EPA-230/1-76-048
MARCH 1976
ECONOMIC ANALYSIS OF PROPOSED AND
INTERIM FINAL EFFLUENT GUIDELINES
INTEGRATED IRON
AND STEEL INDUSTRY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Offic* of Planning and Evaluation
Washington, D.C. 20460
UJ
O
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ECONOMIC ANALYSIS OF PROPOSED AND
INTERIM FINAL EFFLUENT GUIDELINES
INTEGRATED IRON
AND STEEL INDUSTRY
ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF PLANNING & EVALUATION
MARCH 1976
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PREFACE
The attached document is a contractor's study prepared
for the Office of Planning and Evaluation of the Environmental
Protection Agency ("EPA"). This study is a partial report
taken from a larger study entitled "Economic Impact of Envi-
ronmental Regulations on the Integrated Iron and Steel Industry"
which gives consideration to all environmental standards. The
purpose of the study is to analyze the economic impact which
could result from the application of alternative effluent
limitation guidelines and standards of performance to be estab-
lished under sections 304(b) and 306 of the Federal Water Pol-
lution Control Act, as amended.
The study supplements the technical study ("EPA
Development Document") supporting the issuance of proposed
regulations under sections 304(b) and 306. The Development
Document surveys existing and potential waste treatment control
methods and technology within particular industrial source
categories and supports proposal of certain effluent limita-
tion guidelines and standards of performance based upon an
analysis of the feasibility of these guidelines and standards
in accordance with the requirements of sections 304(b) and
306 of the Act. Presented in the Development Document are
the investment and operating costs associated with various
alternative control and treatment technologies. The attached
document utilizes these engineering cost estimates but ag-
gregates them differently for the purpose of estimating the
broader economic effects which might result from the required
application of various control methods and technologies.
This study investigates the effect of alternative approaches
in terms of product price increases, effects upon employment
and the continued viability of affected plants, effects upon
foreign trade and other competitive effects.
The study has been prepared with the supervision and
review of the Office of Planning and Evaluation of EPA. This
report was submitted as a partial report toward fulfillment
of Contract No. 68-01-2832 by Temple, Barker & Sloane, Inc.
This report is being released and circulated at
approximately the same time as publication in the Federal Reg-
ister of a notice of proposed and interim final rule making
under sections 304(b) and 306 of the Act-for the subject point
source category. The study is not an offical EPA publication.
(i)
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It. will be considered along with the information contained
in the Development Document and any comments received by EPA
on either docaraent before or during rulo .-Baking proevrdiuirs
necessary to establish final regulations. Prior to final
promulgation of regulations, the accompanying study shall
have standing in any EPA proceeding or court proceeding only
to the extent that it represents the views of the contractor
who studied the subject industry. It cannot be cited, ref-
erenced, or represented iT any respect in any such proceeding
as a statement of EPA's views regarding the subject industry.
(U)
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ACKNOWLEDGMENTS
A study of this complexity cannot be undertaken
without the cooperation of many individuals. From the outset,
Temple, Barker & Sloane, Inc. (TBS) worked closely with a
committee of top level industry executives organized by Dr.
S. Fletcher of the American Iron and Steel Institute (AISI).
This AISI committee was chaired by Mr. W. Lowe of-Inland
Steel and included Messrs. F. Armour of National Steel,
D. Brewster of Inland Steel, J. Lowey of Republic Steel, and
E. Mallick and B. D. Smith of United States Steel (USS).
TBS would like to express its appreciation for the contri-
bution made by the members of this committee.
A number of other steel industry representatives
also contributed to this study. Mr. B. D. Smith of USS
and his staff, including Messrs. W. Renner, R. Ganem,
L. Van der Veer and A. Skirboll, were particularly helpful.
Throughout the TBS study, these USS representatives provided
valuable industry perspective and insightful comments. We
would like to offer our special thanks to Mr. R. Ganem.
Messrs. D. Hawley of Inland Steel and A. Monnett of USS
provided TBS with valuable assistance in the area of
forecasting domestic steel shipments. In addition to Dr.
Fletcher, other staff of the AISI making contributions include
Messrs. F. Langenberg, J. Collins and E. Sommer.
The TBS study utilized detailed industry operating
data collected by Arthur D. Little for the AISI. Interpreta-
tion of these data was provided by Messrs. S. Margolin, K.
Parmeswaran, T. Rothermel and J. Stevens.
Individuals from several organizations assisted in
developing the detailed cost equations for pollution control
equipment. Among these were Messrs. T. Cent! and J. Boros
of NUS/Cyrus Rice Division, P. Beltz and J. Varga of Battelle
Columbus Laboratory, J. O'Connor and R. Jenkins of the
Environmental Protection Agency's (EPA) Office of Air Quality
Planning and Standards, and E. Hall, W. Hunt, E. Delaney,
J. Williams and P. Williams of the EPA's Effluent Guidelines
Division.
(iii)
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EPA's Office of Planning and Evaluation provided
direction throughout this project. Messrs. A. Brueckmann,
S. Besse and J. Kamihachi guided TBS1 effort, providing
perspective, assisting in data collection, and undertaking
more than their fair share of the unpleasant tasks associated
with a project of this scope. Messrs. A. Aim, P. Brands
and R. Gamse offered valuable comments and encouragement.
TBS' staff was augmented during the study by
several key professionals from other organizations. Professor
S. Bradley of the Harvard Business School assisted in the
development of PTm(Steel), a computer-based model of the
steel industry. Professor J. Light of the Harvard Business
School developed TBS1 analysis of capital market conditions
in the past and the projections of future conditions. Mr. A.
Steinburgh of Resource Planning Associates assisted in the
initial stages of the project.
Valuable comments on the draft of this report were
received from: Messrs. B. D. Smith, D. Dilley and R. Ganem
of USS; J. Briggs and R. Woodward of Bethlehem Steel; W.
Sullivan of the Department of Commerce; R. Crandall and W.
Green of the Council on Wage and Price Stability; D. Brazell
of the Council of Economic Advisors; and Professor P. Marshall
of the Harvard Business School.
While pleased to acknowledge all the assistance
it has received during this study, TBS of course takes full
responsibility for the study's analysis and conclusions.
