United States         Office Of Air Quality          EPA-452/R-00-006
Environmental Protection    Planning And Standards         December 2000
Agency            Research Triangle Park, NC 27711    FINAL REPORT

Air
     Economic Impact Analysis of
    Proposed Coke Ovens NESHAP
               Final Report

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      Economic Impact Analysis
  of Proposed Coke Ovens NESHAP
     U.S. Environmental Protection Agency
   Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group, MD-15
       Research Triangle Park, NC 27711
         Prepared Under Contract By:

          Research Triangle Institute
        Center for Economics Research
       Research Triangle Park, NC 27711
              December 2000

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This report has been reviewed by the Emission Standards Division of the Office of Air Quality Planning and
Standards of the United States Environmental Protection Agency and approved for publication.  Mention
of trade names or commercial products is not intended to constitute endorsement or recommendation for use.
Copies of this report are available through the Library Services (MD-35), U.S. Environmental Protection
Agency, Research Triangle Park, NC 27711, or from the National Technical Information Services 5285 Port
Royal Road, Springfield, VA 22161.

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                                    CONTENTS

Section                                                                         Page

   1      Introduction  	1-1

          1.1    Agency Requirements for an EIA 	1-1

          1.2    Overview of Coke, Iron and Steel, and Foundry Industries	1-2

          1.3    Summary of EIA Results	1-3

          1.4    Organization of this Report	1-5

   2      Industry Profile	2-1

          2.1    Production Overview	2-1
                 2.1.1   By-Product Coke Production Process  	2-2
                 2.1.2   Types of Coke 	2-3

          2.2    Industry Organization	2-6
                 2.2.1   Manufacturing Plants	2-6
                 2.2.2   Companies	2-11
                 2.2.3   Industry Trends  	2-12
                 2.2.4   Markets  	2-15

          2.3    Historical Industry Data	2-16
                 2.3.1   Domestic Production	2-18
                 2.3.2   Foreign Trade	2-19
                 2.3.3   Market Prices	2-22
                 2.3.4   Future Projections  	2-24
                                         in

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                            CONTENTS (CONTINUED)

Section                                                                        Page

   3      Engineering Cost Analysis	3-1

          3.1    Overview of Emissions from Coke Batteries	3-1

          3.2    Approach for Estimating Compliance Costs	3-2

          3.3    Costs for MACT Performance	3-2

          3.4    Costs for Model Batteries  	3-3

          3.5    Estimates of National Engineering Costs	3-6

   4      Economic Impact Analysis  	4-1

          4.1    EIA Data Inputs	4-1
                4.1.1   Producer Characterization	4-1
                4.1.2   Market Characterization	4-2
                4.1.3   Regulatory Control Costs	4-4

          4.2    EIA Methodology Summary  	4-6

          4.3    Economic Impact Results	4-8
                4.3.1   Market-Level Impacts  	4-9
                4.3.2   Industry-Level  Impacts	4-9
                       4.3.2.1  Changes in Profitability  	4-12
                       4.3.2.2  Facility Closures	4-13
                       4.3.2.3  Changes in Employment	4-13
                4.3.3   Social Cost  	4-15
                                        IV

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                           CONTENTS (CONTINUED)

Section                                                                      Page

   5      Small Business Impacts	5-1

          5.1    Identifying Small Businesses	5-1

          5.2    Screening-Level Analysis  	5-2

          5.3    Economic Analysis  	5-4

          5.4    Assessment	5-4


Appendices

   A     Economic Impact Analysis Methodology  	  A-l

   B     Development of Coke Battery Cost Functions	B-l

   C     Economic Estimation of the Demand Elasticity for Steel Mill Products	C-l

   D     Joint Economic Impact Analysis of the Integrated Iron and Steel
          MACT Standard with the Coke MACT Standard	  D-l

   E     Foreign Imports Sensitivity Analysis	E-l

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                                LIST OF FIGURES

Number                                                                      Page

    1-1    Summary of Interactions Between Producers and Commodities in the
          Iron and Steel Industry	1-4

    2-1    The By-Product Coke Production Process	2-2
    2-2    A Schematic of a By-Product Coke Battery	2-4
    2-3    Distribution of U.S. Coke Production by Type:  1997	2-6
    2-4    Location of Coke Manufacturing Plants by Type of Producer:  1997	2-9
    2-5    Distribution of Affected U.S. Companies by Size: 1997 	2-14

    4-1    Market Linkages Modeled in the Economic Impact Analysis	4-3
    4-2    Market Equilibrium without and with Regulation	4-7
                                        VI

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                                LIST OF TABLES

Number                                                                     Page

   2-1    Air Emissions from U.S. Coke Manufacturing Plants by Source 	2-5
   2-2    Summary Data for Coke Manufacturing Plants: 1997  	2-7
   2-3    Coke Industry Summary Data by Type of Producer:  1997	2-10
   2-4    Summary of Companies Owning Potentially Affected Coke
          Manufacturing Plants:  1997  	2-13
   2-5    U.S. Production, Foreign Trade, and Apparent Consumption of Coke:
          1980-1997 (103 short tons) 	2-17
   2-6    U.S. Production of Furnace Coke by Producer Type:  1980-1997
          (103 short tons)	2-20
   2-7    U.S. Production of Foundry Coke by Producer Type: 1980-1997
          (103 short tons)	2-21
   2-8    Market Prices of Coke by Type: 1990-1993 ($ per short ton)	2-23

   3-1    Model Batteries  	3-4
   3-2    MACT Compliance Cost Estimates by Model Coke Battery ($1998)	3-6
   3-3    Number of Coke Batteries Incurring MACT Compliance Costs: 1998  	3-8
   3-4    National MACT Compliance Costs by Model Coke Battery: 1998	3-9

   4-1    Baseline Characterization of U.S. Iron and Steel Markets: 1997	4-5
   4-2    Market-Level Impacts of the Proposed Coke MACT: 1997	4-10
   4-3    National-Level Industry Impacts of the Proposed Coke
          MACT: 1997	4-11
   4-4    Distribution Impacts of the Proposed Coke MACT Across Directly Affected
          Producers:  1997  	4-14
   4-5    Distribution of the Social Costs of the Proposed Coke
          MACT: 1997	4-16

   5-1    Summary Statistics for SBREFA Screening Analysis: 1997	5-3
   5-2    Small Business Impacts of the Proposed Coke MACT: 1997 	5-5
                                       vn

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                                     SECTION 1

                                  INTRODUCTION
       The U.S. Environmental Protection Agency (EPA) is developing a maximum
achievable control technology (MACT) standard to reduce hazardous air pollutants (HAPs)
from the integrated iron and steel manufacturing source categories. To support this
rulemaking, EPA's Innovative Strategies and Economics Group (ISEG) has conducted an
economic impact analysis (EIA) to assess the potential costs of the rule. This report
documents the methods and results of this EIA. Finished steel products are primarily used as
a major input to consumer products such as automobile and appliances.  In 1997, the United
States produced 105.9 million short tons of steel mill products.  This National Emission
Standard for Hazardous Air Pollutants (NESHAP) (or MACT standard) addresses emissions
from pushing, quenching, and battery stacks. These proposed standards will implement
Section 112(d) of the Clean Air Act (CAA) by requiring all  major sources to meet HAP
emission standards reflecting the application of the MACT.  The HAPs emitted by this source
category include coke oven emissions, polycyclic organic matter, and volatile organic
compounds such as benzene and toluene.

1.1    Agency Requirements for an EIA

       Congress and the Executive Office have imposed statutory and administrative
requirements for conducting economic analyses to accompany regulatory actions. Section
317 of the CAA specifically requires estimation of the cost and economic impacts for specific
regulations and standards proposed under the authority of the Act.1 ISEG's Economic
Analysis Resource Document provides detailed guidelines and expectations for economic
'In addition, Executive Order (EO) 12866 requires a more comprehensive analysis of benefits and costs for
   proposed significant regulatory actions. Office of Management and Budget (OMB) guidance under EO
   12866 stipulates that a full benefit-cost analysis is required only when the regulatory action has an annual
   effect on the economy of $100 million or more.  Other statutory and administrative requirements include
   examination of the composition and distribution of benefits and costs. For example, the Regulatory
   Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement and Fairness Act of 1996
   (SBREFA), requires EPA to consider the economic impacts of regulatory actions on small entities.

                                          1-1

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analyses that support MACT rulemaking (EPA, 1999). In the case of the coke MACT, these
requirements are fulfilled by examining the following:

       •  facility-level impacts (e.g., changes in output rates, profitability, and facility
          closures),
       •  market-level impacts (e.g., changes in market prices, domestic production, and
          imports),
       •  industry-level  impacts (e.g., changes in revenue, costs, and employment), and
       •  societal-level impacts (e.g., estimates of the consumer burden as a result of higher
          prices and reduced consumption levels and changes in domestic and foreign
          profitability).
1.2    Overview of Coke, Iron and Steel, and Foundry Industries

       In the United States, furnace and foundry coke are produced by two producing
sectors—integrated producers and merchant producers. Integrated producers are part of
integrated iron and steel mills and primarily produce furnace coke for captive use in blast
furnaces. In 1997, integrated producers accounted for approximately three-fourths of U.S.
coke capacity, and merchant producers accounted for the remaining one-fourth. Merchant
producers sell furnace and foundry coke on the open market to integrated steel producers (i.e.,
furnace coke) and iron foundries (i.e., foundry coke).  Some merchant producers sell both
furnace and foundry coke, while others specialize in only one.

       Figure 1-1 summarizes the interactions between source categories and markets within
the broader iron and steel industry. As shown, captive coke plants are colocated at integrated
iron and steel mills providing furnace coke for its blast furnaces, while merchant coke plants
supply the remaining demand for furnace coke at integrated iron and steel mills and supply
the entire demand for foundry coke at iron foundries.  These integrated mills compete with
nonintegrated mills (i.e., mini-mills) and foreign imports in the markets for these steel
products typically consumed by the automotive, construction, and other durable goods
producers. Alternatively, iron foundries use foundry coke, pig iron, and scrap in their
ironmaking furnaces (cupolas) to produce iron castings, and steel foundries use pig iron and
scrap in their steelmaking furnaces (electric arc and electric induction) to produce steel
castings. The markets for iron and steel castings are distinct with different product
characteristics and end users.
                                          1-2

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£3 ™
^ M [ Markets for Finished Steel Products ) ( T „, ] ( Markets for Steel Castings 1
a 3 \ / V n Castings / V /
1 1 / >k
p4- ^> / Finished Stet
hH /
** /
». / Nnn integrated Steel
2- Foreign Mills (including
5' (Imports) minimills)
VI i ^
dd
re
=
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a
c
n
•s
=
a
0
o
5
5
o
a
ff
S"
5'
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A A 'T~^^^^ >k > i
, _ , , Iron Steel Castings
;1 Products _ .. 1 ~_ e
Castings V X^-~^^^^
w

Integrated Iron and
Steel Mills
Finishing Mills
> ,
Molten
Steel
Steelmaking
Furnace
i \
Pig Iron
Blast Furnace ^

1 1
Furnace
Coke
Captive /
Coke Plants


Iron Steel Foreign
Foundries Foundries (Imports)
i i •
Furnaces Furnaces Foreign
(Exports) and
Other
^ ' l Industries
Scrap I Scrap /
1 / Other Coke
I Foundry Coke /
P / Furnace, Foundry, and Other \
^T^
/
Merchant Foreign
Coke Plants (Imports)


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       The EIA models the specific links between these models.  The analysis to support the
coke EIA focuses on four specific markets:

       •  furnace coke,

       •  foundry coke,

       •  steel mill products, and
       •  iron castings.
Changes in price and quantity in these markets are used to estimate the facility, market,
industry, and social impacts of the coke regulation.

1.3    Summary of EIA Results

       The rule requires coke manufacturers to implement good management practices and
ongoing maintenance that will increase the costs of producing furnace and foundry coke at
affected facilities.  The increased production costs will lead to economic impacts in the form
of small increases in market prices and decreases in domestic coke production. The impacts
of these price increases will be borne largely by integrated producers of finished steel mill
products as well as consumers of finished steel mill products and foundry products.
Nonintegrated steel mills and foreign producers of coke will earn higher profits. Key results
of the EIA for the coke MACT are as follows:

       •  Engineering Costs:  The engineering analysis estimates annual costs for existing
          sources of $14.3 million.
       •  Sales Test: A simple "sales test," in which the annualized compliance costs are
          computed as a share of sales for affected companies that own coke batteries,
          shows that all of these companies' facilities are affected by less than 3 percent of
          sales. The cost-to-sales ratio (CSR) for the median company is 0.05 percent.
       •  Price and Quantity Impacts: The EIA model predicts the following:
          —  The market price for furnace  coke is projected to increase by 1.5 percent
              ($1.56/short ton), and domestic furnace coke production is projected to
              decrease by 2.3 percent (180,000 tons/year).
                                         1-4

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The market price for foundry coke is projected to increase by 2.9 percent ($4.17/short ton),
and domestic foundry coke production is projected to decrease by 0.1 percent (1,400
tons/year).

          — The market price for steel mill products is projected to increase by 0.02
              percent ($0.12/shortton), and domestic production of steel mill products is
              projected to decrease by 0.02 percent (22,000 tons/year).

          — The market price for iron castings is projected to increase by 0.04 percent
              ($0.35/short ton), and domestic production of iron castings is projected to
              decrease by 0.03 percent (3,400 tons/yr).

       •  Plant Closures: One furnace coke battery is projected to close.

       •  Small Businesses:  The Agency identified three small companies that own and
          operate coke batteries, or 17 percent of the total.  The average CSR for these firms
          is 1.3 percent. No small businesses are projected to have CSRs greater than
          3 percent.  Two small businesses are  projected to have CSRs greater than 1
          percent.  No facilities or batteries owned by a small business are projected to close
          as a result of the regulation.

       •  Social Costs:  The annual social costs are projected to be $14.0 million.

          — The consumer burden as a result of higher prices and reduced consumption
              levels is $21.1  million annually.

          — The aggregate producer profit gain is expected to increase by $7.1 million.

              / The profit losses are  $1.7 million annually for domestic producers.

              / Foreign producer profits increase by $8.8  million due to higher prices and
                 level of impacts.

1.4    Organization of this Report

       The remainder of this report supports and details the  methodology and the results of
the EIA of the coke MACT.

       •  Section 2 presents  a profile of the coke industry.

       •  Section 3 describes the regulatory controls and presents engineering cost estimates
          for the regulation.

       •  Section 4 reports market-, industry-, and societal-level impacts.


                                         1-5

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Section 5 contains the small business screening analysis.

Appendix A describes the EIA methodology.

Appendix B describes the development of the coke battery cost functions.

Appendix C includes the econometric estimation of the demand elasticity for steel
mill products.

Appendix D reports the results of the joint economic impacts of the Iron and Steel
and Coke MACTs.
                              1-6

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                                     SECTION 2

                               INDUSTRY PROFILE
       Coke is metallurgical coal that has been baked into a charcoal-like substance that
burns more evenly and has more structural strength than coal.  Coke manufacture is included
under Standard Industrial Classification (SIC) code 3312—Blast Furnaces and Steel Mills;
however, coke production is a small fraction of this industry. In 1997, the U.S. produced
23.4 million short tons of coke. Coke is primarily used as an input for producing steel in
blast furnaces at integrated iron and steel mills (i.e., furnace coke) and as an input for gray,
ductile, and malleable iron castings in cupolas at iron foundries (i.e., foundry coke).
Therefore, the demand for coke is a derived demand that is largely dependent on production
of steel from blast furnaces and iron castings.

       In the remainder of this section, we provide a summary profile of the coke industry in
the United States, including the technical and economic aspects of the industry that must be
addressed in the economic impact analysis. Section 2.1 provides an overview of the
production processes and the resulting types of coke.  Section 2.2 summarizes the
organization of the U.S. coke industry, including a description of U.S. manufacturing plants
and batteries, the companies that own these plants, and the markets  for coke products.
Finally, Section 2.3 presents historical data on the coke industry, including U.S. production
and consumption and foreign trade.

2.1    Production Overview

       This section provides an overview of the by-product coke manufacturing process and
types of coke produced in the United States.  Although not discussed in this section, several
substitute technologies for by-product cokemaking have been developed in the United States
and abroad, including nonrecovery cokemaking, formcoke, and jumbo coking ovens. Of
these alternatives to by-product coke batteries, the nonrecovery method is the only substitute
in terms of current market share in the United States.
                                         2-1

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2.1.1   By-Product Coke Production Process
       Cokemaking involves heating coal in the absence of air resulting in the separation of
the non-carbon elements of the coal from the product (i.e., coke). The process essentially
bakes the coal into a charcoal-like substance for use as fuel in blast furnaces at integrated iron
and steel mills and cupolas at iron foundries. Figure 2-1 summarizes the multi-step
production process for by-product cokemaking, which includes the following steps:
          Metallurgical Coal
              Recycled
              Coke
              Oven Gas
       By-Product
        Recovery
       Coal Preparation
         and Charging
                                Coking and Pushing
By-Products   > f
       All Other Inputs
                                                         All Other Inputs
Hot" Coke
                                     Quenching
            T
          Other
       By-Products
                                                               Coke
                                 To Blast Furnace or
                                   Foundry Cupola
Figure 2-1.  The By-Product Coke Production Process
                                        2-2

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       •   coal preparation and charging,
       •   coking and pushing,
       •   quenching, and
       •   by-product recovery.
In by-product cokemaking, coal is converted to coke in long, narrow by-product coke ovens
that are constructed in groups with common side walls, called batteries (typically consisting
of 10 to 100 coke ovens).

       Figure 2-2 provides a schematic of a by-product coke battery. Metallurgical coal is
pulverized and fed into the oven (or charged) through ports at the top of the oven, which are
then covered with lids. The coal undergoes destructive distillation in the oven at 1,650°F to
2,000°F for 15 to 30 hours. A slight positive back-pressure maintained on the oven prevents
air from entering the oven during the coking process. After coking, the incandescent or "hot"
coke is then pushed from the coke oven into a special railroad car and transported to a quench
tower at the end of the battery where it is cooled with water and screened to a uniform size.
During this process, raw coke oven gas is removed through an offtake system, by-products
such as benzene, toluene, and xylene are recovered, and the cleaned gas is used to underfire
the coke ovens and for fuel elsewhere in the plant.

       As shown in Table 2-1, pollutants may be emitted into the atmosphere from several
sources during by-product cokemaking. For the proposed MACT standards, the sources of
environmental concern to EPA are the pushing of coke from the ovens, the quenching of
incandescent coke, and battery stacks.  Coke pushing results in fugitive particulate emissions,
which may include VOCs, while coke quenching results in particulate emissions with traces
of organic compounds. EPA will focus on these three areas of emissions as HAP-emitting
source categories to be regulated.

2.1.2  Types of Coke

       The particular mix of high- and low-volatile coals used and the length of time the coal
is heated (i.e., coking time) determine the type of coke produced:  (1) furnace coke, which is
used in blast furnaces as part of the traditional  steelmaking process, or (2) foundry coke,
which is used in the cupolas of foundries in making gray, ductile, or malleable iron castings.
                                         2-3

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                                           Standpipe Caps
                Coal Ports
 Quench
 Tower
           Waste Gas
                Stack
                                                                   Coal
                                                                     Conveyor
                                     Coke Side
                                                   Coke Guide
Figure 2-2.  A Schematic of a By-Product Coke Battery

Source: U.S. International Trade Commission. 1994. Metallurgical Coke:  Baseline Analysis of the U.S.
       Industry and Imports.  Publication No. 2745. Washington, DC: U.S. International Trade
       Commission.

Furnace coke is produced by baking a coal mix of 10 to 30 percent low-volatile coal for 16 to
18 hours at oven temperatures of 2,200°F. Most blast furnace operators prefer coke sized
between 0.75 inches and 3 inches. Alternatively, foundry coke is produced by baking a mix
of 50 percent or more low-volatile coal for 27 to 30 hours at oven temperatures of 1,800°F.
Coke size requirements in foundry cupolas are a function of the cupola diameter (usually
based on a 10:1 ratio of cupola diameter to coke size) with foundry coke ranging in  size from
4 inches to 9 inches (Lankford et al., 1985).  Because the longer coking times and lower
temperatures required for foundry coke are more favorable for long-term production, foundry
coke batteries typically remain in acceptable working condition longer than furnace  coke
batteries (Hogan and Koelble, 1996).

       Figure 2-3 shows the distribution of U.S. coke production by furnace and foundry
coke as of 1997. As shown, furnace coke accounts for the vast majority of coke produced in
                                         2-4

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 Table 2-1. Air Emissions from U.S. Coke Manufacturing Plants by Emission Point

                Emission Point                            Example Pollutants
  Oven charging and leaks from doors, lids, and      Polycyclic organic matter (e.g., benzo(a)pyrene and
  offtakes1                                    many others), volatile organic compounds (e.g.,
                                             benzene, toluene), and paniculate matter
  Coke pushing, coke quenching, and battery stacks
  (oven underfiring)2
  By-product recovery plant3                     Benzene, toluene, zylene, napthalene, and other
                                             volatile organic compounds

 'A NESHAP was promulgated for these emission points in 1993—see 40 CFR Part 63, Subpart L.
 2The proposed MACT standard evaluated in this economic analysis will address hazardous pollutants from
 these emission points and is scheduled for promulgation in 2001 in 40 CFR Part 63, Subpart CCCCC.
 3A NESHAP for the by-product recovery plant was promulgated in 1989 in 40 CFR Part 61, Subpart L.
the United States.  In 1997, furnace coke production was roughly 21.8 million short tons, or
93 percent of total U.S. coke production, while foundry coke production was only 1.6 million
short tons. Integrated iron and steel producers that use furnace coke in their blast furnaces
may either produce this coke on-site (i.e., captive coke producers) or purchase it on the
market from merchant coke producers.  As shown in Table 2-2, almost 90 percent of U.S.
furnace coke capacity in 1995 was from captive operations at integrated steel producers
(Hogan and Koelble, 1996).  Alternatively, there are no captive coke operations at U.S. iron
foundries so these producers purchase all foundry coke on the market from merchant coke
producers. In summary, captive coke production occurs at large integrated iron and steel
mills and accounts for the vast majority of domestic furnace coke production, while merchant
coke production occurs at smaller merchant plants and accounts for a small share of furnace
coke production and all of the foundry coke produced in the United States.

       Co-products of the by-product coke production process are (1) coke breeze, the fine
screenings that result from the crushing of coke; and (2) "other coke," the coke that does not
meet size requirements of steel producers that is sold as a fuel source to non-steel producers.
In addition, the by-product cokemaking process results in the recovery of some salable crude
materials such as coke oven gas, ammonia liquor, tar, and light oil.  The cleaned coke oven
gas is used to underfire the coke ovens with excess gas used as fuel in other parts of the plant
                                          2-5

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                               U.S. Coke Production
                               23.4 million short tons
                                                     Foundry Coke Share
               Furnace Coke Share /                     \       7%
                    93%
Figure 2-3.  Distribution of U.S. Coke Production by Type:  1997
or sold. The remaining crude by-products may be further processed and separated into
secondary products such as anhydrous ammonia, phenol, ortho cresol, and toluene. In the
past, coke plants were a major source of these products (sometimes referred to as coal
chemicals); however, today their output is overshadowed by chemicals produced from
petroleum manufacturing (DOE, 1996).

2.2    Industry Organization

       This section provides an overview of the U.S. coke industry, including the
manufacturing plants and batteries, the companies that own them, and the markets in which
they compete.

2.2.1   Manufacturing Plants

       Figure 2-4 identifies the location of U.S. coke manufacturing plants by type of
producer (i.e., integrated and merchant).  As shown, coke is currently manufactured at
25 plants, with 14 integrated plants and 11 merchant plants. These manufacturing plants are
located near their end-users or customers and concentrated in the north-central United States
and Alabama.  Integrated and merchant manufacturing plants are characterized in the
                                         2-6

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        Table 2-2. Summary Data for Coke Manufacturing Plants: 1997
to
Plant Name
Number
of
Location Batteries
Number
of Coke
Ovens
Total Coke
Capacity
(short
tons/yr)
Coke Production by Type (short tons/yr)
Furnace Foundry
Other
Total
Integrated Producers
Acme Steel
AK Steel
AK Steel
Bethlehem Steel
Bethlehem Steel
Geneva Steel
Gulf States Steel
LTV Steel
LTV Steel
National Steel
National Steel
U.S. Steel
U.S. Steel
Wheeling-
Pittsburgh
Total, Integrated
Chicago, IL
Ashland, KY
Middletown, OH
Burns Harbor,
IN
Lackawanna, NY
Provo, UT
Gadsden, AL
Chicago, IL
Warren, OH
Ecorse, MI
Granite City, IL
Clairton, PA
Gary, IN
Follansbee, WV
Producers
2
2
1
2
2
4
2
1
1
1
2
12
4
4
40
100
146
76
164
152
252
130
60
85
85
90
816
268
224
2,648
500,000
1,000,000
429,901
1,877,000
750,000
800,000
500,000
615,000
549,000
924,839
601,862
5,573,185
2,249,860
1,247,000
17,617,647
493,552
942,986
410,000
1,672,701
747,686
700,002
521,000
590,250
543,156
908,733
570,654
4,854,111
1,813,483
1,249,501
16,017,815
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
19,988
0
0
82,848
0
16,320
0
0
0
0
0
0
0
36,247
155,403
513,538
942,986
410,000
1,755,549
747,686
716,322
521,000
590,250
543,156
908,733
570,654
4,854,111
1,813,483
1,285,748
16,173,216
(continued)

-------
Table 2-2. Summary Data for Coke Manufacturing Plants:  1997 (Continued)
Plant Name
Merchant Producers
ABC Coke
Citizens Gas
Empire Coke
Erie Coke
Indiana Harbor Cokea>b
Jewell Coke and CoaF
to Koppers
oo
New Boston Coke
Shenango, Inc.
Sloss Industries
Tonawanda
Number
of
Location Batteries

Tarrant, AL
Indianapolis, IN
Holt, AL
Erie, PA
East Chicago, IN
Vansant, VA
Monessen, PA
Portsmouth, OH
Pittsburgh, PA
Birmingham, AL
Buffalo, NY
Total, Merchant Producers
Total, All Producers


3
3
2
2
4
4
2
1
1
o
J
1
26
66
Number
of Coke
Ovens

132
160
60
58
268
142
56
70
56
120
60
1,182
3,830
Total Coke
Capacity
(short
tons/yr)

699,967
634,931
162,039
214,951
1,300,000
649,000
372,581
346,126
514,779
451,948
268,964
5,615,286
23,232,933
Coke Production by Type (short
Furnace

25,806
173,470
0
0
0
649,000
358,105
317,777
354,137
268,304
0
2,146,599
18,164,414
Foundry

727,720
367,798
142,872
122,139
0
0
0
0
0
131,270
136,225
1,628,024
1,628,024
Other

0
93,936
0
19,013
0
0
0
4,692
0
33,500
63,822
214,963
370,366
tons/yr)
Total

753,526
635,204
142,872
141,152
0
649,000
358,105
322,469
354,137
433,074
200,047
3,989,586
20,162,802
a Operates nonrecovery coke batteries not subject to the regulations.
b Newly built coke operations coming on-line during 1998.

