect Dischargers
Subcategory Total
L i. t h i urn
Direct Dischargers
Indirect Dischargers
Subcategory Total
Magnesium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Zinc
Direct Dischargers
Indirect Dischargers
Subcategory Total
TOTAL
Direct Dischargers
Indirect Dischargers
Subcategory Total
TABLE S-2. BATTERY INDUSTRY TOTAL COMPLIANCE COSTS EXISTING SOURCES 1978 DOLLARS
ALTERNATIVE I ALTERNATIVE 2 ALTERNATIVE 3 ALTKRNATIVE 4 ALTERNATIVE 5
CAPITAL ANNUAL CAPITAL ANNUAL CAPITAL ANNUAL CAPITAL ANNUAL CAPITAL ANNUAL
COST $ COST $ COST $ COST $ COST $ COST $ COST $ COST $ CO
-------
TABLE S-3. BATTERY INDUSTRY TOTAL COMPLIANCE COSTS EXISTING SOURCES 1982 DOLLARS
to
I
SUI1CATEGORY
Cadmium
Direct Dischargers
Indirect Dischargers
Suhcategory Total
Ca I c inin
Direct Dischargers
Indirect Dischargers
Subcalegory Total
l,ec lanche
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lithium
Direct Dischargers
Indirect Dischargers
Stibcalegory Total
Magnes i tun
Direct Dischargers
Indirect Dischargers
Suhcategory Total
Zinc
Direct Dischargers
Indirect Dischargers
Subcategory Total
CAPITAL
COST $
81637.
445622.
527259.
5956.
5956.
61075.
61075.
0.
0.
0.
28226.
38167.
66393.
67897.
348940.
416837.
Lead
Direct Dischargers 744082.
Indirect Dischargers 9363009.
Subcategory Total 10107091.
TOTAL
Direct Dischargers 921842.
Indirect Dischargers 10262769.
oi Total I I 184611.
U"IVE I
ANNUAL
COST $
31138.
102094.
133232.
4485.
4485.
38105.
38105.
667.
8208.
8875.
10981.
19671.
30652.
24596.
119128.
143724.
344556.
3096797.
3441353.
411938.
3388488.
3800426.
ALTERNATIVE 2
CAPITAL ANNUAL
COST $ COST $
165729.
429691.
595420.
5956.
5956.
~
0.
50451.
50451.
121518.
467994.
589512.
2493797.
23993805.
26487602.
2781044.
24947897.
27728941.
50728.
147400.
198128.
4485.
4485.
=
19211.
27318.
46529.
32289.
135266.
167555.
737061.
5814224.
6551285.
839288.
6128694.
6967982.
ALTERNATIVE 3
CAPITAL ANNUAL
COST $ COST $
198088.
561931.
760019.
5956.
5956.
I
0.
50451.
50451.
137911.
547592.
685503.
3039952.
27320066.
30360018.
3375951.
28485996.
31861747.
65576.
189446.
255022.
4485.
4485.
E
—
19211.
27318.
46529.
51552.
215066.
266618.
904947.
6911249.
7816196.
1041286.
7347564.
8388850.
ALTE
CAPITAL
COST $
244445.
840348.
1084793.
0.
99608.
99608.
137911 .
547592.
685503.
3039952.
27320066.
30360018.
3422308.
28807614.
32229922.
IVE 4 ALTERNATIVE 5
ANNUAL CAPITAL ANNUAL
COST $ COST $ COST $
89010. 842792.
247546. 2027134.
336556. 2869926.
1921 I.
37592.
56803.
51552.
215066.
266618.
147188.
738972.
886160.
904947. 4806832.
6911249. 35862986.
7816196. 40669818.
1064720. 5796812.
7411453. 38629092.
8476173. 44425904.
180418.
662518.
842936.
74508.
340558.
415066.
1362918.
10182090.
11545008.
1617844.
11185166.
12803010.
-------
TABLE S-4A. CADMIUM ANODE BATTERIES
SUMMARY OF ECONOMIC IMPACTS FOR EXISTING SOURCES
Alterna- Alterna- Alterna- Alterna- Alterna-
Impact Measure tive 1 tive 2 tive 3 tive 4 tive 5
Investment Compliance Cost
(Millions of 1978 $)
Annual Compliance Cost
(Millions of 1978 $)
Annual Compliance Cost/
Subcategory Revenues (%)
Annual Compliance Cost/
Revenue (%) (for plants
incurring costs )£/
Price Change (%)
Production Change (%)
Average Industry Change
in Return on Sales (%)
Foreign Trade Change
Industry Structure
Plant Closures
Employment at Closed
Plants
0.39
0.99
0.04
0.08
0.03
0.02
b
0
0
0
0
0.44
0.15
0.06
0.11
0.04
0.03
b
0
0
0
0
0.56
0.19
0.08
0.14
0.05
0.04
b
0
0
0
0
0.80
0.25
0.11
0.19
0.07
0.06
b
0
0
0
0
2.13
0.62
0.27
0.48
0.12
0.10
b
0
+
2
220-380
Baseline subcategory characteristics: - value of shipments in 1978 dollars
= $230 million
- number of plants =11
- baseline plant closures = 0
- employment at cadmium plus lead
plus other storage batteries =
26 thousand.
a 8 plants incur_costs
b negligible, less than .05 percent
+ increase in industry concentration
S-14
-------
TABLE S-4B. CALCIUM ANODE BATTERIES
SUMMARY OF ECONOMIC IMPACTS FOR EXISTING SOURCES
Alterna- Alterna- Alterna-
Impact Measure tive 1 tive 2 tive 3
Investment Compliance Cost 0.004 0.004 0.004
(Millions of 1978 $)
Annual Compliance Cost 0.003 0.003 0.003
(Millions of 1978 $)
Annual Compliance Cost/ 0.03 0.03 0.03
Subcategory Revenues (%)
Annual Compliance Cost/ 0.03 0.03 0.03
Revenues for Plants
• Incurring Costs (%)£/
Price Change (%) 0.03 0.03 0.03
Production Change (%) 0.02 0.02 0.02
Average Industry Change b b b
in Return on Sales (%)
Foreign Trade Change
Industry Structure
Plant Closures
0
0
0
0
0
0
0
0
0
Baseline subcategory characteristics: - value of shipments in 1978 dollars
= $12 million
- number of plants = 3
- baseline plant closures = 0
- employment for all primary batteries
equals 11 thousand.
a Two plants will incur costs
b Negligible - less than half a percent
S-15
-------
TABLE S-4C. LEAD ANODE BATTERIES
SUMMARY OF ECONOMIC IMPACTS FOR EXISTING SOURCES
Alterna- Alterna- Alterna- Alterna- Alterna-
Impact Measure tive 1 tive 2 tive 3 tive 4 tive 5
Investment Compliance Cost 7.5 19.6 22.5 22.5 30.1
(Millions of 1978 $)
Annual Compliance Cost 2.5 4.9 5.8 5.8 8.6
(Millions of 1978 $)
Annual Compliance Cost/ 0.15 0.28 0.33 0.33 0.49
Subcategory Revenues (%)
Annual Compliance Cost/ 0.16 0.31 0.37 0.37 0.55
Revenues for Plants
Incurring Costs (%)a
Price Change (%)
Production Change (%)
Average Industry Change
in Return on Sales (%)
Foreign Trade Change
Industry Structure
Plant Closures
Employment at Closed
Plants
0.16
0.05
b
0
n
0
0
0.32
0.10
b
0
n
0
0
0.39
0.12
b
0
n
0
0
0.39
0.12
b
0
n
0
0
0.57
0.17
b
0
n
2
35-70
Baseline subcategory characteristics: - value of shipments in 1978 dollars
- $1,700 million
- number of plants = 184
- baseline plant closures = 20-30
- employment at lead plus cadmium
plus other storage battery plants
equals 26 thousand.
a 117 plants incur costs
b Less than 0.5 percent
n Negligible increase in concentrations
S-16
-------
TABLE S-4D. LECLANCHE ANODE BATTERIES
SUMMARY OF ECONOMIC IMPACTS FOR EXISTING SOURCES
Alterna-
Impact Variable tive 1
Investment Compliance Cost 45.2
(Millions of 1978 $)
Annual Compliance Cost 28.2
(Millions of 1978 $)
Annual Compliance Cost/ 0.01
Subcategory Revenues (%)
Annual Compliance Cost/ 0.02
Revenues for Plants
Incurring Costs (%)a
Price Change (%) 0.01
Production Change (%) 0.01
Average Industry Change b
in Return on Sales (%)
Foreign Trade Change 0
Industry Structure 0
Plant Closures 0
Baseline subcategory characteristics: - value of shipments in 1978 dollars
» $317 million
- number of plants = 20
- baseline plants closures = 0
- employment for leclanche batteries
not available. Employment for total
primary batteries equals 11 thousand.
a Six plants incur costs
b Less than 0.5 percent
S-17
-------
TABLE S-4E. LITHIUM ANODE BATTERIES
SUMMARY OF ECONOMIC IMPACTS FOR EXISTING SOURCES
Alterna-
Impact Variable tive 1
Investment Compliance Cost 0
(Millions of 1978 $)
Annual Compliance Cost 0.007
(Millions of 1978 $)
Annual Compliance Cost/ 0.91
Subcategory Revenues (%)
Annual Compliance Cost/ 1.0
Revenues for Plants
Incurring Costs (%)a
Price Change (%) 0.91
Production Change (%) 0.73
Average Industry Change b
in Return on Sales (%)
Foreign Trade Change 0
Industry Structure 0
Plant Closures 0
Baseline subcategory characteristics: - value of shipments in 1978 dollars
» $0.723 million
- number of plants = 8
- baseline plant closures = 0
- total employment for all primary
battery plants equals 11 thousand.
a Two plants will incur costs
b Less than a half percent
S-18
-------
TABLE S-4F. MAGNESIUM ANODE BATTERIES
SUMMARY OF ECONOMIC IMPACTS FOR EXISTING SOURCES
Alterna- Alterna- Alterna- Alterna-
Impact Variable tive 1 tive 2 tive 3 tive 4
Investment Compliance Cost 0.05 0.037 0.037 0.074
(Millions of 1978 $)
Annual Compliance Cost 0.023 0.034 0.034 0.042
(Millions of 1978 $)
Annual Compliance Cost/ 0.12 0.18 0.18 0.22
Subcategory Revenues (%)
Annual Compliance Cost/ 0.31 0.46 0.46 0.57
Revenues for Plants
Incurring Costs (%)
Price Change (%)
Production Change (%)
Average Industry Change
in Return on Sales (%)
Foreign Trade Change
Industry Structure
Plant Closures
0.16
0.10
b
0
0
0
0.24
0.14
b
0
0
0
0.24
0.14
b
0
0
0
0.29
0.16
b
0
0
0
Baseline subcategory characterises: - value of shipments in 1978 dollars
a $19 million
- number of plants = 8
- baseline plant closures = 0
- employment at magnesium anode plant
is unknown; however, employment for
all primary batteries is 11 thousand.
a Three plants will incur costs
b Less than a half percent
NA Not applicable
S-19
-------
TABLE S-4G. ZINC ANODE BATTERIES
SUMMARY OF ECONOMIC IMPACTS FOR EXISTING SOURCES
Alterna- Alterna- Alterna- Alterna- Alterna-
Impact Measure tive 1 tive 2 tive 3 tive 4 tive 5
Investment Compliance Cost 0.31 0.44 0.51 0.51 0.66
(Millions of 1978 $)
Annual Compliance Cost 0.11 0.12 0.20 0.20 0.31
(Millions of 1978 $)
Annual Compliance Cost/ 0.05 0.06 0.09 0.09 0.14
Subcategory Revenues (%)
Annual Compliance Cost/ 0.05 0.06 0.10 0.10 0.16
Revenues for Plants
Incurring Costs (%)
Price Change (%) 0.05 0.06 0.07 0.07 0.12
Production Change (%) 0.04 0.05 0.06 0.06 0.09
Average Industry Change b b b b b
in Return on Sales (%)
Foreign Trade Change
Industry Structure
Plant Closures
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Baseline subcategory characteristics: - value of shipments in 1978 dollars
= $216 million
- number of plants = 25
- baseline plant closure = 0
- employment for total primary batteries
is 11 thousand.
a 22 plants will incur costs
b Negligible, less than 0.5 percent
S-20
-------
battery production during the next 10 years, even without the proposed regu-
lation. It cannot be stated, with any degree of certainty, whether or not
these 20 plants would include the two that are predicted to close because of
the regulations. These two plants account for less than one-tenth of a per-
cent of industry production and contain fewer than 70 employees.
The primary mechanism for these effects is the intra-industry distribution
of compliance costs. That is, the average compliance costs per unit for the
large plants, which account for most of industry capacity, is significantly
smaller than those of the smaller plants. Since these plants account for most
of industry production, they will be able to maintain their profitability with
very small price increases. Thus, the expected price changes are quite small.
The smaller firms, except those in certain specialty markets, will have to
absorb some, or most, of their compliance costs in order to sell their products
at the market price.
The nickel-cadmium sector is likely to experience two plant closures
under Alternative 5 and no plant closures at the other options. Closings of
these two plants could significantly increase concentration in certain sub-
markets. These two plants employ 220 to 320 people and are parts of larger
manufacturing establishments. The primary mechanisms for these effects are
similar to those described above for the lead-acid sector — intra-industry
distribution of compliance costs. Specifically, these two plant closures
involve production lines which produce sealed nickel-cadmium batteries and
account for 15 to 25 percent of sealed nickel-cadmium battery shipments.
There are six plants in the U.S. that manufacture sealed nickel-cadmium
batteries. One of these plants accounts for 60 to 65 percent of industry
shipments. Because this firm has potential for dominating the industry and
because it will experience no compliance costs, it is expected that the
regulations will have no impact on industry prices. Thus, the two smaller
plants will be unable to pass on the compliance costs in the form of higher
prices and must absorb the entire cost of the Alternative 5 option. At all
other regulatory options, none of these plants are considered likely closure
candidates, because the technologies are considerably less expensive.
S-21
-------
If under the Alternative 5 option, these two nickel-cadmium plants
closed, sealed nickel-cadmium industry capacity would drop substantially
(15 to 25 percent). To the extent that this void is filled by the industry's
largest producer (the firm with 60 to 65 percent of the market), this indus-
try sector will become significantly more concentrated.
Compliance costs as a percent of revenue for most other of the nonlead-
acid battery plants are significantly lower than those for the lead-acid
plants. As seen in Table S-4, they are not enough to cause significant changes
in the quantities of batteries demanded, nor in the general international
competitiveness of the American battery manufacturing industry. However, as
in the lead-acid sector, there is a variation in compliance costs from plant
to plant that will force some plants to absorb some, but usually not all, of
the increased cost of production. However, these changes are usually small
fractions of a percent of the profit rates. Likewise, several plants will be
able to increase their profit rates slightly since the industry price level
would increase more than their costs. The magnitude of all the price, pro-
duction, and profitability changes are extremely small in comparison to the
projected growth rate of 3 to 5 percent annually to 1990 for the primary
battery industry.
Impacts on Small Entities
The proposed regulations will have a greater impact on the profitabilities
of small plants than they will on that of larger ones. This is primarily be-
cause of economies of scale in the water pollution control technologies.
Because of these economies of scale, the average unit compliance cost for
small plants are greater than that for larger ones. However, for most of
these plants, compliance costs are no greater than a fraction of a percent of
revenues. Consequently, these costs will not cause more than the aforemen-
tioned four plant closures.
All four projected plants expected to close as a result of the proposed
Alternative 5 are small. Two of the four (the nickel-cadmium plants) belong
to large corporations. The other two are small independent lead-acid plants.
A Regulatory Flexibility Analysis appears in Chapter 8 and provides a descrip-
tion of the impacts on small entities.
S-22
-------
General Impacts
As summarized in Table S-4, the estimated impacts on prices, production
levels and foreign trade are small. The projected four plant closures involve
between 255 and 390 jobs. However, these amounts are small relative to the
size of the communities in which the plants are located; hence, there will be
no significant community impacts. Because industry output is expected to
grow around 3 to 5 percent annually, quantity reductions of fractions of a
percent will not be noticeable.
Social Costs
The social costs of these regulations are estimated to provide an indica-
tion of the value of goods and services lost to society as a result of the
regulatory action. The present value of social costs (PVSC) is defined as the
discounted value of all costs incurred in perpetuity. Assuming that compliance
expenditures begin in 1984 and that the real discount rate is 10 percent, the
PVSC of the regulatory alternatives are:
Regulatory Social Cost
Alternatives millions of 1978 dollars
Alternative 1 20.5
Alternative 2 32.5
Alternative 3 39.7
Alternative 4 40.1
Alternative 5 62.1
New Source Impacts
Newly constructed facilities and facilities that are substantially mod-
ified are required to meet the New Source Performance Standards (NSPS) and/or
the Pretreatment Standards for New Sources (PSNS). EPA considered three or
more regulatory alternatives for selection of NSPS and PSNS technologies. The
considered options are equivalent to those discussed for existing sources and
are described in Chapters 6 and 7 and in the Development Document.
S-23
-------
The cost of the new source standards are defined as those that are in-
cremental over those for existing standards. The total industry new source
costs are estimated for the period 1980 to 1990 under the assumption that
(a) all of the increases in capacity during that period will be subject to
new source standards (including substantially modified existing sources as
well as newly constructed plants), and (b) new source compliance costs are
equal to existing source compliance costs for comparable plants and com-
pliance options.
Under these assumptions, new source investment costs are estimated to
average 0.91 percent of plant assets and new source annual costs are estimated
to be 0.18 percent of revenues of new sources, for all new sources in the
entire industry. Using forecasts of industry capacity increase to 1990
(1,100 million in 1978 dollars), the new source selected option will total
$2.0 million in annual costs and $10.0 million in investment costs for the
entire industry. As reported in Chapter 7, these costs are not enough to
cause significant barriers to the construction of new plants, nor are they
likely to cause plant closures or job losses.
S-24
-------
1. INTRODUCTION
-------
1. INTRODUCTION
I.1 PURPOSE
This report identifies and analyzes the economic impacts of water pollu-
tion control regulations on the battery manufacturing industry. These regula-
tions include effluent limitations and standards based on BPT (Best Practical
Control Technology currently available), BATEA (Best Available Technology
Economically Achievable), PSES (Pretreatment), NSPS (New Source Performance
Standards), and PSNS (Pretreatment Standards for New Sources) which are being
proposed under authority of Sections 301, 304, 306, 307, 308, and 501 of the
Federal Water Pollution Control Act, as Amended (the Clean Water Act). The
primary economic impact variables of interest include price changes, plant
closures, substitution effects, changes in employment, shifts in the balance
of foreign trade, changes in industry profitability, structure, competition,
and impacts on small business.
1.2 INDUSTRY COVERAGE
Batteries store electrical energy through the use of one or more electro-
chemical cells in which chemical energy is converted to electrical current. A
typical battery cell consists of two dissimilar materials (called cathodes and
anodes) immersed in an electrolyte (a substance which in solution is capable of
conducting an electric current). When the metal electrodes are connected to an
electric circuit, current flows.
There are at least two dozen battery types, as defined by their basic
electrolyte couple type, and many variations of each, depending on battery
structure, variations in chemistry, and production methods. Sixteen of these
battery types represent at least 98 percent of the volume of shipments of bat-
teries in the U.S. For purposes of this study, the battery industry consists
of establishments that manufacture these 16 types of batteries. A list of
1-1
-------
these appears in Table 1-1. The remaining battery types were omitted from
detailed analysis in this study because they are either no longer in production,
are of little commercial significance, or are experimental (e.g., nickel-zinc
and fuel cells).
1.3 INDUSTRY SEGMENTATION
There are a number of ways in which battery types may be classified for
study and different data sources often use one, ignore others, and/or confuse
two or more classification schemes. Examples of some commonly used classifi-
cation schemes include:
Nomenclature System Example
end-use flashlight
size D
shape cylindrical, rectangular
anode/cathode couple carbon-zinc
inventor's name Leclanche cell
electrolyte type acid or alkaline
usage mode primary cell.
No single classification sys.tem is ideal in every single context. The appropri-
ateness of a given system is determined by its intended use. There are three
methods of segmenting the industry that are pertinent to this study—the basic
anode material used, whether it is primary or secondary, and anode-cathode cou-
ple (the dissimilar metals used; also called the negative and positive plates).
The companion technical study categorized the industry according to the
basic anode material used and, to some extent, according to whether the electro-
lyte was acid or alkaline. The basic groupings are: Cadmium, Calcium, Lead,
Leclanche, Zinc, Lithium, and Magnesium. This categorization seems appropriate
since the primary purpose of the study was an evaluation of production processes
and their effluents.
1-2
-------
TABLE 1-1. RELATIONSHIP OF TECHNICAL INDUSTRY SUBCATEGORIES
TO ECONOMIC INDUSTRY SEGMENTS
Battery Product Groups
Lead Acid
Technical Subcategory
Lead
Carbon Zinc and
Related Types
Alkaline Manganese
Carbon Zinc-Air
Mercury Ruben
Nickel Zinc
Mercury Cadmium Zinc
Nickel Cadmium
Mercury Cadmium
Silver Oxide Cadmium
Magnesium Carbon
Magnesium Reserve
Thermal
Lithium
Calcium
Leclanche
Zinc Anode, Alkaline Electrolyte
Cadmium Anode
Magnesium AnodeJL'
Lithium Anodei/
Calcium!/
i/Does not include thermal
JL/Includes magnesium, lithium, calcium anode, and other thermal batteries.
1-3
-------
While the anode classification scheme may be appropriate from a technical
viewpoint, it is expected that economic and financial impacts of the regula-
tions will vary with the type of product, end use, and industry organization.
This is because the determinants of demand, availability of substitutes, and
pricing latitude will vary with these factors. For this reason, battery type
as described by their cathode-anode pair is the primary segmentation scheme
used in the economic study. Table 1-1 above shows the relationship between
the technical and economic industry classification schemes.
Batteries are also classified according to whether they are storage (also
called secondary) or primary. A storage battery can be recharged by connecting
it to a source of electrical current. Primary batteries, on the other hand,
are not rechargeable. Instead, such batteries are usually discarded after the
charge has been drained. The standard SLI (Starting, Lighting, and Ignition)
automobile battery is the most common example of a storage battery, while a
calculator or flashlight battery are common examples of primary batteries.
Some cathode-anode pairs can be made in either primary or storage configurations
However, one of the two usually accounts for most of industry volume and, for
this reason, each cathode-anode pair is usually classified as being either
primary or secondary.
In addition to classifying batteries by whether they are storage or pri-
mary, batteries may also be classified another way: dry cells and wet cells.
Dry cells are generally smaller and more mobile, since their contents are non-
spillable. Examples of these are flashlight and hearing aid batteries. Wet
cells are generally larger, heavier, and less mobile. The automobile battery,
weighing 35 to 40 pounds, is the most obvious example of this type. Battery
sizes vary from large lead-acid industrial storage batteries weighing as much
as 6,000 pounds to small hearing aid or watch batteries. Production and ship-
ment data on each specific size is extremely difficult to find. For this
reason, much of the analysis is done on the basis of weight or value of battery
production. Wherever possible, however, reference is made to number of units.
1-4
-------
1.4 ORGANIZATION OF REPORT
The remainder of this report consists of 8 additional chapters. Chapter 2
presents an overview of the methodology used in the study. Chapters 3 and 4
describe the basic industry characteristics of interest and Chapter 5 projects
some of the critical parameters into the future to enable an understanding of
the expected characteristics of the industry during the 1985 to 1990 time
period, when the primary economic impacts of the proposed regulations will be
felt. Chapter 6 describes the pollution control technologies being recommended
by EPA and their associated costs. The information in this chapter is derived
primarily from the companion technical study and is published in the Draft
Development Document for Effluent Limitations Guidelines and Standards for the
Battery Manufacturing Point Source Category (EPA-440/1801067-a), prepared by
EPA's Effluent Guidelines Division in . Chapter 1 presents
the economic impacts estimated to result from the incurrence of the costs
described in Chapter 6. Chapter 8 discusses the impacts on small business, as
a subset of the general impacts, and Chapter 9 outlines some limitations of
the data, methodology, and assumptions used.
1-5
-------
2. STUDY METHODOLOGY
-------
2. STUDY METHODOLOGY
2.1 OVERVIEW
Figure 2-1 shows an overview of the analytical approach used to assess
the economic impacts likely to occur as a result of the costs of each proposed
regulatory option. For the lead-acid and cadmium battery industry segments
there were five alternative regulatory options considered in the economic study;
each option represents increasing levels of compliance costs and, generally,
pollution abatement. For the other industry segments four regulatory options
were considered. The basic approach used in this study was to develop a model
of the price and output behavior of the battery manufacturing industry. This
model explicitly considered the changes in output caused by reductions in quan-
tity demanded due to higher prices as well as changes in supply due to plant
closings, for each regulatory option.
The model, in conjunction with compliance cost estimates supplied by EPA,
was used to determine new post-compliance industry price and production levels
for each major battery product group and for each regulatory option. Individual
plant data was then analyzed under conditions of the postcompliance industry
price levels, for each regulatory option, to isolate those plants whose produc-
tion costs would appear to change significantly more than the estimated change
in their revenues. Those plants whose estimated production costs changed sig-
nificantly more than their estimated revenue changes were subjected to a finan-
cial analysis that used capital budgeting techniques to determine.likely plant
closures. The industry model was then re-solved for each regulatory option to
incorporate the reduced supply into the analysis. Finally, other effects which
flow from the basic price, production, and industry structure changes were
determined. These include employment, community, and foreign trade impacts.
Specifically, the study proceeded in the following eight steps:
2-1
-------
EPA POLLUTION
CONTROL COSTS
t-o
I
ro
INDUSTRY
SEGMENTATION
INDUSTRY
STRUCTURE
MARKET
STRUCTURE
FINANCIAL
DATA
INDUSTRY
ANALYSIS
MICROECONOMIC
ANALYSIS
PRICE INCREASE
ANALYSIS
COMMUNITY
EMPLOYMENT
EFFECTS
SCREENING
ANALYSIS
IDENTIFICATION
OF HIGH-
IMPACT
SEGMENTS
MODEL
FINANCIAL
ANALYSIS
PLANT
CLOSURES
1
FIGURE 2-1. ECONOMIC ANALYSIS STUDY OVERVIEW
-------
1. Description of industry characteristics
2. Industry Supply and Demand Analysis
3. Analysis of cost of compliance estimates
4. Plant level screening analysis
5. Plant level profitability analysis
6. Plant level capital requirements analysis
7. Assessment of plant closure potential
8. Assessment of other impacts
9. Estimation of social costs
10. Small business analysis
11. Assessment of new source impacts.
Although each of these steps is described separately in this section, it is
important to realize that there were significant iterations between them, as
shown in Figure 2-1.
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
The first step in the analysis was to develop a description of the basic
industry characteristics that would enable estimation of key parameters which
describe the initial impacts of the regulation. These characteristics, which
include the determinants of demand (e.g., demand elasticities), market struc-
ture, the degree of intra-industry competition, and financial performance,
are described in Chapters 3 and 4 of this report.
The sources for this information include government reports, proprietary
market research studies, textbooks, trade association data, The Trade Press,
discussions with various trade association representatives and individuals
associated with the industry, visits to five battery manufacturing plants,
an EPA industry survey, and plant-by-plant compliance cost estimates developed
by EPA's Effluent Guidelines Division. From the first step, several observa-
tions were made which influenced the remainder of the analysis. These are:
• Generally low demand elasticity for the total industry,
due primarily to a lack of substitutes for batteries
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• Somewhat higher elasticities (although still generally
inelastic) for individual battery product groups, due
to the ability to substitute one battery type for another
• Relative price levels and demand elasticities between
now and 1985 will not change significantly
• Low estimated compliance costs for most plants
• A wide variation in estimated unit compliance costs
among plants
• A lack of plant-level data on a number of key varia-
bles, such as profitability.
These observations indicated that if significant economic impacts were to result
from the compliance costs they would be caused by variations in conditions among
plants and firms within the industry. For this reason, there was a need for
analytical methods that would account for these inter-plant and inter-firm vari-
ations .
2.3 STEP 2: SUPPLY-DEMAND ANALYSIS
The purpose of the supply-demand analysis, step 2 of the study approach,
is to determine the likely changes in market prices and industry production
levels resulting from each regulatory option for each battery product group.
The estimates of post-compliance price and output levels are used in the plant-
level analysis to determine post-compliance revenue and profit levels for speci-
fic plants in each product group. If prices can be successfully raised without
significantly reducing product demand and companies are able to maintain their
current financial status, the potential for plant closings will be minimal. If
prices cannot be raised to fully recover compliance costs because of the poten-
tial for a significant decline in product demand or because of significant
intra-industry competition, the firms may attempt to maintain their financial
status by closing higher cost/less efficient plants. The supply-demand analy-
sis was divided into four basic components: determine industry (product group)
structure, project changes in industry structure to 1985 (the expected effective
date for the proposed regulations), determine plant- and firm-specific opera-
tional parameters (e.g., production costs, profit rates, etc.), and develop
price-quantity algorithms.
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Short run pricing behavior depends upon the market structure of the indus-
try. Economic theory predicts different pricing behaviors for competitive,
oligopoly, monopoly, or other types of markets. Many economic impact studies
begin by assuming perfect competition. However, some of the product groups
covered in this study exhibit some characteristics that are indicative of non-
competitive markets. Each product group was characterized according to the
market structure that appears to describe its nature. Three types of markets
applied.
The first is a perfectly competitive market structure in which all firms
have identical cost structures. In this situation, the industry marginal cost
curve is found as a horizontal summation of individual marginal cost curves.
Given similar compliance requirements among firms, the supply curve shifts up-
ward by the exact amount of the compliance cost and the position of each firm
relative to its competitors remains unchanged.
The second market structure involves markets which contain many buyers
and sellers, each seller with a significantly different cost function from the
others. In this situation, the price increase will approximate the amount that
the lower-cost producers (including pollution control costs) would need to main-
tain their pre-compliance financial performance. The rationale for this conclu-
sion is that producers will attempt to move toward their original equilibrium
output, but at prices sufficient to maintain their equilibrium return on equity.