(iv)
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TABLE OF CONTENTS
r;i;.f
PREFACE ( i )
ACKNOWLEDGMENTS (in)
EXECUTIVE SUMMARY
Report Coverage 1
Baseline Conditions 2
Economic Impact of Water Pollution Control 3
Economic Impact of Air Pollution Control 4
Capital Availability 5
Other Impacts 6
Guide to the Report 9
TEXT
1. INTRODUCTION
Report Coverage 1-2
Research Methodology 1-3
2. INDUSTRY BASELINE CONDITIONS
Steel Shipments 2-2
Capacity Expansion 2-3
Capital Expenditures for Expansion
and Modernization 2-5
Capital Expenditures for Pollution Control
Equipment in Service 2-7
Operations and Maintenance Expenses 2-8
3. COST IMPACT OF FEDERAL WATER POLLUTION CONTROL
ACT AND OTHER WATER POLLUTION REGULATIONS
Costing Methodology 3-4
Capital Expenditures for Water Pollution
Control Equipment 3-4
Operations and Maintenance Expenses for
Water Pollution Control Eauipment 3-6
Comparison of Alternative Engineering
Cost Estimates for Water Pollution
Control Equipment 3-8
Sensitivity Analysis: BPCTCA Compliance
Schedule 3-10
4. COST IMPACT OF CLEAN AIR ACT AND OTHER
AIR POLLUTION REGULATIONS
Costing Methodology 4-2
Capital Expenditures for Air Pollution
Control Equipment 4-3
(v)
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Pagp
Operations and Maintenance Expenses for
Air Pollution Control Equipment 4—1
Comparison of Alternative Engineering Cost
Estimates for Air Pollution Control Equipment 4-5
5. SUMMARY OF THE COST IMPACTS OF
ENVIRONMENTAL REGULATIONS
Capital Expenditures 5-1
Operations and Maintenance Expenses 5-3
6. ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS:
REVENUE REQUIREMENTS AND PRICE EFFECTS
Revenue Requirements 6-3
Price Effects 6-5
Sensitivity Analysis: Alternative Basic
Raw Material Costs 6-9
Sensitivity Analysis: Less Than Full Cost
Pass-Thru 6-10
Sensitivity Analysis: Alternative Rates
of Return on Equity 6-11
Sensitivity Analysis: Price and Income
Elasticity 6-13
7. ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS:
EXTERNAL FINANCING NEEDS
Sensitivity Analysis: Steel Shipments Forecast 7-8
Sensitivity Analysis: Planning Under Uncertainty 7-11
Sensitivity Analysis: Alternative Rates of
Return on Equity 7-12
Sensitivity Analysis: Higher Cost of Capital 7-14
Sensitivity Analysis: BPCTCA Compliance Schedule 7-14
8. OTHER IMPACTS OF ENVIRONMENTAL REGULATIONS
Energy Impacts 8-1
Employment Effects 8-4
Community Effects 8-6
Balance of Trade Effects 8-7
9. THE COST AND ECONOMIC IMPACT OF PHASE II
EFFLUENT GUIDELINES
Capital Expenditures 9-2
Operations and Maintenance Expenses 9-3
Required Revenues 9-3
Price Effects 9-4
External Financing 9-5
Energy Impact 9-6
Employment Impact 9-7
(vi)
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LIST OF TABLES AND EXHIBITS
Table
1. Short-Run Economic Impact of Environmental
Regulations, 1975-1977
2. Long-Run Economic Impact of Environmental
Regulations, 1975-1983
Exhibit
1. Domestic Steel Shipments, 1960-1983
2. Capital Expenditures for Capacity Expansion by
Time Period, 1975-1983
3. Capital Expenditures for Reworks and Modernization
by Time Period, 1975-1983
4. Schematic of Steel Production Process
5. Operations and Maintenance Expenses for Iron and
Steel Production by Time Period, 1975-1983
6. Operations and Maintenance Expenses for Water
Pollution Control Equipment Placed Into
Service Prior to 1975 by Time Period, 1975-1983
7. Operations and Maintenance Expenses for Air
Pollution Control Equipment Placed Into Service
Prior to 1975 by Time Period, 1975-1983
8. Capital Expenditures for Water Pollution Control
Equipment by Time Period; NUS/Cyrus Rice
Engineering Cost Estimates, 1975-1983
9. Capital Expenditures for Water Pollution Control
Equipment by Effluent Guideline; NUS/Cyrus Rice
Engineering Cost Estimates, 1975-1983
10. Operations and Maintenance Expenses for Water
Pollution Control Equipment by Time Period;
NUS/Cyrus Rice Engineering Cost Estimates,
1975-1983
11. Operations and Maintenance Expenses for Water
Pollution Control Equipment by Effluent Guideline;
NUS/Cyrus Rice Engineering Cost Estimates,
1975-1983
(vi-i)
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Exhibit
12. Comparison of Capital Expenditures for Water Pollution
Control Equipment; NUS/Cyrus Rice vs. Arthur D. Little
Engineering Cost Estimates, In Place 1974 vs. Additions
1975-1983
13. Comparison of Operations and Maintenance Expenses for
Water Pollution Control Equipment; NUS/Cyrus Rice vs.
Arthur D. Little Engineering Cost Estimates, 1975-1983
14. Capital Expenditures for Air Pollution Control Equipment
by Time Period; Battelle Columbus Laboratories Engineer-
ing Cost Estimates, 1975-1983
15. Capital Expenditures for Air Pollution Control Equipment
by Emission Standard; Battelle Columbus Laboratories
Engineering Cost Estimates, 1975-1983
16. Operations and Maintenance Expenses for Air Pollution
Control Equipment by Time Period; Battelle Columbus
Laboratories Engineering Cost Estimates, 1975-1983
17. Operations and Maintenance Expenses for Air Pollution
Control Equipment by Emission Standard*, Battelle
Columbus Laboratories Engineering Cost Estimates,
1975-1983
18. Comparison of Capital Expenditures for Air Pollution
Control Equipment; Battelle Columbus Laboratories vs.
Arthur D. Little Engineering Cost Estimates, In Place
1974 vs. Additions 1975-1983
19. Comparison of Operations and Maintenance Expenses for
Air Pollution Control Equipment; Battelle Columbus
Laboratories vs. Arthur D. Little Engineering Cost
Estimates, 1975-1983
20. Schematic of TBS Methodology for Estimating Revenue
Requirements and External Financing Needs
21. Revenue Requirements for Industry Baseline and Water
and Air Pollution Control Equipment, 1975-1983
22. Revenue Requirements for Industry Baseline and Water
and Air Pollution Control Equipment by Time Period,
1975-1983
23. Average Price Effects for Industry Baseline and Water
and Air Pollution Control Equipment for Selected
Years, 1974-1983
24. Price Effects for Industry Baseline and Water and Air
Pollution Control Equipment by Steel Product, 1983
25. Price Effects for Industry Baseline and Water and Air
Pollution Control Equipment by Stage of Production,
1983
(viii)
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Exhibit
26. Price Effects for Industry Baseline and Water and Air
Pollution Control Equipment by Process, 1983
27. Sources and Applications of Funds for Industry
Baseline and Water and Air Pollution Control
Equipment, 1975-1977
28. Sources and Applications of Funds for Industry
Baseline and Water and Air Pollution Control
Equipment, 1975-1983
29. External Financing Requirements for Industry
Baseline and Water and Air Pollution Control
Equipment by Time Period, 1975-1983
30. Energy Consumption for Iron and Steel Production,
1975-1983
31. Energy Consumption for Industry Baseline and Water
and Air Pollution Control Equipment by Time
Period, 1975-1983
32. Employment for Iron and Steel Production for Selected
Years, 1974-1983
33. Employment for Industry Baseline and Water and Air
Pollution Control Equipment for Selected Years,
1974-1983
(ix)
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EXECUTIVE SUMMARY
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EXECUTIVE SUMMARY
This study provides a summary of the economic impact
of environmental regulations on the steel industry conducted
by Temple, Barker Si Sloane, Inc. (TBS) for the Office of
Planning and Evaluation, Environmental Protection Agency (EPA).