Sources:  U.S. Environmental Protection Agency. 1998.  Coke Industry Responses to Information Collection Request (ICR) Survey. Database
         prepared for EPA's Office of Air Quality Planning and Standards. Research Triangle Park, NC.
         Association of Iron and Steel Engineers (AISE). 1998. "1998 Directory of Iron and Steel Plants: Volume 1 Plants and Facilities."
         Pittsburgh, PA: AISE.

-------
                                                    • Integrated Producers
                                                    x Merchant Producers
Figure 2-4. Location of Coke Manufacturing Plants by Type of Producer:  1997

Source:  U.S. Environmental Protection Agency.  1998. Coke Industry Responses to Information Collection
        Request (ICR) Survey.  Database prepared for EPA's Office of Air Quality Planning and Standards.
        Research Triangle Park, NC.
remainder of this section using facility responses to EPA's industry survey and industry data
sources.  Table 2-2 presents summary data for individual U.S. coke manufacturing plants,
while Table 2-3 provides summary data by type of producer.

       As of 1997, there were 14 integrated plants operating 40 coke batteries with
2,648 coke ovens.  Total coke capacity at these plants was 17.6 million short tons with
production devoted entirely to furnace coke. These integrated plants are owned and operated
by large integrated steel companies and accounted for 80 percent of total U.S. coke
production in 1997 (all furnace coke). U.S. Steel is the largest integrated producer, operating
                                           2-9

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Table 2-3.  Coke Industry Summary Data by Type of Producer: 1997
Item
Coke Plants (#)
Coke Batteries (#)
Total number
Average per plant
Coke Ovens (#)
Total number
Average per plant
Coke Capacity (short tons/yr)
Total capacity
Average per plant
Coke Production (short
tons/yr)
Total production
Furnace
Foundry
Other
Total
Average per Plant
Furnace
Foundry
Other
Total
Integrated Producers
Total Share
14 56.0%

40 60.6%
2.86

2,648 69.1%
189.1

17,617,647 75.8%
1,258,403


16,017,815 88.2%
0 0.0%
155,403 42.0%
16,173,218 80.2%

1,144,130
0
11,100
1,155,230
Merchant Producers
Total Share
11 44.0%

26 39.4%
2.36

1,182 30.9%
107.5

5,615,286 24.2%
510,481


2,146,599 11.8%
1,628,024 100.0%
214,963 58.0%
3,989,586 19.8%

195,145
148,002
19,542
362,690
Total
25

66
2.64

3,830
153.2

23,232,933
929,317


18,164,414
1,628,024
370,366
20,162,804

726,577
65,121
14,815
806,512
Sources: U.S. Environmental Protection Agency.  1998.  Coke Industry Responses to Information
        Collection Request (ICR) Survey. Database prepared for EPA's Office of Air Quality Planning
        and Standards. Research Triangle Park, NC.
        Association of Iron and Steel Engineers (AISE). 1998. "1998 Directory of Iron and Steel Plants:
        Volume 1 Plants and Facilities."  Pittsburgh, PA: AISE.
                                           2-10

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two coke manufacturing plants in Clairton, Pennsylvania and Gary, Indiana.  The Clairton
facility is the largest single coke plant in the United States, accounting for roughly 24 percent
of U.S. cokemaking capacity.  Together, the two U.S. Steel plants have a total of 16 coke
batteries with 1,084 coke ovens accounting for roughly 40 percent of all coke batteries and
ovens at integrated plants.  As shown in Table 2-3, integrated coke plants had an average of
2.9 coke batteries, 189 coke ovens, and coke capacity of 1.26 million short tons per plant.
These plants produced an average of 1.14 million short tons of furnace coke and accounted
for 88 percent of the 18.2 million short tons of furnace coke produced in 1997.

       As of 1997, there were  11 merchant plants operating 26 coke batteries with
1,182 coke ovens.  Total coke capacity at these plants was 5.6 million short tons with
production split between furnace and foundry coke. Merchant coke plants are typically
owned by smaller, independent companies that rely solely on the sale of coke and coke by-
products to generate revenue.  These plants accounted for 20 percent of total U.S. coke
production in 1997. Sun Coal and Coke is the largest merchant furnace  producer, operating
Jewell Coke and Coal in Vansant, Virginia and newly constructed operations at Indiana
Harbor Coke in East Chicago, Illinois (both plants employ the nonrecovery cokemaking
processes). Although listed as  a merchant producer, the Indiana Harbor Coke plant is co-
located with Inland Steel's integrated plant in East Chicago, Illinois and has an agreement to
supply 1.2 million short tons of coke to Inland and sell the residual furnace coke production
(Ninneman, 1997). As shown in Table 2-3, merchant coke plants are smaller than integrated
plants with an average of 2.4 coke batteries, 108 coke ovens, and coke capacity of only
0.5 million short tons per plant. In 1997, these plants produced an average of 195,000 short
tons of furnace coke and 148,000 short tons of foundry coke per plant, accounting for
12 percent of U.S. furnace coke and 100 percent of foundry coke produced.

2.2.2   Companies

       The proposed MACT will potentially affect business entities that own coke
manufacturing facilities. Facilities comprise a land site with plant and equipment that
combine inputs (raw materials, energy, labor) to produce outputs (coke).  Companies that
own these facilities are legal business entities that have capacity to conduct business
transactions and make business decisions that affect the facility.  The terms facility,
establishment, plant, and mill are synonymous in this analysis and refer to the physical
location where products are manufactured.  Likewise, the terms company and firm  are
synonymous and refer to the legal business entity that owns one or more facilities.
                                        2-11

-------
       As shown in Table 2-4, 18 companies operated the 25 U.S. coke manufacturing plants
in 1997. These companies ranged from small, single-facility merchant coke producers to
large integrated steel producers. As shown, integrated producers are large, publicly owned
integrated steel companies including USX Corporation, Bethlehem Steel Corporation,
National Steel  Corporation, LTV Corporation, and AK Steel Corporation. HMK Enterprises,
which owns Gulf States Steel, is the only integrated producer that is privately owned.
Alternatively, merchant producers are smaller, typically privately owned and operated
companies including Koppers Industries, Drummond Company (which owns ABC Coke),
McWane Incorporated (which owns Empire Coke), and Citizens Gas and Coke. These
potentially affected companies range in size from  130 to over 22,000 employees.

       Companies are grouped into small and large categories using Small Business
Administration (SBA) general  size standard definitions forNAICS codes. Under these
guidelines, SB A establishes 1,000 or fewer employees as the small business threshold for
Iron and Steel Mills (i.e., NAICS 331111), while coke ovens not integrated with steel mills
are classified under All Other Petroleum and Coal Products Manufacturing (i.e., NAICS
324199) with a threshold of 500.  Figure 2-5 illustrates the distribution of affected U.S.
companies by size based on reported employment data. As shown, three companies (all
merchant producers),  or 16.7 percent, are categorized as small, and 15 companies, or
83.3 percent, are categorized as large.  As expected, the companies owning integrated coke
plants are generally larger than the companies owning merchant coke plants. None of the
nine companies owning integrated operations have fewer than 1,000 employees or are
classified as small businesses.  Alternatively,  three of the nine companies owning merchant
operations have fewer than 1,000 employees and are classified as small businesses.
However, not all companies owning merchant coke plants are small; for example, the Sun
Company is one of the largest companies with over 10,000 employees.

2.2.3   Industry Trends
       During  the 1970s and 1980s, integrated steelmakers shut down blast furnaces in
response to reduced demand for steel, thereby reducing the demand for furnace coke.  During
the same period, many coke batteries were also shut down, thereby reducing the supply of
coke.  During the 1990s, the improved U.S. economy has produced strong demand for steel,
and domestic coke consumption currently exceeds production. This deficit may increase
because many domestic furnace coke batteries are approaching their life expectancies and
may be shut down rather than rebuilt. However, no new coke batteries have been built and
                                       2-12

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Table 2-4. Summary of Companies Owning Potentially Affected Coke
Manufacturing Plants:  1997
Company Name
Acme Metals Inc.
AK Steel Corporation
Aloe Holding Company3
Bethlehem Steel Corporation
Citizens Gas and Coke
Drummond Company Inc.b
Geneva Steel Company
HMK Enterprises Inc.0
Koppers Industries Inc.
LTV Corporation
Me Wane Inc.d
National Steel Corporation
New Boston Coke
Corporation
Sun Company Inc.6
Tonawanda Coke
Corporation f
USX Corporation
Walter Industries Inc.g
WHX Corporation11
Legal Form of
Organization
Public
Public
Holding company
Public
Private
Private
Public
Private
Private
Public
Private
Public subsidiary
NA
Public
NA
Public
Public
Public
Producer
Type
Integrated
Integrated
Merchant
Integrated
Merchant
Merchant
Integrated
Integrated
Merchant
Integrated
Merchant
Integrated
Merchant
Merchant
Merchant
Integrated
Merchant
Integrated
Total Sales
($106)
488
2,441
79
4,631
450
700
727
530
465
4,446
560
3,114
35
10,464
23
22,588
1,507
642
Total
Employment
2,471
5,800
435
15,600
1,500
2,700
2,600
3,000
1,800
15,500
4,200
9,417
239
10,900
130
41,620
7,584
5,706
Small
Business
No
No
Yes
No
No
No
No
No
No
No
No
No
Yes
No
Yes
No
No
No
a Owns Shenango Inc.
b Owns ABC Coke.
c Owns Gulf States Steel, Inc.
d Owns Empire Coke.
e Owns Indiana Harbor Coke Company and Jewell Coke and Coal Company, which are not subject to
  proposed regulations.
f Owns Erie Coke Corporation.
g Owns Sloss Industries Corporation.
h Owns Wheeling-Pittsburgh Corporation.

Source:  Dun & Bradstreet. 1998. Dun's Market Identifier Electronic Database. Dialog Corporation.
        Information Access Corporation.  1997.  Business & Company Profile ASAP [computer file].
        Foster City, CA: Information Access Corporation.
                                           2-13

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                     Large
                     83.3%
(3
                                                  Small
                                                  16.7%
Figure 2-5. Distribution of Affected U.S. Companies by Size: 1997
only two coke oven batteries have been rebuilt since 1990—National Steel in Ecorse,
Michigan and Bethlehem Steel in Burns Harbor, Indiana (Agarwal et al., 1996). Most recent
investments in new cokemaking have been made in non-recovery, rather than by-product
recovery, coke batteries. In fact, LTV Steel Corporation and the U.S. Steelworkers Union are
reportedly exploring the possibility of locating a non-recovery coke facility on the site of
LTV's current coke plant in Pittsburgh (American Metal Market, 1998). LTV closed this
coke plant at the end of 1997 because its operating and environmental performance
deteriorated to the point that it was unable to meet CAA requirements without prohibitive
investments of between $400 and $500 million (New Steel, 1997a).

      Faced with the prospect of spending hundreds of millions of dollars to rebuild aging
coke batteries, many integrated steelmakers have totally abandoned their captive cokemaking
operations and now rely on outside suppliers. As of 1997, five integrated steel companies
did not produce their own coke and had to purchase this input from merchant plants, foreign
sources, or other integrated producers with coke surpluses.  These integrated steel
companies—Inland Steel, Rouge Steel, USS/Kobe Steel, WCI Steel, and Weirton Steel—had
an estimated aggregate coke demand of 5.8 million short tons (Hogan and Koelble, 1996).  In
                                   2-14

-------
addition, four other integrated producers currently have coke deficits. However, there are
few integrated producers with coke surpluses to take up the slack. Hogan and Koelble (1996)
reported that only four integrated steelmakers had coke surpluses as of 1995.  This number is
now down to three with the March 1998 closing of Bethlehem Steel's coke operations in
Bethlehem, Pennsylvania (New Steel, 1998b).  These recent closures by LTV and Bethlehem
removed 2.4 million short tons, or 10.5 percent, of U.S. coke capacity (New Steel, 1998b).

       Furthermore, several integrated firms have sold some or all of their coke batteries to
merchant companies, which then sell the majority of the coke they produce to the steel
company at which the battery is located. Some of these are existing coke batteries, and others
are newly rebuilt batteries, including some that use the non-recovery cokemaking process.
An example is the Indiana Harbor Coke Company's coke batteries located at Inland Steel's
Indiana Harbor Works in East Chicago, Indiana.  Both National Steel and Bethlehem Steel
have recently  sold coke batteries to DTE Energy Company (New Steel, 1998a; New Steel,
1997b). Both steel companies will continue to operate the batteries and will buy the majority
of the coke produced by the batteries from DTE at market value (National Steel, 1998).

       These recent trends should have the following future impacts on the U.S. coke
industry:

       •  Reduce the share of furnace coke produced by integrated producers,  thereby
          increasing reliance on merchant producers and foreign sources.
       •  Increase the furnace coke share of merchant production as these producers
          respond to expected increases in market prices for furnace coke, which also has
          lower production cost than foundry coke.

       •  Increase the volume of foreign imports of furnace and foundry coke  as domestic
          demand continues to  exceed domestic supply.
2.2.4  Markets

       The U.S. coke industry has two primary product markets (i.e., furnace and foundry
coke) that are supplied by two producing sectors—integrated producers and merchant
producers. Integrated producers  are part of integrated iron and steel mills and only produce
furnace coke for captive use in blast furnaces.  Therefore, much of the furnace coke is
produced and consumed by the same integrated producer and never passes through a market.
However, some integrated steel producers have closed their coke batteries over  the past
decade and must purchase their coke supply from merchant producers or foreign sources.  In

                                        2-15

-------
addition, a small number of integrated steelmakers produce more furnace coke than they need
and sell their surplus to other integrated steelmakers.  As of 1997, integrated producers
accounted for roughly 76 percent of U.S. coke capacity with merchant producers accounting
for the remaining 23 percent. These merchant producers sell furnace and foundry coke on the
open market to integrated steel producers (i.e., furnace coke) and iron foundries (i.e., foundry
coke).  Some merchant producers sell both furnace and foundry coke, while others specialize
in only one.

       Although captive consumption currently dominates the U.S. furnace coke market,
open market sales of furnace coke are increasing (USITC, 1994). Because of higher
production costs, U.S. integrated steel producers have been increasing their consumption of
furnace coke from merchant coke producers, foreign imports, and other integrated steel
producers with coke surpluses.  In 1997, seven companies produced furnace coke in the
United States.  Although concentration ratios indicate that the U.S. furnace market is slightly
concentrated, it is expected to be competitive at the national level after factoring in
competition from foreign imports and integrated producers with coke surpluses.

       Merchant coke producers account for a small share of U.S. furnace coke production
(about 12 percent in 1997); however, they account for 100 percent of U.S. foundry coke
production.  In 1997, six companies produced foundry coke  in the United States. The U.S.
foundry market appears to be fairly concentrated with two companies currently accounting
for almost 68 percent of U.S. production—Drummond Company Incorporated with
45 percent and Citizens Gas and Coke with 22.6 percent. The remaining four merchant
producers each account for between 7.5 and 8.8 percent of the market. However, these
producers do not produce a differentiated product  and are limited to selling only to iron
foundries, and these factors limit their ability to influence prices. In addition, the strategic
location of these manufacturers would appear to promote competition within the southeastern
and north-central United States and, perhaps, across regions given access to water
transportation. Thus, the U.S. market for foundry  coke is also expected to be competitive at
the national level.

2.3    Historical Industry Data

       This section presents historical and projected market data for coke products.
Table 2-5 provides the historical volumes of U.S. production, foreign trade, changes in
inventories, and apparent consumption of coke. Historical domestic data for 1980 through
1997 were obtained from the U.S. Department of Energy's Energy Information

                                         2-16

-------
Table 2-5. U.S. Production, Foreign Trade, and Apparent Consumption of Coke:
1980-1997 (103 short tons)
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

1980-1997
1980-1989
1989-1997
U.S.
Production
46,132
42,786
28,115
25,808
30,561
28,651
25,540
26,304
28,945
28,045
27,617
24,046
23,410
23,182
22,686
23,749
23,075
22,115

-3.1%
-4.4%
-2.6%
Exports
2,071
1,170
993
665
1,045
1,122
1,004
574
1,093
1,085
572
740
642
835
660
750
1,121
832
Average Annual
-3.5%
-5.3%
-2.9%
Changes in
Imports Inventories
659
527
120
35
582
578
329
922
2,688
2,311
1,078
1,185
2,098
2,155
3,338
3,820
2,543
3,185
Growth Rates
22.5%
27.9%
4.7%
3,442
-1,903
1,466
-4,672
198
-1,163
-487
-1,012
529
336
-1
189
-224
-422
-525
366
21
o
5

-5.9%
-10.0%
-12.4%
Apparent
Consumption3
41,278
44,046
25,776
29,850
29,900
29,270
25,352
27,664
30,011
28,935
28,124
24,302
25,090
24,924
25,889
26,453
24,476
24,465

-4.7%
-1.7%
-2.4%
a  Apparent consumption is equal to U.S. production minus exports plus imports minus changes in
  inventories.

Sources:   U.S. Department of Energy. "AER Database: Coke Overview, 1949-1997."
          . Washington, DC: Energy Information
          Administration. As obtained on September 14, 1998a.
          Hogan, William T., and Frank T. Koelble. 1996. "Steel's Coke Deficit: 5.6 Million Tons and
          Growing." New Steel 12(12):50-59.
          U.S. International Trade Commission.  Trade Database: Version 1.7.1.
           As obtained in September 1998.
                                            2-17

-------
Administration (EIA) and supplemented by USITC (1994) and Hogan and Koelble (1996).
Historical data for U.S. exports and imports of coke were obtained from the U.S.
International Trade Commission's Trade Database (USITC,  1998).

2.3.1   Domestic Production

       As shown in Table 2-5, U.S. coke production has declined by 52 percent from
46.1 million short tons in 1980 to 22.1 million short tons in 1997. During this period, coke
production declined at an average annual rate of 3.1 percent, with growth from year to year
varying slightly throughout the period.  The largest decline occurred between 1981 and 1982
as U.S. coke production fell from 42.8 to 28.1 million short tons. This reduction was caused
by the large-scale restructuring of the U.S. steel industry during which a large number of
integrated mills and their associated cokemaking plants were shut down.  As shown in
Table 2-5, the production volume of coke remained relatively stable during the remainder of
the 1980s. U.S. coke production was almost unchanged from 28.1 million short tons in 1982
to 28 million short tons in 1989. However, during the  1990s, it has steadily declined by an
average of 2.6 percent per year. This steady reduction is associated with the closings of aging
cokemaking operations by several integrated U.S. steel producers.

       Available sources do not provide a breakdown of merchant production by type of
coke.  Thus, to provide U.S. production by type of coke, the  Agency generated historical
estimates of the furnace coke share of merchant production.  Based on limited time-series
data from Hogan and Koelble (1996) on the furnace coke share of merchant coke production,
regression analysis was employed to estimate an equation to project this share from 1980
through 1991l The following time trend equation was estimated using ordinary least squares
(with t-statistics shown in parentheses below coefficients):

                       Furnace Coke Share = -47.04 + .0238 Year                   (2.1)
                                           (-39.0)  (-39.3)

This equation appears to be  highly predictive with an adjusted R-square value of 0.9987. The
Agency estimated U.S.  furnace coke production from merchant producers by multiplying the
projected shares from Equation 1 by total merchant coke production for each year from 1980
through 1997.  U.S.  foundry coke production was then derived as the residual volume.
'The time-series data consisted of only three annual observations for 1979 (19 percent), 1988 (39.6 percent),
   and 1996 (59.6 percent).

                                        2-18

-------
       Table 2-6 provides historical data on U.S. furnace coke production by producer type.
As shown, U.S. production of furnace coke has declined by 51 percent from 42.8 million
short tons in 1980 to 21 million short tons in 1997—an average annual reduction of
3 percent. Integrated producers have been predominant and accounted for 98 percent of U.S.
furnace coke production in 1980.  This share has declined by 6.5 percent over time to
91.5 percent as of 1997.  This decline is attributable to reductions in U.S. cokemaking
capacity due to plant closings at integrated producers. As a result, merchant producer's share
has increased by four-fold from 2.1 percent in 1980 to 8.5 percent in 1997.  This increase is
not only due to declines at integrated producers but also steady increases in production by
merchant producers.  As shown in Table 2-6, merchant production of furnace coke has
doubled over this period from an estimated 0.9 million short tons in 1980 to 1.8 million short
tons in 1997—an average increase of almost 6 percent per year.

       Table 2-7 provides historical data on U.S. foundry coke production at merchant
plants. Although merchant production of furnace coke has increased over time, merchant
production of foundry coke has steadily declined. As shown, U.S. production of foundry
coke has declined by two-thirds from an estimated 3.34 million short tons in 1980 to
1.11 million short tons in 1997—an average annual reduction of 3 percent.  These reductions
are attributable to two factors: (1) declining demand by iron foundries, and (2) increasing
incentive to shift production toward furnace coke.  During the 1980s, the demand for iron
castings declined because of the poor performance of the U.S. economy and changes in the
automotive industry (i.e., reduced demand and material substitution). As a result, one-third
of the U.S. foundries  shut down operations (USITC,  1994). Reductions in demand have
continued throughout the  1990s as foundries have made technological improvements,  similar
to those at blast furnaces, to reduce the amount of coke required to produce castings. In
addition, merchant producers now face increasing incentives of expected higher prices and
lower costs of producing furnace coke to meet the increasing domestic demand by integrated
steelmakers.

2.3.2  Foreign Trade

       International trade has historically comprised a small portion of the U.S. coke industry
because of limitations associated with transport costs and breakage during transport.
However, trade has become increasingly important during the 1990s. Table 2-5 provides the
volume of U.S. exports and imports for coke from 1980 through 1997. As shown, the United
States has become a net importer of coke.  In 1980, the volume of coke exports was
                                        2-19

-------
Table 2-6. U.S. Production of Furnace Coke by Producer Type: 1980-1997
(103 short tons)
Integrated Producers
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

1980-1997
1980-1989
1989-1997
Volume
41,899
38,903
25,374
22,556
26,791
25,175
22,251
22,973
25,490
24,808
23,892
20,796
20,162
19,973
19,444
20,510
19,969
19,213

-3.2%
-4.5%
-2.8%
Share
97.9%
97.7%
97.3%
96.1%
95.9%
95.6%
95.0%
94.8%
94.8%
94.7%
93.7%
93.1%
92.6%
92.3%
91.7%
91.8%
91.6%
91.5%
Average
-0.4%
-0.4%
-0.4%
Merchant Producers
Volume
893
912
709
919
1,156
1,148
1,165
1,259
1,389
1,378
1,675
1,540
1,616
1,673
1,768
1,844
1,841
1,790
Annual Growth Rates
5.9%
6.0%
3.7%
Share
2.1%
2.3%
2.7%
3.9%
4.1%
4.4%
5.0%
5.2%
5.2%
5.3%
6.3%
6.9%
7.4%
7.7%
8.3%
8.2%
8.4%
8.5%

18.1%
16.9%
7.7%
Total Production
42,792
39,815
26,083
23,475
27,947
26,323
23,416
24,232
26,879
26,186
25,567
22,336
21,778
21,646
21,212
22,354
21,810
21,003

-3.0%
-4.3%
-2.5%
Source:  EPA estimates.
                                     2-20

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Table 2-7.  U.S. Production of Foundry Coke by Producer Type:  1980-19973
(103 short tons)
Integrated Producers
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

1980-1997
1980-1989
1989-1997
Volume
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0.0%
0.0%
0.0%
Share
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Average
0.0%
0.0%
0.0%
Merchant Producers
Volume
3,340
2,972
2,032
2,334
2,614
2,328
2,124
2,072
2,066
1,859
2,049
1,712
1,632
1,536
1,476
1,396
1,264
1,113
Annual Growth Rates
-3.9%
-4.9%
-5.9%
Share
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%

0.0%
0.0%
0.0%
Total Production
3,340
2,972
2,032
2,334
2,614
2,328
2,124
2,072
2,066
1,859
2,049
1,712
1,632
1,536
1,476
1,396
1,264
1,113

-3.9%
-4.9%
-5.9%
a  May include some coke screenings or industrial coke.

Source: EPA estimates.
                                       2-21

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2.1 million short tons, while the volume of coke imports was only 0.7 million short tons. By
1997, coke exports had declined by almost 60 percent from 1980 to 0.8 million short tons,
and coke imports had increased by almost 400 percent to 3.2 million short tons.  The decline
in  coke exports resulted from reductions in coke production associated with the declining
U.S. steel industry during the 1980s.  Despite the U.S. steel industry's turnaround during the
1990s, coke exports have continued to decline as they are crowded out by increasing
domestic demand.  The dramatic increase in imports has resulted from the improved U.S.
economy and increasing demand for U.S. steel products since the late 1980s. These factors
combined with previous and continued closings of U.S. coke plants have caused an aggregate
coke deficit at integrated iron and steel mills during the 1990s as domestic supply is not able
to  keep pace with demand for coke.