That is, when required to incur pollution control expenses they will raise
prices sufficiently to cover the additional variable and fixed costs (including
a return to the additional invested capital). However, the price change neces-
sary for the low-cost plants will generally be lower than that for the high-
cost plants. If the high-cost plants attempt to recover their full costs they
will be charging more than the low-cost plants and, consequently, would lose
all their business, providing there is sufficient capacity among low-cost pro-
ducers. Thus, the price change is generally determined from the cost functions
of the low-cost plants. In Chapter 6, the plants that cannot operate at these
new prices are isolated.
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Because of the high concentration ratios for some of the product groups,
oligopolistic pricing behavior might be expected. For this market structure,
full cost pricing is assumed to characterize the behavior of oligopolistic
firms. That is, price is assumed to cover average total cost (the sum of
average variable cost, average fixed cost, and a fair return on investment)
of the "price leaders" in the product group. It is assumed that one or a few
firms will have the ability, because of their market power, to impose their
most desired price and output strategy on the other firms in the market for
the product group.
The oligopolistic pricing model is used for those product categories
which exhibit characteristics of oligopoly markets, such as the following:
• Few firms in the product group
• High four-firm concentration ratio (greater than 75
percent)
• Low degree of foreign competition (less than 10 per-
cent of U.S. sales)
• Abnormally high profitability (return on assets)
• Low demand elasticities
• Large capital requirements (ratio of fixed costs to
variable costs)
• Large degree of integration of production, marketing,
and distribution
• Large degree of specialized knowledge.
Industries which exhibit the first three of these characteristics are
those in which the pricing and output actions of one firm will directly affect
those of others in the industry. While these conditions do not guarantee oligo-
polistic behavior, they are necessary conditions for one and good indicators
that one exists. Abnormally high profits in an industry would, in time, nor-
mally attract new entrants to the industry, thereby increasing price competition
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and industry marginal costs. However,.very high profits over long periods of
time which are not explained by such factors as excess risk, unusual amounts
of technological innovation, or firm size may be an indicator of an imperfect
market structure. Such conditions may occur when entry into an industry is
difficult. The last three of the above points are indicators of difficulty of
entry.
It was necessary to determine if the key industry structure parameters
would change significantly by 1985. Projections of industry conditions
began with a demand forecast. The demand in 1985 is estimated via a consensus
of several economic forecasting techniques, including econometric models,
trend analysis, and market research analysis. An examination was also made
of the factors which might affect the real cost of manufacturing batteries.
No reason was found to expect the real price of battery products to increase
between now and 1985. It was concluded from the projections of industry
conditions that only minor changes in market structure would occur in the base
case. For this reason, the market structures previously described were used
to develop the pricing algorithms.
A significant limitation to the analysis of market structure is that little
information on the variation in key parameters, such as production costs and
profit rates among plants, was available to the study team. In place of this
data, industry-wide averages were used. For example, 12 percent return on
assets was used for the lead battery subcategory. These averages were esti-
mated from various published data sources and information from discussions with
industry personnel during site visits. The key published sources include Cen-
sus of Manufactures, company annual reports, Standard and Poor's Corporation
Records, the FTC's Quarterly Financial Statistics, and other Government reports
which include data from site visits. Compliance cost data, on the other hand,
were available for specific plants and an examination of them showed wide vari-
ation in unit compliance cost from one plant to another within each subcategory.
For this reason, the economic impact analysis was conducted under the assumption
of equal profit margins among plants, but with varying compliance costs.
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The use of the price-quantity algorithms assumes the following:
• Each battery product is a homogeneous good with a
separate market mechanism of its own. (The substitu-
tion possibilities between battery types is considered
in the determination of demand elasticities.)
• Each market is currently at "equilibrium", or will
be when the regulations become effective.
• If possible, firms will attempt to maintain their
current financial status by passing through industry-
wide cost increases in the form of higher prices.
For competitive markets these forces are summed up in the interaction of
elasticities of supply and demand. That is, the amount of a cost increase
that will be passed through into higher prices is
(1) E
s
where E is the elasticity of supply and E. is the elasticity of demand. —'
Since the available data precluded the estimation of Es, a full-cost pricing
strategy was used. Since the estimated impacts are so small, other pricing
strategies are not explicitly covered in this report. Full-cost pricing
appears to characterize the long-term behavior of battery firms in normal
years in which price is assumed to cover average total cost. In this context,
average total cost equals average variable cost plus average fixed cost plus a
I/ In a competitive market price = marginal cost, therefore
dQ
E = s_ _ P = dQs _ me , where me = marginal cost, P = market price, and
s dp Qs dmc Qs Qs = quantity supplied.
See Levenson, Albert M., and Solon, B. S., Outline of Price Theory, Holt,
Rinehart and Winston, Inc., pp. 56-59, 1964.
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target rate of return of investment. Thus, for each homogeneous product group
and for each regulatory option the following algorithms were used:
P, = P + CC. + ROI (Icc)
I O Q
^n
P P
Ql = QO + C 1 - o) e Q0
P.
P Q Q Q P
(3) = 11 + ( o - 1)( 1)(AFC)
P P
Q, = Qi + ( 2 ~ f)
2 ^
pl
where
PO = initial pre-compliance price
P]_, P2» P3» etc. = successive rounds of price changes
CC = total annualized compliance cost
Q0 = initial pre-compliance quantity
ROI = return on net assets
Icc = investment compliance costs per unit of output
e = demand elasticity
Q!> Q2> Q3» etc. = successive rounds of quantity changes
AFC = average fixed costs = ratio of fixed cost to revenues
This algorithm is similar in intent to (1), except that Equations (2) and
(3) are iterated to solve for successive price/quantity adjustments until it
converges. This algorithm accomplishes the same theoretical result as Equa-
tion (1), except that it assumes that firms will attempt to approach the pre-
compliance return on net assets, instead of maximization of revenues. For
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competitive battery product groups the compliance costs used were the mean for
the product group. For those product groups in which one, two, or three firms
appear to dominate the market and have relatively low compliance costs, the
compliance costs of these firms are used in this algorithm. That is, it is
assumed that these alleged "price leaders" will set the prices so as to main-
tain their pre-compliance return on investment and the remainder of the indus-
try will be price takers.
The post-compliance market price levels are used, in a later step, to
assess the financial condition of individual battery manufacturing facilities.
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES
Investment and annual compliance costs for 239 production facilities were
estimated by EPA's Effluent Guidelines Division. For three technical subcatego-
ries (lead, cadmium and zinc) there are five sets of costs, corresponding to
increasing levels of pollution control. For the remaining subcategories only
four options were considered. For purposes of this report the five regulatory
options are labeled "Alternative 1, Alternative 2, etc." A description of the
control and treatment technologies and the rationale behind these compliance
cost estimates appear in Chapter 5.
2.5 STEP 4: PLANT LEVEL SCREENING ANALYSIS
The screening analysis uses two basic criteria to separate those plants
with obviously small impacts from those with potentially significant impacts.
The first criteria is the ratio of total compliance cost to revenue for each
plant; if the ratio is less than one percent, that plant is considered as "low
impact." For these plants, the changes in plant profitabilities are very
small. Although some of these plants will probably experience some drop in
their profitabilities, they would not be considered candidates for closure.
Estimates of profitability changes for these plants are recorded, but they are
not subject to a detailed financial analysis.
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The second criteria is change in return on sales (ROS). In general, if a
plant's ROS is estimated to fall by less than one percent, that plant is not
considered to be a candidate for closure. Twenty-one plants had changes in ROS
estimated to be greater than one percent. These plants were subjected to a
more detailed financial analyses described in steps 5 through 7.
2.6 STEP 5: PLANT LEVEL PROFITABILITY ANALYSIS
Two different measures of financial performance were used to assess the
impact of the proposed regulations on the profitabilities of individual plants:
Return on Investment (ROl) and Internal Rate of Return (IRR). The use of these
techniques involved a comparison of the measures with a critical value.
The return on investment represents the ratio of annual profits after
taxes to the net assets of a plant. This measure is based' on accounting income
rather than cash flows and fails to account for the timing of cash flows, there-
by ignoring the time value of money. However, this technique has the virtue of
simplicity and common usage in comparative analysis of profitabilities of finan-
cial entities. Since ROIs for the individual plants were not available to the
study team a broad range of estimates was developed using aggregate industry
and sample plant data. The estimation procedure is described in Appendix A.
Discounted cash flow (DCF) approaches take into account both the magnitude
and the timing of expected cash flows in each period of a project's life, and
provides a basis for transforming a complex pattern of cash flows into a single
number. There are two major techniques for applying DCF analysis: the .inter-
nal rate of return (IRR) method and the net present value method (NPV).
Because of shortcomings of both approaches to capital budgeting decisions,
and because of the limitations of available data, neither will provide both a
theoretically correct and realistic estimate of plant closures. Although net
present value (NPV) is the most theoretically correct method from an economic
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viewpoint, it was not used here for several reasons: first, the detailed data
necessary to estimate fluctuations in cash flows were not gathered in this
study. Second, a more efficient technique for applying the DCF rationale is
available, given the data constraints. That is, it can be shown.that under the
assumption of a constant rate of net cash flows for any given plant, the DCF
rationale could be applied, given only one year of data, by using the IRR tech-
nique. The IRR technique will generally provide the same plant closure decisions
as the NPV technique. Moreover, because several estimates of cost of capital
(or "hurdle" rates) can be used, IRR is more amenable to sensitivity analysis
than NPV, and sensitivity analysis will be required for this problem. That is,
several different estimates of hurdle rates can be used to test the sensitivity
to the assumptions underlying the profitability estimates, for which we suspect
wide confidence intervals around the estimates. In addition, the IRR technique
will be easier to implement in this case, while under the aforementioned assump-
tions it will always lead to the same investment decisions as the NPV technique.
The IRR for an investment is the discount rate that equates the present
value of the expected stream of cash outflows with that of the expected inflows.
It is represented by that rate r, such that
n
I AT (1 + r)"T
T=0
where AT is the cash flow for period T, and n is the number of periods the
cash flow is expected. Standard methodology calls for solving the equation for
r and then comparing to some required cutoff, or hurdle rate, to determine
acceptability of the investment. A relatively conservative approach is to
select the cost of capital as the hurdle rate. If the initial cash outlay (AQ)
occurs at time T = 0, and if the cash flow is a constant series (A), then
n
A0/A = Z (1 + r)"T.
T-l
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n
Since the values f.or r corresponding to various values of E (1 + r)~^ are pro-
T-l
vided in standard present value tables, r can be found by simply dividing the
initial outlay by the cash flow (i.e., AQ/A) to obtain a factor which can then
be used in conjunction with a present value table to determine the discount
rate. Appendix A provides a derivation of this relationship. Thus, the IRR
is expressed as a function of AQ, A, and n. Since n may remain fixed in our
analysis (e.g., 10 years), the IRR is a function only of A/AQ. In brief, if
the cash flow is constant, and if the initial investment occurs at time T = 0,
then the ratio of cash flow for any given year to initial investment is suffi-
cient to calculate IRR. For this analysis, the initial investment is the
market value of the plant plus the pollution control investment at purchased
price, plus working capital.
Most of the data used in this analysis were estimated from a combination
of publicly available information and the technical 308 Survey. The following
are the most important variables:
• Pre-compliance plant revenues = P^Qi, where PI is
average sales price reported by industry sources and
Q! (production in pounds) is reported in the 308 Survey.
• Post-compliance revenues = P2Q2» where ?2 is defined
in the microeconomic supply-demand analysis and
Q2 = QI + E AP/P|(Q^), where E is the demand elasticity.
• Pollution control costs are supplied by EPA.
• Profits are estimated from industry sources and average
factors from company annual reports.
• Depreciation charges are assumed to be a straight line
over 10 years.
• Fixed assets are determined as a percent of revenues.
Averages for the appropriate 4-digit SIC codes are used.
• Salvage value = current assets + 0.3 of fixed assets.
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• Income tax rates are assumed to be 30 percent.
• The critical value is assumed to be 10 percent. The
rationale for this value is presented in Appendix A.
The sources for these estimates are described in Sections 3, 4, and 7 and in
Appendix A of this report.
2.7 STEP 6: CAPITAL REQUIREMENTS ANALYSIS
In addition to analyzing the potential for plant closures from a profit-
ability perspective, it is also of interest to assess the ability of firms to
make the initial capital investment needed to construct and install the required
treatment systems. Some plants which are not initially identified as potential
closures in the profitability analysis may encounter problems raising the amount
of capital required to install the necessary treatment equipment. To assess the
financial impact of committing the capital necessary to install the specified
pollution control systems, two ratios are calculated:
• compliance capital investment
estimated fixed plant assets
_ compliance capital investment
estimated annual capital expenditures.
The "investment requirements to assets" ratio provides a measure of the
relative size of the required pollution control investment as compared to the
size of the existing facility, and the "investment requirements to normal an-
nual capital expenditures" ratio measures the magnitude of the capital invest-
ment required for compliance in relation to the pre-compliance average annual
capital expenditures of the plant. The latter ratio reflects, to some extent,
the practice of viewing the level of normal pre-compliance capital expenditures
as a budget standard of what a firm considers to be a viable expenditure level.
From this perspective, the ratio of "capital investment requirements to annual
capital expenditures" suggests the extent that resources would have to be
diverted from the normal investments used to sustain and improve the plant's
competitive position.
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Although these ratios provide a good indication of the relative burden
created by the compliance requirement, they do not precisely indicate whether
or not firms can afford to make the investments. tf, for example, the same
investment requirements were placed on a firm which is already highly leveraged
(as indicated by a high debt/equity ratio) and a firm which is not leverged (as
indicated by a debt/equity ratio of zero), the highly leveraged firm is likely
to experience the most significant impact. In addition, the capital require-
ments must be evaluated together with other factors, such as profitability.
For example, a plant that is extremely profitable would consider the risk of
more leverage or increased cost of capital resulting from expansion more worth-
while than would a low profit plant.
The data to be used in these calculations are:
• Compliance capital investment is taken from the
technical contractor's cost estimate.
• Plant fixed assets were estimated, as above, from
industry-wide data published in Census of Manufactures
and the FTC's Quarterly Financial Ratios.
• Annual capital expenditures at the plant level were
extrapolated from industry-level ratios from Census of
Manufactures, and annual reports (i.e., capital expendi-
tures * revenues).
Although the extrapolation of industry-level parameters to plant-specific
parameters understates, somewhat, the variation in characteristics among plants
and firms, the resulting estimates appear to provide a valid indication of the
impacts that might occur as a result of the proposed regulations.
2.8 STEP 7: PLANT CLOSURE ANALYSIS
The plant level analysis examined the individual production units manufac-
turing each product group to determine the potential for plant closures and
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profitability changes. The decision to close a plant, like most major invest-
ment decisions, is ultimately judgmental. This is.because the decision involves
a wide variety of considerations, many of which cannot be quantified or even
identified. Some of the most important factors are:
• Profitability before and after compliance
• Ability to raise capital
• Market and technological integration
• Technological obsolescence
• Market growth rate
• Other pending Federal, state, and local regulations
• Ease of entry into market
• Market share
• Foreign competition
• Substitutability of the product
• Existence of specialty markets.
Many of these factors are highly uncertain, even for the owners of the
plants. However, this analysis was structured to make quantitative estimates
of the first two factors, as described above, and to qualitatively consider the
importance of the others. In this analysis, the first two factors are given
the greatest amount of weight and the importance of the other factors vary from
plant to plant. To provide a format to assess the combined effects of these
factors, a matrix which clearly displays assessments for each of these factors
was developed. This matrix provided a format which facilitates the evaluation
of the combined effects of the key variables.
2.9 STEP 8: ASSESSMENT OF OTHER IMPACTS
"Other impacts" include economic impacts which flow from the basic price,
production, and plant level profitability changes. These impacts include
impacts on employment, communities, industry structure, and balance of trade.
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The estimate of employment effects flows directly from the outputs of the
industry level analysis and the plant closure analysis. The algorithms used
are:
A direct = employment at + (AQr)(Q/employee)
employment closed facilities
AQr = change in quantity produced at the remaining plants, which is
derived from the microeconomic and plant level analyses.
Q/employee = baseline quantity produced per employee (average for industry)
Employment estimates for the closed production facilities are taken from the
technical industry survey.
Community impacts result primarily from employment impacts. The critical
variable is the ratio of battery industry unemployment to total employment in
the community. Data on community employment are available through the Bureau
of the Census and the Bureau of Labor Statistics. Sometimes county-wide data
will have to be relied upon in the absence of community-specific data.
The assessment of industry structure changes is based on examination of
the following before and after compliance with the regulation:
• Numbers of firms and plants
• 4- and 8-firm concentration ratios
• Variance of average total production cost per unit
• Effects of plant closures on specialty markets.
Decreases in the first factor and/or increases in the second factor would indi-
cate an increase in industry concentration and may change the pricing behavior
of the industry. Such potential changes were qualitatively evaluated. An
increase in variability of average costs would indicate that some firms have
become more competitive than others, as a result of the regulation. The long-
term implications of such developments were examined.
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As described in Chapter 4, imports and exports are a very small portion of
battery industry activity and, considering the small price effects projected in
this study, it does not appear that significant changes in the balance of trade
would result from the regulation.
2.10 STEP 9: ESTIMATION OF SOCIAL COSTS
This analysis assesses the total social costs that can be associated with
the EPA effluent regulations. The social costs measure the value of goods and
services lost by society due to a given regulatory action. These costs gen-
erally include the use of resources needed to comply with a regulation, the
use of resources to implement and enforce a regulation, plus the value of the
output that is forgone because of a regulation.
For this analysis only the real resource costs are considered. This
provides an approximation of total social costs, since most of the social costs
are directly related to compliance expenditures by the regulated entities.
Consequently, the present value of social costs (PVSC) of regulations can be
approximated by the following equation:
PVSC = I + (OM/.l) r~n
where: PVSC = present value of social costs
I = investment cost
OM = annual operating and maintenance cost
r = real discount rate
n = number of years between now and the year the
investment is incurred (1984; n=2)
The above equation assumes that:
• The regulations will be in effect in perpetuity
• Operating and maintenance costs will be incurred in
the first year of investment
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It is assumed that the discount rate = 10 percent (mandated by OMB) and that
compliance expenditures will begin in 1984; therefore n equals 2.
2.11 STEP 10: SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, required Federal regulatory agencies to
consider "small entities" throughout the regulatory process. An initial
screening analysis is performed to determine if a substantial number of small
entities will be significantly affected. If so, regulatory alternatives that
eliminate or mitigate the impacts must be considered. This step in the study
addresses these objectives by identifying the economic impacts which are
likely to result from the promulgation of BPT, BAT, NSPS, PSES, and PSNS regu-
lations on small businesses in the battery manufacturing industry. The primary
economic variables covered are those analyzed in the general economic impact
analysis such as compliance costs, plant financial performance, plant closures,
and unemployment and community impacts.
Most of the information and analytical techniques in the small business
analysis are drawn from the general economic impact analysis which is described
above and in the remainder of this report. The specific conditions of small
firms are evaluated against the background of general conditions in the indus-
try as described in the remainder of the report. Since small firms account
for only a small portion of battery manufacturing activity, they are assumed
to be price takers and general market characteristics (demand, supply, equilib-
rium price), are considered exogenous variables to the small business analysis.
Five alternative definitions for "small" battery manufacturing plants were
selected for examination and the impacts on small plants under each definition
were assessed. In addition, the potential impacts of small business exemptions
(tiering) under each of the five alternative sizes were examined. Value of
production was the primary variable used to distinguish firm size. This is
because plant level employment data were considered less reliable and plant
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level production data did not allow consistent comparisons across the product
groups. The five size categories are less than $1 million, $l-$2.5 million,
$2.5-$5 million, $5-$10 million, and greater than $10 million.
2.12 STEP 11: ASSESSMENT OF NEW SOURCE IMPACTS
The assessment of economic impacts on new sources is involved in two pri-
mary tasks. First, compliance costs are estimated and, second, the potential
for economic impacts resulting from the compliance costs is evaluated. The
cost estimates employed the following assumptions and definitions:
• Compliance costs for new source standards are defined
as incremental costs from the costs of the selected
standards for existing sources.
• The compliance costs per unit of output (pound of
batteries) for new sources are assumed to be equal
to the industry subcategory average for that of
existing sources that use the same technology.
The second task in the new source analysis, the assessment of economic
impacts, is based upon the aforementioned cost data and analogy to the impact
conclusions for similar existing plants described above. The primary variables
considered are identical to those for existing plants plus the potential of
the regulation to foster barriers to entry or industry structure changes.
2.13 LIMITATIONS TO THE ACCURACY OF THE ANALYSIS
Various assumptions and estimates were made in the calculation of compli-
ance costs and in the analyses performed to assess their impacts. These factors
unavoidably affect the level of accuracy which can be assigned to the conclu-
sions. The assumptions relating to the estimation of plant specific compliance
costs are outlined in Chapter 6 of this report and are discussed in detail in
the accompanying development document. Even though these assumptions have a
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bearing on the accuracy of the economic impact conclusions, the focus of this
section will center on the assumptions and estimates made in the economic impact
analysis.
The assumptions and estimates that have the greatest impact on the accu-
racy of the conclusions are related to the data used for the analyses. Since
no economic survey was conducted to collect plant-specific financial data, the
data used in this report had to be estimated and/or extrapolated from a variety
of sources such as company annual reports, Census of Manufactures, Federal Trade
Commission reports on major industries, and previous Federal government studies
of the industry. Some of the major assumptions made in estimating and extrapo-
lating these data are:
» An average industry price per pound of production was
used to derive projected sales revenue estimates for
each plant. The actual price per pound could vary
considerably from one battery configuration to another,
even within the same chemical system type. In some
cases market research was able to identify specific
battery types and prices, so that adjustments were
made as required.
• The estimation of plant asset values and profit ratios
are based upon only partial information from a number
of sources that were not necessarily consistent with
each other. This diverse information was used to develop
a wide range of financial ratios which are believed to
encompass those that actually exist. Thus, although
there was limited information, the results were calcu-
lated for a wide range of possible conditions within
the industry. Despite this caution and the conserva-
tive bias used in these estimation procedures, varia-
tion of conditions within the industry could escape
the methodology.
• Lacking detailed data on the salvage value of assets,
specific depreciation schedules and tax rates, it was
assumed that net assets equal salvage value, deprecia-
tion equals 10 percent of fixed assets and the tax rate
is 30 percent, for purposes of the internal rate of return
analysis (IRR).
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• The cost of capital used in estimating compliance costs
was estimated to be 10 percent for the entire industry,
despite the fact that it can differ from firm-to-firm.
A sensitivity analysis of plus and minus 20 percent of
this figure showed that the results of the study would
not be significantly affected.
• To stress the conservative nature of the study effort,
all quantity changes were calculated at the higher end
of the elasticity estimate range and, usually, at the
lower profitability estimates and plant revenue estimates.
These limitations inhibit the ability of the impact analysis to address specific
plant closure decisions in cases where the regulations exert a significant, but
not overwhelming, impact upon the plant (i.e., borderline cases). An overriding
feature of the manner in which the limitations, inferences and extrapolations
were dealt with in the analysis is that a "conservative" approach was followed.
That is, judgments were made that would likely result in overstating the economic
impacts rather than understating them.
Chapter 7 integrates the information of the preceding chapters to describe
projected industry microeconomic behavior when faced with the compliance costs
presented in Chapter 6. The output of Chapter 7 are estimates of the changes in
such variables as price, production levels, employment, industry structure, and
imports and exports which might be caused by each of the proposed regulatory
options.
2-22
-------
3. INDUSTRY DESCRIPTION
-------
3. INDUSTRY DESCRIPTION
3.1 OVERVIEW
This chapter describes the operational characteristics of plants and
firms in the battery manufacturing industry which are pertinent to determining
industry behavior when faced with additional pollution control requirements.
In subsequent chapters of this report this information is used to project
general trends in the industry (Chapter 5) and to assess the potential economic
impacts of the proposed regulations (Chapter 7).
The primary economic unit considered in this study is the individual
establishment or product line. This is the basic unit around which capital
budgeting decisions are made. That is, a single-plant or multi-plant firm
will make decisions regarding opening, closing, or modifying operations on a
plant-by-plant basis. For example, a specific plant considered unprofitable
for one company may still be a viable operation for another and, if sold, may
remain in operation. In addition, financial and economic characteristics at
the company and industry levels must also be examined because they affect
investment decisions at the plant level. By examining some basic industry
parameters such as number, size, and location of plants and firms, employment,
and financial characteristics, this chapter provides the basic descriptive
information to be used to model the pertinent behavioral characteristics
which lead to plant closings and other economic impacts.
3.2 FIRM CHARACTERISTICS
According to the 1977 Census of Manufactures, the battery industry con-
sisted of 175 firms which operated 276 manufacturing establishments. The EPA
Technical Survey (completed in 1979) identified 258 production facilities and
3-1
-------
132 firms which account for most of industry production. Firms which manu-
facture batteries may be described as:
• Large diversified firms
o Large battery manufacturers - batteries as main line of
business
• Small independents with more than one plant
• Independents with only one plant.
The number of firms in each of these categories is shown in Table 3-1.
The majority of the plants are owned by small, private companies that deal
primarily in one particular aspect of the battery market. The trend in recent
years has been for major diversified firms to become more vertically integrated
by buying many of the smaller dependents and using them as component suppliers
and/or distributors of finished batteries.
As shown in Table 3-2, production of primary batteries is highly concen-
trated with four firm and eight firm concentration ratios of 87 percent and
94 percent, respectively. For storage batteries, the figures are 57 percent
and 84 percent, respectively. Nevertheless, it should be noted that no single
firm accounts for over 20 percent of the total market in the storage industry.
As shown later in this report, production of individual battery types is even
more concentrated. The majority of battery plants belong to small, private
firms which serve regional demand. Little public information is available on
these companies. However, because of OSHA, EPA, and the Department of Trans-
portation regulations, there is concern that capital costs to install safety
and health apparatus as well as environmental controls could pose economic
problems for the smaller manufacturers in this industry. These regulations
will be further explained in Chapter 5 (Baseline Projections of Industry
Conditions).
3-2
-------
TABLE 3-1. NUMBER OF FIRMS THAT MANUFACTURE BATTERIES
BY TYPE OF FIRM, 1977
Storage Primary
Large diversified firms 5 8
Large Battery firms 4 3
Independents with more than one plant 8 2
Small independents with only one plant 155 64
173 77
Note: These totals differ somewhat from those in the Census of Manufactures
due to differences in sampling and survey techniques between D&B and
Census.
SOURCE: Dun & Bradstreet Data Files of Plants by Primary SIC Code.
3-3
-------
TABLE 3-2. CONCENTRATION RATIOS OF BATTERY MANUFACTURING INDUSTRY
SIC 3691 -
Storage Batteries
1977
1972
1967
SIC 3692 -
' Primary Batteries
1977
1972
1967
TOTAL
($ MILLIONS)
1,985.2
950.3
579.4
661.1
318.3
327.9
4 LARGEST
COMPANIES
57
58
60
87
91
85
8 LARGEST
COMPANIES
.— — "DTT R Cff MT— — -
84
85
81
94
96
95
20 LARGEST
COMPANIES
93
93
92
99
99
99
SOURCE: Concentration Ratios in Manufacturing - 1977 Census of Manufactures,
3-4
-------
Thirteen major firms appear to dominate the field. Shown below is a
list of these major producers of storage and primary batteries:
Storage Batteries
• ESB, Inc. (subsidiary of Inco, Ltd.)
• Globe-Union, Inc.
• Delco-Remy (division of General Motors Corporation)
• Eltra, Inc.
• General Battery (division of Northwest Industries)
• General Electric
• Eagle-Pitcher
• East-Penn
• Chloride, Inc. (British firm)
• Gould, Inc.
Primary Batteries
• Union Carbide
• ESB, Inc. (subsidiary of Inco, Ltd.)
• P. R. Mallory and Company (subsidiary of Dart Industries).
Some of these firms are highly diversified and integrated, such as
General Electric, General Motors, and Union Carbide, while other major firms
such as Globe-Union and P. R. Mallory are primarly engaged in the manufacture
of batteries.
The primary battery market is dominated by these companies, with Union
Carbide (Eveready Division) accounting for over 50 percent of the market, ESB
(Ray-0-Vac Division) accounting for about 20 percent, and Mallory accounting
for about 10 percent of the market. Most of the battery sales of the major
producers are concentrated in the consumer market, while the smaller companies
tend to specialize in industrial and commercial sectors. Yardney, for example,
3-5
-------
sells largely to the military, while Bright Star accounts for large shares of
the burglar alarm and industrial flashlight markets.
The storage battery market is served by a few large producers and numer-
ous small regional companies. In the SLI (Starting, Lighting, and Ignition)
storage batteries sector, the major producers of batteries for installation
by original equipment manufacturers are Delco-Reray division of General Motors,
ESB (supplies to Chrysler), and Globe-Union (supplies several auto firms).
Leaders in the SLI replacement market are ESB, Globe-Union, General Battery
Corporation, Delco, Gould, Eltra Corp., and Chloride, Inc. The industrial
lead-acid storage batteries sector is dominated by ESB, Gould, and Eltra.
Finally, the leading suppliers of nickel-cadmium batteries are Marathon
Battery, General Electric, Union Carbide (Eveready Division), Gould, SAFT
Inc., and McGraw Edison.
3.3 FINANCIAL STATUS OF COMPANIES
To assess the financial status of the battery manufacturing industry,
financial data has been obtained on the thirteen battery companies whose
financial statements are publicly available. Of the thirteen firms, three
are primarily engaged in battery manufacturing, while the other ten are more
diversified. The nature of the business lines of most of these firms are
discussed in Section 3.2 above. Table 3-3 lists these companies, their sales
revenues, and their long-term debt to equity (D/E) and before tax return on
equity (ROE) ratios. Between 1975 and 1977 more than half of the thirteen
companies had better ROEs than the U.S. all manufacturing average. Among the
less profitable companies are the two smaller companies of the sample, Yardney
Electric Corporation and FDI, Inc. (battery operations now discontinued), whose
ROEs have been below the all manufacturing average from 1975 to 1977. At this
time, the financial characteristics of the smaller battery manufacturers have
not been determined. Some industry sources report that many of the smaller
companies have been finding their manufacturing operations to be less profit-
able than those of larger firms in the industry. As a result, many have become
3-6
-------
TABLE 3-3. FINANCIAL CHARACTERISTICS OF SELECTED BATTERY MANUFACTURERS
U)
I
COMPANIES PRIMARILY ENGAGED
IN BATTERY MANUFACTURING
Globe-Union, Inc.