Its primary objective is to provide both public policy-makers
and industry representatives with an independent, in-depth
evaluation of the total economic impact of environmental regula-
tions developed within the context of the uncertainties facing
the steel incivstry during the next decade. A secondary objec-
tive has been an evaluation of the impact of the recently
promulgated Phase II Effluent Guidelines.
To our knowledge this study of the steel industry
is unique in its appfoach—combining the cost impact methodology
employed by Arthur D. Little in its study for the American Iron
and Steel Institute (AISI) with, for the first time, a computer-
based revenue requirement and external financing methodology
which permits an integrated analysis of the economic impacts of
environmental regulations.
As the foundation for this study, TBS has developed
a Policy-Testing model of the steel industry, PTm(Steel).
This computer-based model combines the planning assumptions of
industry and technical experts with the structural relation-
ships utilized by engineers and accountants.
REPORT COVERAGE
EPA chose as its definition of the steel industry
those on-site facilities from raw materials storage yards for
coke oven and blast furnaces through finishing mills. Thus
facilities for mining, beneficiation and transportation of raw
materials to the site of coking and/or ironmaking as well as
fabrication facilities are excluded, but facilities used by
the steel industry to produce pig iron for foundries and other
uses are included. In addition, all other non-steel operations
by steel firms have been excluded from the impact analysis
reported herein. It is estimated that steel operations as de-
fined herein represented somewhat in excess of 70 percent of
the net fixed assets of the major integrated steel companies
during the 1972-1974 period.
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In order to utilize detailed operating data com-
piled by AISI members, TBS limited its analysis to steel
operations which produce approximately 93 percent of domestic
steel shipments. While extrapolation to total steel opera-
tions could be made, extension of the analysis to iron ore
and coal mining, beneficiation, transportation, fabrication
and other non-steel operations by steel companies would not
be advised.
Environmental requirements analyzed herein are
limited to those promulgated, proposed and/or anticipated
by EPA. They do not include government regulations initiated
by other federal agencies; for example, OSHA requirements.
In addition, the engineering cost estimates and compliance
schedules are based upon compliance by the steel firm at the
plant site, not by municipal wastewater treatment facilities.
BASELINE CONDITIONS
In order to discuss the economic impact of environ-
mental regulations on the steel industry, it is important
first to establish a point of reference from which comparisons
can be made. In so doing, the uncertainties inherent in
forecasting conditions within the steel industry which are
unrelated to environmental regulations should be segmented
from those associated with these regulations. This reference
point requires the establishment of a baseline set of condi-
tions which represents anticipated future operating conditions,
which excludes the impact of all pending environmental regu-
lations, and which includes the impact of pollution control
equipment placed into service prior to 1975.
In establishing a baseline forecast for the steel
industry, TBS has assumed that domestic steel shipments will
rebound from the recession conditions evident in 1975 to the
long-run trend by 1977 and continue to follow the long-run
trend through 1983. This baseline forecast results in domes-
tic steel shipments of 120 million tons by 1980.
The economic implications of this baseline can be
summarized by focusing on five key indicators—capital expen-
ditures, external financing needs, operations and maintenance
expenses, revenue requirements, and average steel price per
ton. These baseline conditions in the short and long run are
as follows:
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SUMMARY OF BASELINE CONDITIONS
(billions of 1975 dollars)
Capital Expenditures
External Financing Needs
O&M Expenses
Revenue Requirements
Average Price
(In 1975 dollars per ton)
Short Run
1975-1977
$8.7
3.8
78.2
96.1
$345.28
Long Run
1975-1983
$27.5
13.0
282.9
338.6
$365.21
Tables 1 and 2 provide a detailed summary of these
economic indicators segmented into the short- and long-run
impacts associated with the industry baseline conditions,
water pollution control regulations, and air pollution control
regulations.
ECONOMIC IMPACT OF WATER POLLUTION CONTROL
Based on the Phase I Development Document pub-
lished in June 1974, the most recent Phase II Development
Document published in March 1976, and other water regulations
anticipated but not covered by either Phase I or Phase II
Effluent Guidelines, TBS estimates that capital expenditures
for water pollution control equipment will total $3.6 billion
during the 1975-1983 period, $2.5 billion of which will re-
quire external financing.^ The capital-related charges as-
sociated with these expenditures, combined with the costs of
operating the additions to water pollution control equipment,
will total $5.8 billion. By 1983 these costs, if passed through
in the form of higher prices, will increase the average steel
price by $9.60 per ton—2.6 percent of the baseline price level.
A summary of the economic impact of water pollution
control is as follows:
It should be noted that these economic impacts are based upon an
assumption that all existing steel facilities will achieve BPCTCA
requirements on or before July 1, 1979 and BATEA requirements by
July 13 1983.
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MATER POLLUTION CONTROL EQUIPMENT
(billions
Capital Expenditures
External Financing Needs
O&M Expenses
Revenue Requirements
Average Price Increase
(1n 1975 dollars per ton)
of 1975 dollars)
Short Run
1975-1977
$1.8
1.6
0.2
0.7
$3.42
Long Run
1975-1983
$3.6
2.5
2.5
5.8
$9.60
ECONOMIC IMPACT OF AIR POLLUTION CONTROL
Utilizing data from the 1974 Cost of Clean Air
report for stack emissions and data supplied by EPA-Durham
for fugitive emissions, TBS projects capital expenditures
for air pollution control equipment to amount to $3.3 billion
in the long run with related external financing needs of
$2.1 billion.2 The revenue requirements associated with
these capital expenditures and operating expenses will
approximate $5.7 billion and will require a 1983 price in-
crease of $7.15 per ton. This price increase represents a
2.0 percent increase over the baseline price level.