2.3.3   Market Prices

       Historical data on market prices for coke are not directly available from public
sources nor can they be derived from the sources providing market volumes. Based on
discussions with DOE's EIA, the USITC (1994) is the only known source of recent market
prices for coke. These market prices are reported as net f.o.b. at plant and are based on
industry responses to the USITC questionnaire. According to the USITC (1994), a vast
majority of coke is sold under long-term contracts ranging from 1 to 6 years. These contracts
typically provide for semiannual or annual renegotiation so that contract prices are closely
related to open market prices.  Thus, because a large share of coke is purchased through
contracts, the USITC provides prices for both contract sales and spot market sales.

       Table 2-8 provides market prices by type of coke product for 1990 through 1993. As
shown, the spot market price is generally higher than the contract sales price and both seem
positively correlated over time. The table  also provides a weighted average price based on
the volume sold through contracts and the spot market for each year.  As shown, the weighted
average market price for furnace coke was roughly $100 per short ton in 1993 and  has
declined since 1990. The market price for foundry coke is typically 50 percent higher than
for furnace coke.  In 1993, the weighted average market price for foundry coke was $154 per
short ton and has slightly increased since 1990. Table 2-8 also provides the market prices  for
other industrial coke and coke breeze. Industrial  coke had a weighted average market price
of $113 per short ton in 1993, while coke breeze was priced at $44 per short ton.
                                        2-22

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Table 2-8. Market Prices of Coke by Type:  1990-19933 ($ per short ton)
Product/Year Contract Sales Price
Furnace coke
1990
1991
1992
1993b
Foundry coke
1990
1991
1992
1993b
Other industrial coke
1990
1991
1992
1993b
Coke breeze
1990
1991
1992
1993b

$106.62
$103.99
$103.05
$101.18

$149.06
$153.55
$152.26
$152.90

$119.98
$117.07
$115.13
$112.08

$42.83
$44.42
$45.42
$43.35
Spot Market Sales
Price

$113.87
$111.26
$81.55
$71.12

$151.86
$147.60
$153.60
$156.35

$117.53
$118.06
$117.46
$115.89

$69.01
$70.67
$59.78
$70.38
Weighted Average
Price

$107.06
$105.00
$102.50
$100.69

$149.82
$151.83
$152.58
$153.75

$119.21
$117.41
$115.25
$112.29

$43.31
$44.94
$45.88
$43.91
a Market prices are reported as net f.o.b. at plant.
b Reflects prices observed for January through June 1993.

Source:  U.S. International Trade Commission.  1994. Metallurgical Coke: Baseline Analysis of the U.S.
        Industry and Imports. Publication No. 2745. Washington, DC: USITC.
                                           2-23

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2.3.4  Future Projections

       Future projections for the U.S. coke industry depend on several uncertain and
interdependent factors including trends in integrated steelmaking and iron casting,
compliance with environmental regulation, investments in or closures of domestic coke
capacity, quality and availability of imports, and economic performance of domestic
producers. For furnace coke, most analysts agree that U.S. capacity and production will
decline faster than consumption and result in continued coke shortfalls to be met by foreign
imports.  Based on a survey of studies, the USITC (1994) reports that U.S. furnace coke
capacity is expected to decline by between 10 to 37 percent from 1990 through 2000, while
U.S. consumption is expected to decline by between 10 to 23 percent.  During the 1990s,
furnace coke capacity at U.S. integrated producers has already declined by 27 percent from
24.2 million short tons in 1990 to 17.6 million short tons per year in 1997 (USITC,  1994;
EPA, 1998).  This decline in capacity at integrated producers has been partially offset by
increases in furnace coke capacity at merchant producers from 2.7 million short tons in 1990
to roughly 4 million short tons in 1997 (USITC, 1994; EPA, 1998).

       Assuming current rates of investment in existing coke batteries at integrated
producers, furnace coke production in the United States is not expected to exceed 16 million
short tons per year through 2000 (Agarwal et al., 1996). Alternatively, assuming integrated
steelmakers demand between 52 to 59 million tons per year of molten iron, furnace coke
consumption is estimated at between 18 to 22 million tons per year in 2000 (Agarwal et al.,
1996). This projected consumption level also assumes that injection of natural gas and coal
will continue  to increase, thereby reducing coke rates and decreasing demand for coke by an
additional 1.2 to 2 million short tons per year. If steel demand is low (i.e., 52 to 54 million
tons per year), then coke demand will be satisfied at the current import level of 3 million tons
per year. However, if this demand is high (i.e., 56 to 59 million tons per year), then coke
imports would likely increase to 6 million tons per year. Agarwal et al. (1996) predict that
this increase in foreign imports may lead to future increases in coke prices and trigger a
scramble for coke.

       For foundry coke, most analysts agree that U.S. capacity will be stable and sufficient
to meet future demands by iron foundries.  The American Foundryman's Society has
projected the demand for iron castings to be between 9 and 10.5 million short tons through
2004 (Stark, 1995). Based on casting yields of 55 percent, metal to coke ratios of 8 to 1, and
a cupola-melting share at 64 percent of total, Stark (1995) projects foundry coke demand to
                                        2-24

-------
range from 1.3 to 1.5 million short tons per year through 2004.  As of 1997, total merchant
plant capacity was 5.6 million short tons per year with roughly 2.1 million tons for foundry
coke. Therefore, existing foundry coke capacity will exceed the projected demand and likely
cause merchant producers to increasingly rely on furnace coke to fill this excess capacity
(Stark, 1995).
                                         2-25

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                                    SECTION 3

                         ENGINEERING COST ANALYSIS
       Control measures implemented to comply with the MACT standard will impose
regulatory costs on coke batteries.  This section presents compliance costs for typical
"model" batteries and the national estimate of compliance costs associated with the proposed
rule. These engineering costs are defined as the annual capital and operating and
maintenance costs assuming no behavioral market adjustment by producers or consumers.
For input to the EIA, engineering costs are expressed per unit of coke production and used to
shift the coke supply functions in the market model.

       The proposed MACT will cover the Coke Ovens: Pushing, Quenching,  and Battery
Stacks source category. It will affect all  58 by-product coke oven batteries at 23 coke plants.
The processes covered by the proposed regulation include pushing the coke from the coke
oven, quenching the incandescent coke with water in a quench tower, and maintaining the
battery stack that is the discharge point for the underfiring system. Capital, operating and
maintenance, and monitoring costs were estimated for 10 representative model batteries.
Model battery costs were linked to  the existing population of coke batteries to estimate the
national costs of the regulation.

3.1    Overview of Emissions from Coke Batteries

       The listed HAPs of concern in coke oven emissions  include hundreds of organic
compounds formed when volatiles  are thermally distilled from the coal during the coking
process. Traditionally, benzene-soluble organics  and methylene chloride-soluble organics
have been used as surrogate measures of coke oven emissions. The primary constituents of
concern are polynuclear aromatic hydrocarbons (PAHs).  Other constituents include benzene,
toluene, and xylene.

       Coke oven emissions from pushing and quenching occur when the coal has not been
fully coked, which is called a "green" push.  A green push produces a dense cloud of coke
oven emissions that is  not captured and controlled by the emission control systems used for
particulate matter.  Coke oven emissions from battery stacks occur when raw coke oven gas
                                        3-1

-------
leaks through the oven walls, enters the flues of the underfiring system, and is discharged
through the stack. Coke oven emissions from these sources are controlled by pollution
prevention activities, diagnostic procedures, and corrective actions.  One component of the
control technology is the operating and maintenance of the general battery to prevent green
pushes and stack emissions.

       Based on limited test data and best engineering judgment, the proposed standards are
expected to reduce coke oven  emissions from pushing, quenching, and battery stacks by
about 50 percent.  There is significant uncertainty in attempts to estimate emissions and
emission reductions because the emissions are fugitive in nature. For example, the emissions
from green coke during pushing and quenching are not enclosed or captured in a conveyance,
which makes accurate measurement of concentrations and flow rates very difficult.

3.2    Approach for Estimating Compliance Costs

       The costs for individual batteries to achieve the MACT level of control will vary
depending on the battery condition and control equipment in place. There is uncertainty in
determining exactly what costs will be incurred by each battery.  Consequently, several
model batteries were developed to represent the range of battery types and conditions to place
bounds on the probable costs.  The emission control programs and equipment in place at the
best controlled batteries were investigated, and the associated costs were obtained.  The costs
were then applied to the model batteries to estimate the cost necessary to comply with the
MACT level. A model battery was assigned to each actual battery based on available
emissions data, knowledge of battery condition, and engineering judgment.  Errors in
underestimating and overestimating costs for individual batteries will tend to cancel when
summing these costs to estimate total nationwide costs.

3.3    Costs for MACT Performance

       The MACT standard involves a routine program of systematic operating and
maintenance and oven repairs to control emissions from battery stacks and pushing.  An
important element of this routine program for battery stacks is the use of continuous opacity
monitors (COMs).  In addition, control of quenching emissions will require  the installation of
baffles in three quench towers that do not have them.

       Several  plants were surveyed to obtain cost information on the technologies that
comprise the MACT standard.  Basic oven repairs include spray patching, ceramic welding,
mobile gunning, silica dusting, end flue repairs, and through-wall brickwork. An annual

                                         3-2

-------
baseline program of oven repairs was developed from the frequency of oven repairs at USS
Clairton Works and includes spray patching, end flue repairs, and through-wall repairs.
Annual estimated costs for oven repairs range from $31,000 to $564,000 per battery.

       Another element of the cost of the MACT is monitoring, which involves observing
four pushes per battery per day and bag leak detection systems for batteries that control
pushing emissions with baghouses. The average time to observe four pushes is estimated to
be about 1 hour, allowing for some delays and time for the observer to get into position.  (For
batteries operated as three in a battery unit, the time may be as short as 15  to 20 minutes, and
for some foundry batteries, the observation time may be  1.5 hours or more.)  Two hours per
plant are allowed for observer travel time and data reduction. For a typical inspection labor
charge of $30/hour, the inspection cost per plant per year would be

  $/yr =  365 days/yr * $30/hr * [1 hr/battery * number of batteries + 2 hr/plant *  1 plant] =

                        $11,000 * number of batteries + $22,000.

The installed capital cost for bag leak detectors  provided by vendors is $9,000 per baghouse.
Annual operating and maintenance costs are estimated to be $500/yr per detector.

3.4    Costs for Model Batteries

       The model batteries are described in Table 3-1.  Two groups are defined:  one to
represent foundry coke by-product batteries and one to represent furnace coke by-product
batteries. These groups are further subdivided into models that represent different battery
conditions that affect emissions and the cost to improve emission control.  For example,
Group A represents batteries that already achieve the MACT level of control and will not
incur significant additional expenses. Group B  represents batteries that must implement a
baseline program similar to that  at the MACT batteries, but they will not incur significant
capital investment. Group C represents batteries that will incur capital expenses to repair and
upgrade oven walls and end flues and, in addition, must implement a baseline program of
continuing diagnostics and repair.  Group D batteries in the furnace coke group represent the
newer 6-meter batteries that are generally in a state of good repair.
                                         3-3

-------
Table 3-1. Model Batteries

Battery
condition
No. of ovens
Height (m)
Coking time
(his)
Coke
production
(tpy)
Foundry By-Product Recovery Batteries
(12 batteries at 6 plants)
1A
No significant
costs for
pushing or
stacks
IB
Will require
baseline repair
program
1C
Will require
baseline repair
program plus 2
through-walls, 10
end flues, and spray
patching on 50
percent of ovens
41
4
27
89,000

Furnace By-Product Recovery Batteries
(46 batteries at 17 plants)
2A
No significant
costs for
pushing or
stacks
2B
Will require
baseline repair
program
2C
Will require baseline
repair program plus 2
through-walls, 10
end flues, and spray
patching on 50
percent of ovens
63
4
19
320,000

2D
No additional
costs for
pushing or
stacks
77
6
18
830,000


-------
       The cost elements associated with the model batteries are given below:

       1.  Model Battery Groups A and D—MACT batteries:  no significant additional
          repair costs.

       2.  Model Battery Group B—Must implement a baseline program like the one at USS
          Clairton.

       3.  Model Battery Group C—Must implement a baseline program like the one at USS
          Clairton plus additional one-time repairs and rebuilds to put them on par with the
          Group B batteries: assume spray patching of 50 percent of the ovens, two
          through-wall repairs, and 10 end flue repairs per battery. These repairs will be
          treated as a capital cost.

       4.  Monitoring—all groups:  Cost of COM for those batteries that do not have one
          and cost of observing four pushes per day for those not already doing it, as well as
          bag leak detection system for plants with baghouses. These costs will be assigned
          on a battery-specific basis.

       5.  Quenching—Apply the cost of baffles to those plants that do not have them.
          These costs will also be assigned on a battery-specific basis.

Model battery costs are summarized in Table 3-2. For the Model A batteries (batteries that
can already achieve the MACT level of control), the lower end of the range (no additional
costs) represents those batteries that already have COMs and pushing emission observers, and
the upper end of the range represents batteries that must install  COMs and hire pushing
emission observers. The Model B batteries'  costs include the cost of monitoring plus the
implementation of a baseline program. The Model C batteries' costs are based on a capital
expenditure to rebuild or upgrade ovens, plus the costs of monitoring and the baseline
program. The Model D furnace coke batteries have the same cost elements for monitoring as
the Model A group.
                                         3-5

-------
Table 3-2. MACT Compliance Cost Estimates by Model Coke Battery ($1998)
Total Costs ($103)

Foundry Coke Model
Battery
Ab
B
C
Furnace Coke Model Battery
Ab
B
C
Db
Capital

Oto46
46
2,550

Oto46
46
2,550
Oto46
Annual
Capital3

Oto6
6
241

Oto6
6
241
Oto6
Annual
Operating

Oto42
317
317

Oto42
442
442
Oto42
Total
Annual

Oto48
323
558

Oto48
448
683
Oto48
a  Reflects capital recovery based on a 20-year life and 7 percent interest for pushing controls and baffles and a
  10-year life and 7 percent interest for monitoring equipment.
b  The range includes those batteries already performing monitoring and those that do not.
3.5    Estimates of National Engineering Costs

       National engineering costs were estimated by assigning model batteries to each actual
battery and then applying the model battery costs (adjusted for the number of ovens in each
actual battery). For example, batteries that have already achieved the MACT control level
are in Groups A and D, and these batteries will incur no additional control costs. However,
some of these batteries will incur monitoring costs if they do not already have a COM or if
they are not observing four pushes per day.  The Group B batteries will incur costs to
implement the baseline program (at $6,100/oven per year). Group C batteries will incur the
capital cost of through-wall repairs, end flue repairs, and spray patching (at $2,500,000 +
                                          3-6

-------
$525 * [50% of the ovens]) plus the cost of the baseline program.  All batteries without
baffles in their quench tower are assumed to  install new baffles.

       The costs of COMs are applied to each stack that currently does not have one. In
addition, bag leak detectors are assumed to be installed for each baghouse. In cases where a
single baghouse serves multiple batteries, the cost of the bag leak detection system ($9,000)
is distributed among the batteries.

       Table 3-3 presents the cost elements of the MACT and the number of batteries for
each model battery type that will incur costs  for that element. Individual battery annualized
compliance costs range from $0 to $679,000, with a mean of $243,000 and a median of
$209,000.

       The aggregate capital, operating, and total national annual costs are given in Table
3-4.  Total annualized engineering costs are estimated to be approximately $14.1 million per
year (1998 dollars).1 Oven repair accounts for approximately 86 percent of total annualized
costs, and monitoring accounts for the remaining 14 percent.
'Annualized costs were converted to 1997 dollars for the EIA to match the latest market data available. Total
   annualized costs in 1997 dollars are $14.2 million.

                                          3-7

-------
     Table 3-3. Number of Coke Batteries Incurring MACT Compliance Costs: 1998
oo

Number of
Batteries
Model Battery Description Represented
1A:
IB:

1C:

2A:
2B:

2C:
Foundry coke battery in 3
good condition
Foundry coke battery; needs 10
baseline repair program
Foundry coke battery; needs 3
extensive oven rebuild and
baseline repair program
Furnace coke battery in 14
good condition
Furnace coke battery; needs 17
baseline repair program
Furnace coke battery; needs 3
Number of Batteries Requiring
Baseline Baffles in Continuous Visible
Oven Repair Quench Opacity Emission Bag Leak
Rebuilds Program Tower Monitor Observer Detector
000333
0 10 2 7 10 8

3 10 1 3 3 0

0 0 0 4 14 11
0 17 0 10 17 15

230330
      2D:
extensive oven rebuild and
baseline repair program

Furnace coke battery; newer
6-meter; in good condition
      Totals
                              58
40
31
56
42

-------
Table 3-4. National MACT Compliance Costs by Model Coke Battery: 1998


Model Battery Description
1A:
IB:

1C:


2A:

2B:

2C:


2D:
Foundry coke battery in
good condition
Foundry coke battery;
needs baseline repair
program
Foundry coke battery;
needs extensive oven
rebuild and baseline
repair program
Furnace coke battery in
good condition
Furnace coke battery;
needs baseline repair
program
Furnace coke battery;
needs extensive oven
rebuild and baseline
repair program
Furnace coke battery;
newer 6-meter; in good
condition
Totals
Number
of
Batteries
3
10

3


14

17

3


8
58
Annual Capital
Oven
Repair,
Baffles
$0
$140

$5,312


$0

$0

$5,034


0
10,486
Cost ($103)

Monitoring
$92
$212

$74


$193

$433

$111


82
1,197
Operating
Oven
Repair,
Baffles
$0
$2,043

$732


$0

$6,789

$1,220


0
10,784
Cost ($103/yr)

Monitoring
$61
$262

$82


$463

$644

$123


209
1,844
Total Annual
Oven
Repair,
Baffles
$0
$2,416

$1,231


$0

$6,789

$1,693


0
12,129
Cost ($103/yr)

Monitoring
$74
$292

$93


$491

$706

$139


220
2,015

-------
                                     SECTION 4

                         ECONOMIC IMPACT ANALYSIS
       The proposed rule to control the release of HAPs from coke pushing and quenching
operations will directly (through imposition of compliance costs) or indirectly (through
changes in market prices) affect the entire U.S. iron and steel industry. Implementation of the
proposed rule will increase the costs of producing furnace and foundry coke at affected
facilities. As described in Section 3, these costs will vary across facilities and their coke
batteries depending upon their physical characteristics and baseline controls.  The response
by these producers to these additional costs will determine the economic impacts of the
regulation.  Specifically, the impacts will be distributed across producers and consumers of
coke, steel mill products, and iron castings through changes in prices and quantities in the
affected markets.  This section presents estimates of the economic impacts of the coke
MACT using an economic model that captures the linkages between the furnace coke and
steel mill products, and foundry coke and iron castings markets.

       This section describes the data and approach used to estimate the economic impacts
of this proposed rule for the baseline year of 1997.  Section 4.1 presents the inputs for the
economic analysis, including characterization of producers, markets, and the costs of
compliance. Section 4.2 summarizes the conceptual approach to estimating the economic
impacts on the affected industries. A fully detailed description of the economic impact
methodology is provided in Appendix A.  Lastly, Section 4.3 provides the results of the
economic impact analysis.

4.1    EIA Data Inputs

       Inputs to the economic analysis are a baseline characterization of directly and
indirectly affected producers, their markets, and the estimated costs of complying with the
proposed rule.

4.1.1   Producer Characterization

       As detailed in Section 2, the baseline characterization of integrated and merchant
manufacturing plants is based on the facility responses to EPA's industry survey and industry

                                         4-1

-------
data sources.  These plant-specific data on existing sources were supplemented with
secondary information from the 1998 Directory of Iron and Steel Plants published by the
Association of Iron and Steel Engineers and World Cokemaking Capacity published by the
International Iron and Steel Institute, as well as coke-specific cost equations as developed for
the 1993 Coke Ovens MACT (as described fully in Appendix B).

4.1.2   Market Characterization

       Figure 4-1 summarizes the market interactions included in the Agency's EIA
modeling approach. Changes in the equilibrium price and quantity due to control costs on
coke batteries were estimated simultaneously in four linked markets:

       •  market for furnace coke,
       •  market for foundry coke,
       •  market for steel mill products, and

       •  market for iron castings.

       As described in Section 2, many captive coke plants supply their excess coke to the
furnace coke market. Merchant coke plants and foreign imports account for the remaining
supply to the furnace coke market. Furnace coke produced at captive coke plants and shipped
directly to integrated iron and steel mills owned by their parent companies does not directly
enter the market for furnace coke.  However, compliance costs incurred by captive, or "in-
house", furnace coke batteries indirectly affect the furnace coke market through price and
output changes in the steel mill products market.

       The market demand for furnace coke is derived from integrated mills producing steel
mill products. Integrated iron and steel mills that need more coke than their captive batteries
can produce purchase furnace coke from the market.  Integrated mills' market (and captive)
demand for furnace coke depends on their production levels as influenced by the market for
steel mill products.  Steel mill products are supplied by three general groups:  integrated iron
and steel mills, nonintegrated steel mills (primarily mini-mills), and imports.  Domestic
consumers of steel mill products and exports account for the market demand.

       As described in Section 2, merchant plants are the sole suppliers of foundry coke to
the market. Based on U.S. industry production and consumption data, foreign imports of
                                         4-2

-------
               Consumers of Steel
                  Mill Products
  Imports
  Exports 4-
 Marketfor
   Steel
Mill Products

Integrated Iron
and Steel Mills
A

• Finishing Mills '
• Steelmaking Furnace j^>
• Blast Furnace I
_ _ __ --,.- j
A

1
Captive Coke Plants f
I
_______ j
i \
A \


Imports

Exports
                                              Consumers of
                                              Iron Castings
 Market for
Iron Castings
Figure 4-1.  Market Linkages Modeled in the Economic Impact Analysis
                                            4-3

-------
foundry coke in 1997 were negligible.1  Consumers of foundry coke include foundries with
cupolas that produce iron castings, and they are modeled using aggregate market demand
curves.2
       Table 4-1 provides the 1997 data on the U.S. furnace and foundry coke, steel mill
products, and iron castings markets for use in this analysis.  The market price for steel mill
products was obtained from Current Industrial Reports (CIR), (U.S. DOC, 1997) and reflects
the production-weighted average across all product types. The market price for iron castings
was also obtained from CIR and reflects the production-weighted average across iron castings
(ductile, gray, and malleable). Market prices for each coke product were determined,
consistent with economic theory, by the highest-cost merchant producer.  Domestic
production from affected facilities reflects the aggregate of the plant-specific data presented
in Section 2, while unaffected domestic production is derived either directly from secondary
sources or as the difference between observed total U.S. production and the aggregate
production from affected facilities. Foreign trade data were obtained from industry and
government statistical publications supplemented by survey data. Market volumes for each
product are then computed as the sum of U.S. production and foreign imports.

4.1.3   Regulatory Control Costs

       As shown in Section 3, the Agency developed compliance cost estimates for model
plants that may be mapped to each of the coke manufacturing facilities affected by the
proposed rule.  These estimates reflect the "most-reasonable" scenario for this industry.  To
be consistent with the 1997 baseline industry characterization of the economic model, the
Agency adjusted the compliance cost estimates from  1998 dollars to 1997 dollars using the
producer price index3. These cost estimates serve as inputs to the economic
'Recent studies have indicated an increasing trend of foreign imports of foundry coke, primarily from China
   (USITC, 2000). Including foreign suppliers of foundry coke in the economic model would lead to smaller
   price changes as imports replace some domestic production. However, the U.S. ITC report indicated that
   lower quality of imported foundry coke and future environmental regulations being proposed in China may
   limit the market penetration of foreign foundry coke in the United States.

2Other coke, frequently grouped with foundry coke, is purchased as a fuel input by cement plants, chemical
   plants, and nonferrous smelters. However, other coke represents only 2 percent of U.S. coke production in
   1997. For simplicity, supply and demand for other coke are assumed to be unaffected by the proposed coke
   regulation and are not included in the market model.
finished Goods 1982 = 100.
                          131.8
= 1.008
                          130.7.
                                           4-4

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Table 4-1.  Baseline Characterization of U.S. Iron and Steel Markets: 1997
                                                                    Baseline
Furnace Coke
    Market price ($/short ton)
    Market output (103 tpy)
       Domestic production
       Imports
Foundry Coke
    Market price ($/short ton)
    Market output (103 tpy)
       Domestic production
       Imports
Steel Mill Products
    Market price ($/short ton)
    Market output (103 tpy)
       Domestic production
           Integrated producers
           Nonintegrated steel mills3
       Imports
Iron Castings
    Market price ($/short ton)
    Market output (103 tpy)
       Domestic production
           Cupola furnaces
           Electric furnacesb
       Imports
$107.36
 11,710
 7,944
 3,765

$145.02
 1,669
 1,669
  NA

$639.74
137,015
105,858
 62,083
 43,775
 31,157

$845.55
 12,314
 11,483
 6,695
 4,789
  831
a  Includes mini-mills.
b  Includes electric arc or electric induction furnaces.
                                           4-5

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analysis and affect the operating decisions for each affected facility and thereby the markets
that are served by these facilities.

4.2    EIA Methodology Summary

       In general, the EIA methodology needs to allow EPA to consider the effect of the
different regulatory alternatives. Several types of economic impact modeling approaches
have been developed to support regulatory development.  These approaches can be viewed as
varying along two modeling dimensions:

       •   the scope of economic decision making accounted for in the model, and
       •   the scope of interaction between different segments of the economy.
Each of these dimensions was considered in selecting the approach used to model the
economic impact of the proposed coke regulation.