P. R. Mallory & Co.
Yardney Electric Corp.
1977 Company Sales
($ Millions)
Tota^l Battery
1977 Long-Term
Debt/Equity
Before Taxes Return on Equity (%)
391.9
341.8
15.9
DIVERSIFIED COMPANIES
Eagle-Picher Indus., Inc.
Eltra Corp./Prestolite &
C&D Batteries Division
FDI, Inc.!/
General Electric Co.
General Motors Corp./
Delco-Remy Division
Gould, Inc.
Inco Ltd./ESB Inc.
Marathon Mfg. Co.
Northwest Indus., Inc./
General Battery Corp.
Union Carbide Corp. 7,036.1
U.S. AVERAGE, ALL MANUFACTURING
309.6
207.5
N/A
474
922
74
17,518
54,961
1,619
1,953
306
1,876
.0
.1
.2
.6
.0
.6
.3
.1
.5
N/A
N/A
N/A
N/A
N/A
330.1
703.2
N/A
N/A
N/A
43.6
28.5*
18.7*
33.0
25.9
277.3
21.6*
6.8*
36.7
53.3
28.0*
77.3
47.0
32.7
1977
43.7*
21.9
13.8
28.6*
21.6
17.6
31.8*
39.8*
25.7*
9.2
20.9
33.1*
17.4
23.2
1976
24.8*
19.4
7.0
27.6*
22.7*
11.7
31.0*
38.0*
19.6
22.2
31.0*
32.1*
23.8*
22.7
1975
16.4
7.6
7.8
26.6*
21.6*
-109.4
25.4*
18.1
15.1
21.7*
35.1*
30.4*
27.1*
18.9
1974
21.7
11.3
29.3*
23.2
31.9*
13.4
19.9
39.3*
28.6*
29.4*
36.1*
23.4
1973
16.9
18.8
26.6*
23.7*
33.5*
35.9*
22.6*
28.3*
-55.2
24.0*
26.1*
21.8
*Better than Ail Manufacturing average
N/A - Not available
JL'Has closed battery manufacturing operations.
SOURCE: Company Annual Reports and Quarterly Financial Report on Manufacturing, Mining and Trade, FTC.
-------
assemblers of purchased parts, ceased manufacturing, opting instead to
service and distribute batteries purchased from major manufacturers, or left
the industry altogether.
3.4 PLANT CHARACTERISTICS
According to the Census of Manufactures, there were 218 storage battery
establishments and 58 primary battery establishments in operation in 1977.
EPA has identified 194 active production facilities that manufacture storage
batteries and 64 active plants that manufacture primary batteries.i/ Table 3-4
lists the number of firms and production facilities identified by EPA by type
of battery. Table 3-5 presents the 1977 distribution of the battery establish-
ments identified by the Department of Commerce and their value of shipments
by employment size. Table 3-6 shows the distribution of battery establishments
throughout the United States. In general, they are quite widely dispersed
among the regions. Plant age varies widely—from new to over 80 years old.
At present, new plants are being constructed and old plants are being expanded
in both the primary and storage segments.
3.4.1 Storage Batteries
As shown in Table 3-5, the storage battery industry segment consists of
many small plants existing alongside a number of large ones. However, these
few large plants account for a major share of the total value of shipments
(the 37 largest plants account for 58 percent of 1977 shipments). Moreover,
during the last 20 years the number of smaller plants in the industry has been
declining, while the number of plants with 20 or more employees has increased
from 106 to 134 (between 1958 and 1977). The number of firms with less than
20 employees decreased from 170 to 84 during the same period.
The census definition of "establishment" and the EPA definition of a
"facility" are inconsistent. Therefore, the numbers do not precisely
match.
3-8
-------
TABLE 3-4. NUMBER OF FIRMS AND PRODUCTION FACILITIES
MANUFACTURING BATTERIES IN EACH PRODUCT GROUP!/
BATTERY TYPE
Primarily Storage
Lead-Acid
Nickel Cadmium
Silver-Oxide-Cadraium
Nickel Zinc
Mercury Cadmium
NUMBER OF FIRMS
114
9
1
1
1
NUMBER OF PLANTS
184
9
1
1
1
Primarily Primary
Leclanche
Carbon Zinc Air
Alkaline Manganese
Mercury Ruben (Zinc)
Mercury Cadmium Zinc
Silver Oxide Zinc
Magnesium Carbon
Magnesium Reserve
Lithium
Thermal (Magnesium)
Calcium
9
2
5
3
1
6
3
4
7
1
3_
170
19
2
8
4
1
9
3
4
8
1
3
258
±J Note that because of the existence of multi-product plants and firms, the
actual number of establishments and firms is lower.
SOURCE: EPA Technical Survey.
3-9
-------
TABLE 3-5. DISTRIBUTION OF BATTERY MANUFACTURING ESTABLISHMENTS
BY EMPLOYMENT SIZE, 1977
NUMBER OF EMPLOYEES
SIC 3691 - Storage Batteries
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
Total
SIC 3692 - Primary Batteries
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
Total
Total of SICs 3691 and 3692
NUMBER OF
ESTABLISHMENTS
39
31
14
25
24
48
31
5
1
IT8"
15
6
4
3
4
8
12
6
18-
276
%
18
14
6
12
11
22
14
2
0
99
26
10
7
5
7
14
21
10
100
VALUE OF
SHIPMENTS
($ MILLIONS)
4.8
12.5
14.1
45.6
120.9
631.3
849.3
304.0
1,982.5
0.8
3.6
8.1
5.4
7.7
67.8
214.4
358.4
666.1
2,648.6
%
0
1
1
2
6
32
43
15
100
0
1
1
1
1
10
32
54
100
NOTE: These census figures do not precisely match those in the EPA data
base because these figures refer to "establishments" and the figures
used in the EPA data base and in the economic impact analysis (in
Chapter 7) refer to production facilities. Production facilities
are individual product lines as defined by cathode-anode pair.
SOURCE: 1977 Census of Manufactures.
3-10
-------
TABLE 3-6. GEOGRAPHIC DISTRIBUTION OF BATTERY PLANTS
DIVISION
3691 - Storage
Batteries
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
Mountain
Pacific
Unidentified
United States Total
3692 - Primary
Batteries
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
Unidentified
United States Total
ALL ESTABLISHMENTS
TOTAL
4
29
33
24
29
14
20
4
46
15
218
1
15
11
3
8
1
19
58
%
2
13
15
11
13
6
9
2
21
8
100
2
26
19
5
14
2
32
100
> 20
EMPLOYEES
3
20
21
16
20
11
12
2
22
7
134
1
8
9
3
6
1
5_
33
< 20
EMPLOYEES
1
9
12
8
9
3
8
2
24
8
84
0
7
2
0
2
0
14
25
VALUE OF
SHIPMENTS!/
($ MILLIONS)
*
325.4
286.2
42.5
252.1
33.6
121.3
*
256.8
N/A
1,982.5
*
20.6
*
*
*
*
*
666.1
%
N/A
16
. 14
2
13
2
6
N/A
13
N/A
100
3
,-nt i
100
*Not disclosed to avoid individual company disclosures
i/ Columns do not add to totals to avoid confidential disclosures,
SOURCE: 1977 Census of Manufactures.
3-11
-------
The storage battery industry consists basically of two types that are in
commercial use: the lead-acid battery and the nickel-cadmium battery.
Lead-Acid Batteries
The lead-acid battery industry produces two basic types of batteries:
SLI (starting, lighting, and ignition) batteries and industrial batteries.
SLI batteries generally weigh 30 to 40 pounds each and are primarily used in
automotive applications, either as original equipment for new cars or as
replacement batteries. Industrial lead-acid batteries are a heterogeneous
class of batteries used to power a wide variety of industrial, commercial,
and consumer products.
Industrial lead-acid batteries can be further divided into two broad
classes: wet and sealed. Wet industrial lead-acid batteries are similar in
construction and operation to SLI batteries, but they are available in a much
wider variety of shapes and sizes for use in a very wide range of applications.
For example, there are 200 to 300 pound batteries for use in coal mining
equipment and 5,000 to 6,000 pound batteries for use in locomotives and
utilities. Sealed lead-acid batteries are different in construction and more
portable than wet lead-acid batteries. They range in size from as little as
one or two ounces to several pounds and come in a variety of shapes. They
are used in a wide range of applications such as rechargeable lanterns, garden
tools, and emergency lighting. The volume of production (by weight) of this
type of battery is only a small fraction of that of total industrial batteries.
There are 205 individual establishments primarily engaged in the manufac-
ture of lead-acid batteries in the United States. Eighty-two to 86 percent of
the volume (by weight) is in SLI batteries and 14 to 18 percent is in industrial
batteries. The SLI battery production is currently producing more than 60 mil-
lion batteries per year. This production level represents approximately 80 per-
cent of the SLI industry segment's estimated maximum capacity of 75.5 million
batteries per year. About 25 percent of these batteries are sold to original
equipment manufacturers, while the remainder goes to the replacement market.
3-12
-------
Nickel-Cadmium Batteries
There are two types of Nickel-Cadmium (Ni-Cad) batteries made: a vented
wet cell and a dry cell. EPA has identified nine plants in the United States
that manufacture Ni-Cad batteries. These plants vary widely in size, ranging
from several thousand to several million pounds in annual production.
3.4.2 Primary Batteries
Most primary batteries are manufactured in establishments having more
than 250 employees (as shown in Table 3-5 above). Eighty-six percent of the
production comes from only 18 of the 58 plants in the primary battery industry.
A number of plants produce more than one primary battery type. A tabulation
of these plants appears in Table 3-7. Primary batteries are manufactured in
many shapes and sizes for use in a wide range of applications. For example,
there are button cells weighing only a few grams for use in calculators or
hearing aids and lantern batteries weighing five or six pounds or more. The
number and size of establishments producing primary batteries are shown in
Table 3-5 above, and the number of firms producing each battery type is shown
in Table 3-4 above.
3-13
-------
TABLE 3-7. COMPARISON OF SINGLE AND MULTI-PRODUCT NON-LEAD-ACID BATTERY PLANTS
PRODUCT GROUP
Alkaline Manganese
Carbon Zinc
Silver Oxide Zinc
Mercury Ruben
Mercury Cadmium Zinc
Carbon Zinc Air
Calcium
Magnesium Reserve
Magnesium Carbon
Lithium
Nickel Cadmium
Other
Total
TOTAL NUMBER
OF PRODUCT LINES
IN SUBCATEGORY
8
19
8
4
1
2
2
4
3
7
9
8
74
NUMBER 'OF
SINGLE PRODUCT
PLANTS
4
13
1
0
0
1
0
3
2
6
4
8
34
NUMBER OF
MULT I -PRODUCT
PLANTS
4
6
7
4
1
1
2
1
1
1
5
0
32
ONE OTHER
BATTERY
PRODUCT
1
3
3
0
0
0
2
I
0
1
2
0
14
TWO OTHER
BATTERY
PRODUCTS
2
2
2
2
0
1
0
0
1
0
3
0
12
THREE OTHER
BATTERY
PRODUCTS
1
1
2
3
1
0
0
0
0
0
0
0
6
CO
I
SOURCE: EPA Technical Survey.
-------
4. MARKET STRUCTURE
-------
4. MARKET STRUCTURE
The primary determinants of the demand for battery products which are
described in this section are the end-use markets, the nature of competitive
products, price elasticity, and the role of imports and exports. This infor-
mation is used in Chapter 5 to project the demand for batteries and to describe
the expected characteristics of the battery industry in the 1985 to 1990
period, and in Chapter 7 to estimate the potential economic impacts of the
proposed regulation.
4.1 OVERVIEW
The 1977 domestic production of both primary and storage batteries
amounted to 2.6 billion dollars.±J Seventy-five percent of this amount repre-
sented storage batteries used in a multitude of products and applications.
Table 4-1 presents the value of battery shipments by major end-use markets.
The storage battery market is dominated by the lead-acid and nickel-
cadmium types. The lead-acid battery accounts for 90 to 95 percent of storage
batteries. About 82 to 86 percent of lead-acid batteries are used for Starting,
Lighting, and Ignition (SLI) applications, primarily for the automobile market.
The other 14 percent goes to the industrial and consumer market. Nickel-cadmium
batteries are used in a wide variety of consumer and industrial products.
Most primary batteries are used in consumer products such as flashlights,
toys, games, watches, calculators, hearing aids, and electronic equipment.
Sales of primary batteries for use in consumer products generally represent
70 to 75 percent of total primary battery shipments.
I/ Census of Manufactures, 1977; the 1980 figure was S3.5 billion (current
dollars)
4-1
-------
TABLE 4-1. VALUE OF BATTERY SHIPMENTS BY END-USE MARKET
1967-1977
(MILLIONS OF DOLLARS)
Storage Batteries
Automobile
Original Equipment
Replacement
Industrial
Stand-by auxiliary power
Motive power
Government, consumers, and other
TOTAL STORAGE BATTERIES
Primary Batteries
Consumer
Lighting
Electronic equipment
Toys and games
Industrial
Government
TOTAL PRIMARY BATTERIES
1967
102
307
409
33
54
87
95
591
106
77
45
~2"2~B~
31
69
338
% of
Total
17
52
69
6
9
15
16
100
32
23
14
~W
9
21
100
1973
176
582
758
49
96
145
157
1,060
110
82
59
nr
44
50
345
% of
Total
17
55
72
5
9
14
15
100
32
24
17
~77
13
14
100
1977
277
1,095
1,372
51.5
255.4
306.9
223
1,902
183
152
104
"4T9~
85
85
609
% of
Total
15
57
72
3
13
16
12
100
30
25
17
~n
14
14
100
NOTE: Percentages may not add due to rounding
SOURCE: Based on Predicasts, Inc., Batteries and Electric Vehicles E36,
Cleveland, Ohio, 1974, and JRB extrapolation of trends for 1977.
4-2
-------
In addition to segmenting the industry's products by whether they are
storage or primary batteries, this study also makes use of another classifi-
cation scheme: whether they are "dry cell" or "wet cell" types. This clas-
sification more accurately reflects end-use markets than the more traditional
"primary versus storage" classification. The dry cell group is generally
composed of small and light batteries primarily for portable use, such as
flashlights and calculators, whether they are primary (e.g., carbon-zinc) or
storage (e.g., nickel-cadmium). The wet cell type is usually larger, less
portable, and of the storage type (e.g., lead-acid automobile or fork-lift
truck batteries). A more detailed description of these battery types appears
in the next section.
4.2 END-USE MARKETS AND SUBSTITUTES
For most applications, there is little or no substitution of other pro-
ducts for batteries. Substitution is generally limited to switching from one
battery type to another. A description of major uses and substitutions for
each battery type is provided below.
4.2.1 ^torage Batteries
Lead-Acid Batteries
In 1977, $1.7 billion of lead-acid batteries were manufactured in the
United States, representing about 67 percent of the value of all battery ship-
ments and 90 percent of all storage batteries. Lead-acid batteries are mainly
used in SLI and industrial applications.
In 1977, SLI batteries represented 82 percent of the overall lead-acid
battery shipments, and were primarily used in automobiles, trucks, buses,
aircraft, and boats. About 77 percent of the SLI battery production went to
the replacement market, while the remainder was purchased by original equip-
ment manufacturers. SLI batteries generally come in 6 or 12 volt types and
4-3
-------
are available in a number of sizes, depending on specific application. There
are two major types of SLI batteries: those with lead-antimony grids and
those with lead-calcium grids (or maintenance-free batteries).
Another major market for lead-acid storage batteries is the industrial
sector (about 18 percent of the value of the 1977 lead-acid shipments).
Major applications for industrial lead-acid batteries are for motive power in
material handling equipment (e.g., fork lift truck), mining vehicles, yard
locomotives, and for stand-by power sources and load leveling in telephone
and electric utility systems. These industrial batteries can weigh as much
as 6,000 pounds, whereas SLIs generally weigh between 35 and 40 pounds.
Industrial batteries also include some smaller batteries used for both com-
mercial and consumer products, such as emergency lighting, communications
equipment, portable tools, and alarm systems. Many of these are sealed units
with gel or paste electrolytes.
For most current uses, there is little or no ability to substitute other
products for lead-acid batteries. Consumers of SLI batteries might postpone
purchasing a new battery for a limited time by recharging their old ones, pur-
chasing used batteries, driving less, or postponing the purchase of a new car.
However, these measures would have only limited effect and are more responsive
to income changes than price changes. Likewise, industrial lead-acid battery
users may, in the short term, delay the purchase of new batteries by rebuilding
or repairing used ones, or using equipment powered by other sources of energy,±J
The literature contains a number of studies which indicate strongly that
the elasticity of demand for auto travel with respect to price (i.e., cost
of travel) is inelastic, whereas the income elasticities for products such
as automobiles are quite elastic. See Consumer Demand in the United States
by H. S. Houthaker and L. D. Taylor, Interindustry Forecasts of the American
Economy by C. Alraon, et al., and The Data Resources Inc. Model, 1977
edi.ti.on, DRI, Lexington, Mass.
4-4
-------
Nickel-Cadmium Batteries
The nickel-cadmium (Ni-Cad) battery is the second most common storage
cell today. Total shipments of Ni-Cad batteries amounted to $103.8 million
in 1977, representing 5 percent of total storage battery shipments.
Ni-Cad batteries are produced in both vented and sealed types. The
structure of Ni-Cad vented cells is basically similar to that of the lead-acid
battery, while the sealed cells are made in button, cylindrical, rectangular,
and other shapes to suit various space and capacity requirements. Vented Ni-
Cads are used primarily in aircraft, while the sealed type is used in consumer
oriented products such as calculators, flashlights, portable appliances, and
power tools. In consumer product applications, Ni-Cad batteries compete with
primary cells such as carbon-zinc and alkaline types. While Ni-Cad batteries
are generally four to six times more expensive than most primary batteries,
their longer life, due to recharging capabilities, makes them more economical
and convenient for many applications.
Recent marketing efforts by the sealed portable lead-acid battery produc-
ers may affect the competitive position of both primary and Ni-Cad batteries.
The chief reason for this is that sealed lead-acid batteries have a self dis-
charge rate (percent of ampere hour capacity left) of about two percent per
month as compared to one percent per day for Ni-Cads. Thus, for applications
in which the battery stands unused for long periods of time,1 the lead-acid
battery will require less frequent recharging than the Ni-Cad battery.
Silver Oxide Zinc Cell
silver-zinc storage cells are composed of a silver oxide cathode, zinc
anode, and a strong alkaline electrolyte. The most important feature of the
silver-zinc cell is its high power-to-weight ratio (as much as six times that
of the nickel-cadmium cell). However, silver-zinc cells have shorter life,
in terms of the number of possible charge/discharge cycles, than nickel-
4-5
-------
cadmium and silver-cadmium batteries. Due to its high cost, the silver-zinc
storage cell is mainly used in military and aerospace applications where cost
is of lesser importance than performance. Primary silver-zinc cells are also
available and are generally used as power sources in hearing aids.
Silver-Cadmium Cell
Silver-cadmium cells are similar in construction to silver-zinc cells
but employ a cadmium anode. The principal advantage of silver-cadmium cells
is a much more rugged construction which greatly increases the cell's life in
terms of charge/discharge cycles. The energy density (power-to-weight ratio)
of silver-cadmium cells are two to three times that of nickel-cadmium cells.
Silver-cadmium systems may replace silver-zinc cells for relatively high dis-
charge rate applications where a longer cycle life is needed. They may also
substitute for nickel-cadmium cells in applications requiring higher power
output at some sacrifice in cycle life. The greatest disadvantage of the
silver-cadmium battery is its high cost. The utilization of the two most
expensive electrode materials in the construction of this cell makes it more
expensive than the silver-zinc system. This factor has limited the use of
silver-cadmium cells to satellites and other space applications. Recently,
however, this cell has been used commercially in appliances, tools, and
portable television sets.
Thermal Cells
Thermal batteries are special purpose reserve systems in which the solid
electrolyte is nonconducting at ambient temperatures. The battery is activated
by melting the electrolyte, thus making the latter conductive. Activation is
generally achieved by igniting a pyrotechnic heat source within the battery.
The lifetime of the battery can range from minutes to days, and operating
temperatures are generally between 400 and 600 degrees centigrade. Upon
cooling, the electrolyte solidifies and the battery becomes inoperable.
4-6
-------
"Thermal batteries have the following special properties: rapid and
reliable activation, virtually no deterioration during storage, moderately
high discharge rates for short times after activation, require no maintenance,
compactness, mechanically rugged, and operability over a wide ambient tempera-
ture range. They are used for military and aerospace systems and for alarm
and sensing applications.
Nickel-Iron (Edison) Cell
Nickel-iron batteries were once used in applications such as material
handling, railway lighting, and telephone exchange system equipment. They
are not produced only in limited quantities primarily for experimental pur-
poses. Substitution by lead-acid and nickel-cadmium batteries has taken place
in most applications because of some major disadvantages of nickel-iron cells.
These disadvantages are their high cost, inferior low temperature performance,
lower terminal voltage requiring larger batteries for the same energy content,
and the low maximum current which can be drawn from the battery.
4.2.2 Primary Batteries
Carbon-Zinc (Leclanche) Cell
This is the most popular and least expensive type of battery. In 1977,
U.S. shipments of carbon-zinc cells were valued at $317 million, representing
52 percent of total primary battery shipments. This is a decrease from 60
percent in 1973 (see Table 4-2), which is due to competition from other types
of batteries such as alkaline-manganese and nickel-cadmium.
Carbon-zinc cells are made in cylindrical, rectangular, or flat forms of
various sizes. They are best used when they are run intermittently at rela-
tively low drains (under 100 milliamperes), but are inefficient in heavy drain
devices such as toys and electronic flashes. However, low prices (e.g., about
20 to 25 cents for "D" cells) make carbon-zinc batteries very popular in a wide
range of applications such as flashlights, radios, clocks, and tape recorders.
4-7
-------
TABLE 4-2. PRIMARY BATTERY PRODUCTION 1973-1977
(CURRENT DOLLARS)
i
CD
TYPE
Carbon-Zinc
Alkaline-Manganese
Mercury-Zinc
Silver-Zinc
Other
Total
1973
$ MILLION
208
57
32
7
42
346
% OF
TOTAL
60
17
9
2
12
100
1975
$ MILLION
263
80
43
18
45
449
% OF
TOTAL
59
18
9
4
10
100
1977
$ MILLION
317
111
65
54
62
609
% OF
TOTAL
52
18
11
9
10
100
COMPOUNDED
AVERAGE ANNUAL
GROWTH (%)
11. 1
18.1
19.4
66.7
10.2
15.2
SOURCE: Census of Manufactures, Portable Energy Sources: Batteries, Fuel Cells, Solar Cells,
Business Communications Co., Stanford, CT,1977, and EPA Technical Survey.
-------
Alkaline-Manganese Cells
In 1977, there were $111 million worth of alkaline-manganese batteries
shipped, representing 18 percent of the primary battery market (See Table 4-2).
The alkaline dry cells are produced primarily in button, cylindrical, and
rectangular shapes. They are usually interchangeable with carbon-zinc cells
in a wide range of applications such as calculators, flashlights, camera
equipment, battery powered toys, radios, tape recorders, etc. Alkaline cells
cost about three to four times the cost of carbon-zinc cells, but have higher
energy density, longer life, and better performance under heavy drain applica-
tions. For continuous heavy drain uses, the alkaline cell performs better
than any other primary battery, although the nickel-cadmium storage battery
is quite competitive in this regard. This battery is also often used for
light and intermittent duties when cost is not a factor, because of its
superior stability and long life. Some alkaline-manganese batteries are
rechargeable and used as shorage batteries.
Mercury Cells
The Mercury-zinc (ruben) cell is the third largest selling primary bat-
tery type. Total shipments in 1977 amounted to $65 million, or 11 percent of
total primary battery shipments (see Table 4-2). The mercury-zinc battery is
composed of a zinc anode and a mercury oxide cathode. This battery has rela-
tively steady discharge characteristics, a high capacity to volume ratio, good
high temperature characteristics, and good resistence to shock, vibration, and
acceleration. This cell is used as a power source for miniaturized electronic
equipment such as hearing aids, electronic watches, calculators, light meters,
and "electric eye" devices. Frequently, the cell is used as a secondary volt-
age standard in regulated power supplies, radiation detection meters, potentio-
meters, computers, and voltage recorders. Substitution by silver-zinc and
lithium cells is possible for many of the mercury-zinc cell applications.
4-9
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The weston cell differs from the ruben cell in that it uses a cadmium
sulfate-raercury sulfate system and is contained in a glass vessel. Before
production of the weston cell ceased in 1977, it was used as a primary volt-
age standard. However, there is currently no known commercial production.
Silver Oxide-Zinc Dry Cells
The silver-zinc dry cell has been the fastest growing primary battery in
recent years. Although it started from a lower base, it averaged an annual
growth rate of 67 percent between 1973 and 1977 and reached $54 million in
sales in 1977 (see Table 4-2).
The usual configuration of the silver-zinc cell is similar to the mercury-
zinc cell, but it uses a silver oxide cathode. Although more expensive than
mercury cells, silver-zinc cells have been replacing mercury cells in many
applications, such as hearing aids, electric watches, and electronic instru-
ments. The primary reason for this is the performance advantages that silver-
zinc cells have over mercury cells, such as higher voltage, greater capacity,
and superior low-temperture capacity (silver-zinc cells remain operative at
-50°F while mercury-zinc capacity drops considerably around 40°F and becomes
virtually inert around the freezing point).
Magnesium-Carbon Cell
The magnesium-carbon cell is patterned after the carbon-zinc cell, but
it uses a magnesium alloy anode. This cell has longer storage life and
greater ability to withstand high heat and humidity than the carbon-zinc
cell. Magnesium—carbon cells are primarily used in military applications
where batteries are stored under severe conditions. This cell is also some-
times used commercially in aircraft emergency systems, and in marine and
mining operations. Magnesium batteries are more expensive than carbon-zinc
cells because of material costs.
4-10
-------
Lithium Cell
Lithium is the earth's lighest solid element. While weighing only about
one-thirtieth the weight of lead, lithium can generte up to eight times as
much electricity. For this reason, major research efforts have been directed
toward developing lithium storage batteries for electric cars. However, to
date this type of battery is still in the development stage, and is produced
in very limited quantities. The only lithium batteries produced in commercial
quantities today are small primary types, mainly for. use in pacemakers,
electric watches, and lanterns. They compete strongly with mercury-zinc and
silver-zinc batteries because of their longer life and thin designs.
Carbon-Zinc-Air Cell
The carbon-zinc-air cell is usually composed of an alkaline electrolyte,
anode of amalgamated zinc, and air-depolarized carbon cathode. Some of these
batteries contain acid electrolytes. The carbon zinc air systems offers a
unique combination of high energy density and high power density at relatively
low cost. Carbon-zinc-air cells are usedin portable transceivers, semaphore
devices, highway flashing systems, lighthouses, railway signals, night-vision
devices, and satellite communications.
Lead-Acid Reserve Cell
As a "reserve" cell, the lead-acid reserve battery is shipped to the user
in an inert state, and must be activated immediately before use. Activation
is accomplished by releasing an acid into the cell, and within a short period
of time the cell is in a ready state. Lead-acid reserve cells are used in
limited quantities in military applications.
Magnesium Reserve Cell
Magnesium reserve cells are used in situations requiring an extremely
long shelf life and high reliability. The battery is shipped and stored in
4-11
-------
an inert state and activated when necessary. This type of battery is used
for life jacket lights and life-raft lights, emergency radio beacons, life-
buoy lights, signal flare initiations, divers' and frogmen's lights, depth
charge initiations, and radio power supplies. In most of these uses the
battery is not tested before use and when activated will be expected to
operate continuously until completely discharged. Some types can be acti-
vated by immersion in seawater.
4.3 RECENT CONSUMPTION AND PRICE TRENDS
Between 1967 and 1980, shipments of storage batteries grew from $0.578
billion to $2.57 billion, representing a compounded average annual growth rate
of 12.4 percent (see Table 4-3). During that time, primary battery shipments
grew from $308 million to $953 million, averaging 9.1 percent per year. In
constant dollars, the compounded annual average growth rates were 6.8 and 4.2
percent for storage and primary battery shipments, respectively. During the
same period, the real Gross National Product (GNP) in constant dollars grew
at an average rate of 3.0 percent. Longer term trends exhibit somewhat lower
rates for storage and higher rates for primary batteries. These are described
in Chapter 5 of this report.
Wholesale prices of storage and primary batteries both grew at an average
annual rate of 4.8 percent during the 13-year period. This was significantly
lower than the average growth of all commodities (7.6%).
The prices of lead and zinc, the two major metals used in battery manu-
facturing, grew at annual rates of 9.6 and 9.0 percent, respectively. However,
this growth, along with the spectacular increases in lead prices from 1975 to
1979, are not expected to continue. There are several reasons for this conclu-
sion. First, the rise in lead prices has been due largely to a number of struc-
tural shifts in its markets and in the industry, which have "one-time-only"
changes which will not be perpetuated. These structural shifts include strikes,
unusual sudden increases in world demand, especially from Japan and Eastern block
4-12
-------
TABLE 4-3. HISTORICAL TRENDS IN THE BATTERY INDUSTRY
STORAGE BATTERIES
Number of Employees (000)
Value of Shipments
(millions of current dollars)
(millions of 1967 dollars)
Price index for Storage Batteries
PRIMARY BATTERIES
Number of Employees (000)
Value of Shipments
(millions of current dollars)
(millions of 1967 dollars)
Price Index for Primary Batteries
PRICE OF LEAD (cents/lb)
PRICE OP ZINC (cents/lb)
ALL COMMODITIES WHOLESALE PRICE
INDEX
GNP (1972 dollars)
1967
19.3
577.5
577.5
100.0
11.0
307.6
307.9
100.0
14.00
14.35
100.0
1008
1968
19.0
633.7
628.7
100.8
11.3
330.8
327.2
101.1
13.21
14.00
108.7
1052
1969
19.9
697.0
677.4
102.9
10.8
340.5
329.6
103.3
14.93
15.15
113.0
1079
1970
20.8
769.8
696.0
110.6
9.4
329.5
312.9
105.3
15.69
15.82
110.4
1086
1971
21.1
828.2
737.5
112.3
9.4
350.5
294.8
118.9
13.89
16.92
113.9
1108
1972
22.1
968.6
857.2
113.0
8.4
348.1
262.5
123.2
15.34
17.72
119.1
1186
1973
23.9
1070.8
938.5
114.1
8.7
380.7
307.3
123.9
16.31
20.84
134.7
1255
1974
23.4
1234.2
980.3
125.9
9.5
423/1
329.2
128.6
22.49
35.94
160.1
1246
1975
21.7
1302.3
899.4
144.8
9.0
473.7
313.1
151.3
21.52
38.89
174.9
1234
1976
23.1
1519.7
1026.1
148.1
in. 4
627.1
395.6
158.5
23.10
37.38
183.0
1300
1977
25.9
1982.5
1218.5
162.7
11. 0
666.1
412.4
161.5
30.74
35.21
194.2
1372
1978
27.2
2269.6
I/
\l
U.2
759.1
468.6
162.0
33.70
31.00
209.3
1433
1979
27.6
2607.1
M
T/
12.1
851.5
500.6
170.1
52.60
37.30
235.6
1483
1980
24.7
2571.8
I/
I/
11.8
952.9
539.9
176.5
44.36
37.00
268.8
1481
1981
NA
NA
NA
NA
NA
NA
NA
182. 2
36.50
44.50
NA
1510
COMPOUNDED
AVERAGE ANNUAL
GROWTH RATE
1966-1967 (2)
12.4
6.B2/
4.8l/
_
9.1
4.2
4.8
9.6
9.0
7.6
3.0
i/ Price index of storage batteries unreported for years beyond 1977.