A summary of the economic impact of air pollution
control is as follows:
AIR POLLUTION CONTROL EQUIPMENT
(billions
Capital Expenditures
External Financing Needs
O&M Expenses
Revenue Requirements
Average Price Increase
(In 1975 dollars per ton)
of 1975 dollars)
Short Run
1975-1977
$2.1
1.9
0.2
0.9
$3.82
Long Run
1975-1983
$3.3
2.1
2.3
5.7
$7.15
is analysis is based upon installation of controls for stack
issions by July 1, 1978 and fugitive emissions by July 1, 1980.
This
emissions
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CAPITAL AVAILABILITY
Some observers of capital market conditions have
forecast a shortage of capital in the near future. TBS
has projected capital availability by means of three,
equally plausible scenarios. The ability of major non-
financial corporations to finance their operations appears
to be feasible under all three scenarios—the unanswered
question is the difficulty of so doing in terms of the cost
of capital in the form of interest rate or stock price.
The capital availability problem is most relevant to the
marginal, interest-sensitive borrower. Normally, these
borrowers would include state and local governments, small
business firms, and individuals requiring home mortgages
and/or consumer credit.
During the last decade the steel industry has de-
pended upon external sources for less than $1.0 billion.
These external financing requirements represented only 5 per-
cent of total applications. The $13.0 billion of external
financing required for capacity expansion and modernization
in the long run represents nearly 40 percent of total base-
line applications. Environmental regulations will increase
financing needs by $4.6 billion. These latter requirements
represent 60 percent of the total application of funds
associated with pollution control equipment.
The most serious financing problem, however, exists
in the short run when environmental regulations will require
$3.5 billion, a near doubling of the financing requirements
for expansion and modernization. Nearly 90 percent of the
funds used for pollution control equipment in the short
run must be financed through external sources. These 1975-
1977 capital market requirements pose serious problems for
the steel industry.
First, these external financing requirements far
exceed historical flows. Second, the industry's level of
profitability has seriously lagged the average of all manufac-
turing firms with the exception of 1974 when the relaxation
of price controls and worldwide shortages of both steel and
basic raw materials enabled the steel industry to raise its
prices and fully utilize its productive capacity. Third, the
steel industry has been burdened in the past by a poor assess-
ment by financial analysts and investors in general. From
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1970 through 1974, the ratio of market value of common stock
to book value for the six major integrated steel firms ap-
proximated 0.5. If the steel industry were required to issue
common stock under these market conditions to finance its
expansion and/or pollution control equipment, the value of
the holdings by existing stockholders would be diluted.
Finally, if steel firms were unable to issue common
stock at prices near book value, they would have the option
of cutting back on expansion plans or modifying the historic
debt-to-equity ratio of 30 to 40 percent. If the industry
were to finance its expansion and pollution control equipment
needs entirely with long-term debt issues, the debt-to-equity
ratio would increase to 100 percent by 1983. Even if this mix
of debt and equity were acceptable to investors (for example,
in terms of interest coverage ratios), the cause for the shift
and its magnitude would most likely have an adverse impact upon
the current bond ratings of firms within the steel industry.
Under these conditions, most steel firms would likely cut back
on their capacity expansion plans.
The above-mentioned analysis does not necessarily
imply that the steel industry cannot finance its expansion
and/or its pollution control requirements in the short run.
While there is little doubt that financing these requirements
will be extremely difficult, TBS believes that the task is
manageable. However, the industry must be able to pass through
the increased operating costs and capital-related charges
associated with expansion and environmental requirements, in-
cluding a rate of return on its common equity at least comparable
to that realized on average by other manufacturing firms.
OTHER IMPACTS
The regulation and control of air and water pollu-
tants in the steel industry will have other impacts. The most
significant of these other effects will concern changes in the
industry's consumption of energy and its levels of employment.
Minor effects may also be expected in communities where sig-
nificant amounts of steelmaking are concentrated and in the
nation's balance of trade.
ENERGY
Relative to the large energy requirements for steel
production, the energy impact of pollution control is small.
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— 7—
Pollution control equipment placed into service during the
1975-1983 period will increase energy consumption by 0.4
quadrillion Btu, approximately 2 percent of the baseline
levels. When the energy consumption of pollution control
facilities already in place is included, total energy use
associated with environmental regulations is calculated to be
0.8 quadrillion Btu, or less than 4 percent of the industry
total. The energy requirements to operate all pollution con-
trol facilities within the steel industry will be 41,000 barrels
of residual fuel oil or equivalent per day.
EMPLOYMENT
The construction, installation and operation of pol-
lution control facilities will create additional jobs. By
1983, compliance with all levels of pollution control guide-
lines will have created 12,500 additional jobs. In total,
more than 14,900 jobs will be required by 1983 to operate pol-
lution control equipment within the steel industry.
In addition to jobs created directly within the
steel industry, the manufacture and installation of pollution
control equipment will generate an annual average of more
than 15,000 jobs in pollution control equipment industries.
This employment will, in turn, create additional employment in
unrelated industries.
Some reduction in production labor may offset these
employment increases. Jobs could be lost if the higher prices
due to the cost of pollution control result in a decline in
domestic steel shipments. Jobs could also be lost if specific
mills or plants were shut down; however, shutting down one
operation might require expanding production at another plant.
The net effect of either of these conditions would be a decline
in employment only to the extent that production is shifted
from more labor-intensive operations to less labor-intensive ones
or domestic production is replaced by imports and/or substitute
materials.
COMMUNITY
The effect on communities of compliance with the pro-
posed environmental regulations will vary by geographic region.
Where plants are large and where significant amounts of steel-
making capacity are concentrated (e.g., in Pennsylvania with
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over 20 percent of steelmaking capacity), closing of processes
at one plant may result in additional Jobs at another plant
nearby. Such community effects require specialized micro-
economic analysis of plant-specific data.
EPA has conducted an in-depth analysis of the potential
economic effects of pollution control costs on the eight steel
plants in the Mahoning Valley region of eastern Ohio. Imposition
of pollution controls or any other major increase in production
costs is likely to reduce significantly the profitability of
these plants. In these situations, the steel firms might elect
to curtail operations rather than make the capital investment to
meet environmental regulations.
On the basis of the Mahoning Valley study, EPA pro-
vided substantial relief from the industry-wide effluent guide-
lines.
BALANCE OF TRADE
In 1974 steel imports resulted in an unfavorable
balance of trade of $3.0 billion, the greatest deficit of the
decade. The increased prices implied by the pass-through of
all pollution control costs, including a competitive return on
common equity, could adversely impact the ability of domestic
producers to compete with imports. However, TBS projects that
steel customers will face increases in nominal steel prices
which will exceed the overall rate of inflation within the
economy by only 0.5 percent. In addition, most knowledgeable
observers of the steel industry believe that the domestic steel
industry is now cost competitive with foreign steel producers.