       To conduct the analysis for the proposed coke regulation, the Agency used a market
modeling approach that incorporates behavioral responses in a multiple-market partial
equilibrium model.  Multiple-market partial equilibrium analysis provides a manageable
approach to incorporate interactions between coke, steel mill product, and iron castings
markets into the EIA to better estimate the proposed regulation's impact. The multiple-
market partial equilibrium approach represents an intermediate step between a simple, single-
market partial equilibrium approach and a full general equilibrium approach. The modeling
technique is to link a series of standard partial equilibrium models by specifying the
interactions between the supply and demand for products and then solving for changes in
prices and quantities across all markets simultaneously. The EIA methodology is fully
detailed in Appendix A.

       The Agency's methodology is soundly based on standard microeconomic theory
relying heavily on previous economic analyses, employs a comparative static approach, and
assumes certainty in relevant markets. For this analysis, prices and quantities are  determined
in perfectly competitive markets for furnace coke, foundry coke, finished steel mill products,
and iron castings. The competitive model of price formation, as shown in Figure  4-2 (a),
posits that market prices and quantities are determined by the intersection of market supply
and demand curves. Under the baseline  scenario, a market price and quantity (P, Q) are
determined by the downward-sloping market demand curve (DM) and the upward-sloping
                                         4-6

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        qa
Affected Facilities
     P'
     P
            S'
         Affected Facilities
                            +  p
                   =  p
                                  Unaffected Facilities
                             a) Baseline Equilibrium
                                Market
                       P'
                       P
Unaffected Facilities
                          b) With-Regulation Equilibrium
Figure 4-2. Market Equilibrium without and with Regulation
                                                                             DM
                                                                          Q
                                                             Q'  Q

                                                          Market
                                        4-7

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market supply curve (SM) that reflects the horizontal summation of the individual supply
curves of directly affected and indirectly affected facilities that produce a given product.

       With the regulation, the cost of production increases for directly affected producers.
The imposition of the compliance costs is represented as an upward shift in the supply curve
for each affected facility from Sa to Sa'.   As a result, the market supply curve to shift upward
to SM/ as shown in Figure 4-2(b) reflecting the increased costs of production at these
facilities.  In the baseline scenario without the proposed standards, the industry would
produce total output, Q, at the price, P, with affected facilities producing the amount qa and
unaffected facilities accounting for Q minus qa, or qu.  At the new equilibrium with the
regulation, the market price increases from P to P' and market output (as determined from the
market demand curve, DM) declines from Q to Q'.  This reduction in market output is the net
result from reductions at affected facilities  and increases at unaffected facilities.

4.3    Economic Impact Results

       Based on the simple analytics presented above, when faced with higher costs of coke
production, producers will attempt to mitigate the impacts by making adjustments to shift as
much of the burden on  other economic agents as market conditions allow.  The adjustments
available to facility operators include changing production processes, changing inputs,
changing output rates, or even closing the facility.  This analysis focuses on the last two
options because they appear to be the most viable for coke manufacturing facilities, at least in
the near-term. A large  segment of the furnace and foundry coke market is affected by the
regulation so we would expect upward pressure on prices as producers reduce output rates in
response to higher costs. Higher prices reduce quantity demanded and output for each market
product, leading to changes in profitability  of batteries, facilities, and firms. These market
and industry adjustments will also determine the social costs of the regulation and its
distribution across stakeholders (producers and consumers).

       To estimate these impacts, the economic modeling approach described in Appendix A
was operationalized in  a multiple spreadsheet model.  This model characterizes those
producers and consumers identified in Figure 4-1 and  their behavioral responses to the
imposition of the regulatory compliance costs. These  costs are expressed per ton of furnace
or foundry coke and serve as the input to the  economic model, or "cost-shifters" of the
baseline supply curves  at affected facilities. Given these costs, the model determines a new
equilibrium solution in a comparative static approach. The following sections provide the
Agency's estimates of the resulting economic impacts for the proposed rule.

                                          4-8

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4.3.1   Market-Level Impacts

       The increased cost of coke production due to the regulation is expected to increase the
price of coke, steel mill products, and iron castings and reduce their production and
consumption from 1997 baseline levels. As shown in Table 4-2, the regulation is projected to
increase the price of furnace coke by 1.5 percent, or $1.56 per short ton, and the price of
foundry coke by nearly 3 percent, or $4.17 per short ton.  The increased captive production
costs and higher market price associated with furnace coke are projected to increase steel mill
product prices by less than 0.1 percent, or $0.12 per ton.  Similarly, the higher market price of
foundry coke are projected to increase iron castings prices by less than 0.1 percent, or $0.35
per ton. As expected, directly affected output declines across all producers, while supply
from domestic and foreign producers not subject to the regulation increases.  Although the
resulting net declines are slight across all products (i.e., roughly 0.1 percent decline in market
output) the change in domestic production is typically higher than 0.1 percent. This is
especially true for furnace coke where domestic production declines by 2.25 percent.

4.3.2   Industry-Level Impacts

       Industry revenue, costs, and profitability change as prices and production levels adjust
to increased production costs.  As shown in Table 4-3, the economic model projects that
profits for directly affected integrated iron and steel producers will decrease by $10.8 million,
or 0.8 percent. In addition, the Agency projects profit losses of $4.6 million for foundries
that produce iron casting with cupola furnaces. However, because integrated steel mills
reduce their captive production of furnace coke and purchase more through the market,
industry-level profits for U.S. merchant coke producers are expected to increase by $2.7
million, or 5.6 percent, for furnace coke.  Similarly, because foundries with cupola furnaces
must continue to buy foundry coke to produce iron castings (i.e., inelastic demand), industry-
level profits for U.S. merchant coke producers are expected to increase by $3.9 million, or
5.0 percent, for foundry coke.  Those domestic suppliers not subject to the regulation
experience windfall gains with non-integrated steel mills (i.e., mini-mills) increasing profits
by $5.4 million and foundries with electric furnaces increasing profits by $1.7 million.
                                          4-9

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Table 4-2. Market-Level Impacts of the Proposed Coke MACT:  1997
Changes From Baseline

Furnace Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Imports
Foundry Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Imports
Steel Mill Products
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Integrated producers
Nonintegrated steel mills3
Imports
Iron Castings
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Cupola furnaces
Electric furnacesb
Imports
Baseline

$107.36
11,710
7,944
3,765

$145.02
1,669
1,669
NA

$639.74
137,015
105,858
62,083
43,775
31,157

$845.55
12,314
11,483
6,695
4,789
831
Absolute

$1.56
-11.8
-178.7
166.9

$4.17
-1.4
-1.4
NA

$0.12
-16.0
-21.9
-30.3
8.4
6.0

$0.35
-3.1
-3.4
-5.4
2.0
0.3
Percent

1.46%
-0.10%
-2.25%
4.43%

2.87%
-0.08%
-0.08%
NA

0.02%
-0.01%
-0.02%
-0.05%
0.02%
0.02%

0.04%
-0.03%
-0.03%
-0.08%
0.04%
0.04
  Includes mini-mills.
b Includes electric arc or electric induction furnaces.
                                          4-10

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Table 4-3.  National-Level Industry Impacts of the Proposed Coke MACT:  1997

Integrated Iron and Steel Mills
Total revenues ($106/yr)
Steel mill products
Market coke operations
Total costs ($106/yr)
Control costs
Steel production
Captive coke production
Market coke production
Production costs
Steel production
Captive coke production
Market coke consumption
Market coke production
Operating profits ($106/yr)
Iron and steel facilities (#)
Coke batteries (#)
Employment (FTEs)
Coke Producers (Merchant Only)
Furnace
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Foundry
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Nonintegrated Steel Mills3
Operating profits ($106/yr)
Cupola Furnaces
Operating profits ($106/yr)
Electric Furnacesb
Operating profits ($106/yr)
Baseline

$40,223.9
$39,716.9
$507.0
$38,837.5
$0.0
$0.0
$0.0
$0.0
$38,837.5
$36,292.9
$942.5
$1,167.8
$434.3
$1,386.4
20
37
67,198


$366.5
$318.5
$0.0
$318.5
$48.0
13
840

$273.3
$194.2
$0.0
$194.2
$79.1
12
2,420

NA

NA

NA
Changes From
Absolute

-$10.50
-$11.80
$1.29
$0.25
$8.43
$0.00
$6.29
$2.14
-$8.17
-$18.25
-$0.30
$16.11
-$5.74
-$10.76
0
0
-39


-$10.01
-$12.69
$2.16
-$14.85
$2.68
-1
-126

$7.03
$O 1 f\
3.10
$3.30
-$0.20
$3.93
0
0

$5.4

-$4.6

$1.7
Baseline
Percent

-0.03%
-0.03%
0.26%
-0.01%
NA
NA
NA
NA
-0.02%
-0.05%
-0.03%
1.38%
-1.32%
-0.78%
0.00%
0.00%
-0.06%


-2.73%
-3.98%
NA
-4.66%
5.59%
-7.69%
-15.00%

2.57%
1.60%
NA
-0.10%
4.96%
0.00%
0.00%

NA

NA

NA
a   Includes mini-mills.
b   Includes electric arc or electric induction furnaces.
0   Includes iron foundries that use electric arc or electric induction furnaces.
                                            4-11

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4.3.2.1 Changes in Profitability

       For integrated steel mills, operating profits decline by $10.8 million.  This is the net
result of three effects:

       •  Net decrease in revenue ($10.5 million): Steel mill product revenue decreases as
          a result of reductions in output.  However, these losses were mitigated by
          increased revenues from furnace coke supplied to the market as a result of higher
          prices.

       •  Net decrease in production costs ($8.2 million): Reduction in steel mill and
          market coke production costs occur as output declines.  However, producers also
          experience increases in costs associated with the higher price of inputs (i.e.,
          furnace coke).

       •  Increase in control costs ($8.4 million): The costs of captive production of
          furnace coke increase as a result of regulatory controls.

       Industry-wide profits for merchant furnace coke producers increase by $2.7 million as
a result of the following:

       •  Decreases in revenue ($10 million): Reductions in output outweigh revenue
          increases as a result of higher market prices.

       •  Reduction in production costs ($14.9 million):  Reduction in coke production
          costs occurs as output declines.

       •  Increased control costs  ($2.2 million): The  cost of producing furnace coke
          increases as a result of regulatory controls.

       Industry-wide profits for merchant foundry coke producers increase by $3.9 million
under the regulation:

       •  Increase in revenue ($7.0 million):  Revenue increases as a result of higher market
          prices with only slight reductions in output.

       •  Reduction in production costs ($0.2 million):  Reduction in coke production costs
          occur as output declines.

       •  Increased control costs  ($3.3 million): The  cost of producing foundry coke
          increases as a result of regulatory controls.
                                          4-12

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       Industry-wide profits for domestic cupola furnaces are projected to decrease by $4.6
million as the result of higher price for foundry coke-their primary input.

       Lastly, domestic producers that are not subject to the regulation benefit from higher
prices without additional control costs. As mentioned above, profits increase are projected
for nonintegrated steel mills and foundries producing iron castings with electric furnaces.

       Additional distributional impacts of the rule within each producer segment are not
necessarily apparent from the reported decline or increase in their aggregate operating profits.
The regulation creates both gainers and losers within each industry segment based on the
distribution of compliance costs across facilities. As shown in Table 4-4, a substantial subset
of the merchant coke facilities are projected to experience profit increases under both
alternatives (i.e., 11 furnace coke batteries, or 85 percent, and 10 foundry coke batteries, or
83 percent). However, one merchant battery is projected to cease market operations as it was
the highest-cost coke battery with the  additional regulatory costs.

       A majority of directly affected integrated iron and steel facilities (i.e., 15 plants, or 75
percent) are projected to become less profitable with the regulation with a total loss of $15.9
million. However, five integrated mills are projected to benefit from higher coke prices and
experience a total profit gain of $5.2 million.  These integrated plants sell a significant share
of furnace coke in the market as compared to negatively affected facilities.

4.3.2.2 Facility Closures

       EPA estimates one merchant battery supplying furnace coke is likely to prematurely
close as a result of the regulation. In addition, one captive battery ceases to supply the market
and only produces coke sufficient for its internal requirements for production of steel mill
products.  In both cases, these batteries are the highest-cost producers of furnace coke with
the regulation.

4.3.2.3 Changes in Employment

       As a result of decreased output levels, industry employment is projected to decrease
by less than 1 percent, or 165 full-time equivalents (FTEs), with the regulation.  This is the
net result of employment losses for integrated iron and steel mills totaling 39 FTEs and
merchant coke plants of 126 FTEs.  Although EPA projects increases in output for producers
not subject to the rule, which would likely lead to increases in employment, the Agency did
not develop quantitative estimates for this analysis.
                                         4-13

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Table 4-4. Distribution Impacts of the Proposed Coke MACT Across Directly Affected
Producers: 1997
With Regulation

Integrated Iron and Steel Mills
Facilities (#)
Coke production
Total (103tpy)
Average (tons/facility)
Coke compliance costs
Total ($106/yr)
Average ($/ton)
Change in operating profit ($106)
Coke Plants (Merchant Only)
Furnace
Batteries (#)
Production (103tpy)
Total (103tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average ($/ton)
Change in operating profit ($106)
Foundry
Batteries (#)
Production
Total (103tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average
Change in operating profit ($106)
Increased
Profits

5

8,409
1,682

$2.72
$0.32
$5.15


11

3,046
277

$1.95
$0.64
$2.70

10

1,702
170

$2.17
$1.27
$4.10
Decreased
Profits

15

6,473
432

$5.87
$0.91
-$15.91


1

160
160

$0.21
$1.31
-$0.01

2

246
123

$1.14
$4.63
-$0.17
Closure

0

0
0

$0
$0.00
$0.00


1

127
127

$0.21
$1.66
$0.00

0

0
0

$0.00
$0.00
$0.00
Total

20

14,882
744

$8.59
$0.58
-$10.76


13

3,332
256

$2.37
$0.71
$2.68

12

1,948
162

$3.30
$1.70
$3.93
                                      4-14

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4.3.3   Social Cost

       The social impact of a regulatory action is traditionally measured by the change in
economic welfare that it generates. The social costs of the proposed rule will be distributed
across consumers and producers alike. Consumers experience welfare impacts due to
changes in market prices and consumption levels associated with the rule.  Producers
experience welfare impacts resulting from changes in profits corresponding with the changes
in production levels and market prices.  However, it is important to emphasize that this
measure does not include benefits that occur outside the market, that is, the value of reduced
levels of air pollution with the regulation.

       The national compliance cost estimates are often used as an approximation of the
social cost of the rule. The engineering analysis estimated annual costs of $14.3 million. In
this case, the burden of the regulation falls solely on the affected facilities that experience a
profit loss exactly equal to these cost estimates.  Thus, the entire loss is a change in producer
surplus with no change (by assumption) in consumer surplus. This is typically referred to as
a "full-cost absorption" scenario in which all factors of production are assumed to be fixed
and firms are unable to adjust their output levels when faced with additional costs.

       In contrast, the economic analysis accounts for behavioral responses by producers and
consumers to the regulation (i.e., shifting costs to other economic agents).  This approach
results in a social cost estimate that differs from the engineering estimate and also provides
insights on how the regulatory burden is distributed across stakeholders. As shown in Table
4-5, the economic model estimates the total  social cost of the rule to be $14.0 million. This
small difference occurs because society reallocates resources as a result of the increased cost
of coke production.

       In the final product markets, higher market prices lead to consumers of steel mill
products experiencing losses of $16.8 million and consumers of iron castings experiencing
losses of $4.3 million. Although integrated  iron and steel producers are able to pass on a
limited amount of cost increases to their final consumers, e.g., automotive  manufactures and
construction industry, the increased costs result in a net decline in profits at integrated mills
of $10.8 million and foundries with cupola furnaces of $4.6 million.

       In the coke industry, low-cost merchant producers of furnace and foundry coke
benefit at the expense of consumers and higher-cost merchant and captive coke batteries
resulting in an industry-wide increase in profits. Furnace coke profits at merchant plants
                                         4-15

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Table 4-5. Distribution of the Social Costs of the Proposed Coke MACT: 1997

 Change in Consumer Surplus ($106/yr)                          -$21.14
     Steel mill product consumers                                 -$16.81
        Domestic                                                -$16.07
        Foreign                                                  -$0.74
     Iron casting consumers                                        -$4.33
        Domestic                                                 -$4.07
        Foreign                                                  -$0.26
 Change in Producer Surplus ($106/yr)                             $7.14
     Domestic producers                                           -$1.69
        Integrated iron and steel mills                             -$10.76
        Nonintegrated steel millsa                                   $5.37
        Cupola furnaces                                           -$4.60
        Electric furnaces'3                                          $1.69
        Furnace coke (merchant only)                               $2.68
        Foundry coke (merchant only)                               $3.93
     F oreign producers                                             $8.83
        Iron and steel                                              $2.52
        Castings                                                  $0.29
        Furnace coke                                              $6.02
 Social Costs of the Regulation  ($106/yr)	-$14.00	
a  Includes mini-mills.
b  Includes electric arc or electric induction furnaces.

increase in aggregate by $2.7 million, and foundry coke profits at merchant plants increase in
aggregate by $3.9 million.

       Lastly, domestic producers not subject to the regulation (i.e., nonintegrated steel mills
and electric furnaces) as well as foreign producers experience unambiguous gains because
they benefit from increases in market price under both alternatives.
                                        4-16

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                                    SECTION 5

                           SMALL BUSINESS IMPACTS
       This regulatory action will potentially affect the economic welfare of owners of coke
batteries. These individuals may be owners/operators who directly conduct the business of
the firm or, more commonly, investors or stockholders who employ others to conduct the
business of the firm on their behalf through privately held or publicly traded corporations.
The legal and financial responsibility for compliance with a regulatory action ultimately rests
with plant managers, but the owners must bear the financial consequences of the decisions.
Although environmental regulations can affect all businesses, small businesses may have
special problems complying with such regulations.

       The Regulatory Flexibility Act (RFA) of 1980 requires that special consideration be
given to small entities affected by federal regulations. The RFA was amended in 1996 by the
Small Business Regulatory Enforcement Fairness Act (SBREFA) to strengthen its analytical
and procedural requirements. Under SBREFA, the Agency must perform a regulatory
flexibility analysis for rules that will have a significant impact on a substantial number of
small entities.

       This section focuses on the compliance burden of the small businesses with the coke
manufacturing industry and provides a screening analysis to determine whether this proposed
rule is likely to impose a significant impact on a substantial number of the small entities
(SISNOSE) within  this industry. The screening analysis employed here is a "sales test" that
computes the  annualized compliance costs as a share of sales for each company. In addition,
it provides information about the impacts on small businesses after accounting for producer
responses to the proposed rule and the resulting changes in market prices and output.

5.1    Identifying Small Businesses

       The Small Business Administration (SBA) released guidelines effective October 2000
that provide small business thresholds based on NAICS codes that replace the previous
thresholds based on SIC codes.  Under these new guidelines, SB A establishes 1,000 or fewer
employees as  the small business threshold for Iron and Steel Mills (i.e., NAICS 331111),
                                        5-1

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while coke ovens not integrated with steel mills are classified under All Other Petroleum and
Coal Products Manufacturing (i.e., NAICS 324199) with a threshold of 500. Based on these
SBA size definitions for the affected industries and reported sales and employment data, as
described in Section 2, the Agency has identified three of the 18 companies as small
businesses  (i.e., 17 percent). The following businesses were identified as small for the
purpose of this analysis:

       •   New Boston Coke Corporation,

       •   Shenango Inc. (owned by Aloe Holding Company), and
       •   Tonawanda Coke Corporation.
Each of these small companies owned and operated a merchant coke facility with a total of
five coke batteries, or roughly 8 percent of all the coke batteries operated in  1997.

5.2    Screening-Level Analysis

       To  assess the potential impact of this rule on small businesses, the Agency calculated
the share of annual compliance costs relative to baseline sales for each company. When a
company owns more than one affected facility, EPA combined the costs for each facility for
the numerator of the test ratio.  Annual compliance costs include annualized capital costs and
operating and maintenance costs imposed on these companies.1 They do not include changes
in production or market adjustments.

       Although small businesses represent 17 percent of the companies within the source
category, they are expected to incur  only 11  percent of the total industry compliance costs of
$14.3 million (see Table 5-1). The average total annual compliance cost is projected to be
$533,000 per small  company, while  the average for large companies is projected to be
$840,000 per company. The mean (median) cost-to-sales ratio for small businesses is 1.3
percent (1.4 percent), with a range of 0.04 to 2.4 percent. EPA estimates that two of the three
small businesses may experience an impact greater than 1 percent of sales, but no small
'Annualized capital costs include purchased equipment costs (PEC), direct costs for installation (DCI), and
   indirect costs for installation (ICI) related to engineering and start up. Operating and maintenance costs
   include direct annual costs (DAC), such as catalysis replacement, increased utilities, and increased labor,
   and indirect annual costs (IAC), such as costs due to tax, overhead, insurance, and administrative burdens.

                                          5-2

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Table 5-1.  Summary Statistics for SBREFA Screening Analysis: 1997

Total Number of Companies
Total Annual Compliance Costs (TACC)
($106/yr)
Average TACC per company ($106/yr)
Compliance Cost-to-Sales Ratios
Average
Median
Minimum
Maximum

Compliance costs are <1% of sales
Compliance costs are > 1 to 3% of sales
Compliance costs are >3% of sales
Small
3
$1.6

$0.53

1.27%
1.36%
0.04%
2.40%
Number Share
1 33%
2 67%
0 0%
Large
15
$12.6

$0.84

0.09%
0.04%
0.00%
0.26%
Number Share
15 100%
0 0%
0 0%
All Companies
18
$14.3

$0.79

0.28%
0.05%
0.00%
2.40%
Number Share
16 89%
2 11%
0 0%
Note: Assumes no market responses (i.e., price and output adjustments) by regulated entities.

-------
businesses will experience an impact greater than 3 percent of sales.  In contrast, all of the
large companies are affected at less than 1 percent of sales.

5.3    Economic Analysis

       The Agency also analyzed the economic impacts on small businesses under with-
regulation conditions expected to result from implementing the MACT.  Unlike the screening
analysis, this approach examines small business impacts in light of the behavioral responses
of producers and consumers to the regulation. As shown in Table 5-2, the economic model
projects operating profits increase by $0.5 million for the furnace coke plants operated by
small businesses. For these plants, furnace coke price increases outweigh the additional costs
associated with the MACT. In contrast, the model projects operating profits decrease by $0.1
million for foundry coke plants operated by a small firm. In this case, increased foundry coke
prices mitigate the losses associated with additional control costs. No batteries (furnace or
foundry) are projected to prematurely close as a result of the additional control costs
associated with the regulation.

5.4    Assessment
       Based on the Quarterly Financial Report (QFR) from the U.S. Bureau of the Census,
the average return to sales for all reporting companies within the iron and steel industry
ranged from 3.2  to 4.6 percent (U.S. Bureau of the Census, 1998).2 In addition, Dun &
Bradstreet reports the median return on sales as 3.7 percent for SIC 3312—Steel Works,
Blast Furnaces (including Coke Ovens), and Rolling Mills (Dun & Bradstreet, 1997).
Although this industry is typically characterized by average profit margins, the Agency's
analysis indicated that none of the coke manufacturing facilities owned by small businesses
are at risk of closure because of the proposed rule. In fact, the two facilities manufacturing
furnace coke are projected to experience a slight increase in profits because of market
feedbacks related to higher costs incurred by competitors, while the one  facility
manufacturing foundry coke is projected to experience a decline in profits of slightly less
than 1 percent.  In summary, this analysis supports certification under the Regulatory
Flexibility Act because, while a few small firms may experience initial impacts greater than 1
percent of sales,  the Agency's economic analysis indicates no significant impacts on their
viability to continue operations and remain profitable.
furthermore, the QFR reports that companies within the iron and steel industry of less than $25 million in
   assets reported an average return to sales ranging from 6.8 to 9.8 percent.

                                         5-4

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Table 5-2.  Small Business Impacts of the Proposed Coke MACT: 1997
Changes From Baseline

Coke Plants (Merchant Only)
Furnace
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Foundry
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Total
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Baseline


$73.0
$72.8
$0.0
$72.8
$0.2
2
414

$38.8
$27.3
$0.0
$27.3
$11.5
3
260

$111.8
$100.2
$0.0
$100.2
$11.7
5
674
Absolute


$1.1
$0.5
$0.5
$0.0
$0.5
0
0

$1.1
$1.1
$1.1
$0.0
-$0.1
0
0

$2.1
$1.6
$1.6
$0.0
$0.5
0
0
Percent


1.4%
0.7%
NA
0.0%
331.5%
0.0%
0.0%

2.8%
4.1%
NA
0.0%
-0.5%
0.0%
0.0%

1.9%
1.6%
NA
0.0%
4.2%
0.0%
0.0%
                                    5-5

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                                  REFERENCES
Agarwal, Jay, Francis Brown, David Chin, Gregory Stevens, Richard Clark, and David
       Smith.  1996.  "The Future Supply of Coke." New Steel 12(3):88.
Association of Iron and Steel Engineers (AISE). 1998. "1998 Directory of Iron and Steel
       Plants: Volume 1 Plants and Facilities."  Pittsburgh, PA: AISE.

American Metal Market.  1998. "LTV, USW Eye Coke Plant Site." 106(37):3.
Bingham, T.H., and TJ. Fox.  1999.  "Model Complexity and Scope for Policy Analysis."
       Public Administration Quarterly 23(3).

Dun & Bradstreet.  1997. Industry Norms & Key Business Ratios: Desk-Top Edition 1996-
       97. Murray Hill, NJ: Dun & Bradstreet.
Dun & Bradstreet.  1998. Dun's Market Identifier Electronic Database. Dialog Corporation.

Engineer ing and Mining Journal.  1997.  "A New U.S. Trend?  No Leftovers—No
       Problems."  198(10):WW15.
Graham, Paul, Sally Thorpe, and Lindsay Hogan. 1999. "Non-competitive Market Behavior
       in the International Coking Coal Market." Energy Economics  21:195-212.
Hogan, William T., and Frank T. Koelble. 1996. "Steel's Coke Deficit: 5.6 Million Tons
       and Growing." New Steel  12(12):50-59.
Information Access Corporation. 1997. Business & Company  Profile ASAP,  [computer
       file] Foster City, CA:  Information Access Corporation.