]J Based on years 1967 to 1977.
SOURCE: U.S. Department of Commerce, Census of Manufactures and Survey of Current Business.
-------
countries, and OSHA regulations, which are estimated to add about one cent to
a pound of lead. According to industry sources, this price escalation is not
expected to continue at such high levels. Moreover, as the data in Table 4-3
shows, the price of lead has dropped significantly from its 1979 high. There-
fore, there is no reason to expect the price of lead to increase more or less
than that of other raw materials over the long run.
4.4 IMPORTS AND EXPORTS
Imports and exports traditionally have been an insignificant factor in
the storage battery market. In recent years, only 2.0 percent of the domestic
consumption of storage batteries was from imports.
In the past, and to some extent today, transportation-associated problems
have been a stumbling block in developing import-export markets. Shipping a
vented battery with electrolyte is not only costly, but difficult as well, in
that batteries could discharge while in transit. This explains the location
of battery manufacturing plants near their markets.
In addition to direct imports of batteries, a number of foreign made bat-
teries enter the U.S. market indirectly via imported automobiles. The number
and origin of batteries entering the U.S. market in this way may be determined
by examining sales of cars in the United States. During the late 1970's and
early 1980's imports have been around 25 percent of the total number of auto-
mobiles sold in this country. Japan, with most of the imported automobile
market, is the leading exporter of storage batteries in this sense. Germany,
Italy, and the United Kingdom, in that order, are the other three major
exporters of storage batteries contained in automobiles. If these indirect
imports are counted together with direct imports, the growth rate of imports
would exceed that of exports.
The SLI battery has also been imported to the United States indirectly
via imported motorcycles. Recently, however, two of the major exporters of
4-14
-------
motorcycles, namely Taiwan and Japan, have found it advantageous to manufacture
motorcycle batteries in the United States—a factor which may influence this
trend.
Exports of American made storage batteries account for about two percent
of the value of storage battery shipments. U.S. technology in primary batteries
has enabled this country to successfully penetrate export markets, as evidenced
by primary battery exports in 1975 and 1981 (see Figure 4-1). In past years,
Japan and Taiwan were able to compete successfully with the U.S. for the market
of flashlight and transistor radio batteries. However, there is no evidence to
date that they can compete against U.S. technology in the high performance
batteries. The data available in this area precludes a comprehensive assessment
by product group. However, as the Figure shows, aggregate industry data
indicates no evidence of secular changes that would significantly affect the
conclusions of this study.
Import and export statistics are summarized from 1965 to 1981 in Table 4-4
and shown graphically in Figure 4-1.
4.5 UNIT VALUE OF BATTERY PRODUCTS
Since batteries within each subcategory are made in numerous sizes,
configurations, and electrochemical properties, it is difficult to standardize
the analysis on a single unit. Department of Commerce documents report battery
activity in terms of millions of units and dollars. However, given the diver-
sity of battery types and sizes, units are of little use to this study. The
Technical Contractor reports production in the form of weight of product pro-
duced. They also report that the wastes at most battery plants are of the
order of magnitude of 1 percent, with a possible upper bound of 5 percent.
Thus, in this report the weight of the product is used as a unit of output
measure and the average value per pound for each battery type is calculated.
For some battery types, this figure is the value of industry shipments for
the battery type divided by the number of pounds produced. The production
4-15
-------
Millions
of Dollars
(Shipments)
140-1
130-
120—
110-
100-
90-
80-
70-
60-
50-
40-
30-
20-
10-
Primary
, Batteries
Export
Primary
Batteries
/ Import
/
Storage
/ Batteries
/ / Export
Storage
Batteries
Import
i i i i i I i I i r i i r i i
67 68 69 70 7l' 72 73 74 75 76 77 78 79 80 81 82
SOURCE: U.S. Bureau of the Census, U.S. Commodity Exports and Imports as Related
to Output, U.S. GPO, Washington, D.C., and U.S. Imports for Consumption
and General Imports.
FIGURE 4-1. VALUE OF IMPORTS AND EXPORTS, 1967-1981
4-16
-------
TABLE 4-4. BATTERY INDUSTRY IMPORTS AND EXPORTS, 1967-1977
(Millions of Dollars)
I
H-•
^J
YEAR
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
IMPORTS
STORAGE
7.8
8.9
11.7
13.2
12.8
14.2
21.6
31.2
24.0
28.1
32.0
38.5
44.8
51.1
53.1
PERCENT
OF DOMESTIC
CONSUMPTION*
1.4
1.4
1.7
1.7
1.6
1.5
2.0
2.5
1.9
1.9
1.6
1.7
1.7
2.0
NA
PRIMARY
8.5
11.2
12.2
11.1
12.2
17.4
17.4
21.5
17.6
32.1
33.0
39.7
47.6
61.4
79.6
PERCENT '
OF DOMESTIC
CONSUMPTION**
2.8
3.4
3.6
3.4
3.5
5.0
4.6
5.3
4.0
5.4
5.3
5.6
6.0
6.9
NA
EXPORTS
STORAGE
16.0
18.2
19.5
22.7
22.5
25.8
28.1
45.4
50.0
56.0
59.0
51.2
43.8
54.1
67.3
PERCENT
OF DOMESTIC
CONSUMPTION
2.8
2.9
2.8
3.0
2.7
2.7
2.6
3.7
3.9
3.8
3.0
2.3
1.7
2.1
NA
PRIMARY
10.3
12.0
12.6
14.7
15 . 1
17.9
22.9
35.5
49.3
67.9
73.0
86.3
102.2
129.8
139.0
PERCENT
OF DOMESTIC
CONSUMPTION
3.4
3.6
3.7
4.5
4.3
5.1
6.1
8.7
11.2
11.5
11.7
12.1
12.8
14.7
NA
*Domestic consumption estimates do not include changes in inventory.
**Data includes battery parts.
SOURCE: U.S. Bureau of the Census, U.S. Commodity Exports and Imports as Related to Output, U.S. GPO,
Washington, D.C., and U.S. Imports for Consumption and General Imports.
-------
weight and value of shipments for 1972 and 1973 were estimated from previous
EPA reports on the industry and adjusted to January 1978 dollars using the
Bureau of Labor Statistics wholesale price indexes for storage batteries and
for primary batteries, as appropriate. For other battery types, price lists
from such sources and the General Services Administration, retail store cata-
logues, and battery manufacturers were used. The resulting estimates of
battery value per pound for each battery type are shown in Table 4-5.
4.6 BATTERY INDUSTRY PRICE DETERMINATION
Increased costs of battery manufacturing will, in whole or in part, be
passed through to customers in the form of higher prices. The amount which can
be passed through depends upon the market acceptance of price increases as meas-
ured by price elasticity of demand, and the price setting behavior in the indus-
try.
4.6.1 Price Elasticity
Price elasticity estimates for the various product groups are presented in
this section. These estimates are used later in this report to determine eco-
nomic impacts of effluent control regulations. In the classical supply and
demand situation, an increase in the price of a product produces a decline in
the amount of the product sold. For example, an elasticity of minus 0.5 means
that a one percent increase in the product prices will result in a 0.5 percent
drop in quantity demanded. A measure of this relationship between a change in
price and the change in production is defined by the following equation:
where
£ = price elasticity
q = current production
Aq = change in production
p = current unit price
Ap = change in unit price.
4-18
-------
TABLE 4-5. AVERAGE VALUE PER POUND OF PRODUCTION
(January 1978 Dollars)
BATTERY TYPE AVERAGE $ VALUE PER POUNDJ/
Lead Acid 0.50
Sealed Portable Lead-Acid 5.59
Nickel Cadmium (vented) 31.70
Nickel Cadmium (sealed) 8.03
Leclanche 1.36
Alkaline Manganese 3.39
Miniature Alkaline-Manganese 4.00
Mercury-Ruben 10.36
Mercury Cadmium-Zinc
Silver Oxide Zinc 26.27
Silver Oxide Cadmium 160.00
Magnesium Carbon 4.08
Lithium 16.00
Nickel-Iron
Carbon Zinc Air
Lead Acid Reserve
Thermal 200+
Magnesium Reserve 26.27
I/January 1978 dollars.
SOURCES: EPA, Economic Impact Assessment of Proposed Effluent Limitation
Guidelines for the Battery Industry Point Source Category,
(Draft, by Kearney Management Systems, 1976-1977)
EPA, Assessment of Industrial Hazardous Waste Practices: Storage
and Primary Batteries Industries, Office of Solid Waste Management
Programs, 1975.
GSA, Federal Supply Service, Federal Supply Schedules 61, Parts I,
II, III, and VIII.
Sears Roebuck, Inc., Merchandise catalog.
1977 Census of Manufactures.
4-19
-------
Price elasticities for the various battery types are not available
directly. However, they can be inferred from demand related factors. The
following discussion presents an initial development of price elasticity
estimates based on an examination of the availability of substitute products
and the strength of consumer demand. Table 4-6 serves as a summary for this
discussion.
In general, there is little or no ability to substitute other products for
batteries in most applications. However, some switching from one battery type
to another is possible. Thus, in addition to an overall industry analysis, a
separate treatment of each battery type is included. For purposes of this dis-
cussion, batteries are classified as being wet cell types or dry cell types.
This classification more accurately reflects end-use markets than does the "pri-
imary versus storage" classification. The "dry cell" group can be thought of as
smaller, lighter batteries primarily for portable use, such as in flashlights,
calculators, hand held tools, etc., whether they are primary (e.g., carbon-zinc)
or storage (e.g., nickel-cadmium). The lead-acid battery is a typical example
of a wet cell battery. It is generally larger and less portable, and has spe-
cific applications, such as in automobiles and industrial trucks.
Eighty-two percent of the lead-acid battery production is for the automo-
bile market. There is little or no ability to substitute other products in this
application. Consumers might postpone purchasing a new battery for a limited
time by recharging their old ones, purchasing used batteries, driving less, and
postponing the purchase of a new car. However, these measures would have only
a limited effect, and are more responsive to income changes than price changes.
Industrial lead-acid batteries are used primarily in industrial vehicles such as
fork lifts, mining equipment, and railroad equipment. Few economically feasible
substitutes exist for these uses, although in the short term, delaying the pur-
chase of new batteries by rebuilding or repairing used ones could occur. In
short, the demand for storage batteries is highly price inelastic. For these
reasons, an initial estimate for the price elasticity of -0.3 seems plausible
as the high end of a likely range for the lead-acid subcategory.
4-20
-------
TABLE 4-6. MAJOR END-USE MARKETS, SUBSTITUTES, AND PRICE ELASTICITIES
FOR BATTERY SUBCATEGORIES
Battery
Type
Lead Acid
Alkaline
Manganese
Carbon Zinc
Nickel Cadmium
.Silver Oxide-
Zinc
Mercury Ruben
Cadmium Silver
Oxide
Mercury Was con
Magnesium
Carbon
Lithium
Nickel Iron
Lead Acid
Reserve
Pare
Major of Pro
Markets Vaiu
Aueos 0.6-C
Industrial
ent Relative
duct Substitutes Price of
ei/ Substitute!'
.8 Rebuilt & used HA
batteries,
Public trans-
portation
Flashlights , 1-75 Carbon Zinc lower
Radios,
Phoco.
Hatches
Silver Oxide higher
Nickel Cadmium higher
Flashlights, 1-50 Alkaline Manganese higher
Radios,
Photo,
Toys,
Industrial
Nickel Cadmium higher
Silver Oxide higher
Calculators, 1-50 Alkaline lover
Ualkie Talkies,
Portable cools
& Appliances
Silver Oxide higher
Defense, 1-20 Mercury lower
Space, Watches,
Hearing aid*.
Cameras
Alkaline lower
Hearing aids, 1-20 Silver Oxide higher
Watches ,
Cameras,
Electronic
Instruments
Alkaline lower
Space, 1-20 Hi-Cad lower
Appliances,
Tools, T.V. sets
Voltage standard HA
Silver Oxide Zinc lower
None HA
Military, 1-20 Alkaline lower
Aircraft, Marine,
Mining
Electric Watches 1-23 Mercury-Ruben lower
Silver Oxide Zinc higher
Material handling, 1-20 Lead Acid lower
Railway lighting,
Telephone exchange
equipment
Hi-Cad
Military 1-10 Hone HA
Relative
Subatitut- Estimated
ability Elasticity
very low -0.3
moderate -0.6 to -0.3
high -0.8 to -1.2
-0.6 to -0.8
moderate
-0.6 to -0.3
moderate
-0.6 to -0.0
moderate
moderate -0.6 to -0.3
HA -0.3 to -0.6
low -0.3 to -0.6
moderate -0.6 to -0.3
moderate -0.3 :o -1.2
HA -0.3 to -0.5
*J Includes only the purchase value, not total life-cycle cost.
NA - Not applicable.
SOURCE: JRB estimates.
4-21
-------
While Che price elasticity for dry cell batteries as a group is also
inelastic, it appears to be greater than that of lead-acid batteries. This
is because they generally represent a larger proportion of end-product value
(ranging from about 1 to 75 percent), and, for some uses, can be eliminated
through the use of direct electricity generation. For these reasons, the
high end of the plausible range for dry cell batteries would appear to be
about -0.5. There is, however, a possibility of substitution of one type of
dry cell battery for another. For example, a flashlight or portable radio
could use an alkaline, a carbon-zinc, or a nickel-cadmium battery. Alkaline
batteries are considerably more expensive than carbon-zinc batteries, but
provide a longer service life. Nickel-cadmium batteries, although quite
expensive, are rechargeable, thus providing the potential for longer service
life. However, their power reserve is generally somewhat smaller than alka-
line batteries. Carbon-zinc batteries appear to have the highest price
elasticity of the various types discussed in this report. This is because
(1) they have the shortest useful life, making their price more visible to
consumers, since they must purchase new ones more frequently; and (2) several
other battery types are possible substitutes, since the uses for these
batteries are most often of a general nature (e.g., toys, flashlights, radios),
which requires no unusual performance characteristics. For these reasons, a
price elasticity of between -0.8 and -1.2 seems plausible, assuming the prices
relative to competing products remain constant. The remaining battery types
are replaced less frequently and a larger proportion of their uses are for
more specialized applications (e.g., calculators, space, defense, electronic
equipment, watches, hearing aids, etc.). For these reasons, the estimated
price elasticities are lower than that of carbon-zinc. As mentioned above,
these elasticity estimates, along with the major contributing factors, are
summarized in Table 4-6.
4.6.2 jndustry Competitiveness
The ability of battery producers to pass along costs of compliance through
higher prices also depends on the pricing behavior and power in the industry.
4-22
-------
If large firms set prices, smaller firms may be forced to accept their lead.
Since, in most cases, unit compliance costs are lower for larger or newer
plants, firms operatng smaller or older plants could be forced to absorb the
difference. If firms perceive their industry as competitive, they will be
more reluctant to increase prices than firms in basically noncompetitive
industries.
The lead acid subcategory is moderately concentrated with four firms
accounting for 66 percent and eight firms accounting for 85 percent of indus-
try production. Alongside these large firms there exist many small and medium
sized firms that might be expected to have higher average costs and a lower
availability of investment capital. Competition among the larger firms is
likely to mitigate their ability to pass along immediately all increased costs
of doing business. However, given the low price elasticities of demand, their
costs will ultimately be passed along. The smaller firms, if they are faced
with high unit compliance costs, will be in a poorer competitive position.
The existence of localized specialty markets may mitigate competition between
smaller and larger firms. However, information gathered is insufficient to
fully assess the magnitude of this occurrence.
Production of primary batteries is highly concentrated with four-firm and
eight-firm concentration ratios of 87 and 94 percent, respectively. Production
of individual battery types is even more concentrated, since, as can be seen in
Table 3-2 (Chapter 3), many of the subcategories have only a half dozen or fewer
plants. High concentrations such as these imply that the industry's ability to
increase their product prices to cover increased costs is limited only by the
strength of market demand.
4-23
-------
5. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
-------
5. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of conditions in the battery industry
to 1990 under the assumption that there are no additional water pollution
control requirements resulting from the Clean Water Act. These projections
are used in Chapter 7, together with other information such as estimated
compliance costs, to assess the incremental economic effects of the effluent
control requirements on future industry conditions.
The baseline projections in this report provide a general point of
reference for the analysis and is not intended to be a comprehensive, authori-
tative forecast of future industry conditions. Although minor changes to the
baseline could result from a more comprehensive treatment of forecasting
techniques, they are not likely to alter significantly the study's overall
conclusions regarding the extent of the economic impacts of the effluent
guidelines.
The primary variables of interest have been divided into two broad cate-
categories for consideration in this report—Demand related factors and Supply
related factors:
• Demand Factors
-Quantity demanded
-Types of Products demanded
-Price elasticities of demand
5-1
-------
• Supply Factors
-Cost of goods sold
-Employment
-Profitability
-Geographical locations
-Discharger status
-Industry structure (number and size of plants and
firms, competitiveness, etc.).
The basic approach followed in developing the projections began with a
forecast of demand related factors under the assumption that battery prices
relative to general price levels remain constant. Then, using the resulting
initial volume estimate, industry supply factors were assessed to determine
if there would be any significant changes in the relative costs or profitability
of producing batteries over the next decade, which would negate the initial
assumption of constant relative prices. Since no reason has been found to
expect the price of batteries to increase faster than that of other goods,
the initial assumption has not been modified.
5.1 DEMAND RELATED FACTORS
The primary reason for beginning the baseline projections with the demand
analysis is that it is hypothesized that the battery industry supply factors
will adjust to demand conditions. This is expected because: (1) the battery
industry is a very small proportion of total economic activity in the U.S.
arid is, therefore, more likely to react to general trends, rather than
influence them; (2) the demand for batteries is a derived demand, depending
on the sales and use of thousands of other products such as automobiles,
flashlights, electronic calculators, and other electronic equipment, and is,
therefore, complementary to the demand of these other products; and (3) the
demand elasticity of batteries with respect to price is estimated to be low.
5-2
-------
Demand forecasting is an inexact discipline, with considerable depen-
dence on individual judgment and simplifying assumptions. Each forecasting
technique has its own particular advantages and disadvantages, which could
result in different types of errors. To mitigate the likelihood of bias
because of such occurrences, two techniques were used and a range of plausible
values was established - Time Series Analysis and Regression Analysis. To
augment these techniques, information and estimates provided by other authors
were used to adjust the forecasts in order to account for industry develop-
ments not measured in the quantitative analysis.
5.1.1 Time Series Analysis
Time series analysis is a useful, but sensitive, forecasting tool. The
results are extremely sensitive to the time period selected for the analysis.
Furthermore, the technique is generally more appropriate for broad economic/
demographic variables than for very specialized industries. A particular
industry may have undergone one or two influential technological or market
changes during part of a 20- or 30-year history, which would bias the calcula-
tion of a long-term trend line. On the other hand, aggregate economic vari-
ables tend to "average out" such changes and, consequently, exhibit a more
uniform growth pattern.
A 27-year time series for value of storage battery shipments (constant
dollars) indicates the existence of such sharp shifts in industry growth
patterns. For example, during the 1950s, the value of storage battery ship-
ments were stagnant, showing no growth at all. In fact, the value for 1960
was 2 percent below that of 1950 (contant dollars). Through the 1960s and
1970s, industry growth steadily accelerated, having compounded average annual
rates of 5.2 percent from I960 to 1970, 5.7 percent from 1963 to 1973, and
7.3 percent from 1967 to 1977. The growth rate for the entire 27-year period
was 3.8 percent. Because of these shifts, simple extrapolation of the trends
could lead to serious bias in any resulting forecasts.
5-3
-------
Several market and technological developments in the storage battery
industry over the time period appear to explain, to a large extent, the sharp
shifts in storage battery industry growth patterns. The first of these was
the switch from 6-volt to 12-volt SLI batteries during the 1950's. Twelve-
volt batteries have thinner plates, which might result in earlier replacement
than 6-volt batteries. The second significant change is increasing power
demands on SLI batteries resulting from increased popularity of power options
(such as air conditioning) in automobiles. The third development is the
general trend toward increased number of miles driven per year by motorists
through the 1950-1977 period. The fourth development is that of maintenance-
free batteries, which might be changing the value of shipments data more than
volume of shipments data, because of their higher price. Finally, the growing
commercialization of nickel-cadmium batteries during the 1970s has made
possible a number of new consumer products as well as some replacement of
primary batteries by these storage batteries. Although these developments
are expected to continue influencing the growth rate, the most rapid part of
their initial market penetration appears to have already occurred. For these
reasons, a compounded average annual growth rate of 5.8 percent (the 1957-
1977 rate) and a growth rate of 3.8 percent (the 1950-1977 rate) appear to be
plausible upper and lower bound estimates for the storage battery industry.
These growth rates would result in a 1990 value of shipments of from $1,898
million to $2,433 million (1967 dollars).
Time series data for the primary battery industry is, to a large extent,
more readily interpreted than that of storage batteries. Between 1957 and
1977, the industry increased its value of shipments from $144.9 million to
$376.8 million (1967 dollars), representing a compounded average annual growth
rate of 4.0 percent. As was observed for the storage battery sector, this
growth was uneven - about 3.5 percent from 1959 to 1973 and accelerating to a
7.8 percent rate during the 1973 to 1977 time period. After eliminating
years that appear to be outliers, fitting exponential curves to the data, and
considering general economic conditions over the period, it appears that the
range of 2.9 to 4.9 percent growth is likely. This growth will probably be
5-4
-------
distributed unevenly among the various primary battery products, primarily
because of innovation in the battery and battery-using industries. In the
battery industry, this innovation includes the commercialization of new
chemical systems and new sizes and shapes of batteries (e.g., nickel cadmium,
silver oxide, and mercury-ruben batteries). In battery-using industries,
recent innovations such as solid state electronic equipment (e.g., calculators,
hearing aids, etc.), disposable flashlights, and smoke alarms have been
quite successful in the marketplace and have caused rapid growth in the use
of the "newer" batteries. Furthermore, the newer batteries have been replacing
carbon zinc batteries in many applications. Thus, the rapid growth of the
newer products is partially offset by falling share of market of the older
products.
With the estimated rates of growth, the 1990 value of shipments is
projected to be between $546 million and $700 million (1967 dollars), or from
45 to 86 percent higher than 1977.
5.1.2 Regression Analysis
Regression analysis is a statistical technique which is used to summarize
the outcome of market forces by statistically describing the relationship
between the fluctuations in the value of a variable and that of the variables
that are believed to cause these fluctuations. In demand analysis, it is
used to relate changes in quantities of a product demanded to the level of
activity in industries or economic sectors that use the product and to prices
of substitute and complementary products. Equations of the following general
form were estimated and tested for statistical significance:
Da = b]. ya + *>2 ps + b3 pc + t + d + e
where Da = Demand for batteries in market a
ya = an appropriate activity variable in market a
ps = the prices of substitutes, appropriately deflated
5-5
-------
pc = the prices of complementary products, appropriately
deflated
b]_, b2, and b3 = the parameters of the relationship to be estimated
t = a measure of technological change
d = constant term
e = error.
In this analysis, it is assumed that there is a causative flow of activity
which runs from macroeconomic activity to activity in industries that produce
investment and consumer goods to activity in industries that produce battery-
using products, to activity in the battery industry itself. Activity variables
were sought for which exogenous forecasts are readily available from such
sources as the Wharton EFU model, Predicasts, Inc., or the Data Resources,
Inc., model. These activity variables consisted of general economic indicators
such as the Federal Reserve Board index of industrial production, GNP, and
personal consumption expenditures. The price of batteries is represented by
the Bureau of Labor Statistics Wholesale Price index series. Complementary
goods price variables included the wholesale price indices for automobiles
and electrical machinery. Since there is no single, direct substitute for
batteries, no single price variable is indicated for this effect; however,
the price of batteries relative to an average price of all goods might capture
some of this effect. A time trend is used as a proxy variable for the
technological change effect, since this effect is so difficult to quantify in
this type of anlaysis. However, statistical tests show that the variable is
not statistically significant. Instead, this effect is dealt with by the use
of dummy variables and sample segmentation to distinguish different periods
in which unusual structural changes occurred which affected the industry.
Technological change is also partially measured by relative prices. That is,
to some extent, technological change is one aspect of a long-run substitution
5-6
-------
process; so Chat relative prices serve, at least partially, as a proxy variable
for technological change, as well as for direct economic substitution.±J
After testing a variety of functional forms, different estimation time
periods and activity and price variables, the equations shown in Table 5-1
have been selected for use in the forecast. The primary variables that are
significant in these equations are real GNP, the Federal Reserve Board index
of industrial production, and the relative prices of storage batteries,
primary batteries and electrical equipment. An evaluation of the general
determinants of costs of producing batteries indicates no reason to expect
production costs to increase or decrease at a greater rate than other goods
and services over the next 13 years. Therefore, the relative price of
batteries is assumed to be constant. Forecasts of the activity variables
(i.e., GNP and Index of Industrial Production) are from Predicasts, Inc.'s
economic forecasting service. These forecasts and assumptions are used in
the estimated equations to provide the demand estimates shown in Table 5-2.
Thus, according to the regression analysis, the 1990 value of storage battery
shipments will be between $1.5 and 1.8 billion (1967 dollars), representing a
compounded annual growth rate of between 1.9 and 3.2 percent. The projections
for primary batteries are between 544 and 789 million, respectively. These
figures represent compounded annual average growth rates of between 2.9 and
5.7 percent.
5.1.3 Forecasts of Other Authors
While a full survey of battery industry personnel and investment analysts
was not conducted in this study, their general concensus regarding future
industry growth can be inferred from various sources, such as the Trade Press
(e.g., American Metal Market, C|hemical Week, etc.), market research and previous
I/ Christopher I. Higgins, "An Economic Description of the United States
Steel Industry," in Essays in Industrial Econometrics, Volume II,
Lawrence R. Klein, ed., p. 10.
5-7
-------
TABLE 5-1. REGRESSION FORECASTING EQUATIONS
_
I
00
Equation
Number
1
2
3
4
5
6
7
8
9
10
11
Dependant
Vartabl*
Value of
atorage
battery
ehlpmenta
Value of
atorage
battery
ehlpmente
Value of
atorage
battery
ehlpmente
Value of
atorage
battery
ahlpmente
Value of
•torags
battery
•hlpmente
Value of
primary
battery
ahlpments
Value of
prlmery
battery
•hlpmentt
Value of
primary
bettery
ahlpaenta
Value of
primary
bettery
ehlpmsnta
Value of
primary
bettery
ehlpaents
Value of
primary
battery
Functional GHP Production Storage
Fora ($1971) (1)67 - 100) Batteries
1
linear .69723 -1063.78
(17.64) (7.81)
linear 0.69339 - 200.41
(21.76) (0.79)
linear 0.80523 - 835.65
(10.31) (4.16)
log 0.9466 - 1.4645
(16.12) (6.96)
log 0.7657 0.5242
(26.90) (1.68)
linear 0.2760
(8.50)
linear 4.3940
(6.61)
linear 5.1133
(8.71)
log- 1.1247
rythmlc (9.69)
log- 1.4521
rytnnlc (8.62)
log- 1.6006
rythmlc
Priatary Electrical Time of alnatlon F Standard
Batteries Equipment Constant Period Freedom [<2 Statistic Error
995.34 1950-77 25 .96 317 45.0
-792.05 922.78 1950-77 24 .98 330 36.2
(3.81)
666.64 1957-77 18 .96 242 46.01
i
-0.1249 1950-77 25 .95 235 0.08
-1.8235 2.8978 1950-77 24 .98 447 .05
(7.08)
-100.44 78.656 1957-77 18 .82 40 29.94
(1.12)
-410.76 671.85 -419.246 1957-77 17 .90 49 23.14
(2.9) (3.26)
-411. GO 1196.41 -916.21 1957-73 13 .92 48 17.19
(4.41) (i.li)
.3158 -2.2361 1957-77 18 .85 31 0.11
(0.99)
•
-1.4097 1.9120 -1.0541 1957-77 17 .9217 67 .083
(3.71) (1-54)
-1.3623 3.0240 -1.7108 1937-73 13 .9354 63 .070
A-6a
-------
TABLE 5-2. SUMMARY OF DEMAND PROJECTIONS OF THE VALUE OF SHIPMENTS OF BATTERY PRODUCTS
(Billions of 1967 Dollars)
I
vo
STORAGE BATTERIES
Value of Shipments
1977 f
1985 $ Billions \
1990 (_
Growth Rates (annual)
1950-1977 f
1977-1985 % 1
1977-1990 (_
PRIMARY BATTERIES
Value of Shipments
1977 r
1985 $ Billions {
1990 (_
Growth Rates (annual)
1957-1977 ]
1977-1985 % j
1977-1990 L
Time
Series
Analysis
1.2
1.6 - 1.8
1.9 - 2.4
3.8%
3.8 - 5.8%
3.8 - 5.8%
0.38
0.47- 0.55
0.55- 0.70
14 . 0%
2.9 - 4.9%
2.9 - 4.9%
Regression
Analysis
-
1.3 - 1.6
1.5 - 1.8
-
1 - 3.6%
1.8 - 3.2%
-
0.47- 0.54
0.55- 0.80
-
2.9 - 5.7%
2.9 - 5.7%
Regression
with Ad-
justments
for Tech-
nological^ .