Future capacity expansion and the shift to more efficient steel-
making should increase this comparative advantage.
It is not possible to foresee accurately the final
impact of these events on our balance of trade. Net imports
of steel is the most difficult measure of demand to forecast
since it is directly affected not only by domestic economic
developments but by foreign ones as well. In addition, for-
eign steel has been an instrument of government policy in the
past.
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GUIDE TO THE REPORT
This report consists of nine sections and related
exhibits.
Section 1 surveys the report coverage and research
methodology;
Section 2 details the cost impact associated with
the industry baseline conditions;
Section 3 estimates the cost impacts of water
pollution control equipment
Section 4 projects the cost impacts of air pollu-
tion control equipment;
Section 5 summarizes the cost impacts of environ-
mental regulations and relates them to the industry
baseline;
Section 6 analyzes the revenue requirements and
price effects associated with these cost impacts;
Section 7 delineates the external financing
needs which follow from these cost impacts;
Section 8 describes other effects of these
environmental regulations; and
Section 9 details the economic impacts
associated with the Phase II Effluent
Guidelines.
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Industry Baseline Conditions
Iron and Steel Production
Water PCE In Place
Air PCE In Place
Total Baseline Conditions
Water PCE Additions
Phase I Processes
Phase II Processes
Storm Runoff Guideline
Other Water PCE
Total Water PCE Additions
Air PCE Additions
Stack Emissions
Fugitives Emissions
Other Air PCE
Total Air PCE Additions
Grand Total
*Less than 0.05 percent
"Less than $5 million
Table 1
SHORT-RUN ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS
1975-1977
(billions of 1975 dollars unless otherwise specified)
Capital External Operations & Revenue Average
Expenditures Financing Maintenance Requirements 1977 Price
Percent of
Amount Baseline
(«)
$8.72 100.0
$8.72 100.0
$0.25 2.9
1.33 15.3
0.02 0.2
0.16 1.8
$1.76 20.2
$1.33 15.3
0.63 7.2
0.13 1.5
$2.09 24.0
$12.56 144.0
Percent of
Amount Baseline
W
$3.74 99.2
0.04 1.1
(0.01) (0.3)
$3.77 100.0
$0.24 6.4
1.18 31.3
0.02 0.5
0.15 4.0
$1.59 42.2
$1.16 30.8
0.62 16.4
0.12 3.2
$1.90 50.4
$7.26 192.6
Percent of
Amount Baseline
(*)
$77.27 98.8
0.68 0.9
0.22 0.3
$78.17 100.0
$0.03 *
0.13 0.2
0.03 *
$0.19 0.2
$0.19 0.2
0.02 *
$0.21 0.3
$78.56 100.5
Percent of
Amount Baseline
<*)
$94.87 98.7
0.93 1.0
0.32 0.3
$96.11 100.0
$0.11 0.1
0.53 0.6
**
0.07 0.1
$0.73 0.8
$0.69 0.7
0.10 0.1
0.07 0.1
$0.86 0.9
$97.69 101.6
Percent of
Amount Baseline
(dollars) (?)
$341.17 98.8
3.12 0.9
0.99 0.3
$345.28 100.0
$0.56 0.2
2.46 0.7
0.02 *
0.38 0.1
$3.42 i.o
$2.98 0.9
0.54 0.2
0.30 0.1
$3.82 1.2
$352.52 102.1
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Industry Baseline Conditions
Iron and Steel Production
Water PCE In Place
Air PCE In Place
Total Baseline Conditions
Water PCE Additions
Phase I Processes
Phase II Processes
Storm Runoff Guideline
Other Water PCE
Total Water PCE Additions
Air PCE Additions
Stack Emissions
Fugitives Emissions
Other Air PCE
Total Air PCE Additions
Grand Total
*Less than 0.05 percent
Table 2
LONG-RUN ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS
1975-1983
(billions of 1975 dollars unless otherwise specified)
Capital External Operations &
Expenditures Financing Maintenance
Percent of
Amount Baseline
(*)
$27.50 100.0
$27.50 100.0
$0.65 2.4
2.18 7.9
0.15 0.5
0.60 2.2
$3.58 13.0
$1.65 6.0
1.34 4.9
0.26 0.9
$3.25 11.8
$34.32 124.8
Percent of
Amount Baseline
W
$13.23 101.8
(0.15) (1.2)
(0.09) (0.7)
$12.99 100.0
$0.48 3.7
1.39 10.7
0.12 0.9
0.49 3.8
$2.49 19.2
$0.93 7.2
0.95 7.3
0.18 1.4
$2.06 15.9
$17.54 135.0
Percent of
Amount Baseline
m
$279.91 99.0
2.29 0.8
0.67 0.2
$282.87 100.0
$0.45 0.2
1.14 0.4
0.10 *
0.85 0.3
$2.54 0.9
$0.96 0.3
1.15 0.4
0.22 0.1
$2.34 0.8
$287.74 101.7
Revenue
Requirements
Percent of
Amount Baseline
W
.$334.95 98.9
2.80 0.9
0.85 0.3
$338.61 100.0
$0.98 0.3
3.25 1.0
0.20 0.1
1.32 0.4
$5.75 1.7
$2.78 0.8
2.44 0.7
0.47 0.1
$5.68 1.7
$350.04 103.4
Average
1983 Price
Percent of
Amount Baseline
(dollars) (X)
$361.96 99.1
2.57 0.7
0.68 0.2
$365.21 100.0
$1.76 0.5
4.22 1.2
0.53 0.1
3.09 0.8
$9.60 2.6
$2.70 0.7
3.70 1.0
0.75 0.2
$7.15 2.0
$381.96 104.6
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TEXT
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I. INTRODUCTION
This report culminates a fifteen-month effort by
Temple, Barker & Sloane, Inc. (TBS) to evaluate the economic
impact of environmental regulations on the steel industry for
the Office of Planning and Evaluation, Environmental Protec-
tion Agency (EPA). Its objectives are two-fold: (1) to pro-
vide both public policy-makers and industry representatives
with an independent, in-depth evaluation of the total economic
impact of environmental regulations within the context of the
uncertainties facing the steel industry during the next decade,
and (2) to assess the impact of the Federal Water Pollution
Control Act Amendments of 1972.
The economic and regulatory climate in which the
steel industry operates has undergone drastic changes since
this study was initiated. Record profits within the steel
industry were achieved in 1974 and the industry was looking
forward with optimism. The economic recession from which the
United States now appears to have recovered was devastating
in its effect upon the steel industry. Shipments declined
by more than 25 percent during 1975, but by year-end the in-
dustry was once again looking forward with optimism—tempered
by the economic realities of an uncertain economy, foreign
competition, and continued government regulation.