Lankford, William T., Norman L. Samways, Robert F. Craven,  and Harold E. McGannon,
       eds. 1985.  The Making, Shaping and Treating of Steel. Pittsburgh: United States
       Steel, Herbick & Held.
National Steel. Web homepage, . As obtained in September
       1998.

New Steel. August 1997a. "LTV will Close Pittsburgh Coke Plant."
New Steel. June 1997b.  "National will Sell Ecorse Coke Battery."

New Steel. August 10, 1998a.  " Bethlehem Sells Coke Battery."
New Steel. January 1998b.  "Bethlehem will Shut Down Coke Division."
                                       R-l

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Ninneman, Patrick. 1997. "Less Coke and More Coal in the Blast Furnace." New Steel
       13(7):38-45.
Stark, Steven.  1995. "The Coke Industry's Changing Face." Foundry Management &
       Technology 123(5):37-41.

U. S. Bureau of the Census. 1998. Quarterly Financial Report for Manufacturing, Mining,
       and Trade Corporations.  First Quarter, Series QFR 98-1. Washington, DC:
       Government Printing Office.
U.S. Department of Commerce. 1991-1997. Current Industrial Reports: Iron and Steel
       Castings. Washington, DC: Bureau of the Census.
U.S. Department of Energy.  1996.  Coal Industry Annual 1995. Washington, DC: Energy
       Information Administration.
U.S. Department of Energy.  "AER Database: Coke Overview, 1949-1997." Washington,
       DC: Energy Information Administration,  . As obtained on September 14, 1998a.

U.S. Department of Energy. 1998b. Coal Industry Annual 1997.  Washington, DC: Energy
       Information Administration.

U.S. Department of Labor, Bureau of Labor Statistics. BLS LABSTAT Database:
       Employment and Earnings, SIC 33.  .  Obtained in September
       1998.

U.S. Environmental Protection Agency.  1979. Technical Approach for a Coke Production
       Cost Model. Prepared by Research Triangle Institute, Research Triangle Park, N.C.
U.S. Environmental Protection Agency.  1988. Benzene Emissions form Coke By-Product
       Recovery Plants-BackGround Information for Proposed Standards.  Office of Air
       Quality Planning and Standards, Research Triangle Park, NC.
U. S. Environmental Protection Agency.  1991. Controlling Emissions from By-Product Coke
       Oven Charging, Door Leaks, and Topside Leaks: An Economic Impacts Analysis.
       Prepared by Research Triangle Institute, Research Triangle Park, NC.
U. S. Environmental Protection Agency.  1998. Coke Industry Responses to Information
       Collection Request (ICR) Survey.  Database prepared for EPA's Office of Air Quality
       Planning and Standards. Research Triangle Park, NC.
U.S. Environmental Protection Agency (EPA). 1999. OAQPSEconomic Analysis Resource
       Document. Durham, NC: Innovative Strategies and Economics Group.
U.S. International Trade Commission.  1994. Metallurgical Coke: Baseline Analysis of the
       U.S. Industry and Imports. Publication No. 2745. Washington, DC: U.S.
       International Trade Commission.
                                       R-2

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U.S. International Trade Commission. Trade Database: Version 1.7.1.
        As obtained in September 1998.

U.S. International Trade Commission. July 2000. "Foundry Coke: A Review of the
       Industries in the United States and China."
       .
                                         R-3

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                                   APPENDIX A

               ECONOMIC IMPACT ANALYSIS METHODOLOGY
       This appendix provides the methodology for analyzing the economic impacts of the
proposed MACT standard for coke ovens. Implementation of this methodology provided the
economic data and supporting information that EPA requires to support its regulatory
determination. This approach is firmly rooted in microeconomic theory and the methods
developed for earlier EPA studies to operationalize this theory.  The Agency employed a
computerized market model of the coke, steel mill products, and iron castings industries to
estimate the behavioral responses to the imposition of regulatory costs and, thus, the
economic impacts of the proposed standard.  The market model captures the linkages
between these industries through changes in equilibrium prices and quantities.  The same
model is used to evaluate the economic impact of the  proposed integrated  iron and steel
facilities MACT and iron foundries MACT to ensure  consistency across the EIAs for these
MACT standards.

       This methodology section describes the conceptual approach selected for this EIA.
For each product market included in the analysis, EPA derived facility-level supply and
demand functions that are able to account for the behavioral response and  market
implications of the regulation's costs. Finally, this appendix presents an overview of the
specific functional forms that constitute the Agency's computerized market model.

A.I    Overview of Economic Modeling Approach

       In general, the EIA methodology needs to allow EPA to consider the effect of the
different regulatory alternatives.  Several types of economic impact modeling approaches
have been developed to support regulatory development.  These approaches can be viewed as
varying along two modeling dimensions:

       •   the scope of economic decision making accounted for in the model, and
       •   the scope of interaction between different  segments of the economy.
                                        A-l

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Each of these dimensions was considered in selecting the approach used to model the
economic impact of the proposed coke regulation. Bingham and Fox (1999) provide a useful
summary of these dimensions as they relate to modeling the outcomes of environmental
regulations.

       For this analysis, prices and quantities are determined in perfectly competitive
markets for furnace coke, foundry coke, finished steel mill products, and iron castings. The
Agency analyzed the impact of the proposed regulation using a market modeling approach
that incorporates behavioral responses in a multiple-market partial equilibrium model.
Multiple-market partial equilibrium analysis accounts for the interactions between coke, steel
mill product, and iron castings markets into the EIA to better estimate the proposed
regulation's impact. The modeling technique is to link a series of standard partial
equilibrium models by specifying the interactions between the supply and demand for
products and then solving for changes in prices and quantities across all  markets
simultaneously.

       Figure A-l summarizes the market interactions included in the Agency's EIA
modeling approach. Changes in the equilibrium price and quantity due to control costs on
coke batteries were estimated  simultaneously  in four linked markets:

       •   market for furnace coke,
       •   market for foundry coke,
       •   market for steel mill products, and

       •   market for iron castings.

       As described in Section 2 of this EIA report, many captive coke plants supply their
excess furnace coke to the market. Merchant  coke plants and foreign imports account for the
remaining supply to the furnace coke market.  Furnace coke produced at captive coke plants
and shipped directly to integrated iron and steel mills owned by their parent companies does
not directly enter the market for furnace coke. However, compliance costs incurred by these
captive, or "in-house," furnace coke batteries  indirectly affect the furnace coke market
through price and output changes in the steel mill products market.

       The market demand for furnace coke is derived from integrated mills producing steel
mill products.  Integrated iron and steel mills that need more coke than their captive batteries
can produce will purchase furnace coke from the market.  Integrated mills' market demand

                                        A-2

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                         Consumers of Steel
                           Mill Products
                Imports
                Exports
Imports
Exports

Integrated Iron
and Steel Mills


1 • Finishing Mills '
1 • Steelmaking Furnace j^--
] • Blast Furnace I
......1......
[ ]
1 Captive Coke Plants ("*""
! i

Figure A-l. Market Linkages Modeled in the Economic Impact Analysis
for furnace coke depends on their production levels as influenced by the market for steel mill
products.  Steel mill products are supplied by three sources: integrated iron and steel mills,
nonintegrated steel mills (primarily mini-mills), and imports. Domestic consumers of steel
mill products and exports account for the market demand.

       As described in Section 2 of this EIA report, in the analysis baseline of 1997,
merchant plants are the sole suppliers of foundry coke to the market. The U.S. International
Trade Commission (2000) has documented an increasing trend in foreign imports of foundry
coke from China; however, these Chinese imports represented less than 1 percent of U.S.
foundry coke consumption in 1997. Moreover, the USITC report indicates that the inferior
quality of imported foundry coke and future environmental regulations being proposed in
China may limit the market penetration in the United States. Consumers of foundry coke
include foundries with cupolas that produce iron castings that are modeled using a single,
representative demand curve.
                                         A-3

-------
       In addition to furnace and foundry coke, merchant and captive coke plants sell a by-
product referred to as "other coke" that is purchased as a fuel input by cement plants,
chemical plants, and nonferrous smelters. Because "other coke" is a by-product and
represented only 2 percent of U.S. coke production in 1997 it is not formally characterized by
supply and demand in the market model.  Revenues from this product are accounted for by
assuming its volume is a constant proportion of the total  amount of coke produced by a
battery and sold at a constant price.

A.2    Conceptual Market Modeling Approach

       This section examines the impact of the regulations on the production costs of coke
for affected facilities, both merchant and captive.  It provides an overview of the basic
economic theory of the effect of regulations on facility production decisions and the
concomitant effect on market outcomes. Following the OAQPSEconomic Analysis Resource
Document (EPA,  1999), we employed standard concepts in microeconomics to model the
supply of affected products and the impacts of the regulations on production costs and the
operating decisions. The approach relies heavily on previous economic analyses, employs a
comparative static approach, and assumes certainty in relevant markets.  The three main
elements of the analysis are regulatory effects on the manufacturing facility, market
responses, and facility-market interactions. The remainder of this section describes each of
these main elements.

A. 2.1  Facility-level Responses to Control Costs

       Individual plant-level production decisions were modeled to develop the market
supply and demand for key industry segments in the analysis. Production decisions were
modeled as intermediate-run decisions, assuming that the plant size, equipment, and
technologies are fixed. For example, the production decision typically involves (1) whether a
firm with plant and equipment already in place purchases inputs to produce output and (2) at
what capacity utilization the plant should operate. A profit-maximizing firm will operate
existing capital as long as the market price for its output  exceeds its per-unit variable
production costs,  since the facility will cover not only the cost of its variable inputs but also
part  of its capital costs.  Thus, in the short run, a profit-maximizing firm will not pass up an
opportunity to recover even part of its fixed investment in plant and equipment.

       The existence of fixed production factors gives rise to diminishing returns to those
fixed factors and,  along with the terms under which variable inputs are purchased,  defines the
                                         A-4

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upward-sloping form of the marginal cost (supply) curve employed for this analysis.  Figure
A-2 illustrates this derivation of the supply function at an individual mill based on the
classical U-shaped cost structure.  The MC curve is the marginal cost of production, which
intersects the facility's average variable (avoidable) cost curve (AVC) and its average total
cost curve (ATC) at their respective minimum points. The supply function is that portion of
the marginal cost curve bounded by the minimum economically feasible production rate (qm)
and the technical capacity (qM).  A profit-maximizing producer will select the output  rate
where marginal revenue equals price, that is, at [P*, q*].  If market price falls below ATC,
then the firm's best response is to cease production because total revenue does not cover total
costs of production.
Figure A-2. Product Supply Function at Facility
       Now consider the effect of the proposed regulation and the associated compliance
costs. These fall into one of two categories: avoidable variable and avoidable nonvariable.
These proposed costs are characterized as avoidable because a firm can choose to cease
operation of the facility and, thus, avoid incurring the costs of compliance. The variable
control costs include the operating and maintenance costs of the controls, while the
nonvariable costs include compliance capital equipment.  Figure A-3 illustrates the effect of
                                         A-5

-------
                                                   MC'
           $/q
          p rn'
          pm
                                   qm qm
                                                ,M
                                                                        q/t
Figure A-3. Effect of Compliance Costs on Product Supply Function at Facility
these additional costs on the facility supply function. The facility's AVC and MC curves
shift upward (to AVC' and MC') by the per-unit variable compliance costs. In addition, the
nonvariable compliance costs increase total avoidable costs and, thus, the vertical distance
between ATC' and AVC'.  The facility's supply curve shifts upward with marginal costs and
the new (higher) minimum operating level (q) is determined by a new (higher) ps.

       Next consider the effect of compliance costs on the derived demand for inputs at the
regulated facility.  Integrated iron and steel mills are market demanders of furnace coke,
while foundries with cupola furnaces are market demanders of foundry coke. We employ
similar neoclassical analysis to that above to demonstrate the effect of the regulation on the
demand for market coke inputs, both furnace and foundry. Figure A-4 illustrates the derived
demand curve for coke inputs. Each point on the derived demand curve equals the
                                        A-6

-------
                      $/qv
                                                       D.
                                                       D
                                                              q/ty
Figure A-4. Derived Demand Curve for Coke Inputs
willingness to pay for the corresponding marginal input.  This is typically referred to as the
input's value of marginal product (VMP), which is equal to the price of the output (P) less the
per-unit compliance cost (c) times the input's "marginal physical product" (MPP), which is
the incremental output attributable to the incremental inputs.  If, as assumed in this analysis,
the input-output relationship between the market coke input and the final product (steel mill
products or iron castings) is strictly fixed, then the VMP of the market coke is constant and
the derived demand curve is horizontal with the constant VMP as the vertical intercept, as
shown in Figure A-4. Ignoring any effect on the output price for now, an increase in
regulatory costs will lower the VMP of all inputs leading to a downward shift in the derived
demand in Figure A-4 from Dy to D  .

A.2.2 Market Effects

       To evaluate the market impacts, the economic analysis assumes that prices and
quantities are determined in a competitive market (i.e., individual facilities have negligible
power over the market price and thus take the price as "given" by the market). As shown in
Figure A-5(a), under perfect competition, market prices and quantities are determined by the
intersection of market supply and demand curves. The initial baseline scenario consists of a
market price and quantity (P, Q) that is determined by the downward-sloping market demand
                                         A-7

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        qa
Affected Facilities
    P'
     P
            S'
         Affected Facilities
                           +  p
                   =  p
                                  Unaffected Facilities
                             a) Baseline Equilibrium
                                Market
                       P'
                       P
Unaffected Facilities
                         b) With-Regulation Equilibrium
Figure A-5. Market Equilibrium without and with Regulation
                                                                             DM
                                                                          Q
                                                             Q'  Q

                                                          Market
                                        A-8

-------
curve (DM) and the upward-sloping market supply curve (SM) that reflects the horizontal
summation of the individual producers' supply curves.

       Now consider the effect of the regulation on the baseline scenario as shown in Figure
A-5(b). In the baseline scenario without the proposed standards, at the projected price, P, the
industry would produce total output, Q, with affected facilities producing the  amount qa and
unaffected facilities accounting for Q minus qa, or qu. The regulation raises the production
costs at affected facilities, causing their supply curves to shift upward from Sa to Sa' and the
market supply curve to shift upward to SM/. At the new with-regulation equilibrium with the
regulation, the market price increases from P to P' and market output (as determined from the
market demand curve, DM) declines from Q to Q'. This reduction in market output is the  net
result from reductions at affected facilities and increases at unaffected facilities.  Unaffected
facilities do not incur the increased costs due to regulation so their response to higher product
prices is to increase production. Foreign suppliers (i.e., imports), which also do not face
higher costs, will respond in the same manner as these unaffected producers.

       The above description is typical of the expected market effects for final product
markets.  The proposed regulation will affect the costs of producing steel mill products by
increasing the market price of furnace coke and the cost of producing captive  furnace coke.
The increase in the market price and captive production costs for furnace coke result in an
upward shift in the supply functions of integrated iron and steel mills, while nonintegrated
and foreign supplier are unaffected.  Additionally, the proposed regulation will affect the
costs of producing iron castings by increasing the market price of foundry coke.  The increase
in market price results in an upward shift in supply functions of foundries operating cupola
furnaces, while foundries operating electric furnaces are unaffected.

       However, there are additional impacts on the furnace and foundry coke markets
related to their derived demand as inputs to either the production of steel mill products or
iron castings. Figure A-6 illustrates, under perfect competition, the baseline scenario where
the market quantity and price of the final steel mill product or iron casting, Qx(Qx0, Px0), are
determined by the intersection of the market demand curve (Dx) and the market supply curve
(Sx), and the market quantity and price of furnace or  foundry coke, Qy(Qy0, Py0), are
determined by the intersection of the market demand curve (Dy) and market supply curve  (Sy).
Given the derived demand for coke, the demanders of coke, Qy, are the individual facilities
that purchase coke for producing their final products (i.e., integrated steel mills in the case of
furnace coke or foundries with cupola furnaces in the case of foundry coke).
                                         A-9

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              $/Qv
                                                     0x1  QXO

                      (a) Market for single steel mill product or iron casting, Q
                Qx/t
              $/Q,,
               p;
           P,,, = P,
                                        Q,,
Q,,
Qy/t
                                     (b) Market for coke input, Q
Figure A-6. Market Equilibria With and Without Compliance Costs
                                         A-10

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       Imposing the regulations increases the costs of producing coke and, thus, the final
product, shifting the market supply functions for both commodities upward to Sx' and Sy',
respectively.  The supply shift in the final product market causes the market quantity to fall to
Qxl and the market price to rise to Pxl in the new equilibrium. In the market for coke, the
reduced production of the final product causes a downward shift in the demand curve (Dy)
with an unambiguous reduction in coke production, but the direction of the change in market
price is determined by the relative magnitude of the demand and supply shift.  If the
downward demand effect dominates, the price will fall (e.g., Pyl); however, if the upward
supply effect dominates, the price will rise  (e.g., Py2).  Otherwise, if the effects just offset
each other, the price remains unchanged  (e.g., Py3 = Py0).

A. 2.3  Facility-Level Responses to Compliance Costs and New Market Prices

       In evaluating the market effects, we must distinguish between the initial effect of the
regulations and the net effect after all markets have adjusted.  The profit-maximizing
behavior of firms, as described above, may lead to changes in output that, when aggregated
across all  producers, lead to changes in the market-clearing price and feedback on the firms to
alter their decisions. These adjustments are characterized as a simultaneous interaction of
producers, consumers, and markets. Thus, to evaluate the facility-market outcomes, the
analysis must go beyond the initial  effect of the regulation and estimate the net effect after
markets have fully adjusted.

       Given changes in the market prices and costs,  each facility will elect to either

       •  continue to operate, adjusting production and input use based on new revenues
          and costs, or
       •  cease production at the facility if total revenues do not exceed total costs.
This decision can be extended to those facilities with multiple product lines or operations
(e.g., coke batteries, blast furnaces, cupolas). If product revenues are less than product-
specific costs, then these product-lines or operations may be closed.

       Therefore, after accounting for the facility-market interaction, the operating decisions
at each individual facility can be derived. These operating decisions include whether to
continue to operate the facility (i.e., closure) and, if so, the optimal production level based on
compliance costs and new market prices. The approach to modeling the facility closure
decision is based on conventional microeconomic theory.  This approach compares the
ATC—which includes all cost components that fall to zero when production

                                        A-ll

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discontinues—to the expected post-regulatory price.  Figure A-3 illustrates this comparison.
If price falls below the ATC, total revenue would be less than the total costs. In this
situation, the owner's  cost-minimizing response is to close the facility.  Therefore, as long as
there is some return to the fixed factors of production— that is,  some positive level of
profits— the firm is expected to continue to operate the facility.

       If the firm decides to continue operations, then the facility's decision turns to the
optimal output rate. Facility and product-line closures, of course, directly translate into
reductions in output. However, the output of facilities that continue to operate will also
change depending on the relative impact of compliance costs and higher market prices.
Increases in costs will tend to reduce producers' output rates; however, some of this effect is
mitigated when prices are increased. If the market price increase more than offsets the
increase in unit costs,  then even some affected facilities could respond by increasing their
production. Similarly, supply from unaffected domestic producers and foreign  sources will
respond positively to changes in market prices.

A.3    Operational Economic Model

       Implementation of the proposed MACT standard on coke plants will affect the costs
of coke production for captive and merchant plants across the United States.  Responses at
the facility-level to these additional costs will collectively determine the market impacts of
the rule.  Specifically, the cost of the regulation may induce some facilities to alter their
current level of production or to cease operations. These choices affect and, in  turn are
affected by, the market price of each product.  As described above, the Agency  has employed
standard microeconomic concepts to model the supply and demand of each product and the
impacts of the regulation on production costs and the output decisions of facilities.  The main
elements of the analysis  are to

       •   characterize production of each product at the individual supplier and market
          levels,
       •   characterize the demand for each product, and
       •   develop the solution algorithm to determine the new with-regulation equilibrium.

The following sections provide the supply and demand specifications for each product market
as implemented in the EIA model and summarize the model's solution algorithm.  Demand
elasticities are presented in Table A-l.
                                         A-12

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Table A-l. Supply and Demand Elasticities Used in Analysis
Market
Furnace Coke
Domestic
Foreign
Foundry Coke
Domestic
Steel Mill Products
Domestic
Foreign
Iron Castings
Domestic
Foreign
Supply Elasticity

Calculated
3.0a

Calculated

1.0b
1.0b

1.0b
1.0b
Demand Elasticity

Derived
-0.3a

Derived

-0.59C
-1.0b

-0.58C
-1.0b
a Graham, Thorpe, and Hogan (1999).
b Assumed value.
0 Weighted average of product demand elasticities estimated in econometric analysis.
A. 3.1  Furnace Coke Market

       The market for furnace coke consists of supply from domestic coke plants, both
merchant and captive, and foreign imports and of demand from integrated steel mills and
foreign exports.  The domestic supply for furnace coke is modeled as a stepwise supply
function developed from the marginal cost of production at individual  furnace coke batteries.
The domestic demand is derived from iron and steel production at integrated mills as
determined through the market for steel mill products and coking rates for individual
batteries. The following section details the market supply and demand components for this
analysis.

A3.1.1 Market Supply of Furnace Coke

       The market supply for furnace coke, QSc, is the sum of coke production from
merchant facilities, excess production from captive facilities (coke produced at captive
batteries less coke consumed for internal production on steel mill products), and foreign
imports, i.e.,
                                        A-13

-------
                             /~v Sr     Sc     Sc     Sc
                             Q   - qM  +  qi   + qF
where


         Sc
       qM  =  furnace coke supply from merchant plants,




         Sc
       qz   =  furnace coke supply from integrated steel mills, and




         Sc
       qF   =  furnace coke supply from foreign sources (imports).




       Supply from Merchant and Captive Coke Plants. The domestic supply of furnace

coke is composed of the supply from merchant and captive coke plants reflecting plant-level


production decisions for individual coke batteries. For merchant coke plants the supply is


characterized as



                                Sc 	 x "^  x "^   Sc
                               qM  ~ 2-*i  2-*i qM(ij)                              (A.2)
                                      i   j
where
         Sc
       qM  =  supply of foundry coke from coke battery (j) at merchant plant (1).
Alternatively, for captive coke plants the supply is characterized as the furnace coke

production remaining after internal coke requirements are satisfied for production of final


steel mill products, i.e,
                     SE
                        = MAX
                                            Sc      S   Ss
0
(A.3)
where
                     the furnace coke production from captive battery (j) at integrated steel


                     mill (1);
                                         A-14

-------
         g
       TJQ    =      the coke rate for integrated steel mill (1), which specifies the amount of
                     furnace coke input per unit of final steel mill product;1 and

       qI(1S)   =      supply of steel mill product from integrated mill (1).

The MAX function in Eq. (A.3) indicates that if the total captive production of furnace coke
at an integrated mill is greater than the amount of furnace coke consumption required to
produce  steel mill products, then supply to the furnace coke market will equal the difference;
otherwise, the mill's supply to the furnace  coke market will be zero (i.e., it only satisfies
internal requirements from its captive operations).

       As stated above, the domestic supply of furnace coke is developed from plant-level
production decisions for individual coke batteries.  For an individual  coke battery the
marginal cost was assumed to be constant.  Thus, merchant batteries supply 100 percent of a
battery's capacity to the market if the battery's marginal cost (MC) is below the market price
for furnace coke (pc), or zero if MC exceeds pc.  Captive batteries first supply the furnace
coke demanded by their internal steelmaking requirements. Any excess capacity will then
supply the furnace coke market if the remaining captive battery's MC is below the market
price.

       Marginal  cost curves were developed for all furnace coke batteries at merchant and
captive plants in the United States as detailed in Appendix B. Production costs for a single
battery are characterized by constant marginal cost throughout the capacity range of the
battery.  This yields the inverted L-shaped  supply function shown in Figure A-7(a).  In this
case, marginal cost (MC) equals average variable cost (AVC) and is constant up to the
production capacity given by q. The supply function becomes vertical at q because
increasing production beyond this point is not possible. The minimum economically
achievable price level is equal to p*.  Below this price level, p* is less than AVC, and the
supplier  would choose to shut down rather than to continue to produce coke.
'The furnace coke rate for each integrated steel mill is taken from Hogan and Koelble (1996). The coke rate is
   assumed to be constant with respect to the quantity of finished steel products produced at a given mill. A
   constant coke rate at each integrated mill implies a constant efficiency of use at all output levels and
   substitution possibilities do not exist given the technology in place at integrated mills. Furthermore, the
   initial captive share of each integrated mill's coke requirement is based on the baseline data from the EPA
   survey.

                                          A-15

-------
             $/q
             P*
                                             AVC = MC
                                             	q/t
                                           H

            (a) Inverted L-Shaped Supply Function at Single-Battery Plant



             $/q
                                             MC battery 1
                                             MC battery 2
                                             	q/t
                                           M

             (b) Inverted L-Shaped Supply Functions at Multibattery Plant



             $/q
                             (c) Stepwise Market Supply Curve
Figure A-7. Facility-Level Supply Functions for Coke
                                               A-16

-------
       A stepwise supply function can be created for each facility with multiple batteries by
ordering production from least to highest MC batteries (see Figure A-7[b]).  For captive coke
plants, the lowest cost batteries are assumed to supply internal demand, leaving the higher
cost battery(ies) to supply the market if MC


-------
         DC
       qF   =  foreign demand of furnace coke (exports).