Chanue -/
-
1.4 - 1.8
1.7 - 2.1
-
2.2 - 4.8%
3.0 - 4.4%
-
-
-
-
-
-
Business
Communica-
tions Corp.
(BCC)-7
-
1.9 - 2.2
2.6 - 3.3
-
6-8%
6 - 8%
-
0.56
0.72
-
5.0%
5.0%
Battery
Council
Int'l.^
-
1.6
2.0
-
4%
-
-
-
-
-
-
Kearney
Manage-
ment
Systems
-
.1.6
1.9
-
3.5%
3 . 5%
-
.47
.55
-
2 . 9%
2.9%
Trade r .
4 , ->/
Press — s—
-
1.8 - 1.9
2.3 - 2.6
•
-
5 - 6%
5 - 6%
-
.47- .61
.55- .81
-
5 - 62
5 - 6%
Concensus
-
1.4 - 1.8
1.7 - 2.3
-
3 - 4.42
3 - 4.42
-
0.48- 0.56
0.56- 0.72
-
3-5%
3 - 5%
I/ Business Communications Co., Stamford, Conn., Portable Energy Sources: Batteries, fuel Colls, Solar Cells,
~ October 1977. Storage battery figure was adjusted from "current dollars" forecast, of 13.7%.
2/ American Metal Market, March 30, 1979.
3_/ Kearney Management; Systems, Draft Economic Impact Assessment of Proposed Effluent Limitation Guidelines for
the Battery Industry Point Source Category, Contract Ho. EPA 68-01-1940, 1976.
<\J Chemical Week 1/10/79 - Estimate is for entire battery industry.
5/ Quote from Edward D. Hopkins, President of Gould, Inc.
6/ Prom the information in Section 4.1.3, an adjustment to the regression modal is mode to account for the
~~ potential growing use of electric vehicles (63.) and the other changes in the storage battery industry (G'i>) .
-------
government reports, and interviews with a number of industry personnel
contacted during the course of the study (although not a statistically
representative sample). From these sources, a number of trends are evident,
These are:
• Maintenance free batteries will increasingly dominate
the lead-acid battery industry. This will result in
increased demand for lead-calcium alloy. To meet this
demand, lead smelters will decrease the proportion of
scrap lead to virgin lead.
• Research and development geared toward developing new
types of batteries could threaten the long-term future
for lead-acid batteries. Such R&D is also being done to
improve lead-acid technology, but such improvements
would be minor in comparison to the theoretical potential
of some other systems (e.g., lithium batteries).
• The development of a practical electric vehicle holds the
promise of revolutionizing this industry. Although there
are a number of test vehicles on the road today, none
appear to be able to replace completely the internal com-
bustion engine at this time. Assuming that a fairly con-
ventional lead-acid powered automobile becomes popular,
each 1,00,000 vehicles sold could increase industry value
of shipments by 6 percent. One hundred thousand vehicles
represent about 1 percent of annual U.S. auto sales.
• The recent trend of considerable downsizing of SLI batteries
is expected to continue. This is believed to be largely
offset by an expected shorter average useful battery life-
time of the downsized batteries.
• The trend toward diesel engines will increase demand for
SLI batteries, since diesel engines require two batteries.
• Increased cost of electric power production has made the
storage of electrical energy by utilities for use during
peak demand periods more cost-effective. This trend will
have a positive effect on lead-acid battery growth.
5-10
-------
The combined effects of these trends is to add 12 percent to the value of
lead-acid battery shipments .over the next 10 years. This estimate is used in
Section 5.1.4 below, in conjunction with other information, to project industry
activity.
5.1.4 Concensus of Demand Projections
Table 5-2 shows a number of alternative forecasts of battery shipments
for the years 1985 and 1990. The first two columns show the results of the
time series and regression analyses performed by the study team. The third
column represents a modified version of the regression analysis which
incorporates an adjustment made by the study team to account for expected
technological innovation in the industry. The adjustment results from the
incorporation of the opinions of industry experts discussed in Section 5.1.3
into the analysis. The next four columns are forecasts taken from or derived
from other published sources that have appeared over the past few years and
the last column is a consensus forecast based on the other information in
the table as well as the information in Section 5.1.3 regarding potential
technological and market shifts in the battery industry.
The five projections of 1990 primary battery shipments ranged in value
from $470 million to $800 million in 1967 dollars. However, two of the five
projections are considered less reliable than the other three. The projection
based on the "trade press" source is based upon the entire battery industry
and is therefore heavily weighted by the storage battery sector. The regression
results, although useful in spotting possible turning points, has somewhat
inconsistent results. Furthermore, the projections resulting from the other
three sources are fairly close. For these reasons, the projections based on
the regression analysis and the trade press source are eliminated from the
forecast. The remaining three sources result in 1990 shipments estimates of
from $550 to $700 million. These figures represent compounded average annual
5-11
-------
growth rates of 3 to 5 percent. Inherent in these projections is the expecta-
tion that the more rapid growth of the mid-1970s will taper off because of
market saturation of the newer battery types and the new battery-using products,
The six projections of 1990 storage battery industry shipments ranged in
value from $1.5 billion to $3.3 billion in 1967 dollars. The trade press
projection reflects quotations from industry managers and marketer.?. Often,
such estimates are an off-the-cuff "gut feeling" based upon only very recent
experience. Thus;, if the last two or three years were up or down, the pro-
jections would be correspondingly overly optimistic or pessimistic. Since
the last few years have shown unusually rapid growth in storage battery ship-
ments and since the sources listed provided little or no explanation regarding
their forecasts, the 5-6 percent growth rate obtained from the trade press is
considered an overestimate, or at least an upper bound. The Business Com-
munications Corporation (BCC) etimate appears too high, because they are
based largely on conjecture regarding future technological developments in
storage battery technology and markets. However, it is the judgment of the
study team that technological "breakthroughs" are extremely difficult to fore-
cast with accuracy and, therefore, such estimates should be accepted only at
the very lower bounds. The BCC study appears to have used more optimistic
estimates in this regard. For these reasons, the trade press and BCC estimates
(the two highest estimates) are eliminated from further use in our forecast.
However, in an intuitive manner they do serve to substantiate the remaining
projections.
The remaining estimates are relatively consistent except that the time
series analysis has a rather wide range of values. This is due primarily to
the standard error of estimate of the time-fitted line. Thus, a range of
$1.7 billion to $2.3 billion (1967 dollars) for 1990 storage battery shipments
is selected as the consensus forecast. This represents compounded average •
annual growth rates of 3 to 4.4 percent, respectively. For comparative
purposes, the GNP forecast for the time period is for average growth of 3.3
percent annually.
5-12
-------
5.2 SUPPLY FACTORS
The primary supply related factors of interest are employment, industry
establishments, prices, profits, and industry location.
5.2.1 Employment
In general, it is expected that employment will increase with growing
industry activity, but at a lower rate than that of value of shipments or
value added. The lower rate results from a trend of increasing productivity
in the battery industry and inflation, in recent years. From 1963 to 1977,
the value added and value of shipments of storage batteries grew at a compounded
average annual growth rate of 6.8 percent, while industry employment grew 3.4
percent per year. Thus, the growth in production was largely the result of
increased labor productivity. The value of shipments per employee increased
almost steadily from $32,000 to $45,000 during the period, in 1967 dollars (2.5
percent per year). The increased productivity resulted from improvements in
products and production processes, increases in the proportion of industry
production at larger plants (which generally have greater capital investment
° • •
per employee than smaller plants), and changing product mix. Since there is
little evidence indicating significant changes in these trends, productivity
is expected to continue to grow at the historic rate of 2.5 percent per year.
Thus, at the lower range of the above forecast, 1990 storage battery employment
is projected to be 27.4 thousand, about 12 percent higher than 1977..!/
Primary battery employment increased from 8,500 in 1963 to 10,700 in
1977, representing a compounded average growth rate of 1.8 percent per year.
This figure is less than half (44 percent) of the growth in value of ship-
ments over the period. During the period, the real value of shipments per
employee increased from $26,300 to $35,200, which represents an average
i/ At the historical growth in shipments of 3.8 percent, employment would be
30.6 thousand in 1990.
5-13
-------
growth of about 2.1 percent per year. Extrapolating this growth rate to
1990 results in $46,100 per employee. At the lower range of the demand
forecast, this would mean 12,100 primary battery employees in 1990, about 13
percent higher than in 1977.
5.2.2 Number of Industry Establishments in 1990
Storage Batteries
The storage battery industry appears to be following a long-term trend
toward fewer and larger plants. The Census of Manufactures reports that the
number of establishments dropped 13 percent between 1963 and 1977, from 252
to 218. There are a number of reasons for this trend, most of which will
probably be operating over the next 13 years. These are (1) rapidly increasing
operating costs at older, more labor-intensive plants relative to newer and
larger plants, (2) changes in products and production technology, (3)
geographical shifts in markets, and (4) costs of compliance with health,
safety and environmental regulations.
t
The basic problem of many older, labor intensive plants is their inability
or unwillingness to keep up with changing, lower-cost production technologies
developed during the past 20 years. The primary changes in production
technology include the replacement of rubber battery cases with plastic ones,
automatic battery lid sealers and other assembly equipment, faster grid
casting machines, and the stamping and drawing grid making processes. Product
changes have included a shift from using 6-volt to the use of 12-volt SLI
batteries, and the development of "maintenance free" batteries which generally
use a lead-calcium alloy instead of the more traditional lead-antimony alloy.
The manufacture of lead-calcium grids requires more sophisticated and,
therefore, more expensive equipment than that of lead-antimony grids. It is
also expected that, in addition to a continuation of these trends over the
next decade, there will be a general downsizing of the SLI battery and some
possible new battery configurations to accomodate the growing popularity of
5-14
-------
electric vehicles. These technology changes require significant investments
in capital equipment and product development, which makes it difficult for
small firms with limited access to investment capital to survive.
Many smaller lead-acid battery firms serve local, regional, or specialty
markets and, consequently, do not maintain a national marketing and advertising
network to promote and distribute their products. In addition, battery manu-
facturing has traditionally been located near markets, because of the basic
transportation economics of the industry. As a result, they are particularly
vulnerable to geographic shifts in population distribution. Thus, as the
U.S. population shifts West and South, the growth in volume of the older,
smaller plants in the northeast will be limited and their financial position
will likely deteriorate.
Lead-acid battery producers are particularly vulnerable to health,
safety, and environmental regulations. EPA and OSHA lead air standards have
already added significantly to production costs and investment expenditures.
For these reasons, it is projected that plants will continue to decline
at the same rate as during the 1963 to 1977 time period (about 1.5 - 2.5 per
year). Thus, by 1990, there will be an additional 20 to 33 plant closures in
the lead-acid battery industry (if the lower end of the demand forecast occurs),
Primary Batteries
The number of primary battery plants have been increasing over the past
15 years. The size of these plants generally range from 40 to 500 employees,
with less than a handful as small as the small lead-acid plants (i.e., less
than 20 employees). Most of them are owned by large companies. In recent
years there has been some consolidation of operations by these companies,
5-15
-------
that is, merging the operations of small plants with other small and large
plants. Industry personnel report that some of these consolidations are
encouraged by environmental regulations. At this time, there does not appear
to be any significant reason to expect more than a handful of such consolida-
tions or any baseline plant closures for other reasons in this industry
segment over the next 10 years.
5.2.3 New Battery Plants
Little information has been uncovered which would allow a precise estimate
of the number of new plants that might be built between now and 1990. However,
using information in the previous sections of this report, several observations
can be made. This discussion is based on the lower bound demand forecasts
derived above.
Production and market economies in the storage battery industry make it
highly unlikely that any plant of less than $20 to $30 million in capacity
would be built today. With plants of this size, the projected increase in
demand (assuming the lower-bound estimate of $800 million in 1977 dollars)
could be met with 26-40 new plants. An additional one or two plants of this
size would account for capacity lost from the closure of about 30 small
plants. If, however, the increased capacity is installed at existing estab-
lishments, the number of new plants would be fewer. Industry sources report
that the later scenario is more likely. Thus it is doubtful that, at the
lower demand projections, there would be more than 5 or 6 new lead acid
plants built by 1990.
The size of future primary battery plants can vary widely, depending
upon the degree of specialization in specific battery types. However, a
rough estimate of $5 to $10 million in capacity per plant is consistent with
current trends. With plants of this size, it would take 30 to 60 new plants
to meet the projected demand increase of $300 million (1977 dollars) capacity,
5-16
-------
if there wsa no expansion of current facilities. While, at this time, no
consistent estimates have been found regarding expansion plans at current
facilities in the primary battery segment of the industry, it appears that
most of the required added capacity will be at existing facilities.
5.2.4 Prices
Over the past 20 years, average battery prices increased at a slower
rate than the aggregate price levels and the price level in the electrical
equipment industry. More recently, however, there has been an unusual jump
in some prices, because of raw material and energy cost increases. This has
been especially so for the lead-acid subcategory. Some industry sources
project a retreat from these record high prices in the next couple of years.U
After this adjustment, it is expected that the prices of batteries will
increase at approximately the same rate as the general economic price levels.
.5.2.5 Profitability
Since the industry has generally low demand elasticities, it is anticipated
that most increases in production costs occurring through 1990 will be passed
on. Although industry competition and potential for foreign imports in some
industry subcategories could mitigate, somewhat, their ability to maintain
profit margins in the future, this potential occurrence has not been quantified
in this study.
5.3 SUMMARY OF BASELINE CONDITIONS
A summary of baseline conditions appears in Table 5-3. Between now and
1990 shipments will increase at an annual rate somewhat greater than that of
the long-term GNP trend. However, because of increasing labor economies of
U See page 4-4.
5-17
-------
TABLE 5-3. SUMMARY OF BASELINE PROJECTIONS
STORAGE BATTERIES
PRIMARY BATTERIES
Ul
oo
Value of Shipments
(Billions of 1977 Dollars)
(X) (Annual)
No. of Employees—' (000)
No. of Plants^
No. of Firms
2/
Price Level-
Return on Sales
Before Taxes)
Industry Competition
1977
$ 1.9
24.5
215
112-132
162^
.06 - .14
1985
2.4-2.7
3-4%
26.2
195-202
NA
I/
.06 - .14
1990
2.7-3.4
3-4.4%
27.4
182-195
MA
I/
.06 - .14
1977
0.6
10.7
57
17
.06.-
1985
0.8-0.9
3-5%
11.5
57-75
NA
I/
.14 .06 - .14
1990
0.9-1.2
3-5%
12.1
57-75
NA
I/
.06 - .14
Moderate
Moderate
Moderate
Mod.
Mod.
Mod.
_!_/ EstJmatcd at tlic lower demand estimate.
2j Bureau of Labor Statistics Wholesale Price Index for Storage Batteries.
J)/ Price increases are projected to he equal to those of the general price levels.
_4_/ ni.S, wholesale price index for Primary Batteries.
NA -Not Available
-------
scale and a trend toward larger plants, growth in employment in the industry
will be lower than that of output. In 1990 the average plant size will be
significantly larger. This is especially true of the lead-acid segment of
the industry, since it is projected that there will be many small plants that
will cease to manufacture batteries and since the newer technologies in lead-
acid battery production are only practicable for larger plants. Although
increased industry concentration is expected in the lead-acid battery industry
(because of the projected exists of small firms and, possible consolidations
of larger firms), the information available did not allow a precise quantitative
determination of the magnitude of this development. Similar forces at work
in the primary battery sector would lead to consolidation in the mature pro-
duct lines (e.g., carbon zinc batteries). However, the dynamic nature of
technological developments in the newer battery types (including lithium
batteries and some still in the research and development stage such as nickel-
zinc) has made it difficult to project trends in consolidation of these products,
Prices of battery products are projected to increase at about the same
rate as the general price levels in the economy. This is because no extra-
ordinary relative price changes in the basic factors of production were pro-
jected. Thus, relative to other prices in the economy, battery prices are
projected to remain constant.
Insufficient information is available to reliably estimate changes in
profitability measures for the industry. This results from the dynamic nature
of the technology and industry structure described previously. Because of this
shortcoming the economic analysis was performed under the assumption that pro-
fit rates remain at current levels.
Although insufficient information was available to quantitatively
disaggregate industry growth projections into the specific battery type,
enough information was available to categorize the various battery types
according to whether they are expected to be above, below, or approximately
5-19
-------
equal to the average growth rate for the industry. The results of this cate-
gorization are shown below:
Lower Than Industry Average Growth Rate
Carbon zinc-air
Lead Acid Reserve
Leclanche
Mercury cadmium zinc
Nickel zinc*
Average Industry Growth Rate
Lead Acid
Magnesium carbon
Magnesium reserve
Silver oxide - Cadmium
Calcium
Higher Than Industry Average Growth Rate
Alkaline manganese
Lithium
Mercury ruben
Nickel cadmium
Silver oxide - zinc
Thermal
* Nickel zinc batteries are experimental. If they become commercialized
they would probably grow at a considerably higher rate than that of
the industry.
5-20
-------
6. COST OF COMPLIANCE
-------
6. COST OF COMPLIANCE
6.1 OVERVIEW
The recommended water treatment control systems, costs, and effluent limi-
tations for the battery manufacturing industry were enumerated in the develop-
ment document for effluent limitation guidelines and standards of performance.
That document identifies various characteristics of the industry, including
manufacturing processes;, products manufactured; volume of output; raw waste
characteristics; supply, volume, and discharge destination of water used in
the production processes; sources of waste and wastewaters; and the constitu-
ents of wastewaters. Using that data, pollutant parameters requiring limita-
tions or standards of performance were selected by EPA. The primary criteria
for this selection were that both the nature of the pollutant parameters and
the volume of discharge must be significant.
The EPA draft development document also identified and assessed the range
of control and treatment technologies within each industry subcategory. This
involved an evaluation of both in-plant and end-of-pipe technologies that could
be designed for each subcategory. This information was then evaluated for
existing surface water industrial dischargers to determine the effluent limi-
tations required for the best practical control technology currently available
(BPT), and the best available technology economically achievable (BAT). New
direct dischargers are required to comply with new source performance standards
(NSPS), which require best available demonstrated control technology (BDT).
New and existing dischargers to publicly owned treatment works are required to
comply with pretreatment standards (PSNS and PSES). The technologies were
analyzed to calculate cost and performance. Cost data were expressed in terms
of investment, operating and maintenance costs, plus depreciation, and interest
expense. Pollution characteristics were expressed in terms of median and mean
concentration levels (per liter of water as well as volume of production) for
each subcategory.
6-1
-------
6.2 COST ESTIMATION METHODOLOGY
The estimation of the costs presented in this section began with the
selection of specific wastewater treatment technologies and in-process control
techniques. The components of these techniques were combined into alternative
wastewater treatment and control systems appropriate for each battery industry
technical subcategory. The selection of the specific treatment systems was
based upon an examination of raw waste characteristics, considerations of
manufacturing processes, and an evaluation of available treatment technologies
discussed in Section V of the development document. The rationale for selec-
tion of these alternative systems is presented in Sections IX and X, and the
selected techniques are enumerated and described in Sections VII and VIII of
the development document. Investment and annual cost estimates for each treat-
ment technique were based on wastewater flow rates and raw waste characteristics
for each subcategory. The costs were then aggregated to represent the invest-
ment and annual operating costs for the appropriate treatment systems.
The final input data set comprises raw waste flow rates for each input
stream for one or more plants in each subcategory addressed. Three cases cor-
responding to high, low, and typical flows encountered at existing facilities
were used for each battery manufacturing subcategory to represent the range of
treatment costs which would be incurred in the implementation of each control
and treatment option offered. In addition, data corresponding to the flow rates
reported by each plant in the category were used to provide plant-specific cost
estimates for use in the economic impact analysis.
In general terms, cost estimation is provided by mathematical relation-
ships in each subroutine approximating observed correlations between component
costs and significant operational parameters such as water flow rate, retention
times, and pollutant concentrations. Flow rate is usually the primary determi-
nant of investment costs and of most annual costs with the exception of materi-
als costs. In some cases, however, pollutant concentrations may also signifi-
cantly influence costs.
6-2
-------
6.3 COST FACTORS, ADJUSTMENTS, AND ASSUMPTIONS
In developing the compliance cost estimates a number of critical factors
had to be estimated, and adjustments and assumptions made by EPA. These are
described in the development document and summarized below:
• All costs are expressed in January 1978 dollars
• Nonsupervisory direct labor cost estimates assumed
an average wage rate of $6.00 per hour, which is the
hourly wage rate for nonsupervisory workers in water,
stream, and sanitary systems for January 1978, as
reported in the U.S. Department of Labor, Bureau
of Labor Statistics1 "Employment and Earnings."
Indirect labor charges were estimated at 10 percent
of the direct labor costs
• An average rate of 3.3 cents per kilowatt hour was
used for all electrical energy costs; It was assumed
that electrical needs would be satisfied by the exist-
ing electrical distribution system; i.e., no new meter
would be required.
• Capital recovery costs assumed a straight line ten-year
depreciation, whereas depreciation charges for various
items of plant equipment were estimated to range from
10 to 25 years.
• Subsidiary costs associated with system construction
are included in the system cost estimates. These
include administrative and laboratory facilities,
line segregation, yardwork, engineering, legal costs,
fiscal and administrative expenses, interest during
construction, and garage and shop facilities.
• No new land purchases were costed. That is, it was
assumed that the land required for the treatment
systems was already available at the plant.
• Where batch, continuous or haul-away treatment systems
were possible, the system with the lowest life-cycle
cost, over a 10-year period, was selected for presen-
tation in the system cost table.
6-3
-------
6.4 POLLUTANT PARAMETERS
The selection of pollutant parameters for the application of effluent
limitation guidelines was primarily based on a review of laboratory analyses of
wastewater samples from several battery manufacturing plants and on responses
to a mail survey submitted to all known battery manufacturers. This informa-
tion was used to estimate the concentration of each of the 129 priority pollu-
tants as well as other variables considered to be "traditional parameters" in
the study of water pollution. The specific approach to selecting pollutant
parameters is presented in Sections V and VI of the development document.
Table 6-1 lists the parameters selected as inputs to the cost program.
The values of these pollutant parameters were used in determining materials
consumption, sludge volumes, treatment component sizes and effluent characteris-
tics. Individual subcategories of the battery industry commonly encompass a
number of widely varying waste streams, which are present to varying degrees
at different facilities. The raw waste characteristics shown as inputs to the
waste treatment systems represent a mix of these streams including all signifi-
cant pollutants generated in the subcategory and will not, in general, corres-
pond precisely to process wastewater at any existing facility. The process by
which these raw wastes are defined is explained in Section X of the development
document.
6.5 CONTROL AND TREATMENT TECHNOLOGY FOR EXISTING DISCHARGERS
Tables 6-2 to 6-7 provide an overview of the recommended BPT, and BAT
treatment systems for six subcategories (treatment systems for the Leclanche
subcategory were not described in the development document; zero discharge
was proposed for this subcategory). Generally these treatment systems involve
increasing levels of pollutant reduction and wastewater quality at each succeed-
ing option (i.e., BAT level 1 provides greater pollution reduction than BPT,
BAT level 2 provides greater pollution reduction than BAT level 1, and so on).
The recommended compliance technologies for each option vary from one subcate-
gory to another. However, the recommended BPT options generally rely upon
6-4
-------
TABLE 6-1. COST PROGRAM POLLUTANT PARAMETERS
Parameter, Units
Flow, MGD
pH, pH units
Turbidity, Jackson Units
Temperature, degree C
Dissolved Oxygen, mg/1
Residual Chlorine, mg/1
Acidity, mg/1 CaC03
Alkalinity, mg/1 CaC03
Ammonia, rag/1
Biochemical Oxygen Demand mg/1
Color, Chloroplatinate units
Sulfide, mg/1
Cyanides, mg/1
Kjeldahl Nitrogen, mg/1
Phenols, mg/1
Conductance, microohms/cm
Total Solids, mg/1
Total Suspended Solids, mg/1
Settleable Solids, ml/1
Aluminum, mg/1
Barium, mg/1
Cadmium, mg/1
Calcium, mg/1
Chromium, Total
Copper, mg/1
Fluoride, mg/1
Iron, Total, mg/1
Lead, mg/1
Magnesium, mg/1
Molybdenum, mg/1
Total Volatile Solids, mg/1
mg/1
Parameter, Units
Oil, Grease, mg/1
Hardness, mg/1 CaCOj
Chemical Oxygen Demand, mg/1
Algicides, mg/1
Total Phosphates, mg/1
Polychlorobiphenyls, mg/1
Potassium, mg/1
Silica, mg/1
Sodium, mg/1
Sulfate, mg/1
Sulfite, mg/1
Titanium, mg/1
Zinc, mg/1
Arsenic, mg/1
Boron, mg/1
Iron, Dissolved, mg/1
Mercury, mg/1
Nickel, mg/1
Nitrate, mg/1
Selenium, mg/1
Silver, mg/1
Strontium, mg/1
Surfactants, mg/1
Beryllium, mg/1
Plasticizers, mg/1
Antimony, mg/1
Bromide, mg/1
Cobalt, mg/1
Thallium, mg/1
Tin, mg/1
Chromium, Hexavalent, mg/1
Source: EPA Development Document, Table VIII-1.
6-5
-------
TABLE 6-2. RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY FOR CALCIUM SUBCATEGORY
CONTROL AND TREATMENT TECHNOLOGY
End-of-Pipe Treatment
• Settling
• Chemical Chromium Reduction
• Chemical Precipitation (Lime)
and Settling
• Polishing Filtration
• Holding Tank
• Recycling of Wastewater
• Sludge Dewatering by Vacuum
Filtration
In-Process Control
BPT
HEAT PAPER CELL
PRODUCTION TESTING
X
X
X X
X X
N N
BAT-1
HEAT PAPER CELL
PRODUCTION TESTING
X
X
X X
X X
X X
N N
BAT-2
HEAT PAPER CELL
PRODUCTION TESTING
X
X
X
X
X X
X
N N
N = None
-------
TABLE 6-3. RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY FOR CADMIUM SUBCATEGORY
CONTROL AND TREATMENT TECHNOLOGY
End-of-Pipe Treatment
Oil Skimming
Chemical Precipitation (lime or acid) and Settling
Polishing Filtration .
Reverse Osmosis with Recycling of Permeate
Ion Exchange
Chemical Precipitation and Settling of Brine
Sludge Dewatering by Vacuum Filtration
Vapor Recompression Evaporation of Brine
Centrifugation
In-Process Control
Recycling of Process Solutions
Segregation of Noncontact Cooling Water
Control of Electrolyte Drips and Spills
Dry Cleaning of Floors and Equipment
Control of Rinse Flow rates
Recirculat ion of Wastewater from Air Scrubbers
Dry Cleaning of Impregnated Electrodes
Reduction of Cell Wash Water Use
Countercurrent Rinse
Reduction of Cadmium Powder Rework
Elimination of Impregnation Rinse Wastewater
Discharge
BPT BAT-1
X X
X X
X X
X X
X X
X X
X
X
X
X
X
X
BAT-2
X
X
X
X
X
X
X
X
X
X
X
X
X
BAT-3
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
BAT-4
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
-------
TABLE 6-4. RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY FOR LEAD SUBCATEGORY
CONTROL AND TREATMENT TECHNOLOGY
End-of-Pipe Treatment
• Oil Skimming
• Chemical Precipitation (Lime and Carbonate)
and Settling
• Polishing Filtration
• Filtration
• Reverse Osmosis with Recycling of Permeate
• Chemical Precipitation (Sulfide) and Settling
• Membrane Filtration
• Sludge Dewatering by Vacuum Filtration
In-Process Control
• Reuse of Spent Formation Acid
• Multistage Settling and Recycling of Pasting
Operations Wastewater
• Low Rate Charging in Case
• Recirculat ion of Air Scrubber Water
• Control Spills
• Countercurrent Rinse of Electrodes After
Open Case Formation
• Eliminate or Recycle Process Water for Plate
Dehydration
• Water Rinse of Batteries Prior to Detergent Wash
• Countercurrent Rinse of Batteries or Reuse of
Battery Rinse Water
BPT BAT-1
X X
X X
X X
X X
X X
X
X
X
X
X
X
X
BAT-2
X
X
X
X
X
X
X
X
X
X
X
X
X
BAT- 3
X
X
X
X
X
X
X
X
X
X
X
X
X
BAT-4
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
oo
-------
TABLE 6-5. RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY FOR LITHIUM SUBCATEGORY
CONTROL AND TREATMENT TECHNOLOGY
End-of-Pipe Treatment
Aeration
Settling
Chromium Reduction
Chemical Precipitation and Settling
Polishing Filtration
Sludge Dewatering by Vacuum Filtration
Holding Tank
Recycling of Wastewater
In-Process Control
BPT
ABC
X
X
X
XXX
X X
N N N
BAT-1
ABC
X
X
X
XXX
X X
X X
N N N
BAT-2
ABC
X
X
X X
X
X
X
X
N N N
BAT- 3
ABC
X
X
X X
X X
X
X
X
N N N
A = Heat paper production wastewater
B = Process wastewaters frorti the manufacture of iron disulfide cathodes, lead iodide cathodes,
cell testing, cell wash, lithium scrap disposal, floor and equipment wash
C = Process wastewater from air scrubbers
N = None
-------
TABLE 6-6. RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY FOR MAGNESIUM SUBCATEGORY
CONTROL AND TREATMENT TECHNOLOGY
End-of-Pipe Treatment
Settling
Chromium Reduction
Carbon Absorption
Chemical Precipitation and Settling
Polishing Filtration
Sludge Dewatering by Vacuum Filtration
Holding Tank
Recycling of Wastewater
In-Process Control
• Control of Rinse Water Flow
• Countercurrent Cascade Rinse
BPT
ABC
X
X
X XX
XXX
X
BAT-1
ABC
X
X
XXX
X
XXX
X
X
BAT-2
ABC
X
X X
X
X X
X
X
X
X
BAT-3
ABC
X
X
X X
X X
X X
X
X
X
X
I
*—«
o
A = Heat paper production wastewater
B = Wastewaters from the manufacture of silver chloride cathodes, cell testing, and floor and
equipment wash
C = Wastewater from air scrubbers
-------
TABLE 6-7. RECOMMENDED CONTROL AND TREATMENT TECHNOLOGY FOR ZINC SUBCATEGORY
CONTROL AND TREATMENT TECHNOLOGY
End-of-Pipe Treatment
• OIL Skimming
• Chemical Precipitation (Lime or Acid) and Settling
• Polishing Filtration
• Reverse Osmosis with Recycling of Permeate
• Chemical Precipitation (Sulfide) and Settling
• Membrane Filtration
• Sludge Dewatering by Vacuum Filtration
In-Process Control
• Recycling or Reuse of Process Solutions
• Elimination of Use of Chromates in Cell Washing
• Segregation of Noncontact Cooling Water
• Segregation of Organic Bearing Cell Cleaning
Wastewater
• Control of Electrolyte Drips and Spills
• Control of Rinse Water Flows
• Countercurrent Rinses for Eight Processes
• Recirculate Amalgamation Area Floor Wash Water
• Dry Cleanup of Floor and Equipment or
Recirculation of Wash Water
• Elimination of Wastewater from Gelled Amalgam
Production
• Amalgation by Dry Processes
BPT BAT-1
X X
" X X
X X
X X
X X
X X
X X
X X
X X
X
X
X
BAT- 2
X
X
X
X
X
X
X
X
X
X
X
X
X
BAT- 3
X
X
X
X
X
X
X
X
X
X
X
X
X
X
BAT-4
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
-------
chemical precipitation and settling technologies. The recommended BAT options
usually include the BPT option components plus additional filtration and greater
wastewater flow reduction gained from in-process controls. More detailed
descriptions of the treatment technologies appear in Sections IX, X, XI and XII
of the development document.