The relaxation of steel price controls during 1974
was a major factor in the industry's record performance that
year. Perhaps just as important was the anticipation of
shortages in basic raw materials which led to a significant
increase in steel product inventories held by steel customers.
The year 1975 was marked by direct confrontation between the
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1-2
Council on Wage and Price Stability (CWPS) and the steel in-
dustry over price increases. The CWPS Steel Symposium was
convened in December to discuss in public forum the major
differences of opinion evident among public policy-makers,
industry spokesmen, knowledgeable industry observers and
representatives of major steel consumers.
It is hoped that this report will further assist in
promoting open discussion of public policy as it impacts the
steel industry and will extend this dialogue to include the
economic impact of environmental regulations.
REPORT COVERAGE
In analyzing the steel industry, EPA necessarily had
to define the boundaries of its analysis. In so doing, EPA
chose as its definition of the steel industry those on-site
facilities from raw materials storage yards for coke oven
and blast furnaces through finishing mills. Thus facilities
for mining, beneficiation and transportation of raw materials
to the site of coking and/or ironmaking as well as fabrication
facilities are excluded, but facilities used by the steel industry
to produce pig iron for foundries and other uses are included.
In addition, all other non-steel operations by steel firms have
been excluded from the impact analysis reported herein.
Utilizing data provided by AISI, -it is estimated that steel operations
as defined herein represented somewhat in excess of 70 percent of the
net fixed assets of the major integrated steel companies during the
1972-1974 period. If iron oret metallurgical coal and scrap metal were
transferred at market values, sales revenues from steel operations ap-
proximated 80 percent of the total revenues of these firms during this
period.
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1-3
The American Iron and Steel Institute (AISI), whose
members operate 139 steel plants, provided detailed operating
data on 130 of these plants for its cost impact study conducted
2
by Arthur D. Little (ADL). In order to utilize these data
most effectively, TBS limited its analysis to steelmaking and
finishing facilities which produce approximately 93 percent of
domestic steel shipments. While extrapolation to total steel
operations could be made, extension of the analysis to iron ore
and coal mining, beneficiation, transportation, fabrication and
other non-steel operations by steel companies would not be advised,
RESEARCH METHODOLOGY
To our knowledge this study of the steel industry is
unique in its approach—combining the cost impact methodology
employed by ADL in its study for the AISI and developing, for
the first time, a computer-based revenue requirement and ex-
ternal financing methodology which permits an integrated analy-
sis of the economic impacts of environmental regulations within
the context of uncertain operating conditions.
As the foundation for this study, TBS has developed
a Policy-Testing model of the steel industry, hereinafter
referred to as PTm(Steel). This computer-based model combines
the planning assumptions of industry and technical experts
2
Steel and the Environment: A Cost Impact Analysis, Arthur D. Little for
the American Iron and Steel Institute, May 2975.
^In ite report ADL concluded, "Several attempts have already been made
to examine the economic impact of pollution control costs on the iron
and steel industry. These have been severely limited by the lack of
the kind of data now provided by this (i.e., ADL) study. An economic
impact analysis, the next step after this cost impact examination, is
needed to evaluate the full implications of pollution control costs
for the iron and steel industry." (Ibid, p. VI-60)
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1-4
with the structural relationships utilized by engineers and
accountants. Underlying PTm(Steel) are three independent
modules which correspond to (1) production facilities planning
and operations, (2) pollution control equipment planning and
operations, and (3) revenue requirements and external finan-
cing needs determination. The first two modules provide the
cost impacts which, when combined with the revenue requirements
module, permit an integrated statement of the economic impact
of environmental regulations.
All financial transactions within PTm(Steel) are com-
puted in current dollars. During periods of inflation, these
financial transactions recognize cost escalation where rele-
vant (e.g., operations and maintenance expenses) as well as
an historic cost basis (e.g., depreciation). However, for
purposes of comparability, all financial data have been re-
ported in constant 1975 dollars. In so doing, transactions
have been inflated at sectoral rates of inflation and de-
4
flated by the rate of overall inflation (i.e., GNP deflator).
The economic impact analysis reported herein focuses
upon the 1975-1983 time period. In order to capture the cumu-
lative effect of environmental regulations during this period,
most exhibits provide detailed information for the three-year
periods 1975-1977, 1978-1980 and 1981-1983 as well as the
For example, assume that a polling mill completed in 1975 costs $100.0
million. A comparable facility scheduled for initial operation in 1980
would cost $161.1 million in current dollars and $126.2 million in con-
stant 1975 dollars vf the sectoral rate of inflation in the construc-
tion industry were 10 percent and overall GNP inflation were 5 percent
during the 1976-1980 period.
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1-5
1975-1983 period. The text and the tables therein summarize
these data into short-run (1975-1977) and long-run (1975-
1983) time periods.
In comparing the ADL methodology with PTm(Steel).,
it should be noted that the ADL computer-based model is ca-
pable of computing the cost impacts on a process, plant and/or
company basis. The methodology utilized by TBS is consistent
with these levels of analysis; however, the data provided
TBS by ADL with the concurrence of AISI do not permit analyses
at either the plant or company level. The AISI data were
aggregated prior to their dissemination to TBS and others in
order to avoid divulging proprietary operating data. When
more detailed data become available, analyses at the plant
and/or company level can be undertaken. However, these data
were not required to perform the economic impact analysis
herein reported.
-------
2, INDUSTRY BASELINE CONDITIONS
In order to discuss the economic impact of the proposed
and interim final effluent limitation guidelines and other
pending environmental regulations on the steel industry, it is
important first to establish a point of reference from which
comparisons can be made. In so doing, the uncertainties in-
herent in forecasting conditions within the steel industry
which are unrelated to environmental regulations should be
segmented from those associated with these regulations. This
reference point requires the establishment of a baseline set
of conditions which represents anticipated future operating
conditions, which excludes the impact of all pending environ-
mental regulations—promulgated, proposed, and anticipated,
and which includes the impact of pollution control equipment
placed into service prior to 1975.
The major steps undertaken to establish this industry
baseline include:
0 specifying future domestic steel shipments,
• determining capacity expansion requirements,
o projecting capital expenditures for capacity
expansion and modernization,
Environmental requirements analyzed herein are limited to those promul-
gated, proposed and anticipated by EPA. Thus they do not include regu-
lations initiated by other federal agencies; for example, OSHA require-
ments. In addition, the engineering coat estimates and compliance
schedules are based upon compliance by the steel firm at the plant site,
not by municipal wastewater treatment facilities.
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2-2
• determining the level of capital expen-
ditures for pollution control equipment
placed into service prior to 1975,
• estimating operations and maintenance
expenses associated with the above-
mentioned production requirements and
operation of pollution control equipment,
• projecting the revenues required to cover
operating expenses and capital-related
charges, and
• determining external financing needs.