       Domestic Demand for Furnace Coke. Integrated steel mills use furnace coke as an
input to the production of finished steel products. Furnace coke demand is derived from the
final product supply decisions at the integrated  steel mills. Once these final production
decisions of integrated producers have been made, the mill-specific coke input rate will
determine their individual coke requirements. Integrated steel mills satisfy their internal
requirements first through captive operations and second through market purchases.  Thus,
the derived demand for furnace coke is the difference between total furnace coke required
and the captive capacity at integrated plants, i.e.,
                    DC
                       = MAX
                                      rT,
                                       s    Ss    V^   Sc
(A.6)

             = the coke rate for integrated steel mill (1), which specifies the amount of
               furnace coke input per unit of final steel mill product;

       qI(1S)   = supply of steel mill product from integrated mill (1); and

         Sc
       qj(!j)  = the furnace coke production from captive battery (j) at integrated steel mill
               a).
The MAX function in Eq. (A.3) indicates that  if the amount of furnace coke consumption
required by an integrated mill to produce steel mill products is greater than its total captive
production, then demand from the furnace coke market will equal the difference; otherwise,
the mill's demand from the furnace coke market will be zero (i.e., it fully satisfies internal
requirements from its captive operations).

       Increases in the price for furnace coke will increase the per-unit costs of final steel
products and thereby shift upward the integrated mill's supply curve for steel mill products.
The shift in the supply curve decreases the market quantity of finished steel products
produced, which subsequently reduces the quantity of furnace coke consumed at integrated
mills and shifts their demand curve downward in the furnace coke market.

       Foreign Demand for Furnace Coke (Exports). Foreign demand for furnace coke is
expressed as

                                         A-18

-------
                                qFDc = BFC (p c)%                                (A.7)
where

       Bp   =  multiplicative demand parameter for the foreign furnace coke demand
                equation, and

       %    =  foreign demand elasticity for furnace coke (literature estimate = -0.3).

The multiplicative demand parameter, BF, calibrates the foreign coke demand equation to
replicate the observed 1997 level of foreign exports based on the market price and the foreign
demand elasticity.

A. 3.2  Market for Steel Mill Products

       The market for steel mill products consists of supply from domestic mills and foreign
imports and of demand from domestic and foreign consumers. Steel mill products are
modeled as a single commodity market.  The domestic supply for  steel mill products includes
production from integrated mills operating blast furnaces that require furnace coke and from
nonintegrated mills that operate electric arc furnaces that do not.  The proposed rule is
expected to increase the price of furnace coke that will increase the cost of production at
integrated mills and thereby shift their supply curves upward and increase the price of steel
mill products.

A. 3.2.1  Market Supply of Steel Mill Products

       The market supply for steel mill products (QSs) is defined as the sum of the supply
from integrated iron and steel mills, nonintegrated mills, and foreign imports, i.e.,
                               QSs     Ss     Ss      Ss                             , .  ON
                                  - qi   + qNi + qF                              (A.S)
where

       qjs  =  supply of steel mill products from integrated mills;

         Ss
       qNI  =  supply of steel mill products from the nonintegrated steel mills; and
                                         A-19

-------
         Ss
       qF   =  supply of steel mill products from foreign suppliers (imports).

       Supply from Integrated Mills. Supply of steel mill products from integrated iron and
steel mills is the sum of individual mill production, i.e.,

                                  ^Ss  - V  ^Ss                                  /-A rvi
                                  li   ~ 2^   0 and P < 0.

       Figure A-8 illustrates the theoretical supply function of Eq. (A.6). As shown, the
upward-sloping supply curve is specified over a productive range with a lower bound of zero
                                             B2
that corresponds with a shutdown price equal to -*-— and an upper bound given by the
                                             4y?

productive capacity of qY that is approximated by the supply parameter y,.  The curvature of
the supply function is determined by the p parameter.
                                         A-20

-------
              $/q
              4Y
                                                                    q/t
Figure A-8. Theoretical Supply Function for Integrated Facilities and Foundries

       To specify the supply function of Eq. (A.6) for this analysis, the p parameter was
computed by substituting an assumed market supply elasticity for the product (£), the market
price of the product (p), and the production-weighted average annual production level across
mills (q) into the following equation:
                                P =  -£
(A. 11)
The p parameter was calculated by incorporating market price and elasticity of supply values
into Eq. (A.I 1). Absent empirical or literature-based estimates, the Agency assumed the
market-level supply elasticity is equal to one (i.e., a 1 percent change in price leads to a 1
percent change in output).

       The intercept of the supply function, yb approximates the productive capacity and
varies across products at each facility.  This parameter does not influence the facility's
production responsiveness to price changes as does the p parameter. Thus, the parameter j{ is
used to calibrate the economic model so that each individual facility's supply equation
matches its baseline production data from 1997.
                                        A-21

-------
       Modeling the Impact of Compliance Costs.  The effect of the regulation is to increase
the MC of producing furnace coke by the compliance costs. These costs include the variable
component consisting of the operating and maintenance costs and the nonvariable component
consisting of the control equipment required for the regulatory option.  Regulatory control
costs will shift the supply curve upward for each affected facility by the annualized
compliance cost (operating and maintenance plus annualized capital) expressed per unit of
coke production.  Computing the supply shift in this way treats compliance costs as the
conceptual equivalent of a unit tax on output.  For coke facilities, the horizontal portion of its
supply curve will rise by the per-unit total compliance costs. In this case, the MC curve will
shift by this amount to allow the new higher reservation price for the coke battery to
appropriately reflect the fixed costs of compliance in the operating decision. At a multiple-
battery facility, the change in each battery's MC may cause a reordering of the steps because
the compliance costs vary due to the technology, age, and existing controls of individual
batteries.

       Compliance costs on captive furnace coke batteries will directly affect production
decisions at integrated mills, while compliance costs on merchant furnace coke batteries will
indirectly affect these decisions through the change in the market price of furnace coke. Both
of these impacts were modeled as reducing the net price integrated mills receive for finished
steel products.  Returning to the integrated mill's supply function presented in Eq. (A. 10), the
mill's production quantity with compliance costs is expressed as

                    Ss
                                                                                (A.12)
v 'P
V2
1
s r A i \ A i
where
       TJQ   =  the coke rate for integrated steel mill (1), which specifies the amount of
                furnace coke input per unit of steel mill product;

       a,     =  the share of integrated steel mill 1's furnace coke provided by captive
                batteries;

       Ac,   =  change in per-unit cost of captive coke production at integrated steel mill 1;

       (1-a,) =  share of integrated steel mill 1's furnace coke provided by the market; and

       Apc   =  change in the market price for furnace coke.

                                        A-22

-------
The bracketed term in the denominator represents the increased costs due to the regulation,
i.e., both the direct and indirect effects. These costs, Ac, and Apc, are expressed per ton of
furnace coke and weighted to reflect each integrated mill's reliance on captive versus market
furnace coke.2  The change in the cost per ton of furnace coke due to the regulation is then
multiplied by the mill's coke rate to obtain the change in the cost per ton of finished steel
product. The change in the cost per ton of finished steel product corresponds to the shift in
the affected facility supply curve shown in Figure A-5b.

       Supply from Nonintegrated Mills.  The supply of steel mill products from domestic
nonintegrated mills is specified as

                                qNSi  =  ANi(ps)4                                (A. is)
where

       ANI = multiplicative parameter for nonintegrated mill supply equation, and

       CNI  = the nonintegrated mill supply elasticity for finished steel products (assumed
               value =1).

Absent literature or econometric estimates of the supply elasticity, this analysis employed an
assumed value of one, which was then varied in conducting a sensitivity analysis for this
parameter. The multiplicative supply parameter is determined by backsolving Eq. (A.8),
given baseline values of the market price, supply elasticities, and quantities supplied by
nonintegrated mills and foreign mills.

       Foreign Supply (Imports).  The supply of steel mill products from foreign suppliers
(imports) is specified as

                                 q? = AFs(ps)«                                 (A. 14)
2The captive versus market furnace coke weights are endogenous in the model because integrated mills exhaust
   their captive supply of coke first; hence, changes in coke consumption typically come from changes in
   market purchases, while captive consumption remains relatively constant.

                                          A-23

-------
where
         p =  multiplicative parameter for foreign supply equation, and
       £SF  =  the foreign supply elasticity for finished steel products (assumed value = 1).

Absent literature or econometric estimates (new or existing) of the supply elasticity, this
analysis employed an assumed value of one, which was then varied in conducting a
sensitivity analysis for this parameter. The multiplicative supply parameters are determined
by backsolving Eq. (A. 8), given baseline values of the market price, supply elasticity, and
level of imports.

A. 3. 2. 2 Market Demand for Steel Mill Products

       The market demand for finished steel mill products, QDs, is the sum of domestic and
foreign demand, i.e.,
                                 QDs    Ds     Ds                               / A  t r-\
                                    = qD  +  qF                                 (A. is)
where
       qD  =  domestic demand for finished steel mill products, and

         Ds
       qF   =  foreign demand for steel mill products (exports).

       Domestic Demand for Steel Mill Products.  The domestic demand for finished steel
products is expressed as

                                q°s  =B^(ps)*                               (A. 16)
where
       BQ  =  multiplicative parameter for domestic steel mill products demand equation,
               and

       T|D  =  domestic demand elasticity for steel mill products (estimate = -0.59).
                                        A-24

-------
The multiplicative demand parameter calibrates the domestic demand equation given baseline
data on price and demand elasticity to replicate the observed 1997 level of domestic
consumption.

       Foreign Demand for Steel Mill Products (Exports).  Foreign demand (exports) for
finished steel products is expressed as

                               qF°S  =BFs(ps)*                               (A. 17)
where

       BFS   = multiplicative demand parameter for foreign steel mill products' demand
              equation, and

       %   = foreign (export) demand elasticity for steel mill products (assumed value =
              -1).
The multiplicative demand parameter calibrates the foreign demand equation given data on
price and demand elasticities to replicate the observed 1997 level of foreign exports.

A.3.3  Market for Foundry  Coke

       The market for furnace coke consists of supply from merchant coke plants and
demand from foundries operating cupola furnaces.  The domestic supply for foundry coke is
modeled as a stepwise supply function developed from the marginal cost of production at
individual foundry coke batteries. The domestic demand is derived from iron castings
production at foundries operating cupola furnaces as determined through the market for iron
castings and coking rates for  individual batteries. As described previously, the level of
imports and exports of foundry coke were negligible in 1997 and, thus, were not included in
the market model. The following section details the market supply and demand components
for this analysis.

A. 3.3.1 Market Supply of Foundry Coke

       The market supply of foundry coke, Qsk, is composed solely of the supply from
domestic merchant plants reflecting plant-level production decisions for individual merchant
coke batteries, i.e.,
                                        A-25

-------
                                   Sk
                                         =  E  E  qM(U)                        (A. is)
                              Merchant     i
where
       1        = plants
       j        = batteries
         Sk
               = supply °f foundry coke from coke battery (j) at merchant plant (1).
As was the case for furnace coke batteries, the marginal cost for an individual foundry coke
battery is assumed to be constant reflecting a fixed-coefficient technology. Marginal cost
curves were developed for all foundry coke batteries at merchant plants in the United  States
as detailed in Appendix B.

       Foundry coke production decisions are based on the same approach used to model
furnace coke production decisions. Thus, as illustrated previously in Figure A-7, the
production decision is determined by an inverted L-shaped supply curve that is perfectly
elastic to the capacity level of production and perfectly inelastic thereafter. Foundry coke
batteries will supply 100 percent of capacity if its marginal cost is less than market price;
otherwise, it will cease production. The regulatory costs shift each affected battery's
marginal cost upward, affecting facilities' decision to operate or shut down individual
batteries.

A. 3. 3. 2 Market Demand for Foundry Coke

       The market demand for foundry coke, QDk, is composed solely of the  domestic
demand by foundries operating cupola furnaces. Therefore, the foundry coke demand is
derived from the production of iron castings from cupola furnaces. Increases in the price of
foundry coke due to the regulation will lead to decreases in production of iron castings at
foundries operating cupola furnaces.  Foundries operating  cupola furnaces are modeled as a
single representative supplier. Thus, the demand function for foundry coke is expressed as
follows:
                                QDk     Dk     i    Si                              / A  i r>\
                                   = qCF  =  rcp qCF                              (A. 19)
                                         A-26

-------
where
         Dk
       qCF  =  derived demand for foundry coke from domestic cupola foundries;
       TCP   = the coke rate for cupola foundries, which specifies the amount of foundry
               coke input per unit output; and

       qCF   = quantity of iron castings produced at domestic cupola foundries;

Changes in production at foundries using electric arc and electric induction furnaces to
produce iron castings do not affect the demand for foundry coke.

A. 3. 4  Market for Iron Castings

       The market for iron castings consists of supply from domestic foundries and foreign
imports and of demand from domestic and foreign consumers.  Iron castings are modeled as a
single commodity market. The domestic supply for iron castings includes production from
foundries operating cupola furnaces that require foundry coke and from foundries that operate
electric furnaces that do not. The proposed rule is expected to increase the price of foundry
coke that will increase the cost of production at foundries with cupola furnaces and thereby
shift their supply curves upward and increase the price of iron castings.

A3. 4.1  Market Supply of Iron Castings

       The market supply for iron castings, QSl, is defined as the sum of the supply from
domestic and foreign foundries.  Domestic foundries are further segmented into operations
using foundry coke (referred to as cupola foundries) and operations using electric furnaces
(referred to as electric foundries).  Supply is expressed as a function of the market price for
castings:
                               QSi     Si     Si     Si
                                 =
where
       qcp   =  quantity of iron castings produced at domestic cupola foundries,
       qEF   =  supply from domestic electric foundries, and
                                        A-27

-------
       qF'   = supply from foreign foundries.

       Domestic Cupola Foundries. The Agency used a simple supply function (Cobb
Douglas) to characterize the production of iron castings.  Compliance costs on captive
foundry coke batteries will directly affect cupola foundries' production decisions through the
change in the market price of foundry coke.  This impact is modeled as reducing the net
revenue cupola foundries receive for the sales of iron castings.  The aggregate cupola
foundry's supply function is expressed as

                         qcSF  =  ACF (P '  -  ICF Ap k)^                          (A.21)
where

       ACP  =  multiplicative supply parameter for cupola foundry's supply equation,

       rCF   =  the coke rate for cupola foundries, which specifies the amount of foundry
                coke input per unit output,

       Ap k  =  change in the market price for foundry coke, and

       £'CF   =  supply elasticity for iron castings (assumed value =1).

The multiplicative supply parameter, ACT, is determined by backsolving Eq. (A.21), given
baseline values of the market price, supply elasticity, and quantity supplied.
       Domestic Electric Furnace Foundries.  The functional form of the supply curve for
domestic foundries with electric arc or induction furnaces is specified as

                                    = A' (pf-                               (A.22)
where

       AFF = multiplicative parameter for electric foundries supply equation, and


                                        A-28

-------
       £'EF  =  electric foundries supply elasticity for iron castings (assumed value = 1).

The multiplicative supply parameter, AgF, is determined by backsolving Eq. (A.22), given
baseline values of the market price, supply elasticity, and quantity supplied from electric
foundries.

       Foreign Supply (Imports).  The functional form of the foreign supply curve for iron
castings is specified as

                                qFSl  = AF' (p 'f                               (A.23)
where

       AF =  multiplicative parameter for foreign iron castings supply equation, and

       £'F  =  foreign supply elasticity for iron castings (assumed value =1).

The multiplicative supply parameter, AF, is determined by backsolving Eq. (A.23), given
baseline values of the market price, supply elasticities, and level of imports.

A. 3.4.2  Market Demand for Iron Castings

       The market demand for iron castings (Q01) is the sum of domestic and foreign
demand, and it is expressed as a function of the price of iron castings:
                                 Qr)j     Di     Di                                / *  ^ ,1 \
                                    = qD  +  qF                                (A.24)
where
       qD'  =  domestic demand for iron castings, and

       qF'  =  foreign demand (exports) for iron castings.

       Domestic Demand for Iron Castings. The domestic demand for iron castings is
expressed as
                                        A-29

-------
                               qDDl  = BD (p ^                               (A.25)


where

       BQ =  multiplicative parameter for domestic iron castings' demand equation, and

       %>  =  domestic demand elasticity for steel mill products (estimate = -0.58).

The domestic demand elasticity for iron casting products is expected to be inelastic and
assumed to be -0.58. The multiplicative demand parameter calibrates the domestic demand
equation given baseline data on price and demand elasticity to replicate the observed 1997
level of domestic consumption.

       Foreign Demand for Iron Castings. Foreign demand (exports) for iron castings is
expressed as

                               qFDl  = Bp1 (p ')*                               (A.26)


where

       Bp =  multiplicative demand parameter for foreign steel mill products' demand
              equation, and

       %  =  foreign (export) demand elasticity for steel mill products (assumed value =
              -1).
The foreign demand elasticity for iron casting products is assumed to be -1.0,  which is more
elastic than the domestic demand elasticity of-0.58. The multiplicative demand parameter
calibrates the foreign demand equation given data on price  and demand elasticities to
replicate the observed 1997 level of foreign exports.

A. 3.5  Post-regulatory Market Equilibrium Determination

       Integrated steel mills and iron foundries with cupola furnaces must determine output
given the market prices for their finished products, which in turn determines their furnace and
                                        A-30

-------
foundry coke requirements. The optimal output of finished steel products at integrated mills
also depends on the cost of producing captive furnace coke and the market price of furnace
coke; whereas iron foundries with cupolas depend on only the market price of foundry coke
because they have no captive operations. Excess production of captive furnace coke at
integrated mills will spill over into the furnace coke market; whereas an excess demand will
cause the mill to demand furnace coke from the market. For merchant coke plants, the
optimal market supply of furnace and/or foundry coke will be determined by the market price
of each coke product.

       Facility responses and market adjustments can be conceptualized as an interactive
feedback process. Facilities face increased costs from the regulation, which initially reduce
output. The cumulative effect of these  individual changes leads to an increase in the market
price that all producers (affected and unaffected) and consumers face, which leads to further
responses by producers (affected and unaffected) as well as consumers and thus new market
prices, and so on. The new equilibrium after imposing the regulation is the result of a series
of iterations between producer and consumer responses and market adjustments until a stable
market price arises where market supply equals market demand for each product, i.e., Qs =
QD-
       The Agency employed a Walrasian auctioneer process to determine equilibrium price
(and output) associated with the increased production costs of coke. The auctioneer calls out
a market price for each product and evaluates the reactions by all participants (producers and
consumers), comparing total quantities supplied and demanded to determine the next price
that will guide the market closer to equilibrium (i.e., where market supply equals market
demand).  Decision rules are established to ensure that the process will converge to an
equilibrium, in addition to specifying the conditions for equilibrium. The result of this
approach is a vector of prices with the  proposed regulation that equilibrates supply and
demand for each product.

       The algorithm for deriving the with-regulation equilibria in all markets can be
generalized to five recursive steps:

       1.  Impose the control costs for each affected facility, thereby affecting their supply
          decisions.
       2.  Recalculate the production  decisions for coke products and both final steel mill
          products and iron castings across all affected facilities. The adjusted production
          of steel mill products from integrated steel mills and iron castings from foundries

                                         A-31

-------
          with cupola furnaces determines the derived demand for furnace and foundry coke
          through the input ratios. Therefore, the domestic demand for furnace and foundry
          coke is simultaneously determined with the domestic supply of final steel mill
          products and iron castings from these suppliers. After accounting for these
          adjustments, recalculate the market supply of all products by aggregating across
          all producers, affected and unaffected.
       3.  Determine the new prices via a price revision rule for all product markets.
       4.  Recalculate the supply functions of all facilities with the new prices, resulting in a
          new market supply of each product, in addition to derived (domestic) demand for
          furnace and foundry coke. Evaluate domestic demand for final steel mill products
          and iron castings, as well as import supply and export demand for appropriate
          products given the new prices.
       5.  Go to Step #3, resulting in new prices for each product. Repeat until equilibrium
          conditions are satisfied in all markets (i.e., the ratio of supply to  demand is
          approximately one for each and every product).
A. 3.6  Economic Welfare Impacts

       The economic welfare implications of the market price and output changes with the
regulation can be examined using two slightly different tactics, each giving  a somewhat
different insight but the same implications: changes in the net benefits of consumers and
producers based on the price changes and changes in the total benefits and costs of these
products based on the quantity changes. This analysis focuses on the first measure—the
changes in the net benefits of consumers and producers. Figure A-9 depicts the change in
economic welfare by first measuring the change in consumer surplus and then the change in
producer surplus.  In essence, the demand and supply curves previously used as predictive
devices are now being used as a valuation tool.

       This method of estimating the change in economic welfare with the regulation divides
society into consumers and producers.  In a market environment, consumers and producers of
the good or service derive welfare from  a market transaction. The difference between the
maximum price consumers are willing to pay for a good and the price they actually pay is
referred to as "consumer surplus." Consumer surplus is measured as the area under the
demand curve and above the price of the product. Similarly, the difference between the
minimum price producers are willing to accept for a good  and the price they actually receive
is referred to as "producer surplus" or profits. Producer surplus is measured as the area above
the supply curve and below the price of the product.  These areas can be thought of as

                                        A-32

-------
                    $/Q
                                            I    I
                                            I    I
                                            I    I
                                            Q
Q/t
                       (a) Change in Consumer Surplus with Regulation
                    $/Q
                                            Q2   Q1         Q/t

                       (b) Change in Producer Surplus with Regulation
                    $/Q
                                            Q2   Q1
Q/t
                       (c) Net Change in Economic Welfare with Regulation



Figure A-9. Economic Welfare Changes with Regulation:  Consumer and Producer

Surplus
                                       A-33

-------
consumers' net benefits of consumption and producers' net benefits of production,
respectively.

       In Figure A-9, baseline equilibrium occurs at the intersection of the demand curve, D,
and supply curve, S.  Price is P[ with quantity Qj. The increased cost of production with the
regulation will cause the market supply curve to shift upward to S'. The new equilibrium
price of the product is P2. With a higher price for the product, there is less consumer welfare,
all else being unchanged as real incomes are reduced.  In Figure A-9(a), area A represents the
dollar value of the annual net loss in consumers' benefits with the increased price. The
rectangular portion represents the loss in consumer surplus on the quantity still consumed,
Q2, while the triangular area represents the foregone surplus resulting from the reduced
quantity consumed, Ci-Q2.

       In addition to the changes in consumer welfare, producer welfare also changes with
the regulation. With the increase in market price, producers receive higher revenues on the
quantity still purchased, Q2. In Figure A-9(b), area B represents the increase in revenues due
to this increase in price. The difference in the area under the supply curve up to the original
market price, area C, measures the loss in producer surplus, which includes the loss
associated with the quantity no longer produced. The net change in producer welfare is
represented by area B-C.

       The change in economic welfare attributable to the compliance costs of the regulation
is the sum of consumer and producer surplus changes, that is, - (A) + (B-C). Figure A-9(c)
shows the net (negative) change in economic welfare associated with the regulation as area
D. However, this analysis does not include the  benefits that occur outside the market (i.e.,
the value of the reduced levels of air pollution with the regulation). Including this benefit
may reduce the net cost of the regulation or even make it positive.
                                        A-34

-------
                                   APPENDIX B

            DEVELOPMENT OF COKE BATTERY COST FUNCTIONS
       This appendix outlines EPA's method for estimating 1997 baseline production costs
for coke batteries. The Agency used a coke production cost model developed in support of
the 1993 MACT on coke ovens. EPA's Technical Approach for a Coke Production Cost
Model (EPA, 1979) provides a more detailed description of this model.  For this analysis, the
model was updated with reported technical characteristics of coke batteries from the
Information Collection Request (ICR) survey responses and available price data. In addition,
the Agency incorporated estimates of MACT pollution abatement costs developed for the
1993 MACT on coke ovens (EPA, 1991).

B.I    Variable Costs

       Coke batteries use four variable inputs during the manufacturing process—
metallurgical coal, labor, energy, and other materials/supplies.  Metallurgical coal is
essentially the only raw material used in the production of coke. Labor transports and
delivers the raw materials as well as final products.  Coke ovens and auxiliary equipment
consume energy and supplies during the production process and periodic maintenance and
repair of the coke batteries.

       Coke production requires a fixed amount of each variable input per ton of coke, and
these inputs are not substitutable.  Accordingly, the total variable cost function is linear in the
output and input prices, or, in other words, the average variable cost function is independent
of output.  Therefore, the average variable cost function (expressed in dollars per short ton of
coke) can  be written as

                 AVC = AV_CI»PC + AV_LI-w + AV_EI-Pe + AV_OI»P0            (B.I)

where AV_CI, AV_LI, AV_EI, and AV_OI are the  fixed requirements per ton of coke of
metallurgical coal, labor, energy, and other material and supplies. Pc, w, Pe, and P0 are the
prices  of each variable input, respectively. As shown above, the contribution of each variable
input to the per-unit coke cost is equal to the average variable input (fixed requirement of the
input per ton of coke) times the price of the input. For example, the contribution of labor to

                                        B-l

-------
the cost per ton of coke (AV_LI) is equal to the labor requirement per ton of coke times the
price of labor (w).

       The variable costs above include those costs associated with by- and co-product
recovery operations associated with the coke battery. To more accurately reflect the costs
specific to coke production, the Agency subtracted by- and co-product revenues/credits from
Eq. (B.I). By-products include tar and coke oven gas among others, while co-products
include coke breeze and other industrial coke.  Following the same fixed coefficient
approach, these revenues or credits (expressed per ton of coke) are derived for each recovered
product at the coke battery by multiplying the appropriate yield (recovered product per ton of
coke) by its price or value. The variable cost components and by-/co-product credits are
identified below.

B. 1.1  Metallurgical Coal (A VCI, P)

       The ICR survey responses provided the fixed input requirement for metallurgical coal
at each battery. Based on the responses from the survey, U.S. coke producers require an
average of 1.36 tons of coal per ton of coke produced. This fixed input varies by type of
producer. Integrated, or captive, producers require an average of 1.38 tons of coal per ton of
coke produced, while merchant producers require an average of 1.31 tons of coal per ton of
coke produced. The U.S. Department of Energy (1998b) provides state-level coal price data
for metallurgical coal. For each coke battery, EPA computed the cost of coal per short ton of
coke by multiplying its input ratio  times the appropriate state or regional price.  As shown in
Table B-l, the average cost of metallurgical coal per ton of coke in 1997 was $66.27 for
captive producers and $63.77 for merchant producers.