6.6 CONTROL AND TREATMENT TECHNOLOGIES FOR NEW SOURCES
The considered BDT options for new sources to achieve NSPS are identical to
BAT options. Similarly, the pretreatment options for new sources (PSNS) are
also identical to BAT options for existing dischargers to publicly-owned treat-
ment works (PSES).
6.7 INDUSTRY COMPLIANCE COSTS
Tables 6-8 and 6-9 show the estimated investment and total annual compli-
ance costs by battery type and industry technical subcategory in 1978 and 1981
dollars, respectively. The five alternatives shown correspond generally to
those in the development document as follows:
Alternative 1 H BPT/PSES-0
Alternative 2 = BAT-l/PSES-1
Alternative 3 = BAT-2/PSES-2
Alternative 4 = BAT-3/PSES-3
Alternative 5 = BAT-4/PSES-4
These alternatives were developed by arraying the technological options in
order of increasing total annual costs. This alteration was necessitated by
the fact that although the original options (i.e., BAT 1, BAT 2 ...) generally
correspond to increasing levels of compliance cost, there are some plants for
which this correlation does not hold. This is because reductions in flow
rates, resulting from certain in-process control technologies, reduce the
capacity requirements of the end-of-pipe-treatment systems, thereby lowering
6-12
-------
TABLE 6-8. BATTERY INDUSTRY TOTAL COMPLIANCE COSTS EXISTING SOURCES 1978 DOLLARS
SUBCATEGORY
Cadmium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Calcium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lead
Direct Dischargers
Indirect Dischargers
Subcategory Total
Leclanche
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lithium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Magnesium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Zinc
Direct Dischargers
Indirect Dischargers
Subcategory Total
TOTAL
Direct Dischargers
Indirect Dischargers
Subcategory Total
ALTERNATIVE 1
CAPITAL ANNUAL
COST $ COST $
60472. 23065.
330090. 75625.
390562. 98690.
4412. 3322.
4412. 3322.
551172. 255227.
6935562. 2293924.
7486734. 2549151.
45241. 28226.
45241. 28226.
0. 494.
0. 6080.
0. 6574.
20908. 8134.
28272. 14571.
49180. 22705.
50294. 18219.
258474. 88243.
308768. 106462.
682846. 305139.
7602051. 2509991.
8284897. 2815130.
ALTERNATIVE 2
CAPITAL ANNUAL
COST $ COST $
122762. 37576.
318290. 109185.
441052. 146761.
4412. 3322.
4412. 3322.
1847257. 545971.
17773189. 4306833.
19620446. 4852804.
'
0. 14230.
37371. 20236.
37371. 34466.
90013. 23918.
346662. 100197.
436675. 124115.
2060032. 621695.
18479924. 4539773.
20539956. 5161468.
ALTERNATIVE 3
CAP ITAL ANNUAL
COST $ COST $
146732. 48575.
416245. 140330.
562977. 188905.
4412. 3322.
4412. 3322.
2251816. 670331.
20237086. 5119444.
22488902. 5789775.
0. 14230.
37371. 20236.
37371. 34466.
102156. 38187.
405624. 159308.
507780. 197495.
2500704. 771323.
21100738. 5442640.
23601442. 6213963.
ALTERNATIVE 4
CAPITAL ANNUAL
COST $ COST $
181070. 65933.
622480. 183368.
803550. 249301.
2251816. 670331.
20237086. 5119444.
22488902. 5789775.
0. 14230.
73784. 27846.
73784. 42076.
102156. 38187.
405624. 159308.
507780. 197495.
2535042. 788681.
21338974. 5489966.
23874016. 6278647.
ALTERNATIVE 5
CAPITAL ANNUAL
COST $ COST $
624290. 133643.
1501581. 490754.
2125871. 624397.
3560616. 1009569.
26565175. 7542289.
30125791. 8551858.
109028. 55191.
547387. 252265.
656415. 307456.
4293934. 1198403.
28614143. 8285308.
32908077. 9483711.
-------
TABLE 6-9. BATTERY INDUSTRY TOTAL COMPLIANCE COSTS EXISTING SOURCES 1982 DOLLARS
SUBCATEGORY
Cadmium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Calcium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Leclanche
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lithium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Magnesium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Zinc
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lead
Direct Dischargers
Indirect Dischargers
Subcategory Total
TOTAL
Direct Dischargers
Indirect Dischargers
Subcategory Total
ALTERNATIVE 1
CAPITAL ANNUAL
COST $ COST $
81637. 31138.
445622. 102094.
527259. 133232.
5956. 4485.
5956. 4485.
61075. 38105.
61075. 38105.
0. 667.
0. 8208.
0. 8875.
28226. 10981.
38167. 19671.
66393. 30652.
67897. 24596.
348940. 119128.
416837. 143724.
744082. 344556.
9363009. 3096797.
10107091. 3441353.
921842. 411938.
10262769. 3388488.
11184611. 3800426.
ALTERNATIVE 2
CAPITAL ANNUAL
COST $ COST $
165729. 50728.
429691. 147400.
595420. 198128.
5956. 4485.
5956. 4485.
0. 19211.
50451. 27318.
50451. 46529.
121518. 32289.
467994. 135266.
589512. 167555.
2493797. 737061.
23993805. 5814224.
26487602. 6551285.
2781044. 839288.
24947897. 6128694.
27728941. 6967982.
ALTERNATIVE 3
CAPITAL ANNUAL
COST $ COST $
198088. 65576.
561931. 189446.
760019. 255022.
5956. 4485.
5956. 4485.
0. 19211.
50451. 27318.
50451. 46529.
137911. 51552.
547592. 215066.
685503. 266618.
3039952. 904947.
27320066. 6911249.
30360018. 7816196.
3375951. 1041286.
28485996. 7347564.
31861747. 8388850.
ALTERNATIVE 4
CAPITAL ANNUAL
COST $ COST $
244445. 89010.
840348. 247546.
1084793. 336556.
0. 19211.
99608. 37592.
99608. 56803.
137911. 51552.
547592. 215066.
685503. 266618.
3039952. 904947.
27320066. 6911249.
30360018. 7816196.
3422308. 1064720.
28807614. 7411453.
32229922. 8476173.
ALTERNATIVE 5
CAPITAL ANNUAL
COST $ COST $
842792. 180418.
2027134. 662518.
2869926. 842936.
147188. 74508.
738972. 340558.
886160. 415066.
4806832. 1362918.
35862986. 10182090.
40669818. 11545008.
5796812. 1617844.
38629092. 11185166.
44425904. 12803010.
-------
the total cost of the given in-process technology. This re-arraying of the
compliance cost data serves to maintain consistency in the underlying assump-
tion that the owner or operators of a given plant will select abatement techno-
logies on an economically rational basis. That is, for a given target level of
abatement the lowest cost option will be used, even if it surpasses the target
level.
As Tables 6-8 and 6-9 show, the most costly control option (Alternative 5)
would add $9.5 million to the annual cost of manufacturing batteries in the
United States (1978 dollars). Direct dischargers will incur $1.2 million and
indirect dischargers will incur $8..3 million of this figure. Associated invest-
ment costs are $4.3 million for direct dischargers, $28.6 million for indirect
dischargers, and $32.9 million for the entire industry. As shown in the tables,
the costs for most other options are significantly lower. For example, Alterna-
tive 4 would incur a total industry annual cost of $6.3 million and an investment
cost of $23.9 million. It should also be noted that the lead acid battery pro-
duct group accounts for 92 percent of total industry annual costs and 94 percent
of industry investment costs (for example, at the Alternative 4 level). Average
unit compliance costs and the distributions of compliance costs among plants
in the industry is discussed further in Chapter 7 of this report.
6.8 COST FOR SOLID AND HAZARDOUS WASTES
The battery manufacturing industry produces a variety of waste materials
in the form of scrap metals, spent concentrated solutions, reject batteries,
and wastewater treatment sludges. Under the Resource Conservation and Recov-
ery Act (RCRA), battery manufacturing plants will be required to establish
certain hazardous waste management practices as generators, shippers, storers,
treaters, or disposers of hazardous waste. A preliminary estimate of the
costs of these wastes was prepared by EPA and provided for this study. This
estimate was that RCRA will cost the industry $287,000. However, this estimate
is only preliminary because it is based upon an earlier version of the evolving
RCRA regulations.
6-15
-------
Table 6-10 shows the total annual RCRA costs broken out by technical sub-
category and product group. These costs include operating, maintenance, depre-
ciation and interest expenses. The distribution of the costs among the product
groups within each subcategory was based upon the assumption that the compliance
cost per pound of product output would be constant across the product groups.
Because the estimated economic impacts from these costs are minimal, violation
of these assumptions would not significantly affect the outcome of the economic
impact analysis.
The aforementioned compliance cost estimates were used, in combination with
the information on the battery industry characteristics contained in Chapters
1 through 5, to estimate the potential economic impacts of the proposed regu-
lations. The results of that investigation are reported in the next chapter.
6-16
-------
TABLE 6-10. TOTAL ANNUAL RCRA COMPLIANCE COSTS
(THOUSANDS OF 1978 DOLLARS)
Subcategory
Leclanche
(Zinc Anode,
Acid Electro-
lyte)
Zinc Anode,
Alkaline
Electrolyte
Cadmium Anode
Magnesium
Anode
Lithium Anode
Calcium Anode
Lead Anode
Total
Battery
Product Group
Carbon Zinc, (Le-
clanche), Silver
Chloride, Carbon
Zinc Air
Alkaline Manganese
Carbon-Zinc-Air
Mercury (Ruben)
Silver-Oxide-Zinc
Mercury-Cadmium-Zinc
Nickel Zinc
Nickel Cadmium
Cadmium Silver Oxide
Silver Cadmium
Thermal (Magnesium)
Magnesium Carbon
Magnesium Reserve
Lithium
Calcium
Lead Acid
Annual RCRA Costs
(Thousands of Dollars)
Product
Group Subtotal
127,250
68,564
7,070
4,601
4,733
144
88
74,177
123
NEC
NA
NA
NA
286,750
Technical
Category Subtotal
127,250
85,200
74,300
0.0
NA
NA
NA
286,750
NEC = negligible.
Only $14,450 of the Leclanche costs and $2,700 of the Zinc costs are the result
of wastewater treatment sludges, the remainder being for manufacturing process
waste RCRA disposal costs.
6-17
-------
7. ECONOMIC IMPACT ASSESSMENT
-------
7. ECONOMIC IMPACT ASSESSMENT
This chapter describes the economic impacts likely to occur as a result
of the costs of the effluent control technologies described in Chapter 6. It
is based upon an examination of the estimated compliance costs and other eco-
nomic, technical and financial characteristics of each of 239 battery manufac-
turing facilities of various sizes and configurations and the analytical
methodology described in Chapter 2. These plants represent 93 percent of the
production facilities estimated to be in the industry and at least 98 percent
of the production capacity of the industry. The primary areas of interest
include the effect of the pollution control costs on prices, battery industry
profitability, industry structure and competition, small business, employment,
communities, imports and exports, and the potential for plant closures.
7.1 PRICE AND QUANTITY CHANGES
Table 7-1 shows the price and production changes estimated from the full-
cost pricing strategy model described in Chapter 2. For most product groups
price changes are small, exceeding one-half percent of before compliance prices
for only four product groups for the most costly option (alternative 5 or,
where this is no alternative to 5, the next most costly option). The price
increases for alternative 5 range from a low of zero for several products to a
high of one percent in the magnesium reserve battery group. The quantity reduc-
tions were obtained by multiplying the expected price increases by the demand
elasticities shown in Table 4-6. The resulting quantity reductions range from
zero for several subcategories to 0.7 percent for cadmium silver-oxide batteries.
For the other alternatives price and production changes are considerably lower.
For example, for alternative 2, only two product groups will experience price
changes greater than 0.5 percent.
7-1
-------
TABLE 7-1. PRICE AND PRODUCTION CHANGES (%)
BATTERY TYPE
Leclanche
Alkaline-Manganese
Carbon-Zinc-Air
Mercury (Ruben)
Nickel Zinc
Silver Oxide-Zinc
Mercury Cadmium-Zinc
Nickel Cadmium
Mercury Cadmium
Cadmium-Silver Oxide
Thermal (Magnesium)
Magnesium Carbon
Magnesium Reserved/
Lithiumi/
Calcium
Leaf)-Acid
NUMBER OF
FACILITIES
IN INDUSTRY^/
19
8
2
4
1
9
1
9
1
1
1
3
4
8
3
184
NUMBER
OF FIRMS!/
9
5
2
3
1
6
1
9
1
1
1
3
4
1
3
114
ANNUAL
PRODUCTION
(MILLIONS
OF LBS.)!/
228.62
38.80
D
2.60
e
2.68
D
11.53
D
D
D
D
.174
.045
D
2,974.0
VALUE OF
PROnUCTION
(MILLIONS
OF $)!/
294.07
140.96
D
26.97
e
70.36
D
230.14
D
D
D
D
4.56
.72
D
1,487.0
ESTIMATED PRICE CHANGES (PERCENT).!/
ALT- I ALT-2 ALT-3 ALT-4 ALT-5i/
.01 .01 .01 .01 .01
.04 .04 .06 .06 .11
00000
.08 .09 .16 .16 .31
-----
.10 .12 .18 .18 .24
.09 .11 .13 .23 .23
.03 .04 .05 .07 .12
00000
.04 .09 .13 .36 .88
.13 .13 .13 .13 NA
00000
.40 .50 .50 .80 NA
.91 NA NA NA NA
.03 .03 .03 NA NA
.16 .32 .39 .39 .57
ESTIMATED QUANTITY CHANCES ( PERCENT)!/
ALT-1 ALT-2 ALT-3 ALT-4 ALT-5.L/
.01 .01 .01 .01 .01
.03 .03 .05 .05 .09
00000
.06 .07 .13 .13 .25
-----
.08 .10 .14 .14 .19
.07 .09 .11 .19 .19
.03 .03 .04 .06 .10
00000
.03 .07 .10 .29 .71
.08 .08 .08 .08 NA
00000
.40 .30 .30 .48 NA
.73 NA NA NA NA
.02 .02 .02 NA NA
.05 .10 .12 .12 .17
D -
e •
Detailed data withheld to maintain confidentiality of data.
experimental NA • not applicable
For Lead Acid and Cadmium and Zinc batteries only. The data shown for the other battery types are identical to the
Alternative-4 option.
!/ From EPA Technical Survey.
'
Calculated using average dollars per pound and EPA Survey data and may not precisely match total production
figures reported elsewhere in this report.
5_ Excludes Thermal Batteries.
2; Alternatives refer to different pollution control technologies with increasing levels of cost from lower numbered
alternatives to the higher numbers. These increasing alternatives correspond to either increases or no change in
the level of pollution abatement. The alternative numbers correspond generally, but not precisely, to the .
options labeled "BPT/PSES-0, BAT-l/PSES-2, etc." in the development document.
SOURCE: JRB Associates estimates
-------
The price changes estimated in Table 7-1, when added to existing price
levels represent the prices that firms will probably be able to obtain for
their products after compliance with the regulations. It is expected that
those firms that cannot earn a profit at these new price levels will suffer
financial losses by most measures of financial performance (e.g., return on
investment, sales, or equity, etc.) and probably will leave the industry. An
assessment of the ability of individual plants to earn a profit at these esti-
mated post-compliance price levels is presented in Sections 7.3 through 7.5.
7.2 RESULTS OF SCREENING ANALYSIS
As described in Chapter 2, the screening analysis proceeded in two steps.
First, the ratio of total annualized compliance cost to annual plant revenues
was calculated for each of the 239 facilities for which compliance cost and
other data was available. The total annualized compliance cost figure includes
variable costs (operating, maintenance, fuel, labor, etc.) plus capital costs
(depreciation plus interest expense). Plant revenues were estimated by multi-
plying production volumes (reported in the technical 308 survey) by the average
product prices per pound (reported in Table 4-5, page 4-19). The distribution
of the compliance cost to revenue ratios are shown in Table 7-2. For alterna-
tive 5, 39 production facilities had ratios of costs to revenues in excess of
the threshold value of one percent. For the other alternatives, fewer facili-
ties have ratios greater than one percent. For example, for alternative 4, 16
facilities exceed the threshold value, for alternative 2 the figure is 12
facilities and for alternative 1, 9 facilities had ratios of cost to revenues
exceeding 1 percent. All other facilities are considered to have a low pro-
bability for plant closure.
The second step in the screening analysis involved a calculation of expect-
ed declines in return on sales (ROS) for each plant. The estimated decline in
ROS results from the reduced quantity demanded due to higher prices and the
assumption that these plants must absorb the difference between compliance costs
and the changes in market prices which were reported in Section 7.1. The
estimated profit declines are shown in Table 7-3. As the table shows, 21
7-3
-------
TABLE 7-2. NUMBER OF PLANTS BY TOTAL ANNUAL COMPLIANCE COST TO REVENUES RAT10
(Number of Plants)
COMPLIANCE COST AS A PERCENTAGE OF REVENUES.!/
PRODUCT GROUP
Leclanche
Alkaline-Manganese
Carbon-Zinc-Air
Mercury (Ruben)
Nickel Zinc
Silver-Oxide-Zinc
Mercury— Cadmium-Z inc
Nickel Cadmium
Mercury Cadmium
Cadmium-Silver-Oxide
Thermal (Magnesium)
Magnesium Carbon
Magnesium Reserve
Lithium
Calcium
Lead-Acid
TOTAL
NUMBER OF
FACILITIES
SAMPLED
19
8
2
4
1
9
1
9
1
1
1
3
4
8
3
165
239
ALTERNATIVE 1
£1Z 1-2Z 2-4% HZ
19
8
2
4
1
8 1
1
9
1
1
1
3
4
8
3
157 7 I
230 7 1 1
ALTERNATIVE 2
4Z
19
8
2
4
1
7 1
1
8 1
1
I
1
3
4
8
3
151 10 3 1
223 11 4 1
ALTERNATIVE 5.?/
<1Z 1-2Z 2-4Z HZ
19
5 3
2
4
1
7 1 I
1
52 2
1
1
1
3
4
8
3
135 20 6 4
200 26 9 4
Total Compliance Costs include operating and maintenance, depreciation, interest and profit. Alternatives
refer to different pollution control technologies with increasing levels of cost from lower numbered
alternatives to the higher numbers. These increasing alternatives correspond to either increases or no
change in the level of pollution abatement. The alternative numbers correspond generally, but not
precisely, to the options labeled "BPT/PSES-0, BAT-l/PSES-1, etc." in the Development Document.
I
Alternative 5 applies only to the lead, cadmium anode (nickel cadmium, mercury cadmium, and cadmium-silver
oxide), and zinc categories. The other figures shown in this column are for costs identical to alternative 4.
SOURCE: EPA Development Document and JR8 Associates estimates.
-------
TABLE 7-3. NUMBER OF PLANTS BY ESTIMATED .CHANGE IN RETURN ON SALES
(NUMBER OF P1ANTS)-
PRODUCT GROUP
Lee lanche
Alkal ine-Manganesc
Carhon-Zinc-Air
Mercury (Ruben)
Nickel Zinc
Silver -Oxide-Zinc
Mercury-Cadmium-Z inc
Nickel Cadmium
Mercury Cadmium
Cadmium-Si I ver-Oxide
Thermal (Magnesium)
Magnesium Carbon
Magnesium Reserve
Li th turn
Calc ium
Lead-Acid
TOTAL
NUMBER OF
FACILITIES
SAMPLED
19
8
2
4
1
9
1
9
1
I
1
3
it
8
3
165
239
ALTERNATIVE 1
4%
19
8
2
4
I
8 I
I
9
1
I
1
3
4
8
3
160 5
233 6 1 0
,.,...
ALTERNATIVE 2
<1% 1-2? 2-4% >4%
19
8
2
4
1
8 I
1
9
1
I
1
3
4
8
3
160 5
233 6 1 0
ALTERNATIVE 3
4Z
19
8
2
4
I
8 1
1
•)
I
I
1
3
4
8
3
158 6 1
233 6 2 0
ALTERNATIVE 4
£1% 1-2% 2-4% 2.4Z
19
ft
2
4
I
8 I
I
8 1
1
I
I
3
4
8
3
158 6 I
229 7 3 0
ALTERNATIVE 5l/
<1% 1-2% 2-4% >4%
19
5 3
2
4
1
7 1 1
I
6 1 2
I
t
I
3
4
8
3
152 8 4 1
218 13 7 1
I/
2/
Alternatives refer to different pollution control technologies with increasing levels of cost from lower
numbered alternatives to the higher numbers. These increasing alternatives correspond to either increases
or no change in the level of pollution abatement. The alternative numbers correspond generally, but not
precisely, to the options labeled "BPT/PSES-0, BAT-l/PSES-1, etc." in the Development Document.
t
Alternative 5 applies only to the lead, zinc, and calcium anode (nickel cadmium, mercury cadmium, and cadmium-
silver oxide) categories. The other figures shown in this column are for costs identical to Alternative 4.
SOURCE: JRB Associates estimates.
-------
plants are expected to experience profit declines of more than one percent of
sales under the most costly scenario. Of these, 13 are lead acid battery plants
and 3 are nickel cadmium battery manufacturing facilities, 3 are alkaline
manganese plants and 2 are silver oxide plants. Under the alternative 4 option,
only 8 lead-acid and 1 nickel-cadmium, 2 silver oxide, and 3 alkaline manganese
plants would experience profit declines of more than one percent. For the
other alternatives, the number of plants with significant declines in ROS is
significantly smaller. The likelihood of closures for these plants as a result
of the regulation is described in Section 7.5.
In summary, all but 21 plants in the industry will experience impacts
greater than the ROS threshold values due to the highest options available. The
following two sections present a more detailed financial analysis for these
21 plants.
7.3 PLANT LEVEL PROFITABILITY ANALYSIS
Two different measures of financial performance were used to assess the
impact of the regulation on the profitabilities of individual plants: return
on investment (ROI) and internal rate of return (IRR). The use of these tech-
niques involved a comparison of the measures before and after compliance.
Since no precise data was available on before compliance profitability, a
range of values was estimated based on industry-wide data from the Census of
Manufactures, "model plant" data appearing in the literature, and discussions
with industry representatives. This range of values indicates upper and lower
bounds for before compliance ROI of 12 and 16 percent respectively for the
lead acid product group and 12 and 20 percent for the other product groups. A
description of these estimates appear in Chapter 2 and Appendix A, along with
the rationale for the IRR technique.
Table 7-4 shows the estimated ROI before and after compliance with the pro-
posed regulations for each of the 21 potentially affected plants. The upper
and lower bounds in the table correspond to the extremes of the baseline ROI
estimates. Although the full range of profitability estimates were calculated,
7-6
-------
TABLE 7-4. POST-COMPLIANCE RETURNS ON TOTAL ASSETS (Percent)
Product Group
Alkaline
Manganese
Silver Oxide
Nickel Cadmium
Lead Acid
Plant
I.D.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
ROI Before
Compliance
12
12
12
12
Lower Bound
ROI After Compliance^
ALT.l ALT. 2 ALT. 3 ALT. 4 ALT. 5
12 12 11 11 09
12 12 11 11 09
12 12 10 10 09
08 06 06 06 08
10 10 09 09 08
10 10 I'D 09 07
10 09 09 08 04
11 10 10 09 04
08 08 07 07 03
09 08 06 06 04
10 10 09 09 ' 05
10 10 09 09 06
09 09 09 09 07
11 11 10 10 07
10 10 10 10X 07
11 10 10 10 09
12 11 10 10 08
09 09 09 09 08
11 11 10 10 08
09 09 09 09 09
09 09 09 09 10
Upper Bound
ROI Before
Compliance
20
20
20
16
-
ROI After Compliancel
ALT.l ALT. 2 ALT. 3 ALT. 4 ALT. 5
20 20 19 19 17
20 20 20 19 16
20 20 18 18 17
14 12 12 12 16
18 18 18 18 15
19 18 18 16 13
17 17 16 15 09
18 18 18 16 09
12 12 10 10 06
13 10 10 10 08
14 14 12 12 09
14 14 13 13 . 10
13 13 12 12 10
15 15 13 13 10
14 14 14 14 11
15 14 14 14 13
16 15 14 14 12
13 13 13 13 12
15 15 14 14 12
13 13 13 13 13
13 13 13 13 14
Alternatives refer to different pollution control technologies with increasing levels of cost from lower num-
bered alternatives to the higher numbers. These increasing alternatives correspond to either increases or no
change in the level of pollution abatement. The alternative numbers correspond generally, but not precisely, to
the options labeled "BPT/PSES-0, BAT-l/PSES-1, etc." in the development document.
SOURCE: JRB Associates estimates.
-------
most evaluations in this study are made on the basis of the lower bound esti-
mates in .order to emphasize a conservative approach to the study. These esti-
mates indicate that there would be a significant drop in the profitabilities
of these plants, although it may not be enough to cause many plant shutdowns.
Although it is difficult to set specific threshold values for ROI, the esti-
mated ROI can be compared to averages for 33 major industry groups, which are
published by the Federal Trade Commission (FTC). The range of ROIs for these
33 major manufacturing industries was 6 to 18 percent during the time period
for which the plant data base was developed.J/ All but four lead-acid plants
and two cadmium plants are well within this range. These six plants have
post-compliance ROI's near or just below the lower end of the range for the
major industry averages under the alternative 5 scenario. At the upper pro-
fitability estimates five of these six plants would be well within the pro-
fitable range of values for the various major industry groups. As the table
shows the financial performance projected for the lower regulatory alternatives
are significantly better.
To confirm these results, estimates of the Internal Rates of Return (IRR)
were also calculated using the methodology described in Chapter 2 and Appendix
A. The estimated post-compliance IRR's are shown in Table 7-5. The upper and
lower bounds correspond to those of the baseline IRR estimates described in
Appendix A. For the alternative 5 option, seven plants have IRR's below the
critical value of 10 percent. Three of these are small lead-acid plants,
three are nickel cadmium production facilities, and one is a silver oxide
zinc facility. For the alternative 4 option, only the silver oxide plant
would have an IRR below the critical value. All other facilities would be
profitable by this measure. The IRR values for the 21 affected plants will
be used in Section 7.5, together with other information, to assess the plant
closure potential for the industry.
Federal Trade Commission, Quarterly Financial Report for Manufacturing,
Mining and Trade Corporations.
7-8
-------
TABLE 7-5. POST-COMPLIANCE INTERNAL RATES OF RETURNS (Percent)
vO
Product Group
Alkaline
Manganese
Silver Oxide
Nickel Cadmium
Lead Acid
Plant
I.D.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Lower Bound
IRR After Compliance1
ALT.l ALT. 2 ALT. 3 ALT. 4 ALT. 5
13 13 11 11 10
13 13 12 12 10
13 13 11 11 10
09 08 07 07 09
13 11 11 11 10
13 11 11 10 09
11 10 ,10 10 05
12 11 11 10 04
12 12 11 11 03
13 11 10 10 08
14 14 12 12 09
14 14 12 12 10
13 13 12 12 11
15 14 13 13 17
14 14 14 14 11
16 14 14 14 13
17 17 16 16 12
14 14 13 13 12
16 16 15 15 12
13 14 14 14 14
14 14 14 14 14
Upper Bound
IRR After Compliance^
ALT.l ALT. 2 ALT. 3 ALT. 4 ALT. 5
20 20 19 19 17
20 20 19 19 17
20 20 18 18 17
14 14 12 12 17
19 18 18 18 17
19 18 18 17 14
18 17 17 16 09
19 18 18 17 08
15 15 14 14 12
16 15 14 14 12
17 17 15 15 11
17 17 15 15 14
16 16 15 15 14
18 17 16 16 14
17 17 17 17 14
21 19 20 20 18
22 22 21 21 17
20 20 18 18 16
21 21 20 20 16
18 20 20 20 20
20 20 20 20 21
Alternatives refer to different pollution control technologies with increasing levels of cost from lower num-
bered alternatives to the higher numbers. These increasing alternatives correspond to either increases or no
change in the level of pollution abatement. The alternative numbers correspond generally, but not precisely,
to the options labeled "BPT/PSES-0, BAT-l/PSES-1, etc." in the development document.
SOURCE: JRB Associates estimates.
-------
7.4 CAPITAL REQUIREMENTS ANALYSIS
As described in Chapter 2, two ratios were calculated to assess the finan-
cial impact of committing the capital necessary to install the specified pollu-
tion control systems:
• compliance capital investment
estimated fixed plant assets
• compliance capital investment
estimated annual capital expenditures
The "investment requirements to assets" ratio provides a measure of the
relative size of the required pollution control investment as compared to the
size of the existing facility, and the "investment requirements to annual
capital expenditures" ratio measures the magnitude of the capital investment
required for compliance in relation to the pre-corapliance average annual capital
expenditures of the plant.