The remainder of this section will detail the first
five steps in this process of specifying an industry baseline.
The last two steps will be discussed in Sections 6 and 7
after computing all of the cost impacts, including those
associated with environmental regulations.
STEEL SHIPMENTS
Perhaps the most uncertain element in this baseline
set of conditions is forecasting the future level of domestic
steel shipments. Following a steady rate of growth during
the early 1960s, domestic steel shipments remained relatively
stagnant near 90 million tons from 1965 through 1972 as steel
imports increased 70 percent. Record levels for domestic ship-
ments, averaging 110 million tons per year, occurred in 1973
and 1974. Preliminary estimates of shipments during 1975 in-
dicate a decline of approximately 25 percent from the 1974
level.
In establishing a baseline forecast for the steel
industry, TBS has assumed that domestic steel shipments will
rebound from the recession conditions evident in 1975 to the
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2-3
long-run trend by 1977 and continue to follow the long-run
trend through 1983. This forecast, summarized in Exhibit 1,
projects an annual growth in total domestic shipments of
2.54 million tons per year from 1977 onward and results in
total domestic steel shipments of 113.0 million tons in 1977,
120.6 million tons in 1980, and 128.2 million tons in 1983.2
Recognizing that the capital expenditures for capacity
expansion and modernization associated with any prespecified
level for future domestic steel shipments would be highly
problematic, TBS also specified both an optimistic and pessi-
mistic level of shipments which deviated in the long run from
baseline levels by plus and minus 10 percent, respectively.
In selecting these alternative rates for growth in steel ship-
ments, it should be noted that recent forecasts of 1980 ship-
ments by AISI, the International Iron and Steel Institute,
Arthur D. Little (for the AISI), Booz, Allen & Hamilton (in
separate studies for the Council on Environmental Quality
and the Department of Commerce), Chase Econometrics, Data
Resources, Inc., and the Bureau of Labor Statistics differ
from the baseline forecast by less than 7 percent.
CAPACITY EXPANSION
The forecast baseline growth in steel shipments
implies a need for capacity expansion. In analyzing this need,
TBS assumed that the steel industry will expand its capacity to
n
The analysis reported herein is limited to eteelmaking and finishing facilities
which represent 93 percent of domestic shipments. Thus the corresponding
baseline forecast of shipments would be 105.1 million tons in 1977,
112.2 million tons in 1980 and 119.2 million tons in 1983.
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2-4
meet anticipated steel shipment requirements and to be able
to operate at planned levels of utilization.
Capacity additions to basic oxygen and electric fur-
naces of approximately 50 million tons will be required to meet
the baseline shipments forecast and to replace open hearth
capacity being retired. These additions imply a net increase
in steelmaking capacity of approximately 25 million tons,
necessitating the expansion of coal, scrap and coking facilities
and the replacement of approximately 10 million tons of iron-
making capacity in the form of old blast furnaces which are
currently not in blast. The transition toward continuous
casting will require the addition of continuous casting facili-
ties capable of producing nearly 30 million tons. Most fin-
ishing mills—especially wire, pipe and tubing, galvanizing
and tin plating, and plate—will require additional capacity
to meet the baseline requirements.
During the 1973-1974 period, many steelmaking and
finishing processes operated at levels above their sustainable
utilization. If shipments return to the long-run trend by
1977, a substantial amount of the steelmaking, continuous
casting and finishing expansion will be needed in the short
run.
l'lt should be noted that this approach assumes that the industryt as well
as each firm within the industry, will add facilities to achieve balances
in terms of annual throughput. Given the importance of maintaining market
share and the economies of scale evident in several processes, this
approach projects the minimum capital expenditures required to meet a
specified projection of domestic steel shipments.
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2-5
CAPITAL EXPENDITURES FOR
EXPANSION AND MODERNIZATION
The capital expenditures implied by the above-
mentioned schedule of capacity additions are as follows:
CAPITAL EXPENDITURES FOR
EXPANSION AND MODERNIZATION
(billions of 1975 dollars)
Short Run
1975-1977
Capacity Expansion
Placed Into Service $3.33
Changes In Construction
Work 1n Progress 0.40
TOTAL $3.73
Capacity Modernization 4.99
GRAND TOTAL $8.72
Long Run
1975-1983
$ 9.61
These capital expenditures for capacity expansion and moderni-
zation are detailed by stage of production and by time period
in Exhibits 2 and 3, respectively.4
Expenditures for the expansion of production capacity
amount to $3.7 billion in the short run and $11.6 billion in
the long run—approximately $1.3 billion per year, and include
both equipment placed into service during the period and
changes in the amount under construction. In the long run these
expenditures for increases in construction work in progress
(CWIP) exceed $2.0 billion, an amount ignored in most studies
of the steel industry.
4
TBS has segmented steel production -into 28 processes. These processes
are then summarized into five stages of production—on-site raw materials
preparationt ironmaking, steelmdking, casting and forming^ and finishing.
Exhibit 4 provides a schematic diagram of the steel production process.
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2-6
The TBS approach to estimating capital expenditures
for capacity expansion, which focuses on production require-
ments and capacity additions by process, differs significantly
from the methods employed by other industry observers. Other
estimates of expansion requirements focus on overall steel-
making facilities which, when combined with a rough estimate
of the cost of adding a ton of raw steel capacity (ranging
from $200 to more than $800 per ton), permits an estimate of
capital expenditures for expansion. Furthermore, estimates
of additions to steelmaking capacity are often confounded by
an unspecified conversion from open hearth to basic oxygen
and electric furnace production.
In addition to capital expenditures for capacity
expansion, outlays for modernization of existing capacity rep-
resent a relatively constant flow of funds which usually cannot
be delayed or curtailed without operating inefficiencies and/or
loss of productive capacity. These expenditures for reworking
and/or replacing existing facilities do not result in increased
capacity. They amount to $5.0 billion in the short run and
$15.9 billion in the long run and comprise 57 percent of base-
line capital expenditures.
AISI estimates expenditures for capacity moderniza-
tion by focusing upon the aggregate level of capital expendi-
tures during the past decade when productive capacity remained
relatively unchanged. The TBS methodology permits more
Steel Industry Economics and Federal Income Tax Policy, American Iron
and Steel Institute, June 2975.
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2-7
detailed analysis than the approaches used by AISI and other
industry observers. Utilizing AISI data provided by ADL, TBS
estimated annual capital expenditures required to maintain a
ft
ton of existing capacity for each process. These annual
expenditures, prior to adjustment for cost escalation,
ranged from 1.0 to 6.8 percent of the original construction
cost.