B.I.2  Labor (AVLI, w)

       The cost model provides an estimate of the fixed labor requirement for operation,
maintenance, and supervision labor at each battery.  The Agency used these estimates to
derive the average variable labor cost for each individual battery given its technical
characteristics and the appropriate state-level wage rates obtained from the U.S. Bureau of
Labor  Statistics (1998). As shown in Table B-2, average labor costs per ton of coke are
significantly lower for captive producers (e.g., $15.74 per ton of coke) relative to merchant
producers (e.g., $27.21 per ton of coke).  Captive batteries are typically larger capacity
batteries and therefore require fewer person-hours per ton of coke.
                                         B-2

-------
 Table B-l. Metallurgical Coal Costs by Producter Type: 1997 ($/ton of coke)

Number of batteries
Average
Minimum
Maximum
Captive
40
$66.27
$59.25
$77.56
Merchant
18
$63.77
$56.18
$70.34
All Coke Batteries
58
$65.49
$56.18
$77.56
 Table B-2. Labor Costs by Producer Type: 1997 ($/ton of coke)

Number of batteries
Average
Minimum
Maximum
Captive
40
$15.74
$8.62
$31.04
Merchant
18
$27.21
$10.48
$42.04
All Coke Batteries
58
$19.30
$8.62
$42.04
B.I.3  Energy (AVEI, PJ

       The cost model estimates the fixed energy requirements (i.e., electricity, steam, and
water) for each battery. These estimates are used to derive the energy costs per ton of coke
for each battery.  Captive producers have a lower electricity requirement (i.e., 47.58 kWh per
ton of coke) relative to merchant producers (i.e., 50.96 kWh per ton of coke). As shown in
Table B-3, the average energy cost per ton of coke across all coke batteries is $4.36.  Average
energy costs per ton of coke are lower for captive producers (e.g., $4.19 per ton of coke)
relative to merchant producers (e.g.,  $4.71 per ton of coke). This difference reflects lower
state/regional electricity prices in regions where captive batteries produce coke.
                                         B-3

-------
 Table B-3.  Energy Costs by Producer Type: 1997 ($/ton of coke)

Number of batteries
Average
Minimum
Maximum
Captive
40
$4.19
$3.00
$10.59
Merchant
18
$4.71
$3.13
$10.59
All Coke Batteries
58
$4.36
$3.00
$10.59
B. 1.4  Other Materials and Supplies (A VOI, PJ

       The fixed requirements for other materials and supplies associated with the
production of coke include

       •   chemicals,
       •   maintenance materials,
       •   safety and clothing, and
       •   laboratory and miscellaneous supplies.
As shown in Table B-4, the cost model estimates the average cost for these items across all
coke batteries is $4.02 per short ton of coke, ranging from $2.73 to $6.56 per ton of coke.
These costs vary by producer type, with merchant producers averaging $4.82 per ton of coke
versus captive producers who average $3.66 per ton of coke.

B. 1.5  By- and Co-product Credits

       In addition to the variable cost inputs described above, by- and co-products are
associated with the manufacture of coke products. Therefore, the Agency modified Eq. (B.I)
by subtracting (1) revenues generated from the sale of by-/co-products and (2) credits
associated with using of coke oven gas as an energy input in the production process. The
following cost function adjustments were made to the engineering model to incorporate by-
and co-products into the cokemaking cost function:
                                        B-4

-------
 Table B-4. Other Costs by Producer Type:  1997 ($/ton of coke)

Number of batteries
Average
Minimum
Maximum
Captive
40
$3.66
$2.73
$5.70
Merchant
18
$4.82
$2.79
$6.56
All Coke Batteries
58
$4.02
$2.73
$6.56
       •   Coke breeze—ICR survey responses provided coke breeze output per ton of coke
          for each battery. The U.S. International Trade Commission (1994) provided data
          on market prices of coke breeze.

       •   Other industrial coke—ICR survey responses provided other industrial coke
          output per ton of coke for each battery.  The U.S. International Trade Commission
          (1994) provided data on market prices of other industrial coke.

       •   Coke oven gas—Based on secondary sources and discussions with engineers,
          furnace coke producers were assumed to produce 8,500 ft3 per ton of coal, and
          foundry producers were assumed to produce 11,700 ft3 per ton of coal (Lankford
          etal., 1985; EPA,  1988).

As shown in Table B-5, the average by-/co-product credit is $16.55 per ton of coke for
captive producers and $21.31  per ton of coke for merchant producers.

B.2    MACT/LAER Pollution Abatement Costs

       The 1990 Clean Air Act Amendments mandated two levels of control for emissions
from coke ovens. The first control level, referred to as MACT, specified limits for leaking
doors, lids, offtakes, and time of charge.  This level of control was to be attained by 1995.
The second level of control, Lowest Achievable Emissions Rate (LAER), specified more
stringent limits for leaking doors and offtakes. Estimates of the MACT and LAER costs
associated with these controls were developed for EPA's Controlling Emissions from By-
Product Coke Oven Charging, Door Leaks, and Topside Leaks: An Economic Impacts
                                        B-5

-------
 Table B-5.  By-/Co-Product Credits by Producer Type:  1997 ($/ton of coke)

Number of batteries
Average
Minimum
Maximum
Captive
40
$16.55
$13.41
$30.95
Merchant
18
$21.31
$8.83
$48.30
All Coke Batteries
58
$18.03
$8.83
$48.30
Analysis (EPA, 1991).J Table B-6 provides summary statistics for the projected costs
associated with each level of control. However, the Agency determined that industry actions
undertaken in the interim period to comply with the MACT limits have enabled them to also
meet the LAER limits.  Therefore, only the MACT-related pollution abatement costs have
been incorporated to determine the appropriate baseline costs for the 1997 economic model.
As shown in Table B-6, the average MACT pollution abatement cost across all coke batteries
is $1.27 per short ton of coke. The projected costs for captive producers range from zero to
$2.54 per ton of coke, while projected costs for merchant producers range from zero to
$10.93 per ton of coke.

B.3    Fixed Costs

       Production of coke requires the combination of variable inputs outlined above with
fixed capital equipment (e.g., coke ovens and auxiliary equipment).  It also includes other
overhead and administrative expenses. For each coke battery, the average fixed costs per ton
of coke can be obtained by dividing the total fixed costs (TFC) estimated by the coke model
by total battery coke production.  Therefore, the average fixed cost function (expressed in
dollars per ton of coke) can be written as
                         AFC = (PTI + ASE +PYOH+ PLOH)/Q
(B.2)
'The Agency estimated costs for the LAER control level using two scenarios. The first (LAER-MIN) assumed
   all batteries will require new doors and jambs. The second (LAER-MAX) also assumed all batteries will
   require new doors and jambs and in addition assumed batteries with the most serious door leak problems
   would be rebuilt. This analysis reports cost estimates for the LAER-MIN scenario.

                                         B-6

-------
 Table B-6. Pollution Abatement Costs by Producer Type:  1997 ($/ton of coke)

Number of batteries
MACT
Average
Minimum
Maximum
LAER
Average
Minimum
Maximum
Captive
40

$0.82
$0.00
$2.54

$1.64
$0.07
$2.63
Merchant
18

$2.29
$0.00
$10.93

$2.44
$0.94
$6.07
All Coke Batteries
58

$1.27
$0.00
$10.93

$1.88
$0.07
$6.07
where
          property taxes and insurance (PTI) = (0.02)»($225»Coke Capacity).  This category
          accounts for the fixed costs associated with property taxes and insurance for the
          battery. The cost model estimates this component as 2 percent of capital cost.
          Capital costs are estimated to be $225 per annual short ton of capacity based on
          reported estimates of capital investment cost of a rebuilt by-product coke-making
          facility (USITC,  1994). As shown in Table B-7, the average PTI cost across all
          batteries is $4.47 per ton of coke.

          administration and sales expense (ASE) = (0.02)»($225»Coke capacity). This
          category accounts for the fixed costs associated with administrative and sales
          expenses for the coke battery.  The cost model also calculates this component as 2
          percent of capital cost.  As shown in Table B-7, the average cost across all coke
          batteries for ASE is  $5.02 per ton of coke.

          payroll overhead (PYOH) = (0.2)»(Total labor costs). Payroll overhead is
          modified as 20 percent of total labor costs.  Payroll overhead is used to capture
          fringe benefits because wage rates obtained from the Bureau of Labor  Statistics
          exclude fringe benefits. As shown in Table B-7, the average payroll overhead is
          $3.15 per ton of coke for captive producers and $5.44 per ton of coke for
          merchant producers, reflecting the different labor requirements by producer type.
                                        B-7

-------
 Table B-7. Average Fixed Costs by Producer Type: 1997 ($/ton of coke)

Number of batteries
Property taxes and insurance
Average
Minimum
Maximum
Administrative and sales
expense
Average
Minimum
Maximum
Payroll overhead
Average
Minimum
Maximum
Plant overhead
Average
Minimum
Maximum
Captive
40

$4.41
$3.20
$6.78


$4.96
$3.60
$7.63

$3.15
$1.72
$6.21

$9.33
$5.38
$17.67
Merchant
18

$4.58
$3.55
$6.11


$5.16
$4.00
$6.87

$5.44
$2.10
$8.41

$17.77
$7.50
$26.95
All Coke Batteries
58

$4.47
$3.20
$6.78


$5.02
$3.60
$7.63

$3.86
$1.72
$8.41

$11.95
$5.38
$26.95
       •   plant overhead (PLOH) = (0.5)»(Total payroll + Total other expenses).  The cost
          model computes plant overhead as 50 percent of total payroll and total other
          expenses by producer type. As shown in Table B-7, the average plant overhead
          cost is $9.33 for captive producers and $17.77  for merchant producers.  As with
          payroll overhead, this difference reflects differences in labor requirements for
          captive and merchant producers.

B.5    Summary of Results

       Table B-8 summarizes each cost component and aggregates them to estimate the
average total costs per ton of coke by producer type. As shown, the average total cost (ATC)
across all coke batteries is $101.72 per short ton of coke.  The ATC for captive producers is
$95.99 per short ton of coke and is significantly lower than the ATC for merchant producers
                                        B-8

-------
 Table B-8. Cost Summary by Producer Type: 1997 ($/ton of coke)

Number of batteries
Average variable cosf
Average
Minimum
Maximum
MACT
Average
Minimum
Maximum
Average fixed cost
Average
Minimum
Maximum
Average total cost
Average
Minimum
Maximum
Captive
40

$73.32
$62.09
$82.74

$0.82
$0.00
$2.54

$21.85
$15.03
$38.28

$95.99
$77.42
$119.72
Merchant
18

$79.21
$44.91
$95.43

$2.29
$0.00
$10.93

$32.96
$17.37
$46.16

$114.47
$76.97
$145.02
All Coke Batteries
58

$75.15
$44.91
$95.43

$1.27
$0.00
$10.93

$25.30
$15.03
$46.16

$101.72
$76.97
$145.02
 alncludes by-/co-product credits.


at $114.47. This difference reflects both economies of scale and lower production costs
associated with the production of furnace coke. These differences are also consistent with
observed market prices for furnace coke $71-$114 (produced mainly by captive producers)
and for foundry coke $148-$ 154 (produced solely by merchant producers with some furnace
coke) (USITC, 1994). A correlation analysis of these cost estimates shows that ATC is
negatively correlated with coke battery capacity (correlation coefficient of-0.66) and
start/rebuild date (correlation coefficient of-0.36). Therefore, average total costs are lower
for larger coke batteries and those that are new or recently rebuilt. Tables B-A and B-B, at
the end of this appendix, present cost estimates for individual captive and merchant coke
batteries, respectively.
                                         B-9

-------
B.6    Nonrecovery Cokemaking

       Several substitute technologies for by-product cokemaking have been developed in
the United States and abroad. In the United States, the nonrecovery method is the only
substitute that has a significant share of the coke market.  This technology is relatively new,
and, as a result, the original coke production cost model did not include estimates for these
types of coke-making batteries.  The nonrecovery process is less costly than the by-product
process because of the absence of recovery operations and a lower labor input requirement
per ton of coke. Therefore, the Agency modified the model to reflect these cost advantages in
the following manner:

       •   No expenses/credits associated with by- and co-product recovery.
       •   Reduced labor input—labor requirement estimates generated by the model were
          multiplied by a factor of 0.11, which represents the ratio of employment per ton of
          coke at merchant batteries to employment per ton of coke at nonrecovery batteries.
       •   Exceed current standards of pollution abatement (Engineering and Mining
          Journal, 1997)—MACT compliance costs were excluded.
As shown in Table B-9, the ATC for nonrecovery coke-making facilities is $71.28 per ton of
coke, which is significantly lower than the average ATC of captive and merchant producers.
These costs vary slightly across these batteries ranging from $68.49 to $72.88 per ton of
coke.  Table B-C,  at the end of this appendix, presents cost estimates for individual
nonrecovery cokemaking batteries.
                                        B-10

-------
Table B-9. Cost Summary for Nonrecovery Coke Batteries: 1997 ($/ton of coke)

                                                  Nonrecovery
Number of batteries                                         8
Metallurgical coal
  Average                                              $52.03
  Minimum                                             $50.38
  Maximum                                             $53.67
Labor
  Average                                               $1.90
  Minimum                                              $1.31
  Maximum                                              $2.39
Energy
  Average                                               $5.17
  Minimum                                              $5.01
  Maximum                                              $5.38
Other
  Average                                               $1.74
  Minimum                                              $1.63
  Maximum                                              $1.82
Average fixed cost
  Average                                              $10.45
  Minimum                                              $9.90
  Maximum                                             $10.85
Average total cost
  Average                                              $71.28
  Minimum                                             $68.49
  Maximum                                             $72.88
                                   B-ll

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Table B-A. Cost Data Summary for Captive Coke Batteries: 1997
Facility Name
Acme Steel
Acme Steel
AK Steel
AK Steel
AK Steel
Bethlehem Steel
Bethlehem Steel
Bethlehem Steel
td
^ Bethlehem Steel
to
Geneva Steel
Geneva Steel
Geneva Steel
Geneva Steel
Gulf States Steel
Gulf States Steel
LTV Steel
LTV Steel
National Steel
National Steel
National Steel
Producer
Location Type3
Chicago, IL
Chicago, IL
Ashland, KY
Ashland, KY
Middletown, OH
Burns Harbor, IN
Burns Harbor, IN
Lackawanna, NY
Lackawanna, NY
Provo, UT
Provo, UT
Provo, UT
Provo, UT
Gadsden, AL
Gadsden, AL
Chicago, IL
Warren, OH
Ecorse, MI
Granite City, IL
Granite City, IL
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
Coke
Type"
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Capacity
(short
tons/yr)
250
250
634
366
429
948
929
375
375
200
200
200
200
250
250
615
549
924
300
300
,000
,000
,000
,000
,901
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,839
,931
,931
Start/
Rebuild
Date
1979
1978
1978
1953
1952
1972
1983
1962
1952
1944
1944
1944
1944
1942
1965
1982
1979
1992
1982
1980
AVCC
($/short
ton)
$80
$80
$71
$73
$75
$64
$65
$71
$71
$77
$77
$78
$81
$82
$81
$69
$69
$80
$75
$75
.49
.49
.63
.79
.09
.93
.27
.46
.45
.36
.97
.24
.21
.74
.56
.02
.05
.77
.74
.74
MACT
($/short
ton)
$1.00
$1.00
$1.26
$1.00
$1.21
$0.71
$0.70
$1.75
$1.79
$0.26
$0.26
$0.22
$0.22
$1.68
$2.54
$0.35
$0.04
$0.26
$0.67
$0.67
AFC
($/short
ton)
$20.15
$20.15
$18.63
$20.83
$22.12
$17.57
$18.13
$20.40
$20.22
$24.84
$26.85
$22.85
$38.28
$26.63
$18.77
$17.96
$20.79
$16.56
$20.72
$20.72
ATC
($/short
ton)
$101.64
$101.64
$91.52
$95.62
$98.42
$83.22
$84.10
$93.61
$93.46
$102.46
$105.08
$101.31
$119.72
$111.05
$102.86
$87.33
$89.88
$97.59
$97.13
$97.13
                                                                                              (continued)

-------
Table B-A. Cost Data Summary for Captive Coke Batteries: 1997 (continued)
Facility Name
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
Wheeling-Pitt
Wheeling-Pitt
Wheeling-Pitt
Wheeling-Pitt
Location
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Gary, IN
Gary, IN
Gary, IN
Gary, IN
Follansbee, WV
Follansbee, WV
Follansbee, WV
Follansbee, WV
Producer
Type3
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
Coke
Type"
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Capacity
(short
tons/yr)
844,610
668,680
668,680
373,395
373,395
373,395
378,505
378,505
378,505
378,505
378,505
378,505
827,820
827,820
297,110
297,110
782,000
163,000
151,000
151,000
Start/
Rebuild
Date
1982
1976
1978
1989
1989
1979
1955
1955
1955
1954
1954
1954
1976
1975
1954
1954
1977
1964
1955
1953
AVCC
($/short
ton)
$64.94
$65.89
$65.89
$68.36
$68.36
$68.36
$70.52
$70.52
$70.52
$71.75
$71.75
$71.75
$73.33
$74.13
$79.40
$79.68
$62.09
$76.53
$77.49
$77.49
MACT
($/short
ton)
$0.71
$0.00
$0.00
$0.00
$0.00
$1.02
$1.02
$1.07
$1.07
$1.07
$1.02
$0.00
$0.64
$0.64
$1.48
$1.48
$0.30
$1.33
$1.09
$1.09
AFC
($/short
ton)
$15.28
$19.72
$19.72
$20.96
$20.96
$20.96
$21.96
$21.96
$21.96
$21.69
$21.69
$21.69
$22.55
$21.93
$23.84
$24.98
$15.03
$28.51
$27.79
$27.79
ATC
($/short
ton)
$80.92
$85.61
$85.61
$89.32
$89.32
$90.34
$93.50
$93.55
$93.55
$94.51
$94.46
$93.44
$96.52
$96.70
$104.72
$106.14
$77.42
$106.37
$106.37
$106.38
aC = Captive; M
bl = Furnace; 2 =
= Merchant.
 Foundry; 3 = Both.

-------
Table B-B. Cost Data Summary for Merchant Coke Batteries:  1997
Facility Name
ABC Coke
ABC Coke
ABC Coke
Citizens Gas
Citizens Gas
Citizens Gas
Empire Coke
Empire Coke
Erie Coke
Erie Coke
Koppers
Koppers
New Boston
Shenango
Sloss Industries
Sloss Industries
Sloss Industries
Tonawanda
Location
Tarrant, AL
Tarrant, AL
Tarrant, AL
Indianapolis, IN
Indianapolis, IN
Indianapolis, IN
Holt, AL
Holt, AL
Erie, PA
Erie, PA
Monessen, PA
Monessen, PA
Portsmouth, OH
Pittsburgh, PA
Birmingham, AL
Birmingham, AL
Birmingham, AL
Buffalo, NY
Producer
Type3
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
Coke
Type"
2
3
3
3
2
2
2
2
2
2
1
1
1
1
3
1
1
2
Capacity
(short
tons/yr)
490,528
112,477
96,962
389,116
128,970
116,845
108,026
54,013
130,073
84,878
245,815
126,766
346,126
514,779
184,086
133,931
133,931
268,964
Start/
Rebuild
Date
1968
1951
1941
1979
1946
1941
1978
1978
1943
1952
1981
1980
1964
1983
1959
1952
1956
1962
AVCC
($/short
ton)
$72.41
$86.96
$91.22
$58.28
$80.97
$85.88
$93.33
$95.13
$76.52
$77.73
$87.77
$99.08
$83.67
$84.44
$62.04
$90.33
$90.33
$44.91
MACT
($/short
ton)
$1.20
$2.64
$2.51
$1.03
$1.98
$2.09
$7.24
$10.93
$1.70
$1.45
$0.12
$0.35
$1.32
$0.00
$1.58
$1.58
$1.58
$1.99
AFC
($/short
ton)
$17.37
$31.18
$34.63
$20.19
$41.91
$46.16
$36.59
$38.96
$44.67
$46.00
$28.92
$37.76
$25.86
$27.30
$24.69
$29.16
$29.16
$32.30
ATC
($/short
ton)
$90.99
$117.48
$125.02
$76.97
$124.85
$134.12
$137.16
$145.02
$122.88
$125.18
$113.16
$133.55
$107.02
$108.16
$84.77
$117.35
$117.35
$79.20
aC = Captive; M =
bl = Furnace; 2 =
= Merchant.
Foundry; 3 = Both.

-------
      Table B-C.  Cost Data Summary for Nonrecovery Coke Batteries: 1997
td
Facility Name
Jewell Coke
and Coal
Jewell Coke
and Coal
Jewell Coke
and Coal
Jewell Coke
and Coal
Indiana Harbor
Coke Co
Indiana Harbor
Coke Co
Indiana Harbor
Coke Co
Indiana Harbor
Coke Co
Location
Vansant, VA

Vansant, VA

Vansant, VA

Vansant, VA

East Chicago, IN

East Chicago, IN

East Chicago, IN

East Chicago, IN

Producer
Type3
M

M

M

M

M

M

M

M

Coke
Type"
1

1

1

1

1

1

1

1

Capacity
(short
tons/yr)
197,000

164,000

124,000

164,000

325,000

325,000

325,000

325,000

Start/
Rebuild
Date
1966

1983

1989

1990

1998

1998

1998

1998

AVCC
($/short
ton)
$58.59

$59.31

$59.98

$59.31

$62.36

$62.36

$62.36

$62.36

MACT
($/short
ton)
$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

AFC
($/short
ton)
$9.90

$10.38

$10.85

$10.38

$10.52

$10.52

$10.52

$10.52

ATC
($/short
ton)
$68.49

$69.69

$70.83

$69.69

$72.88

$72.88

$72.88

$72.88

      aC = Captive; M = Merchant.
      bl = Furnace; 2 = Foundry; 3 = Both.
      Includes by-/co-product credits.

-------
                                   APPENDIX C

      ECONOMETRIC ESTIMATION OF THE DEMAND ELASTICITY FOR
                            STEEL MILL PRODUCTS
       This appendix summarizes EPA's estimation of the demand elasticities for steel mill
products. These estimates are based on national-level data from 1987 through 1997 as
obtained from the AISI (1990, 1992, 1997), U.S. Bureau of the Census (1988-1998, 1997,
1998), U.S. Bureau of Labor Statistics (1998), and other government sources (U.S.
Department of Energy, 1990, 1998 and U.S. Geological Survey 1987-1990, 1995-1997). The
following sections summarize the econometric procedure and present the estimates of the
demand elasticity for the following nine steel  mill products:

       •  semi-finished products
       •  structural shapes and plates
       •  rails and track accessories
       •  bars
       •  tool steel
       •  pipe and tubing
       •  wire
       •  tin mill
       •  sheet and strip
C.I    Econometric Model

       A partial equilibrium market supply/demand model is specified as a system of
interdependent equations in which the price and output of a product are simultaneously
determined by the interaction of producers and consumers in the market.  In simultaneous
equation models, where variables in  one equation feed back into variables in other equations,
the error terms are correlated with the endogenous variables (price and output).  In this case,

                                       C-l

-------
single-equation ordinary least squares (OLS) estimation of individual equations will lead to
biased and inconsistent parameter estimates.  Thus, simultaneous estimation of this system to
obtain elasticity estimates requires that each equation be identified through the inclusion of
exogenous variables to control for shifts in the supply and demand curves over time.

       Exogenous variables influencing the demand for steel mill products include measures
of economic activity such as U.S.  gross national and domestic production and the value of
construction activity, and the price of substitute products such as aluminum, plastics and
other nonferrous materials and building materials like cement/concrete (typically proxied by
the appropriate producer price indices). Exogenous variables influencing the level of supply
include measures of the change in the costs of iron and steel production caused by changes in
prices of key inputs like raw materials, fuel, and labor (typically proxied by the producer
price index for iron ore, coke, metallurgical coal, as well as the average hourly earnings for
the industry's production workers).

       The supply/demand system for a particular steel mill product over time (t) is defined
as follows:

                                   Qtd = f(Pt,Zt) + ut                              (C.I)

                                   Qts = g(Pt,Wt) + vt                              (C.2)

                                       Q,d = Q,s                                   (C.3)
Eq. (C.I) shows quantity demanded in year t as a function of price, Pt, an array of demand
factors, Zt(e.g., measures of economic activity and substitute prices), and an error term, u,.
Eq. (C.2) represents quantity supplied in year t as a function of price and other supply factors,
Wt (e.g., input prices), and an error term, vt, while Eq. (C.3) specifies the equilibrium
condition that  quantity supplied equals quantity demanded in year t, creating a system of
three equations in three variables.  The interaction of the specified market forces solves this
system, generating equilibrium values for the variables Pt* and Qt*=Qtd*=Qts*

       Since the objective is to generate estimates of the demand elasticities for use in the
economic model, EPA employed the two-stage least squares (2SLS) regression procedure to
estimate only the parameters of the demand equation. This 2SLS approach is  preferred to the
three-stage least squares approach because the number of observations limits the degrees of
freedom for use in the estimation procedure.  EPA specified the logarithm of the quantity
demanded as a linear function of the logarithm of the price so that the coefficient on the price
                                         C-2

-------
variable yields the estimate of the constant elasticity of demand for steel mill product.  All
prices employed in the estimation process were deflated by the gross domestic product (GDP)
implicit price deflator to reflect real rather than nominal prices.  The first stage of the 2SLS
procedure involves regressing the observed price against the supply and demand "shifter"
variables that are exogenous to the  system. This first stage produces fitted (or predicted)
values for the price variable that are, by definition, highly correlated with the true
endogenous variable, the observed price, and uncorrelated with  the error term. In the second
stage, these fitted values are then employed as observations of the right-hand side price
variable in the demand function.  This fitted value is uncorrelated with the error term by
construction and thus does not incur the endogeneity bias.