These ratios were calculated for each of the 21 potentially high-impact
plants. Since complete plant-level financial data was unavailable, the pre-
compliance values of the ratios were estimated from industry-level data for
SIC 3691 and SIC 3692 appearing in the 1977 Census of Manufactures. The com-
pliance investment costs were taken from the Draft Development Document, and
the production data; from which plant revenues and assets were estimated, were
taken from the EPA Technical Survey. The resulting ratios measure the relative
burden of the investment requirements and are shown in Table 7-6.
Compared to plant fixed assets, compliance investment costs are substan-
tial for a number of lead-acid and nickel cadmium battery manufacturing facili-
ties. The ratio ranges from zero to 64 percent of fixed asset value (fixed
assets are one-third to one-half of total assets). The pollution control
equipment would add substantially to the asset base of> these plants. For
7-10
-------
TABLE 7-6. COMPLIANCE CAPITAL COSTS RELATIVE TO FIXED ASSETS AND ANNUAL CAPITAL EXPENDITURES
(Percent)
Product Group
Alkaline
Manganese
Silver Oxide
Nickel Cadmium
Lead Acid
Plant
I.D.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16 .
17
18
19
20
21
Compliance Capital Cost as A
Percent of Fixed Assets^
ALT.l ALT. 2 ALT. 3 ALT. 4 ALT. 5
0 0 06 06 12
0 0 04 04 08
0 0 05 05 07
22 33 35 35 0
07 10 10 10 15
04 06 06 12 31
10 11 12 17 46
07 06 06 14 35
34 34 34 35 64
0 33 0 0 0
12 14 20 20 39
12 13 14 14 29
20 19 21 21 31
0 23 25 25 39
13 13 14 14 35
00000
0 08 14 15 25
26 26 26 29 35
08 16 16 16 28
00000
0 0 00 0
Compliance Capital Costs As A
Percent of Annual Capital Expenditures*-
ALT.l ALT. 2 ALT. 3 ALT. 4 ALT. 5
0 0 29 29 56
0 0 18 18 41
0 0 24 24 36
106 159 169 169 0
33 47 47 47 72
17 31 31 60 150
50 54 60 82 222
32 29 29 66 1.67
138 138 142 142 261
0 133 0 0 0
49 57 80 80 161
49 55 59 59 119
83 78 85 85 126
0 94 101 101 161
52 52 57 57 141
00000
0 34 57 59 100
106 106 106 116 142
34 64 64 66 116
00000
00000
Alternatives refer to different pollution control technologies with increasing levels of cost from lower numbered
alternatives to the higher numbers. These increasing alternatives correspond to either increases or no change
in the level of pollution abatement. The alternative numbers correspond generally, but not precisely, to
the options labeled "BPT/PSES-0, BAT-l/PSES-1, etc." in the development document.
SOURCE: JRB Associates estimates
-------
example, the two plants with the highest compliance investment costs would
have to increase their fixed assets by 64 and 46 percent, respectively. These
estimates do not, by themselves, indicate whether or not a plant closure will
occur. They are evaluated, simultaneously with other financial and nonfinan-
cial variables, to determine the potential for closure, in Section 7.5.
Compliance investment costs are large in comparison to normal annual capi-
tal expenditures in the industry. Alternative 5 investment costs for most of
the 21 plants are greater than their estimated pre-compliance annual capital
expenditures. Compliance costs for alternatives 4 and 3, though significantly
lower than that of alternative 5 are, nevertheless, substantial. For most
plants they amount to more than half of annual pre-corapliance capital investment
expenditures. Alternative 1 and 2 costs, though lower, are also substantial.
Investment expenditures of this magnitude indicate a significant burden on the
firms' ability to maintain their existing capital investment plans, although
they do not, by themselves, indicate a plant closure. That is, they indicate
that significant investment resources would have to be diverted from pre-
compliance "normal" investments for a period of 1 to 3 years. "Normal" invest-
ments are those used to sustain and improve the plants' operations.
7.5 PLANT CLOSURE POTENTIAL
Although major investment decisions, such as plant closure decisions, are
made largely on the basis of their financial performance, they are ultimately
judgmental. That is, in addition to financial variables, decision makers must
consider a number of other factors, such as market growth potential, the exist-
ence of specialty markets, intra-industry competition, the potential for tech-
nological obsolescence, marketing techniques, and substitution potential for
the products. Table 7-7 summarizes a number of factors relevant to the invest-
ment decisions relating to the 21 plants shown in Tables 7-4, 7-5, and 7-6.
The information in the table was drawn from earlier sections of this report.
The last column contains the study team's evaluation of the potential for
plant closures, based on a review of the combined effects of the other col-
umns in the the table.
7-12
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION
FBCD'uCT
CROUP
AUaline-
Manganeae
AUaline-
Hanganeae
Alkaline-
Manganese
Silver-
Oxide Zinc
Silvec-
Oiide Zinc
PLANT
1
2
3
4
5
KABXET
SHARE
Small
Small
Small
Small
Small
GROWTH OF
PRODUCT
GROUP
High
High
High
High
High
DECREE OF
SUBSTITUTION
Moderate
Moderate
Moderate
Moderate
Moderate
PRICE
ELASTICITY
.6 - .8
.6 - .8
.6 - .8
.6 - .8
.6 r .8
EXISTENCE
OF SPECIALTY
MARKETS
Low
Lou
Low
Med.
Ned.
REGULATORY
ALTERNATIVE
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
RATIO OF
COMPLIANCE
COST TO
REVENUE (X)
0
0
0.4
0.4
1.2
0
0
0.4
0.4
1.3
0
0
0.7
0.7
1.3
1.4
l.»
2.7
2.8
2.8
0.4
0.6
0.8
1.5
1.5
ESTIMATED
CHANCE IN
RETURN ON
SALES (!)
0
0
0.36
0.36
1.15
0
0
0.33
0.33
1.21
0
0
0.68
0.68
1.17
1.3
1.7
2.0
2.0
2.0
0.27
0.45
0.65
0.65
1.21
ESTIMATED!/
RETURN ON
ASSETS AFTER
COMPLIANCE (I)
12 - 20
12 - 20
11-19
11 - 19
9-17
12 - 20
12 - 20
10 - 18
10 - 18
9-17
12 - 20
12 - 20
10 - 18
10 - 18
9-17
8-14
6-12
6-12
6-12
8-16
10 - 18
10 - 18
9-18
9-18
8-15
ESTIMATED!/
INTEKNAi. RATF.
OF KETURN AFTEK
COMPLIANCE (!)
13-20
13-20
11 - 19
11 - 19
10 - 17
13 - 20
13 - 20
11 - 18
11 - 18
10 - 17
13 - 20
13 - 20
11 - IB
11 - 18
10 - 17
9-14
8-14
7-12
7-12
9-17
12 - 19
11 - 18
11 - 18
11 - 18
10 - 17
RATIO OF
COMPLIANCE
INVESTMENT
COST TO PI.ANT
FIXED ASSETS < I >
0
0
6
6
12
0
0
4
4
8
0
0
5
5
7
22
33
35
35
0
7
10
to
10
15
RATIO OF COMPLIANCE
INVESTMENT COST TO
ANNUAL CAPITAL
EXPEKDITIIBESCZ)
0
0
29
29
56
0
0
18
18
41
0
0
24
24
36
106
159
169
169
0
33
47
47
47
72
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY COST
Low
Lou
Lou
Lou
Low
Lou
Low
Low
Low
Low
Low
Lou
Low
Lou
Low
Low
Low
Med.
Med.
Hud.
Low
Low
Lou
Low
Low
I
t—>
u>
I/
Lower and upper bounds
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
PRODUCT
GROUP
Nickel-
Cadmium
Hi-Cad.
Hi. -Cad.
Lead-Acid
Lead-Acid
PLANT
6
7
8
9
10
MARKET
SHARE
Small
Small
Small
iniig.
inaig.
GROWTH OF
PRODUCT
GROUP
Medium
High
High
Medium
Medium
DECREE OF
SUBSTITUTION
Low
Moderate
Moderate
Lou
Low
PRICE
ELASTICITY
0 - .3
.6 - .8
.« - .8
0 - .3
0 - .3
EXISTENCE
OF SPECIALTY
MARKETS
N/A
Lou
Lou
Lou
Lou
REGULATORY
ALTERNATIVE
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
• RATIO OF
! COMPLIANCE
COST TO
REVENUE (Z)
.6
.6
.6
1.0
1.7
.7
.8
i .8
l.l
3.1
.5
.6
.6
1.0
3.7
1.6
1.6
2.2
2.2
4.9
1.7
2.2
3.2
3.2
4.4
ESTIMATE!)
CHANGE IN
RETURN OH
SALES (Z)
.36
.54
.54
.88
1.61
.66
.78
.82
1.10
3.10
.22
.57
.57
.98
3.67
1.47
1.31
1.81
1.81
4.36
1.53
1.92
2.80
2.80
1.86
ESTIMATED^/
RETURN ON
ASSETS AFTER
COMPLIANCE (Z)
10 - 19
10 - 18
10 - 18
9-16
7-13
10 - 17
9-17
9-16
8-15
4-9
11 - 18
10 - 18
10 - 18
9-16
4-9
8-12
8-12
7-10
7-10
3-6
9-13
8-10
6-10
6-10
4-8
ESTIMATED!/
INTERNAL KATE
OF RETURN AFTER
COMPLIANCE (Z)
12 - 19
11 - 18
11 - 18
10-17
9-14
11 - 18
10-17
10 - 17
10 - 16
5-9
12 - 19
11 - IB
11 - 18
10 - 17
4-8
12 - 15
12 - 15
11 - 14
11 - 14
3-12
13 - 16
11 - 15
10 - 14
10 - 14
8-12
RATIO OF
COMPLIANCE
INVESTMENT
COST TO PLANT
FIXED ASSETS(Z)
04
06
06
12
31
10
11
12
17
46
07
06
06
14
35
34
34
35
35
64
0
.33
0
0
0
RATIO OF COMPLIANCE
INVESTMENT COST TO
ANNUAL CAPITAL
EXPENDITURES(Z)
17
31
31
60
150
50
54
60
82
222
32
29
29
66
167
138
138
142
142
261
0
133
0
0
0
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY COST
Lou
1.0U
Lou
Low
Med.
Lou
Lou
Lou
Lou
High
Lou
Lou
Lou
Lou
High
Lou
Lou
Lou
Lou
High
Lou
Lou
Lou
Lou
High
I
h-*
4>
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
PRODUCT
GROUP
Lead-Acid
Lead-Acid
Lead-Acid
Lead-Acid
Lead-Ac id
PLANT
11
12
13
U
15
MARKET
SHARE
in.ig.
Small
Small
Small
Moderate
GROWTH OF
PRODUCT
GROUP
Medium
Medium
Medium
Medium
Medium
DEGREE OF
SUBSTITUTION
Moderate
Moderate
Moderate
Moderate
Moderate
PRICE
ELASTICITY
0 - .3
0 - .3
0 - .3
0 - .3
0 - .3
EXISTENCE
OF SPECIALTY
MARKETS
N/A
Low
Low
Med.
Some
REGULATORY
ALTERNATIVE
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
RATIO OF
COMPLIANCE
COST TO
REVENUE (Z)
.9
.9
1.8
1.6
3.7
.8
.0
.4
.4
.1
.2
.3
.6
.6
2.6
.2
.8
1.0
1.0
2.4
0.5
0.5
0.9
0.9
2.3
ESTIMATED
CIIANGK IN
RETURN ON
SALES (Z)
.72
.62
1.44
1.44
3.10
.66
.72
.99
.99
2.50
1.07
.98
1.17
1.17
2.03
.03
.43
.61
.61
1.80
.39
.23
.56
.56
1.72
ESTIMATED!/
• RETUHN ON
ASSETS AFTER
COMPLIANCE (Z)
10 - 14
10 - 14
9-12
9-12
5-9
10 - 14
10 - 14
9-13
9-13
6-10
9-13
9-13
9-12
9-12
7 - 10
11 - 15
II - 15
10-13
10 - 13
7-10
10 - 14
10 - 14
10 - 14
10 - 14
7-11
ESTIMATED!/
INTERNAL RATE
OP RETUHN AFTER
COMPLIANCE (Z)
14-17
14-17
12-15
12 - 15
9-11
14-17
14-17
12 - 15
12 - 15
11-14
13 - 16
13 - 16
12 - 15
12 - 15
11 - 14
15 - 18
14-17
13 - 16
13 - 16
It - 14
14 - 17
14 - 17
14 - 17
14 - 17
11 - 14
RATIO OF
COMPLIANCE
INVF.STMENT
COST TO !>LAHT
FIXED ASSETS(Z)
12
14
20
20
39
12
13
14
14
29
20
19
21
21
31
0
23
25
25
39
13
13
14
14
35
RATIO OF COMPLIANCE
INVESTMENT COST TO
ANNUAL CAPITAL
EXPENDITURES(Z)
49
57
80
80
161
49
55
59
59
119
83
78
85
85
126
0
94
101
101
161
52
52
57
57
141
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY COST
Low
Low
Low
Low
Hed.
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
—I
I
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
PRODUCT
GROUP
Lead-Acid
Lead-Acid
Lead-Acid
Lead-Ac id
Lead-Acid
PLANT
16
17
18
19
20
MARKET
SHARE
Small
inaig.
inaig.
inaig.
inaig.
GROWTH OF
PRODUCT
GROUP
Medium
Medium
Medium
Medium
Medium
DEGREE OF
SUBSTITUTION
Moderate
Low
Low
Low
Low
PRICE
ELASTICITY
0 - .3
0 - .3
0 - .3
0 - .3
0 - .3
EXISTENCE
OF SPECIALTY
MARKETS
Some
Sig.
Small
Small
REGULATORY
ALTERNATIVE
1
2
3
It
5
1
2
3
4
5
1
2
3
i>
5
1
2
3
4
5
1
2
3
4
5
RATIO OF
COMPLIANCE
COST TO
REVENUE (X)
.9
1.3
1.6
1.6
2.2
.2
.5
.8
.8
2.0
.0
.0
.2
.2
.2
.6
.7
.0
.0
.8
.7
.7
.7
.7
.7
ESTIMATED
CHANGE IN
RETURN ON
SALES (Z)
.71
1.00
1.25
1.25
1.67
0
.21
.38
.38
1.40
.79
.63
.60
.60
1.32
.41
.37
.58
.58
1.24
.51
.34
.28
.28
.09
ESTIMATED!/
RKTURN ON
ASSETS AFTER
COMPLIANCE (Z)
1! - 15
10 - 14
10 - 14
10 - 14
9-13
12 - 16
It - 15
10 - 14
10 - 14
8-12
9-13
9-13
9-13
9-13
8-12
11 - 15
a - 15
10 - 14
10 - 14
B - 12
9-13
9-13
9-13
9-13
9-13
ESTIMATED.!/
INTERNAL RATE
OF RETURN AFTF.R
COMPLIANCE (I)
16 - 21
14 - 19
14 - 20
14 - 20
13 - 18
17 - 22
17 - 22
16 - 21
16 - 21
12 - 17
14 - 20
14 - 20
13 - 18
13 - 18
12 - 16
16 - 21
16 - 21
15 - 20
15 - 20
12 - 16
13 - 18
14 - 20
14 - 20
14 - 20
14 - 20
RATIO OF
COMPLIANCE
INVESTMENT
COST TO PLANT
FIXED ASSETS
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
PRODUCT
CROUP
Lead-Acid
PLANT
21
MARKET
SHARE
inaig.
CBOUTH O?
PRODUCT
GROUP
Medium
DECREE OF
SUBSTITUTION
Low
PRICE
ELASTICITY
0 - .3
EXISTENCE
OP SPECIALTY
MARKETS
REGULATORY
ALTERNATIVE
1
2
3
4
5
RATIO OF
COMPLIANCE
COST TO
REVENUE (Z)
1.5
1.5
1.5
1.5
1.5
ESTIMATED
CHANGE IN
RETURN ON
SALES (Z)
1.38
1.22
1.15
1.15
.97
ESTIMATED!/
RETURN ON
ASSETS AFTER
COMPLIANCE (Z)
9-13
9-13
9-13
9-13
10 - 14
ESTIMATED!/
INTERNAL RATE
OF RETURN AFTEK
COMPLIANCE (Z)
14 - 20
14 - 20
14 - 20
14 - 20
14 - 21
RATIO OF
COMPLIANCE
INVESTMENT
COST TO PLANT
FIXED ASSF.TSU)
' 0
0
0
0
0
RATIO OF COMPLIANCE
INVESTMENT COST TO
ANNUAL CAPITA!.
EXPENDITURES(Z)
0
0
0
0
0
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY COST
Low
Low
Low
Low
Low
I
H-«
-xl
-------
In Beneral, .the market factors for these products are strong, so that the
bulk of the impacts will result from the intra-industry distribution of compli-
ance costs and the subsequent change in the competitiveness among the various
plants. Four plants are likely closures at the alternative 5 option, and ano-
ther plant would be a "borderline" closure. Their after compliance internal
rates of return are below the threshold level for the "worst case" (lower bound)
scenario, but above the threshold level at the upper ranges of the IRR estimate.
The same is true for their estimated ROIs. The other plants are believed to have
a low potential for closure, since their profitability measures are adequate and
their capital investment requirements are small relative to fixed assets and
annual capital expenditures. The plants estimated to be likely closures under
Alternative 5 are quite small and the loss of their combined capacity would
have a negligible effect on the rest of the industry. There are no estimated
plant closures for Alternatives 1 through 4.
Table 7-8 summarizes plant closure potential by regulatory option before
consideration of any baseline plant closures (i.e., plants that might close,
even without the regulation). As described in Chapter 4, baseline closures are
projected to include around 20 to 33 small lead-acid plants between 1977 and
1990. Consequently, it is possible that the lead-acid plants would close even
without the regulation. However, it is difficult to determine, from the data,
whether or not the baseline closures would be the same lead-acid establishments
that are listed in Table 7-8 as having a high potential for closure.
7.6 OTHER IMPACTS
7.6.1 Employment, Community and Regional Effects
As shown in Table 7-9, the 4 plants estimated to have a high potential for
closure under Alternative 5 employ between 255 and 390 people out of a total
industry employment of 37,000. Since each of these firms is located in differ-
ent areas of the country no significant community impacts are expected.
7-18
-------
TABLE 7-8. SUMMARY OF POTENTIAL PLANT CLOSURES
BEFORE CONSIDERATION OF BASELINE CLOSURES
BATTERY NUMBER OF REGULATORY!/ NUMBER OF
PRODUCT GROUP PRODUCTION FACILITIES OPTION PROBABLE CLOSURES
Lead Acid 184 Alternative 5 2
Nickel-Cadmium ' 9 Alternative 5 2
Other 65 - ALL 0
Total 258 Alternative 5 4
There are no closures estimated for Alternatives 1 through 4,
SOURCE: Table 7-7.
7-19
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TABLE 7-9. SUMMARY OF POTENTIAL EMPLOYMENT IMPACTS
Lead-Acid
Nickel-Cadmium
Other
Employment
Number of Number of in Closed
Number Employees Regulatory Probable Production
of Plants (000) Option Closures Lines
184 24 - 25 Alternative 5 2 35-70
8 1-2 Alternative 52 220 - 320
65 9-11 All 0 0
Total
258
37 Alternative 5
255 - 390
SOURCES: Tables 7-7 and 7-8 and EPA Technical Survey.
7-20
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7.6.2 Foreign Trade Impacts
As described in Chapter 3 foreign trade has not been a major factor in
the battery industry. However, the possibility exists that during the 1980s,
competition for markets from far eastern producers could intensify as their
technology advances. If there were a significant price effect from the regu-
lations, the U.S. competitive position could be damaged. However, as shown in
Table 7-1, the price increases estimated to result from the regulations are
quite small, amounting to fractions of a percent. Price increases of this
magnitude would not be large enough to induce consumers to switch battery
brands.
7.6.3 Industry Structure Effects
The potentially high impacted plants (the 21 plants that passed through
the screening analysis), are small relative to the plants that produce most of
the industry output. The average compliance cost per unit of production for
these plants are significantly higher than those of the larger plants. As
shown in Chapters 5 and 6, the baseline conditions of the industry indicate
increasing industry concentration and closing of small plants. Moreover, unit
costs of compliance of other Federal regulations are also higher for small
than for large plants. The combined effect of these developments will be a
substantial shift in the competitive position of small versus large plants.
This is especially true in the lead-acid product group. The combined effect
of all Federal regulations on these plants could be so great that only those
small plants with specialty markets can remain in the industry over the long
run. Specialty markets, in this context, may be a specific type of battery
with very narowly defined specifications meant for a particular use, the volume
of which will not support a major portion of the industry. A specialty market
may also be a specific geographic region in which a local producer has a cost
advantage over nationwide firms, because of high transportation costs to the
7-21
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region. In a specialty market a small battery manufacturer may earn more
than the "normal" profit margin, so that the firm can absorb much of the com-
pliance costs and still remain profitable.
A substantial shift in industry concentration is likely to occur in the
sealed nickel-cadmium industry segment under the Alternative 5 option. There
are six plants that manufacture about $90 million worth of sealed nickel-cadmium
batteries in the U.S. These plants belong to large firms. One of these six
plants accounts for 60 to 65 percent of industry output* This plant will incur
no compliance costs, since it has no effluent. About 15 to 20 percent of out-
put is accounted for by two plants whose compliance costs will be substantial
(Alternative 5 annual costs amount to over 3 percent of annual revenues).
These two plants are estimated to be likely closures under the Alternative 5
option. A third nickel cadmium plant will experience significant profit reduc-
tion; but this reduction will not be enough to cause the plant to close. This
plant is considered to have a low closure potential. At all other options,
none of these plants are considered likely or borderline closure candidates,
because the technologies are considerably less expensive.
If these two plants closed, industry capacity would drop substantially
(15 to 20 percent). To the extent that this void is filled by the industry's
largest producer (the firm with 60 to 65 percent of the market), this industry
sector will become significantly more concentrated. The long-run impact of
increased concentration could be a reduction in price competition within this
industry segment.
7.7 SOCIAL COST ESTIMATES
This section assesses the total social costs that can be associated with
the EPA effluent regulations. The social costs measure the value of goods and
services lost by society due to a given regulatory action. These costs generally
include the use of resources needed to comply with a regulation, the use of
resources to implement and enforce a regulation, plus the value of the output
that is foregone because of a regulation.
7-22
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7.7.1 Conceptual Framework
The partial equilibrium analytical framework is conceptually the most
practical means for estimating total social costs. This framework, in its most
sophisticated form, is based on an analysis of supply and demand relationshipos
in the directly-affected markets. When an industry is regulated, compliance
requirements result in increased unit costs of production. This, in turn,
leads to an upward shift in the industry's supply curve. The supply curve shift
normally results in higher prices and a lower production level. Compliance
costs, production losses, and net welfare losses incurred by producers and
consumers due to decreased output are measurable within this framework. There
are other costs that are not measurable within this framework. Costs of
implementing and enforcing a regulation must be added. Also, other social
costs do not appear in this static analysis such as productivity effects,
innovation impacts, and costs of reallocating resources that become unemployed.
Unfortunately, the data does not exist to carry out such analysis at this time,
and a compromise which captures the major costs to society was carried out.
7.7.2 Social Cost Analysis
For this analysis only the real resource costs are considered. This pro-
vides a reasonable estimate of social costs, since most of the social costs
are directly related to compliance expenditures by the regulated entities.
Consequently, the present value of social costs (PVSC) of regulations can be
approximated by the following equation:
PVSC = I/(l + .l)n + (OM/. 1)7(1 + .l)n
where:
PVSC = present value of social costs
I = investment cost
OM = annual operating and maintenance cost
n = number of years between now and year of investment,
7-23
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This equation assumes that:
• The regulations will be in effect in perpetuity
• Operating and maintenance costs will be incurred in
the first year of investment
• The real discount rate (imposed by OMB) is 10 percent.
Assuming the compliance expenditures will begin in 1984, n would equal 2 and
PVSC (in 1982) of the proposed regulations for the industry are calculated and
presented below.
Social Cost
Regulatory Alternative $ millions of 1978.dollars
Alternative 1 20.5
Alternative 2 32.5
Alternative 3 39.7
Alternative 4 40.1
Alternative 5 62.1
7.8 NEW SOURCE IMPACTS
Newly constructed facilities and facilities that are substantially modified
are required to meet the New Source Performance Standards (NSPS) and/or the
Pretreatment Standards for New Sources (PSNS). EPA considered three or more
regulatory alternatives for selection of NSPS and PSNS technologies. The
considered options are equivalent to those discussed for existing sources and
are described in Chapter 6 above and in the Development Document. The final
selections were found to be identical to the alternatives shown in the second
column of Table 7-10. The following paragraphs discuss the costs and impacts
of these alternatives.
7-24
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TABLE 7-10. SELECTED REGULATORY ALTERNATIVES AND INCREMENTAL COMPLIANCE COSTS
FOR NEW SOURCES IN BATTERY MANUFACTURING
INDUSTRY AND SUBCATEGORY AVERAGES
SUBCATEGORY
Cadmium
Direct
Indirect
Calcium
Direct
Indirect
Lead
Direct
Indirect
Leclanche
Direct
Indirect
Lithium
Direct
Indirect
Magnesium
Direct
Indirect
Zinc
Direct
Indirect
TOTAL
SELECTED
EXISTING
SOURCE
ALTERNATIVE
2
2
None
None
2
2
None
1
None
None
None
1
2
2
-
SELECTED
NEW SOURCE
ALTERNATIVE
5
5
1
1
5
5
1
1
1
1
3
3
5
5
-
INCREMENTALC
COSTS v ASSETS
(PERCENT)
1.6
3.2
0.06
0.06
1.18
0.88
0
0
0
0
0
0.32
0.06
0.16
0.91
ANNUAL COSTSC
* REVENUES
(PERCENT)
0.16
0.53
0.03C
0.03
0.13
0.19
Oa
0
0.10
6.25b
0.08
0.13
0.05
0.06
0.18
a This estimate is based on that for indirect dischargers
b This cost is based on that for a low production, prototype facility
c These costs are for the difference between the new source alternatives
and the existing source selected alternatives
7-25
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7.8.1 New Source Compliance Costs
The cost of implementing the new source technologies depends upon the
nature of new sources in the battery industry, the number of new sources, and
the definition of costs used. There is considerable uncertainty regarding the
first two factors and this uncertainty has affected the approach used to assess
new source costs and impacts. Although projections of general activity levels
in the industry are presented in Chapter 5 of this report, the data is insuffi-
cient to reliably forecast the number of plant modifications and the proportion
of output that will be at new versus existing plants. In addition, insufficient
information is available to estimate the impacts of the regulatory requirements
on the design of new plants nor, alternatively, the impacts of new production
technologies on pollution control requirements. For these reasons, the follow-
ing two assumptions were employed in estimating new source compliance costs:
• The compliance costs per unit of output (pound of
batteries) for new sources are assumed to be equal
to the industry subcategory average for that of
existing sources which use the same treatment technology
• Compliance costs for new sources are to be expressed
as ratios, or percents, relative to the unit value of
output or plant assets, as appropriate (e.g., annual
compliance costs * revenues and investment compliance
costs * plant assets).
The first assumption implies that the costs may include retrofitting costs
which are incurred when the same technology is applied to existing plants. To
the extent that retrofitting costs are significant, the resulting compliance
costs are overestimated. Moreover, because there are economies to scale in
most of the considered pollution control technologies and because the average
new plant size for some subcategories is expected to be larger than the average
existing plant (as described in Chapter 5), it is expected that the new source
cost estimate will be biased upward. The effect of this bias on the economic
impact analysis would be to overstate the impacts. There is insufficient infor-
mation available to the study teams to quantify the bias. However, it is
believed that the estimates shown are reasonable approximations for use in an
industry-wide assesment of impacts.
7-26
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For purposes of evaluating new source impacts, compliance costs for new
source standards are defined as incremental costs from the costs of selected
standards for existing sources. For example, the cost shown for the cadmium
subcategory is the cost of alternative 5 minus that of alternative 2. For
those subcategori.es with no regulation for existing sources, the cost shown
represents that of installing the system over the current practice in the
industry. For those subcategories where the existing and new source options
are identical, there is zero incremental cost.
Table 7-10 shows annual compliance costs as a percent of revenues and
investment compliance cost as a percent of plant assets. New sources will
incur annual costs equal to 0.2 percent of revenues and investment costs equal
to 0.9 percent of plant assets. The costs ratios vary considerably from one
subcategory to another. For example, new source incremental annual costs are
zero for the Leclanche subcategory and 0.5 percent of revenues for indirect
discharger cadmium battery manufacturers. Similarly, capital costs range from
zero to 3.2 percent of plant assets.
7.8.2 Economic Impacts on New Sources
The assessment of economic impacts on new sources is based upon the cost
data shown in Table 7-10 and analogy to the impact conclusions for similar
existing plants described in Sections 7.1 through 7.7. The primary variables
of interest are identical to those for existing plants plus the potential of
the regulation in fostering barriers to entry or causing intra-industry shifts
in competitiveness.
As sections 7.1 through 7.6 demonstrate, the impacts of each of the regula-
tory alternatives will cause no plant closures and price increase and profit
reduction of less than one percent for all but the cadmium and lead subcategories,
Thus, the new source alternatives will cause no general economic impact for
these five subcategories. The cost ratios shown in Table 7-10 indicate
differences in cost of production of significantly less than one percent of
7-27
-------
revenues. Moreover, the new source requirements will add only a fraction of a
percent to the asset value of a plant for the five subcategories. Cost differ-
entials of this magnitude do not constitute a significant competitive advantage
or disadvantage for new versus existing plants; nor do they imply significant
incremental barriers to entry of new capacity into the industry.
For the cadmium and lead subcategories, the incremental annual costs are
larger than for the other subcategories, although they are still less than one
percent of revenues. Costs of this magnitude were found to cause a high poten-
tial for four plant closures among existing plants. By analogy, the profita-
bilities of some new plants may be adversely affected. However, the magnitudes
of the differential profits would not, by themselves, deter construction of a
new plant.
The investment costs for the new source cadmium plants are 3.2 percent of
assets for indirect dischargers and 1.6 percent of assets for direct dischargers,
The significant difference between these two figures may be due to a bias intro-
duced by the cost estimating methods and assumptions used. That is, compliance
costs for existing sources were estimated for each existing plant, with treat-
ment in place used as the baseline. If the direct dischargers had more treat-
ment in place, their compliance costs would be lower than those for indirect
dischargers. This situation may not accurately represent the baseline treatment
in place for new sources. For example, if the baseline treatment in place for
direct and indirect dischargers was equal, then the differences in their esti-
mated compliance costs would be smaller than those estimated above. Neverthe-
less, the affect of these costs on the investment decision cannot be determined
with certainty. However, taken together with other business decision factors,
they are certainly noticeable.
7.8.3 Total New Source Compliance Costs
Estimates of the cost of the new source standards were developed by (a)
forecasting the increase in industry output from 1980 to 1990, (b) estimating
7-28
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the proportions of the added output that will be subject to new source require-
ments, (c) estimating the compliance costs per unit of output for new sources,
and (d) multiplying compliance cost per unit of output by estimated increase
in capacity. In following these steps, three assumptions and inferences were
made. These are:
• The increase in industry output is taken from the base
case demand forecast in Chapter 5 ($800 million for
storage batteries and $300 million for primary batteries
in 1978 dollars)
• The amount of industry output subject to new sources
standards is assumed to be equal to the above fore-
casted growth in industry output
• The annual compliance cost per unit of output and
the investment compliance cost as a percent of plant
assets are assumed to be equal to that for existing
sources for the same pollution control technology.
(To the extent that new plants are larger and that
these costs include retrofitting costs, these estimtes
could be overestimated.)
Using this approach, the new source selected option will cost the industry
$10.0 million in investment costs and $2.0 million in annual costs by 1990, in
1978 dollars.
7.9 LIMITATIONS TO THE ACCURACY OF THE ANALYSIS
Various assumptions and estimates were made in the calculation of compli-
ance costs and in the analyses performed to assess their impacts. These fac-
tors unavoidably affect the level of accuracy which can be assigned to the
study's conclusions. The assumptions relating to the estimation of plants'
specific compliance costs are outlined in Chapter 6 of this report and are
discussed in detail in the technical development document. Even though these
assumptions have a bearing on the accuracy of the economic impact conclusions,
the focus of this section will center on the assumptions and estimates made in
this report.
7-29
-------
The major assumptions and estimates that have the greatest impact on the
accuracy of the conclusions are related to the data used for the analyses.
Since no economic survey was conducted to collect plant-specific financial
data, the data used in this report had to be estimated and/or extrapolated from
a variety of sources such as average industry, corporation, and "model plant"
operating and financial ratios. Some of the major assumptions made in estimating
and extrapolating these data are:
• An average industry price per pound of production
was used to derive projected sales revenue estimates
for each plant. The actual price per pound could
vary considerably from one battery configuration to
another, even within the same chemical system type..
In some cases market research was able to identify
specific battery types and prices, so that adjust-
ments were made as required.
• The estimation of plant asset values and profit
ratios are based upon only partial information
from a number of sources that were not necessarily
consistent with each other. This diverse informa-
tion was used to develop a wide range of financial
ratios which are believed to encompass those that
actually exist. Thus, although there was limited
information, the results were calculated for a wide
range of possible conditions within the industry.
Despite this caution and the conservative bias used
in these estimation procedures, variation of condi-
tions within the industry could escape the methodology.
• Lacking detailed data on the salvage value of assets,
specific depreciation schedules, and tax rates, it was
assumed that net assets equal salvage value, depreciation
equals 10 percent of fixed assets, and the tax rate for
small firms is 30 percent for purposes of the internal
rate of return analysis (IRR).
• The cost of capital was estimated to be 12 percent for
the entire industry, despite the fact that it can differ
from firm to firm. A sensitivity analysis of plus and
minus 20 percent of this figure showed that the results
of the study would not be significantly affected.
• To stress the conservative nature of the study effort,
all quantity changes were calculated at the higher end
of the elasticity estimate range and, usually, at the
lower profitability estimates and plant revenue estimates.
7-30
-------
These limitations inhibit the ability of the impact analysis to address speci-
fic plant closure decisions in cases where the regulations exert a significant,
but not overwhelming, impact upon the plant (i.e., borderline cases). An over-
riding feature of the manner in which the limitations, inferences, and extrapo-
lations were dealt with in the analysis is that a "conservative" approach was
followed. That is, judgments were made that would more likely result in over-
stating the economic impacts than understating them.
7-31
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8. REGULATORY FLEXIBILITY ANALYSIS
-------
8. REGULATORY FLEXIBILITY ANALYSIS
8.1 INTRODUCTION
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, requires Federal regulatory agencies to con-
sider "small entities" throughout the regulatory process. The RFA requires an
initial screening analysis to be performed to determine if a substantial number
of small entities will be significantly impacted. If so, regulatory alterna-
tives that eliminate or mitigate the impacts must be considered. This analysis
addresses these objectives by identifying and evaluating the economic impacts
of the aforementioned regulations on small battery manufacturers. As described
in Chapter 2, the small business analysis is developed as an integral part of
the general economic impact analysis and is based on the examination of the
distribution by plant size of the number of battery manufacturing plants, com-
pliance costs and potential closures as a result of the regulations. The
primary economic impact variables include production cost, profitability, plant
closures, capital structure, equality of goods, industry structure and competi-
tion, changes in imports and exports, and innovation and growth in the industry.
Most of the information in this section is drawn from the general economic impact
analysis which is described in Chapters 1 through 7 of this report. Specifically,
the areas covered in the Regulatory Flexibility Analysis (RFA) include:
• Description of the analytical approach to the RFA
• Definitions of small entities in the battery manu-
facturing industry
• Baseline conditions of small entities in the battery
manufacturing industry
• Direct compliance cost
8-1
-------
• Economic impacts
• Effects of special considerations for small entities.
8.2 ANALYTICAL APPROACH
8.2.1 Overview
The analytical appraoch used for the RFA follows the basic approach used
for the general analysis of the economic impacts of the regulations described
in Chapter 2 of this report. That is, the industry is divided into product
groups that correspond, as closely as possible, to homogeneous markets. The
demand and supply characteristics of each of these markets are then studied to
project pre-compliance industry conditions at the time the proposed regulations
are expected to become effective (1984-1985). The specific conditions of small
firms are evaluated against the background of the general conditions in each
product group market. Since small firms account for only a small portion of
battery manufacturing activity, they are assumed to be price takers and general
market characteristics (demand, supply, and equilibrium price) are considered
exogenous variables to the small firm analysis.
8.2.2 Definition of Small Entities
A specific problem in the methodology was the development of an acceptable
definition of small entities. The Small Business Administration (SBA) defines
small entities in SIC 3691 (Storage Batteries) and SIC 3692 (Primary Batteries)
as firms of fewer than 2,500 employees. Since there are about 200 firms in the
industry and since employment in the two industry sectors are 11,000 and 25,000,
respectively, the SBA definition would include almost the entire industry. It
was also observed that many battery plants are owned by major Fortune 500 cor-
porations (e.g., Union Carbide, General Motors, Dart Industries). For these
reasons the SBA definition was not used as a basis for defining small entities
in the battery manufacturing industry. Instead, a definition was sought which
8-2
-------
would account for firm size in comparison to total industry size and to unit
compliance costs (unit compliance costs increase significantly in reverse
proportion to plant size) and would provide EPA with alternative definitions
of "small" plants. Moreover, since the available data on compliance cost and
production was on a plant basis, the individual production facility, rather
than firm was used as the basis for the analysis.
Five alternative definitions for "small" battery manufacturing plants were
selected for examination and the impacts on small plants under each definition
were assessed. In addition, the potential impacts of small business exemptions
(tiering) under each of the five alternative sizes were examined. Value of
production was the primary variable used to distinguish firm size. This is
because plant level employment data were considered less reliable and plant
level production data did not allow consistent comparisons across the product
groups. The five size categories are less than $1 million, $l-$2.5 million,
$2.5-$5 million, $5-$10 million, and greater than $10 million.
8.3 BASELINE CONDITIONS
The number of battery manufacturing plants falling into each size category
is shown in Tables 8-1 and 8-2. The table also shows the value of production
of different sized plants, along with the percentages of the industry totals
for each. As the table shows, the industry is characterized by a few large
plants which account for most of the production and many smaller plants produc-
ing a smaller portion of industry output. As described in Chapter 4, between
20 and 30 closures of small lead acid plants are expected between 1980 and
1990, even without the proposed regulations. Any new lead acid plants to be
build in the future are expected to be large ones, because only large plants
are currently considered economically feasible. Thus, small lead acid plants
are considered to be economically weak, except for those serving specialty
markets.
8-3
-------
TABLE 8-1. COMPLIANCE COSTS OF LEAD ACID BATTERY MANUFACTURING FACILITIES BY SIZE OF FACILITY
(1978 DOLLARS)!/
00
l.r.lll, si..
of Tol 1
>HO Nllllo.
1 of Toi.l
ior*L
IKDUSTM
1 of 1«l.l
Nuotivf of
r.ciliiio
41
(l«.«l>
14
(Lit)
II
(«.ii>
>i
(II. «>
a
(11. tt)
14*
(1001)
V.lo* of
(o.it)
11.140
(I.UI
41.IM
(1.01)
114.111
(i>.4»
1. III. 174
(01.11)
l.i4 .10
(l.tt) (1.11)
411. •)• IU.44) ..1
11 II) (l.lt)
•14.011 109.11* .ii
(l.ll) (1.01)
l.tM.lll 110.111 .41
(II. Ml (11.11)
11. Ml. Ill 1.111. Ill .14
(it. 01) (11.11)
14.1)1.111 I. 101. 10« .11
(1001) IIOOI)
, _ 1
4nnu«l
CoaplUor* Co»t
•• a P«rcoM(
1BO.10I II). IB) .•)
(l.ll) (1 II)
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(l.ll) (l.ll)
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(1.41) (1.11)
1.414.1)0 110. Ill .41
110.11) (ll.lt)
ll.iil.lil t.lll.Ul .14
(it. ill 00.11)
li.lll.m i.lil.lil .11
(loot) (loot)
~ : : " ,
«Rnu«l
Co*plioAf« Co«t
«• 4 r«*c*oi
HI. 140 lit. Ill 1.01
(I.»V (1. 11)
VM.lt) 111.460 .•!
(1.41) (l.tl)
1)1.140 111.140 .10
(1 II) (l.il)
4.401. 401 111.411 .it
(11 11) 111.11)
11.04). 411 l.tl). Ill .11
(tl.lO (tl.fl)
tt.tai.iti i.oti.iii .14
(loot) (loot)
Ann,.. I
Co«pli«nr* Coal
401.108 lit. 101 !.•'
(1.41) 11.41)
110.111 lll.llf l.ll
(Lit) (4.11)
1.4)1.111 4)1.110 1.01
(i.il) (t.lt)
1, til. Ill 1. lit. Ill .ti
(11.01) (10.il)
11.011.411 4.U1.111 .40
(it. 41) (11.11)
11. til, ill 1.410.110 .10
(loot) (tool)
i/ Data for 38 of the 184 faciities were not adequate for inclusion in this table.
£./ Note the industry totals differ throm those reported in Chapter 6, because of differences in sample size.
SOURCE: EPA and JRB estimates.
-------
TABLE 8-2. COMPLIANCE COSTS OF NON-LEAD ACID BATTERY MANUFACTURING FACILITIES BY SIZE OF FACILITY
(1978 DOLLARS)
< II Hilll..
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(ll.tt) (11.11)
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It .Ml Ut.lH .11
(1 .11) (W.OI)
(M.1I) (14.11)
(1001) (1001)
00
Ol
i/ Data for 9 of the 74 production facilities were not adequate for inclusion in this table,
SOURCE: EPA and JRB estimates
-------
In contrast to the lead acid category, no baseline closures are expected
in the non-lead acid industry segment; although like the lead acid segment, the
average plant size is also expected to increase. Thus, it is likely that the
small plants counted in Table 8-1 will still be in operation in 1985. Moreover,
there is no reason to expect the proportion of industry output produced by
these small plants to change.
The projections of baseline conditions are based on industry-level data
provided by Census of Manufactures. Limitations to this data preclude estima-
tion of plant-specific activities. Consequently, the assessment of impacts on
small business was developed primarily with the data base of exiting plants
from the EPA 308 survey and industry trade sources.
8.4 COMPLIANCE COSTS
This section describes the compliance costs that will be incurred by small
firms. The economic impacts which result from the proposed regulation begin
with the compliance costs incurred at the plant level. Table 8-1 shows the
compliance cost estimates for the lead acid battery manufacturing sector by
plant size. For each of the five alternative definitions for "small plant" and
for each regulatory option, the table shows the estimated investment and total
annual compliance costs. This table was taken from the same data sources as
used in Chapter 6 (Cost of Compliance). The table also shows the proportion of
total lead acid battery output and industry sector compliance costs attributed
to both small and large plants. For example, 29 percent (42 plants) of the
lead acid plants in the sample produce less than $1 million annually. Plants
in this size produce 0.9 percent ($1.3.7 million) of industry output and will
incur 4.2 percent ($88,575) of the industry's annual compliance cost and 2.9
percent ($193,362) of the industry's investment costs under Alternative 1. The
annual alternative 1 compliance costs for these 42 plants would be 0.65 percent
of their combined revenues.
8-6
-------
In contrast to these very small plants, 36 percent (52 plants) of the
plants have annual production values in excess of $10 million. These 52 plants
produce 82 percent ($1.2 billion) of the lead acid batteries in the sample and
account for 62 percent ($1.3 million) of the industry sector's annual cost and
60 percent ($4.0 million) of the industry sector's investment cost under Alterna-
tive I. The annual compliance cost for these 52 plants would be 0.11 percent
of their combined revenues. For all regulatory options, compliance costs as a
percent of revenues is significantly larger for the smaller than for the larger
plants.
Table 8-2 shows compliance costs estimated for the non-lead acid sector.
The observations made from Table 8-2 are also similar to those made for the
lead acid sector (Table 8-1). That is, unit compliance costs are generally
inversely proportional to plant size. For this reason, the proposed regula-
tions will reduce the profitabilities of small plants more than it will for
large plants.
With one notable exception, most indirect costs were estimated by the
Effluent Guidelines Division under the term "subsidiary" costs. Subsidiary
costs include administrative and laboratory facilities, line segregation, yard-
work, engineering, legal costs, fiscal and administrative expenses, interest
expenses during construction, and garage and shop facilities. The one exception
includes that of downtime of manufacturing facilities during construction of
the pollution control systems and changes in daily work routines.
8.5 ECONOMIC IMPACTS ON SMALL ENTITIES
As described previously and shown in Tables 8-1 and 8-2, the average unit
compliance costs of small plants are expected to be higher than those of larger
plants. Following the assumptions of relatively homogeneous product groups and
relatively free market conditions described in Chapters 2 and 7, the costs of
the proposed regulation will foster a drop in the returns on sales (ROS) of
many small plants. It is estimated that at the most costly pollution control
8-7
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option (alternative 5) there will be 21 plants whose ROSs will fall by more
than one percent. For most of these plants the drop in ROS will not be enough
to cause a plant shutdown. However, it is likely that under alternative 5,
four small plants will close. Two of these are lead acid plants which belong
to single plant firms and have annual production values of $2.5 million or less,
They employ between 15 and 35 people each. The other two production facilities
likely to close manufacture cadmium batteries and are either subsidiaries or
divisions of large corporations. In addition, these 2 facilities are parts of
larger production establishments. One of these facilities falls into the
$l-$2.5 million category and the other falls into the $2.5-$5 million category.
These facilities employ between 95 and 170 people each. As shown in Table 8-3,
plant closures under regulatory alternatives 1 through 4 are not likely.
8.6 POTENTIAL EFFECTS OF SPECIAL CONSIDERATIONS FOR SMALL ENTITIES
For purposes of this study, the granting of special considerations for
small entities is considered in terms of the most extreme special consideration
the exemption of small entities from the regulation. Such an exemption would
have the following impacts:
• It would decrease the total cost of implementing
the regulations
• It would mitigate the negative economic impacts
of the proposed regulations
• It would decrease the effectiveness of the regu-
lations (i.e., amount of pollutants removed
from the effluent).
The amount of total costs of compliance avoided by special exemptions increases
with the size definition of small entities. These figures are shown in Tables
8-1 and 8-2 above. For example, under regulatory alternative 5, $256 thousand
8-8
-------
TABLE 8-3. NUMBER OF PLANT CLOSURES BY SIZE OF PLANT
Facility Size
by Value of
Production
< $1 Million
$1-2.5 Million
$2.5-5 Million
$5-10 Million
> $10 Million
Total
Number of
Plants
in Sample
42
14
12
26
52
146
Lead Acid Plants
Alt. 1
0
0
0
0
0
0
Alt. 2
0
0
0
0
0
0
Alt. 3
0
0
0
0
0
0
Alt. 4
0
0
0
0
0
0
Alt. 5
I
1
0
0
0
2
/
/
/
/
;
Number of
Plants
in Sample
21
8
8
6
22
65
Non-Lead Acid Plants
Alt. 1
0
0
0
0
0
0
Alt. 2
0
0
0
0
0
0
Alt. 3
0
0
0
0
0
0
Alt. 4
0
0
0
0
0
0
Alt. 5
0
1
1
0
0
2
oo
SOURCE: JRB estimates
-------
of annual cost and $609 thousand of investment cost and one plant closure would
be avoided in the lead acid sector if the plants with production values of under
$1 million were exempted. In addition, 42 very small plants would incur no
additional costs. If an exemption were set for plants with production values
of under $10 million, 35 percent ($2.6 million) of the lead acid sector's annual
costs and 34 percent ($8.6 million) of the lead sector's investment cost would
be avoided at the alternative 5 option. Moreover, two thirds of the plants in
the industry would be exempt from the regulation; there would be no plant
closure and price, production, and profit impacts would be small. The implica-
tions of the other definitions for "small entities" can be seen in Tables 8-1,
8-2, and 8-3. For example, under regulatory alternative 5, $256 thousand of
annual cost and $609 thousand of investment cost and one plant closure would be
avoided in the lead acid sector if the plants with production values of under
$1 million were exempted. In addition, 42 very small plants would incur no
additional costs. If an exemption were set for plants with production values
of under $10 million, 35 percent ($2.6 million) of the lead acid sector's annual
costs and 34 percent ($8.6 million) of the lead sector's investment cost would
be avoided at the alternative 5 option. Moreover, two thirds of the plants in
the industry would be exempt from the regulation; there would be no plant
closure; and price, production, and profit impacts would be small. The implica-
tions of the other definitions for "small entities" can be seen in Tables 8-1,
8-2, and 8-3.
8-10
-------
APPENDIX A
PROFITABILITY ANALYSIS METHODOLOGY
This appendix describes the methodology used in the plant level profit-
ability analysis. It includes the rationale for the use of the profitability
measures selected (return on investment and internal rate of return) and the
methods used for estimating values for the specific data used in the calculation
of these profitability measures.
General
Analysis of plant-level profitability, for purposes of capital budgeting
decisions, can be grouped into three general approaches: the payback period,
financial ratio analysis, and discounted cash flow (DCF) techniques. The
payback period is not applicable for plant closure analysis since, the plant
receives no financial return on its pollution control investment.
Financial Ratio Analysis
The second approach to measuring product and plant profitability is to
compare financial ratios that are key measures of profitability, such as returns
on equity, assets, and sales. Of these, return on equity and assets are the
most useful measures and the average rate of return on average investment is
the most direct. This rate represents the ratio of annual profits after taxes
to. either the original or the average investment in the project. The principal
virtue of this method is its simplicity and its common usage in comparing
overall profitabilities of financial entities. Its principal shortcomings
are that it is based on accounting income rather than cash flows, and that it
fails to account for the timing of cash flows, thereby ignoring the time value
of money. Since the ROIs for the individual battery plants were not available
to the study team a broad range of estimates were developed using aggregate
industry and sample plant data. The estimation procedure is described later
in this appendix.
A-l
-------
Discounted Cash Flow Analysis
Discounted cash flow (DCF) approaches take into account both the magnitude
and the timing of expected cash flows in each period of a project's life, and
provide a basis for transforming a complex pattern of cash flows into a single
number. There are two major techniques for applying DCF analysis: the internal-
rate-of-return (IRR) method and the present-value method (PV).
Because of shortcomings of each of the four approaches to capital budgeting
decisions, and of available data, none of them will provide both a theoretically
correct, and realistic estimate of plant closures. Although PV is the most
theoretically correct method from an economic viewpoint, it is not recommended
here for several reasons: first, the detailed data necessary to estimate
fluctuations in cash flows will not be gathered in this study. Second, without
detailed estimates of cash flows, the assumption of a constant rate of net cash
flows for any given plant is reasonable; which, as shown below, implies that the
DCF rationale could be applied, given only one year of data, by using the IRR
technique. The IRR technique will generally provide the same plant closure
decisions as the PV technique; and because several estimates of IRR can be used,
in comparison to the cost of capital, to test its sensitivity to the assumptions
underlying the profitability estimates, it is more appropriate to the problem
at hand (in which there are wide confidence intervals around the estimates of
profitability). In addition, the IRR technique will be easier to implement,
in this case, while it embodies the same rationale as the PV technique. The
remainder of this paper describes the suggested implementation of this technique.
The IRR for an investment is the discount rate that equates the present
value of the expected stream of cash outflows with that of the expected inflows.
It is represented by that rate r, such that
n
AT (1 + r)~T = 0
T=0
where A^, is the cash flow for period T, and n is the last period in which the
cash flow is expected. Standard methodology calls for solving the equation for
r and then comparing to some required cutoff, or hurdle rate, to determine
A-2
-------
acceptability of the investment. A relatively conservative approach is to
select the cost of capital as the hurdle rate. If the initial cash outlay
(A ) occurs at .time T=0, and if the cash flow is an even series (A), then
*—•> —T
A /A = /_,(1+ r) • Since the values for r corresponding to various values
v^ —T
of 2/1 + r) are provided in standard present value tables, r can be found
by simply dividing the initial outlay by the cash flow (i.e., A /A) to obtain
a factor which can then be used in conjunction with a present value table to
look up the discount rate. Exhibit A provides a derivation of this relation-
ship. Thus, the IRR is expressed as a function of A , A and n. Since n may
.remain fixed in our analysis (e.g., 10 years) the IRR is a function only of — .
In brief, if the cash flow is constant, and if the initial investment occurs
at time 0, then the cash flow for any given year as a ratio of initial invest-
ment is sufficient to calculate IRR. For this analysis, the initial investment
is the market value of the plant plus the pollution control investment, plus
working capital.
Data Sources
Since no survey of industry financial and economic data was conducted,
information from published sources was used to develop a range of values that
are likely to include the actual values in the affected plants. The range of
values results from imputing rather wide confidence intervals around industry-
wide data and data on "model" or "typical" plants found in the literature.
Since the resulting estimates are not precise calculations of the variables,
they cannot be used to make exact predictions of plant-level impacts. However,
they allowed us to develop a reasonable range of likely impacts that could
result from the regulations. The following data sources were used in the
analysis:
• Census of Manufacturers, 1972 and 1977
• Company Annual Reports for Union Carbide Corp., Eltra Corp., ESB Inc.,
Glove Union, Inc., P.R. Mallory, Inc.
• Lead-Acid Battery Manufacture - Background Information for Proposed
Standards (DRAFT), EPA 450/3-79-028a, EPA, Office of Air Quality
Planning and Standards, November, 1979.
The last source used data obtained at site visits to develop financial
statements for two model "representative" lead acid battery plants - a 100
A-3
-------
battery per day plant (about one million pounds per year) and a 250 battery
per day plant (about 2.5 million pounds per year). The model financial
statements are shown in Tables A-l and A-2. The financial characteristics
of this data was confirmed, to some extent (as the data permitted), by
information gathered at plant visits. Separate calculations were done for
"very small" (less than one million pounds per year) and small plants
(between one and 10 million pounds per year). However, since the data on
"small" plants conflicts with data in corporate annual reports and site
visit reports, only the ROI for the "very small" plants were actually used
in the analysis. This decision favors a conservative approach to impact
assessment since the ROI for the latter is lower than that of the former. To
account for possible variations in profitability in the industry and to insure
conservative estimates, the ROI and IRR estimates were varied by using financial
ratios calculated from FTC and company annual reports. The resulting estimates of
ROI and IRR are shown in Table A-3. Although the study team had only limited
access to plant-level financial data, these estimates represent a range of
plausible conditions under which the regulation will be promulgated.
Available financial data for the non-lead acid product groups was scarcer
than that for the lead acid plants. A number of values for return on invest-
ment and internal rate of return were developed for corporations and industry
groups related to battery manufacturing. None of the sources used had di-
rectly measured the financial parameters for any single battery product group.
However, the range of values developed appear to be reasonable for an indus-
try-wide assessment of the probable impacts. The variables whose values
were taken from the above sources include sales, total gross assets,
net assets, total fixed assets and net profit for corporations engaged in the
manufacture of electronic equipment, and battery manufacturing. These
variables were used to calculate a range of values for the following
ratios: return on sales, sales to assets, profits to net assets and cash
flow. Then, using the following relationships, return on net assets and
IRR were calculated:
Net Profits x Sales = Net Profits
Sales Net Assets Net Assets
A-4
-------
Table A-l
ESTIMATED FINANCIAL DATA
for
SMALL LEAD-ACID BATTERY MANUFACTURING PLANTS1
BEFORE NSPS LEAD AND SULFURIC ACID MIST CONTROLS
Model Plant Size
Revenue
Operating Expenses
Earnings Before Taxes
Earnings Rate Before Taxes
Taxes
Earnings After Taxes
Earnings Rate After Taxes
100 BPD
$540,000
$470,400
$ 69,600
12.9%
$ 20,400
$ 49,200
9.1%
250 BPD
$1,350,000
$1,168,500
$ 181,500
13.4%
$ 74,100
$ 107,400
8.0%
For Wet and Wet/Dry Formation.
"Based on operating rate of 80% and battery price of $27.00
per battery.
Calculated at 22% of first $50,000 and 48% on remainder of
earnings before taxes rather than at official rate of 20% of
first $25,000, 22% of next $25,000 and 48% of remainder over
$50,000.
Source: Lead-Acid Battery Manufacture-Background Information for Proposed
Standards (DRAFT EIS). EPA-450/3-79-028e, Office of Air Quality
Planning and Standards, November, 1979.
A-5 '
-------
TABLE A-2
BASELINE ECONOMICS
CAPITAL INVESTMENT FOR EXISTING LEAD-ACID BATTERY PLANTS
WET AND DRY FORMATION
(In Thousand of Dollars)
Manufactur ina
100 BPD 250 BPD
Fixed Investment
Casting $ 15.0 $ 24.5
Pasting 6.7 10.0
3-P Process 10.0 11.6
Formation 12.5 17.5
Land 15.0 20.0
Building 68.6 101.8
Other Fixed Investment
OSHA 23.3 26.0
SIP - particulates 35.0 35.0
Total Fixed Investment $186.1 246.4
Accumulated Depreciation^- 54.1 77.1
Fixed Investment After
Depreciation 132.0 169.3
Current Assets2 132.0 169.3
Total Assets Before
Control $264.0 $338.6
^Building at .25 ; process equipment at .66; OSHA, SIP at .133
2At 100% of fixed investment after depreciation.
A-6
-------
TABLE A-3
ESTIMATED PROFITABILITY MEASURES FOR LEAD ACID BATTERY PLANTS
Small Very Small
ROI
Low .40 .12
Medium .54 .18
High .67 .24
IRR
Low .15 .17
Medium .23 .22
High .31 -32
Source: EPA, Office of Air Quality Planning and Standards,
Lead Acid Battery Manufacture - Background
Information for Proposed Standards (Draft),
EPA 450/3-79-028a, November, 1979., Corporate
Annual Reports, JRB Site Visits, and Census of
Manufactures 1977.
A-7
-------
Net Profit + Depreciation = n ,.. s-T
Assets ^v"1
(Salvage Value) /_.
T=l
The value of r was then looked up on a present value table. The result is a
range of likely values for ROI and IRR appearing in Table A.-4. The Table is
divided into two broad sections to allow consideration of the sales to asset
ratio the uncertainty of which is greater than that of most other variables.
The first two columns are multiplied to get the third. The IRR value is de-
termined from the above expression. Depreciation is estimated from industry
and corporate averages and net assets are assumed to equal the salvage value
of assets.
Some of the values in the table are quite low in comparison to the cost
of capital of 10-11 percent. This results from the emphasis of the study
team on arriving at extremely conservative results. However, the estimates
corresponding to the lower return on sales figure were rejected, because they
are in conflict with behavior in the industry, that is, these IRRs are so
low that all firms would leave the industry, without compliance costs. Con-
sequently, the analysis will focus on those conditions in which return on
sales is at least 7 percent and in which sales to asset ratios are at least
3.
-------
TABLE A-4
ESTIMATED PROFITABILITY MEASURES FOR NON-LEAD-ACID BATTERY PLANTS
Sales/Asset Ratio
Net Profit/Sales
Net Profit/Assets
IRR
(3.33)
,05
,07
.10
,12
13
,17
,24
,30
,13
.21
.25
(2.0)
06
12
17
(1.71)
,05
,07
,10
,12
,07
.09
,13
,16
Source: Census of Manufactures, Quarterly Financial Report For
Manufacturing, Mining and Trade Corporation (FTC), Corporate
Annual Reports.
A-9
-------
EXHIBIT A
PRESENT VALUE OF AN EVEN CASH FLOW
This exhibit explains that if net cash flow is the same for each period,
and the initial outlay occurs at time 0, the internal rate of return (r) may
be calculated ''by dividing the initial outlay by the cash flow to obtain a
factor which can be used in conjunction with a present value table to find r.
In the relationships that follow:
AQ = initial investment
Aj = A-2 = A3 » . . . A^ « annual cash flow,
r «» internal rate of return
n = number of years cash flows are expected
Calculation of r requires solving the following equation for r:
»
n -t
v AT (1 + r) =0
T=0
n -t
£ AT (1 + r) -
T-l
A JT (1 + r) - A0
T-l
n -t
J (1 + r) « A0/A
T-l
r can thus be calculated by simply looking up the discount rate corresponding
to y (1 -f r)~c on a present value table.
T-l
A-10
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