C.2    Econometric Results

       Table C-l provides the results of the econometric estimation for each steel mill
product demand equation.  The coefficients of the price variables represent the demand
elasticity estimates for each of the nine steel mill products.  As economic theory predicts, all
of these estimates are negative, reflecting reductions in quantity demanded as price increases.
The elasticities range from -0.16 for semi-finished products to -2.17 for rails and track
accessories, with a shipments weighted average elasticity for all products of-0.59.  As
shown, three of the nine elasticity estimates are significant at a 90 percent confidence level.

       As expected, the estimated coefficients for the demand growth variables (GDP  and
value of new construction) are all positive with the exception of the equation for steel wire
drawn products. However, this estimate is not statistically significant.  The regression
coefficient results generally show that the price of aluminum, nonferrous metals'  producer
price index (PPI), and plastics' PPI are substitutes for the majority of the steel mill products.
Prices increases for these products result in increases in quantity demand for steel mill
products.  The coefficient for the primary copper PPI is negative in the wire equation
indicating that it is a complement. A price increase for this product decreases wire
consumption.  Copper and steel are both used in electric appliances; therefore, this is
consistent with these results.  The regressions also show a negative coefficient for the price of
aluminum in the semi-finished products equation, the nonferrous metals' PPI in the tin mill
products equation, and the concrete products' PPI in the structural shapes and plates equation
suggesting these products are also complement products. Although these products may be
                                         C-3

-------
    Table C-l.  Two Stage Least Squares Regression Estimation of Steel Mill Products Demand Equations
o
Independent Variables
Constant

In(price)

In(gdp)

ln( value new construct)

ln(alum_price)

ln(PPI_nonferrmetals)

ln(PPI_plast_parts_mfg)

ln(PPI_plast_sh_rd_tube)

ln(PPI copper_prim)

ln(PPI conc_prod)

ln(PPI_plast_prod)

Time trend squared


Semi-
finished
Products
3.42
(1.47)
-0.16
(-1.39)
1.52
(4.64)***
—

-0.20
(-2.75)**
—

—

—

—

—

—

—


Structural
Shapes
and Plates
11.24
(1.93)
-0.17
(-0.71)
1.20
(4.00)**
—

—

0.69
(1.66)
—

—

—

-1.59
(-1.25)
—

—


Rails and
Track
Accessories
1.26
(0.27)
-2.17
(-1.95)*
2.95
(4.96)***
—

0.08
(0.69)
—

—

—

—

—

—

—

Dependent Variables (In Qd)
Pipe and
Bars Tool Steel Tubing
6.56 2.06 14.41
(1.71) (0.31) (1.11)
-0.66 -0.47 -1.62
(-1.17) (-2.02)* (-2.14)*
1.61 — —
(6.08)***
— 0.98 0.13
(1.84) (0.18)
0.27 0.09 —
(2.67)** (0.52)
— — —

— — —

— — 2.09
(0.90)
— — —

— — —

— — —

— — —


Wire
22.5
(1.14)
-0.73
(-2.05)
-1.13
(-0.55)
—

—



—

—

-0.50
(-2.90)**
—

1.78
(2.46)*
-0.002
(-0.54)

Tin Mill
Products
3.66
(0.61)
-0.28
(-1.61)
1.41
(2.32)*
—

—

-0.15
(-1.59)
0.39
(1.23)
—

—

—

—

-0.002
(-2.37)*

Sheet and
Strip
6.14
(0.61)
-0.65
(-1.90)
1.92
(2.59)**
—

0.12
(1.18)
—

-0.26
(-0.29)
—

—

—

—

—

                                                                                                     (continued)

-------
Table C-l. Two Stage Least Squares Regression Estimation of Steel Mill Products Demand Equations (Continued)

Dependent Variables (In Qd)


Independent Variables
R-Squared
Adjusted R-Squared
F value
Observations
Degrees of Freedom
Semi-
finished
Products
0.90
0.86
21.44***
11
7
Structural
Shapes
and Plates
0.81
0.65
5.26**
10
5
Rails and
Track
Accessories
0.82
0.75
10.87***
11
7


Bars
0.84
0.77
12 32***
11
7


Tool Steel
0.44
0.20
1.85
11
7

Pipe and
Tubing
0.51
0.30
2.41
11
7


Wire
0.98
0.96
42.23***
10
4

Tin Mill
Products
0.57
0.14
1.31
11
5

Sheet and
Strip
0.93
0.88
17.47***
10
5
Note:  T-statistics of parameter estimates are in parenthesis.  The F test analyzes the usefulness of the model. Asterisks indicate significance levels for these tests as
follows:

         * = 90%, ** = 95%, *** = 99%

aPrice of corresponding steel mill product.
Variable Descriptions:
In(gdp)
ln(value_new_construct)
ln(alum_price)
ln(PPI_nonferrmetals)
ln(PPI_plast_parts_mfg)
ln(PPI_plast_sh_rd_tube)
ln(PPI_copper_prim)
ln(PPI_conc_prod)
ln(PPI_plast_prod)
time trend squared
real gross domestic product
real value of construction put in place
real price of aluminum
real producer price index for nonferrous metals
real producer price index for plastic parts and components for manufacturing
real producer price index for laminated plastic sheets, rods, and tubes
real producer price index for primary copper
real producer price index for concrete products
real producer price index for plastic products
time trend squared

-------
substitutes in specific applications, they are often complement products in the production of
final goods (i.e., building construction).

       As a result of these econometric findings, the market model used the weighted
average demand elasticity of-0.59.
                                         C-6

-------
                                   APPENDIX D

   JOINT ECONOMIC IMPACT ANALYSIS OF THE INTEGRATED IRON AND
         STEEL MACT STANDARD WITH THE COKE MACT STANDARD
       For this analysis, the Agency also considered the national-level economic impacts of
joint implementation of the Integrated Iron and Steel MACT Standard with the Coke MACT
standard.  The measures of economic impacts presented in this appendix are the result of
incorporating the costs of compliance for each affected integrated iron and steel mill under
the Integrated Iron and Steel MACT into market models developed by the Agency to analyze
the economic impacts of the Coke MACT Standard. The engineering analysis estimates
annual costs for existing sources are $5.9 million under the Integrated Iron and Steel MACT
and $14.3 million under the Coke MACT. Therefore, the total national estimate for existing
sources under joint implementation are $20.2 million.

D.I   Market-Level Impacts

       The increased cost of coke production due to the regulation is expected to increase the
price of coke, steel mill products, and iron castings and reduce their production and
consumption from 1997 baseline levels. As shown in Table D-l, the regulation is projected
to increase the price of furnace coke by 1.5 percent, or $1.56 per short ton, and the price of
foundry coke by nearly 3 percent, or $4.17 per short ton. The increased captive production
costs and higher market price associated with furnace coke are projected to increase steel mill
product prices by less than 0.1 percent, or $0.14 per ton. Similarly, the higher market price of
foundry coke are projected to increase iron castings prices by less than 0.1  percent, or $0.35
per ton. As expected, directly affected output declines across all producers, while supply
from domestic and foreign producers not subject to the regulation increases.  Although the
resulting net declines are slight across all products (i.e., roughly 0.1 percent decline in market
output) the change in domestic production are typically higher.  This is especially true for
furnace coke where domestic production declines  by 2.25  percent.
                                         D-l

-------
Table D-l. Market-Level Impacts of the Joint Implementation of the Integrated Iron
and Steel MACT with the Coke MACT: 1997
Changes From Baseline

Furnace Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Imports
Foundry Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Imports
Steel Mill Products
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Integrated producers
Nonintegrated steel millsa
Imports
Iron Castings
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Cupola furnaces
Electric furnacesb
Imports
Baseline

$107.36
11,710
7,944
3,765

$145.02
1,669
1,669
NA

$639.74
137,015
105,858
62,083
43,775
31,157

$845.55
12,314
11,483
6,695
4,789
831
Absolute

$1.56
-11.9
-178.8
166.9

$4.17
-1.4
-1.4
NA

$0.14
-17.6
-24.2
-33.4
9.2
6.6

$0.35
-3.1
-3.4
-5.4
2.0
0.3
Percent

1.46%
-0.10%
-2.25%
4.43%

2.87%
-0.08%
-0.08%
NA

0.02%
-0.01%
-0.02%
-0.05%
0.02%
0.02%

0.04%
-0.03%
-0.03%
-0.08%
0.04%
0.04%
a  Includes mini-mills.
b  Includes electric arc or electric induction furnaces.
                                         D-2

-------
D.2    Industry-Level Impacts

       Industry revenue, costs, and profitability change as prices and production levels adjust
to increased production costs.  As shown in Table D-2, the economic model projects that
profits for directly affected integrated iron and steel producers will decrease by $15.9 million,
or 1.2 percent.  In addition, the Agency projects profit losses of $4.6 million for foundries
that produce iron casting with  cupola furnaces. However, because integrated steel mills
reduce their captive production of furnace coke and purchase more through the market,
industry-level profits for U.S. merchant coke producers are expected to increase by $2.7
million, or 5.6 percent, for furnace coke.  Similarly, because foundries with cupola furnaces
must continue to buy foundry coke to produce iron castings (i.e., inelastic demand), industry-
level profits for U.S. merchant coke producers are expected to increase by $3.9 million, or
5.0 percent, for foundry coke.  Those domestic suppliers not subject to the regulation
experience windfall gains with non-integrated steel mills (i.e., mini-mills) increasing profits
by $5.9 million and foundries with electric furnaces increasing profits by $1.7 million.

D.2.1  Changes in Profitability

       For integrated steel mills, operating profits decline by $15.9 million. This is the net
result of three effects:

       •    Net decrease in revenue ($11.7 million): Steel mill product revenue decreases as
           a result of reductions in output. However, these losses were mitigated by
           increased revenues from furnace  coke supplied to the market as a result of higher
           prices.
       •    Net decrease in production costs  ($10.2 million): Reduction in steel mill and
           market coke production costs  occur as output declines. However, producers also
           experience increases in costs associated with the higher price of inputs  (i.e.,
           furnace coke).
       •    Increase in control  costs ($14.4 million): The costs of captive production of
           furnace coke increase as a result of regulatory controls.
       Industry-wide profits for merchant furnace coke producers increase by $2.7 million as
a result of the following:

       •    Decreases in revenue ($10 million):  Reductions in output outweigh revenue
           increases as a result of higher market prices.
                                          D-3

-------
Table D-2. National-Level Industry Impacts of the Joint Implementation of the
Integrated Iron and Steel MACT with the Coke MACT:  1997

Integrated Iron and Steel Mills
Total revenues ($106/yr)
Steel mill products
Market coke operations
Total costs ($106/yr)
Control costs
Steel production
Captive coke production
Market coke production
Production costs
Steel production
Captive coke production
Market coke consumption
Market coke production
Operating profits ($106/yr)
Iron and steel facilities (#)
Coke batteries (#)
Employment (FTEs)
Coke Producers (Merchant Only)
Furnace
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Foundry
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Nonintegrated Steel Mills3
Operating profits ($106/yr)
Cupola Furnaces
Operating profits ($106/yr)
Electric Furnaces'"
Operating profits ($106/yr)
Baseline

$40,223.9
$39,716.9
$507.0
$38,837.6
$0.0
$0.0
$0.0
$0.0
$38,837.6
$36,292.9
$942.5
$1,167.8
$434.3
$1,386.3
20
37
67,198


$366.5
$318.5
$0.0
$318.5
$48.0
13
840

$273.3
$194.2
$0.0
$194.2
$77.9
12
2,420

NA

NA

NA
Changes From
Absolute

-$11.71
-$12.99
$1.29
$4.21
$14.36
$5.94
$6.28
$2.14
-$10.15
-$20.09
-$0.42
$16.10
-$5.74
-$15.92
0
0
-45


-$10.01
-$12.69
$2.16
-$14.85
$2.68
-1
-126

$7.03
$3.10
$3.30
-$0.20
$3.93
0
0

$5.9

-$4.6

$1.7
Baseline
Percent

-0.03%
-0.03%
0.25%
0.01%
NA
NA
NA
NA
-0.03%
-0.06%
-0.04%
1.38%
-1.32%
-1.15%
0.00%
0.00%
-0.07%


-2.73%
-3.98%
NA
-4.66%
5.59%
-7.69%
-15.00%

2.57%
1.60%
NA
-0.10%
4.96%
0.00%
0.00%

NA

NA

NA
a  Includes mini-mills.
b  Includes electric arc or electric induction furnaces.
0  Includes iron foundries that use electric arc or electric induction furnaces.
                                           D-4

-------
       •  Reduction in production costs ($14.9 million): Reduction in coke production
          costs occurs as output declines.
       •  Increased control costs ($2.2 million): The cost of producing furnace coke
          increases as a result of regulatory controls.
       Industry-wide profits for merchant foundry coke producers increase by $3.9 million
under the regulation:

       •  Increase in revenue ($7.0 million):  Revenue increases as a result of higher market
          prices with only slight reductions in output.
       •  Reduction in production costs ($0.2 million): Reduction in coke production costs
          occur as output declines.
       •  Increased control costs ($3.3 million): The cost of producing foundry coke
          increases as a result of regulatory controls.
       Industry-wide profits for domestic cupola furnaces are projected to decrease by $4.6
million as the result of higher price for foundry coke-their primary input.

       Lastly, domestic producers that are not subject to the regulation benefit from higher
prices without additional control costs. As mentioned above, profits increase are projected
for nonintegrated steel mills and foundries producing iron castings with  electric furnaces.

       Additional distributional impacts of the rule within each producer segment are not
necessarily apparent from the reported decline or increase in their aggregate operating profits.
The regulation creates both gainers and losers within each industry segment based on the
distribution of compliance costs across facilities.  As shown in Table D-3, a substantial
subset of the  merchant coke facilities are projected to experience profit increases under both
alternatives (i.e.,  11 furnace coke batteries, or 85 percent, and 10 foundry coke batteries, or
83 percent).  However, one merchant battery is projected to cease market operations as it was
the highest-cost coke battery with the additional regulatory costs.

       A majority of directly affected integrated iron and steel facilities (i.e., 15 plants, or 75
percent)  are projected to become less profitable with the regulation with a total loss of $20.9
million.  However, five integrated mills are projected to benefit from higher coke prices  and
experience a  total profit gain of $4.9 million.  These integrated plants sell a significant share
of furnace coke in the market as compared to negatively affected facilities.
                                          D-5

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Table D-3. Distributional Impacts of the Joint Implementation of the Integrated Iron
and Steel MACT with the Coke MACT: 1997
With Regulation

Integrated Iron and Steel Mills
Facilities (#)
Steel production
Total (103 tpy)
Average (tons/facility)
Steel compliance costs
Total (103 tpy)
Average (tons/facility)
Coke production
Total (103 tpy)
Average (tons/facility)
Coke compliance costs
Total ($10Vyr)
Average ($/ton)
Change in operating profit ($106)
Coke Plants (Merchant Only)
Furnace
Batteries (#)
Production (103 tpy)
Total (103 tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average ($/ton)
Change in operating profit ($106)
Foundry
Batteries (#)
Production
Total (103 tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average
Change in operating profit ($106)
Increased
Profits

5

12,081
2,416

$0.35
$0.03

8,409
1,682

$2.72
$0.32
$4.94


11

3,046
277

$1.95
$0.64
$2.70

10

1,702
170

$2.17
$1.27
$4.10
Decreased
Profits

15

50,002
3,333

$5.59
$0.11

6,473
432

$5.87
$0.91
-$20.87


1

160
160

$0.21
$1.31
-$0.01

2

246
123

$1.14
$4.63
-$0.17
Closure

0

0
0

0
$0.00

0
0

$0
$0.00
$0.00


1

127
127

$0.21
$1.66
$0.00

0

0
0

$0.00
$0.00
$0.00
Total

20

62,083
3,104

$5.94
$0.10

14,882
744

$8.59
$0.58
-$15.92


13

3,332
256

$2.37
$0.71
$2.68

12

1,948
162

$3.30
$1.70
$3.93
                                     D-6

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D.2.2  Facility Closures

       EPA estimates one merchant battery supplying furnace coke is likely to prematurely
close as a result of the regulation.  In addition, one captive battery ceases to supply the market
and only produces coke sufficient for its internal requirements for production of steel mill
projects. In both cases, these batteries are the highest-cost producers  of furnace coke with the
regulation.

D.2.3  Changes in Employment

       As a result of decreased output levels, industry employment is projected to decrease
by less than 1 percent, or 171 full-time equivalents (FTEs), with the regulation.  This is the
net result of employment losses for integrated iron and steel mills totaling 45 FTEs and
merchant coke plants of 126 FTEs. Although EPA projects increases in output for producers
not subject to the rule, which would likely lead to increases in employment, the Agency did
not develop quantitative estimates for this analysis.

D.3    Social Costs

       The social impact of a regulatory action is traditionally measured by the change in
economic welfare that it generates. The social costs of the proposed rule will be distributed
across consumers and producers alike. Consumers experience welfare impacts due to
changes in  market prices and consumption levels associated with the  rule.  Producers
experience welfare impacts resulting from changes in profits corresponding with the changes
in production levels and market prices.  However, it is important to emphasize that this
measure does not include benefits that occur outside the market, that  is, the value of reduced
levels of air pollution with the regulation.

       The national compliance cost estimates are often used as an approximation of the
social cost  of the rule. The engineering analysis estimated annual costs of $20.2 million. In
this case, the burden of the regulation falls solely on the affected facilities that experience a
profit loss exactly equal to these cost estimates.  Thus, the entire loss  is a change in producer
surplus with no change (by assumption) in consumer surplus. This is typically referred to as
a "full-cost absorption" scenario in which all factors of production are assumed to be fixed
and firms are unable to adjust their output levels when faced with additional costs.

       In contrast, the economic analysis accounts for behavioral responses by producers and
consumers  to the regulation (i.e., shifting costs to other economic agents).  This approach
                                         D-7

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results in a social cost estimate that differs from the engineering estimate and also provides
insights on how the regulatory burden is distributed across stakeholders. As shown in Table
D-4, the economic model estimates the total social cost of the rule to be $19.9 million. This
small difference occurs because society allocates resources as a result of the increased cost of
coke production.

       In the final product markets, higher market prices lead to consumers of steel mill
products experiencing losses of $18.5 million and consumers of iron castings experiencing
losses of $4.3 million. Although integrated iron and steel producers are able to pass on a
limited amount of cost increases to their final consumers, e.g.,  automotive manufactures and
construction industry, the increased costs result in a net decline in profits at integrated mills
of $15.9 million and foundries with cupola furnaces of $4.6 million.

       In the coke industry, low-cost merchant producers of furnace and foundry coke
benefit at the expense of consumers and higher-cost merchant and captive coke batteries
resulting in an industry-wide increase in profits. Furnace coke profits at merchant plants
increase in aggregate by $2.7 million, and foundry coke profits at merchant plants increase in
aggregate by $3.9 million.

       Lastly, domestic producers not subject to the regulation (i.e., nonintegrated steel mills
and electric furnaces) as well as foreign producers experience unambiguous gains because
they benefit from increases in market price under both alternatives.
                                         D-8

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Table D-4.  Distribution of the Social Costs of the Joint Implementation of the
Integrated Iron and Steel MACT with the Coke MACT:  1997

 Change in Consumer Surplus ($106/yr)                                       -$22.85
     Steel mill product consumers                                              -$18.51
         Domestic                                                          -$17.70
         Foreign                                                             -$0.82
     Iron casting consumers                                                    -$4.33
         Domestic                                                           -$4.07
         Foreign                                                             -$0.26
 Change in Producer Surplus ($106/yr)                                          $2.91
     Domestic producers                                                      -$6.31
         Integrated iron and steel mills                                         -$15.92
         Nonintegrated steel mills"                                               $5.91
         Cupola furnaces                                                      -$4.60
         Electric furnaces'3                                                     $1.69
         Furnace coke (merchant only)                                           $2.68
         Foundry coke (merchant only)                                           $3.93
     Foreign producers                                                         $9.22
         Iron and steel                                                         $2.91
         Castings                                                             $0.34
         Furnace coke                                                         $6.02
 Social Costs of the Regulation ($106/yr)	-$19.94

a  Includes mini-mills.
b  Includes electric arc or electric induction furnaces.
                                             D-9

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                                   APPENDIX E

                  FOREIGN IMPORTS SENSITIVITY ANALYSIS
       In 1997, the baseline year of the Coke MACT EIA, Chinese imports represented
approximately 2 percent of U.S. foundry coke consumption (USITC, 2000). As a result, the
operational model developed to estimate the economic impacts of the rule on the foundry
coke market focused on domestic foundry coke production and did not explicitly model
foreign trade.  However, the USITC has recently documented an increasing trend in foreign
imports of foundry coke from China.  This report indicated that the ratio of imports to
consumption increased to 11.3 percent in 1999. The purpose of this appendix is to describe
our methods for modifying the economic model and investigate the sensitivity of economic
impact estimates to the inclusion of foreign trade. We find that including foreign imports of
approximately 10 percent does not significantly alter conclusions reported in this report.

E.I    Modifying the Economic Model
       Our approach to investigating the influence of foreign imports on the economic
impact of the proposed regulation was to begin with the baseline year of 1997 and impose the
1999 levels of foundry coke imports.  The first step in modifying the economic  model was to
calculate a hypothetical quantity (short tons) of imported foundry coke. The USITC reports
that in 1999, imports were 133,000 metric tons and domestic production was 1,248,000
metric tons (see Table 2-2 of the report). Thus, the ratio of imports to domestic production
was calculated to be 10.7 percent. Multiplying this ratio by domestic production in 1997
(1,669,094 short tons) results in an import estimate of 178,593 short tons. In addition, we
adjusted the baseline level of iron castings production to account for the new foundry coke
consumption implied by the additional imports. Finally, we used a simple constant elasticity
functional form to develop a supply curve for this foreign supplier (see Eq. [A.4] in
Appendix A for a description of the similar foreign supply used for furnace coke) using a
furnace coke foreign supply elasticity of 3 based on Graham, Thorpe, and Hogan (1999).
Additional sensitivity analysis was conducted for the foreign supply elasticity using an even
more elastic value of 6.
                                        E-l

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E.2    Sensitivity Analysis Results

       As shown in Table E-l, the inclusion of the Chinese imports with an import supply
elasticity of 3 does not significantly affect the Coke MACT economic impact results
presented in Section 4. The market price does not change and the change in domestic market
output decreases from -0.08 percent to -1.02 percent, an additional decrease of 15,600 short
tons.  Because the change in domestic output is so small, all the decrease in output is borne
by the marginal battery.1  With the addition of foreign imports, the capacity utilization for the
marginal battery decreased to 64 percent.  We assume that at 64 percent capacity utilization,
the battery will continue to operate and hence there are no closures.

Table E-l. Market-Level Impacts of the Proposed Coke MACT: 1997

Foundry Coke
Market price (percent change)
Market output (percent change)
Domestic production
Imports
Closures (# batteries)
Exclude Chinese
Imports

2.9%
-0.08%
-0.08%
0
0
Include Chinese
Imports
£ = 3.0

2.9%
-0.06%
-1.02%
8.9%
0
Include Chinese
Imports
£ = 6.0

3.9%
-0.09%
-2.8%
25.8%
1
       As a sensitivity test, Table E-l also shows the impact of including Chinese imports
with an import supply elasticity of 6 (twice the empirical estimate presented in the literature).
Again, the Coke MACT economic impact results presented in Section 4 do not significantly
change. The market price now increases by 3.9 percent, as opposed to a price increase
associated with the regulation of 2.9 percent without imports. The percent change in
domestic output also decreases to 2.8 percent.  The decrease in domestic output decreases the
marginal battery's capacity utilization to 28 percent.  At this utilization rate, we project that
'The marginal battery is the unit with the highest marginal cost of production. Because each coke battery is
   modeled as having a constant marginal cost of production, all domestic changes in output are borne by the
   highest cost battery until the decrease in market output is great enough to close the battery.
                                          E-2

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the battery would close and its market supply would be compensated by increased foreign
supply.  The results presented Table E-l for the supply elasticity 6 scenario incorporate the
closure of the marginal battery.
                                          E-3

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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1. REPORT NO. 2.
EPA-452/R-00-006
4. TITLE AND SUBTITLE

Economic Impact Analysis of Proposed Coke Ovens NESHAP
7.AUTHOR(S)
Michael P. Gallaher and Brooks M. Depro, RTI
9. PERFORMING ORGANIZATION NAME AND ADDRESS
Research Triangle Institute (RTI)
Center for Economics Research, Hobbs Bldg.
Research Triangle Park, NC 27709
12. SPONSORING AGENCY NAME AND ADDRESS
John Seitz, Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
3. RECIPIENT'S ACCESSION NO.
5. REPORT DATE
December 2000
6. PERFORMING ORGANIZATION CODE
8. PERFORMING ORGANIZATION REPORT NO.
RTI Project Number 7647-012
10. PROGRAM ELEMENT NO.
11. CONTRACT/GRANT NO.
68-D-99-024
13. TYPE OF REPORT AND PERIOD COVERED
Final
14. SPONSORING AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
16. ABSTRACT
This report evaluates the economic impacts of the proposed NESHAP for pushing and quenching operations
at coke plants. The social costs of the rule are estimated by incorporating the expected costs of compliance
to a partial equilibrium model of the U.S. iron and steel industry and projecting the market impacts for
furnace and foundry coke. The report also provides the screening analysis for small business impacts.
17. KEY WORDS AND DOCUMENT ANALYSIS
a. DESCRIPTORS
economic impacts
small business impacts
social costs
18. DISTRIBUTION STATEMENT
Release Unlimited
b. IDENTIFIERS/OPEN ENDED TERMS
Air Pollution control
Economic Impact Analysis
Regulatory Flexibility Analysis
19. SECURITY CLASS (Report)
Unclassified
20. SECURITY CLASS (Page)
Unclassified
C.COSATI Field/Group

21. NO. OF PAGES
22. PRICE
EPA Form 2220-1 (Rev. 4-77)
                               PREVIOUS EDITION IS OBSOLETE

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