The TBS methodology for computing capital expenditures
for modernization yields estimates comparable to those developed
by other observers. For example, AISI has reported that total
capital expenditures by the steel industry during the last
decade have averaged $1.8 billion per year. The TBS estimate
of capital expenditures for the modernization of steel opera-
tions during the 1975-1983 period is $1.8 billion per
year.
CAPITAL EXPENDITURES FOR
POLLUTION CONTROL EQUIPMENT IN SERVICE
In specifying industry baseline conditions, TBS in-
cluded the impact of pollution control equipment which was
This method of computing capital expenditures for modernisation and re-
works was suggested, although not employed, by ADL in i,tt study for
AISI. Instead, ADL utilized the AISI approach to estimate these ex-
penditures.
7
It should be noted that the TBS estimate is in constant 1975 dollars
and covers only 93 percent of the steel industry. The AISI concludes,
"...it is estimated that capital expenditures to maintain present capacity
during the 1975-1983 period will approximate at least $2.0 billion per
year before escalation." (op. ait., p.24). Thus, TBS expenditures for
reworks and modernization approximate those proposed by the AISI.
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2-8
placed into service prior to 1975. The impact of in-place
pollution control equipment includes past capital expenditures
which must be recovered as well as the annual operations and
maintenance expenses which are incurred. These past capital
expenditures will result in depreciation and other capital
charges during the next decade.
As a basis for determining the impact of these
environmental facilities, EPA technical contractors estimated
by process the proportion of existing facilities which have
installed equipment necessary for compliance with each of the
water effluent guidelines and air emission standards. Uti-
lizing these proportions, TBS estimated capital expenditures
incurred prior to 1975 for pollution control facilities to be
nearly $2.2 billion—$1.5 billion for water and $0.7 billion
for air pollution control equipment.
OPERATIONS AND MAINTENANCE EXPENSES*
PTm(Steel) computes production requirements for each
process which are consistent with the previously cited baseline
forecast of steel shipments. When these production requirements
are combined with factor prices for each resource employed,
operations and maintenance (O&M) expenses during the 1975-1983
period are as follows:
a
Operations and maintenance expenses for iron and steel production as
defined herein include direct labor and overhead, rau materials, energy,
supplies and other utilities, but exclude depreciation and other capital
charges.
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2-9
OPERATIONS AND MAINTENANCE EXPENSES FOR
IRON AND STEEL PRODUCTION
(billions of 1975 dollars)
Short Run Long Run
1975-1977 1975-1983
Basic Raw Materials $37.29 $140.o5
Direct Labor and Overhead 28.44 99.93
Other O&M Costs 11.54 39.33
TOTAL $77.27 $279.91
These O&M expenses for iron and steel production are detailed
by stage of production and by time period in Exhibit 5.
Operations and maintenance expenses represent the
largest component of steel industry costs. These expenses,
which are expected to average $25.8 billion per year in the
short run and $31.1 billion in the long run, are dominated
by basic raw material costs and labor-related charges. The
remainder of O&M expenses can be accounted for by other raw
materials (e.g., fluxes and alloying elements), energy in the
form of natural gas, fuel oil and electricity, and miscel-
laneous maintenance supplies and utilities.
Basic raw materials represent the largest and fastest
growing component of O&M expenses—38 percent of O&M expenses
in 1972, 48 percent in the short run and 50 percent in the
long run. In projecting iron ore and metallurgical coal
prices, TBS has assumed that the recent decline in productivity
within underground coal mines will continue during the next
decade and that future wage increases of miners will parallel
those of steelworkers. Furthermore, it is anticipated that
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2-10
the cost per ton of hot metal and scrap metal charges to
g
steelmaking furnaces will be comparable.
Direct labor and related overhead charges are as-
sumed to escalate at a rate in excess of Inflation within
the economy in general. However, the significant increase
in raw material prices results in a relative decline in
labor's share of O&M expenses from 43 percent in 1972 to 37
percent in the short run and 36 percent in the long run.
In addition to these O&M expenses for iron and steel
production, operation of pollution control equipment placed
into service prior to 1975 will require expenses totalling
$3.9 billion during the 1975-1983 period as follows:
OPERATIONS AND MAINTENANCE EXPENSES FOR
POLLUTION CONTROL EQUIPMENT PLACED INTO SERVICE
PRIOR TO 1975
(billions of 1975 dollars)
Mater Pollution
A1r Pollution
TOTAL
Short Run
1975-1977
$0.68
0.22
$0.89
Long Run
1975-1983
$2.29
0.67
$2.96
Exhibits 6 and 7 detail these O&M expenses by stage of produc-
tion and by time period for water and air pollution control
equipment, respectively.
These assumptions imply basic rau material costs (in nominal terms) of
$27.32, $46.35 and $100.72 per ton in 197? and $38.86, $84.60 and $158.67
per tcaSi yn 1983 for iron ore, metallurgical coal and scrap metal, reapec-
tivety?
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2-11
These operating expenses are estimated to be $0.3
billion per year in the short run and approximately 10 percent
higher in the long run. More than 75 percent of the O&M ex-
penses associated with pollution control equipment placed
into service prior to 1975 will be required to operate water
pollution control equipment with the remainder associated with
air pollution control.
Throughout subsequent analyses of environmental
regulations, these impacts from existing equipment will be
segmented from those associated with pollution control equip-
ment additions required to meet environmental regulations
promulgated, proposed, and anticipated.
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3, COST IMPACT OF FEDERAL WATER POLLUTION CONTROL
ACT AND OTHER WATER POLLUTION REGULATIONS1
The Federal Water Pollution Control Act Amendments
of 1972 (P.L. 92-500, hereinafter referenced as the Water Act)
constitute the current statutory basis of regulatory respon-
sibility in the area of effluent standards. The national
objective declared by this environmental legislation is to
eliminate discharges of pollutants into navigable waters by
1985. As an interim goal, waters are to be suitable for
the purposes of human recreations and the growth of fish,
shellfish, and other wildlife by July 1, 1983. The Water Act
stipulated the goal of improving receiving water quality by
cleaning up industrial process discharges with means which
are both technologically and economically feasible.
The Water Act charged EPA with the responsibility
of developing limitations guidelines for point sources of
effluents. In addition, authority for discharge permit pro-
grams was transferred from the U.S. Army Corps of Engineers,
with whom it had traditionally rested, to the EPA.
Section 301(b) of the Water Act specifies limitation
standards based on the application of Best Practicable Control
Technology Currently Available (BPCTCA) which are to be op-
erational in all existing steel industry facilities by
July 1, 1977. The industry is expected to meet a higher
standard of water effluent control in existing facilities by
July 1, 1983 based on the application of Best Available
This section provides the overall cost impact of the Federal Water Pollution
Control Act, including those environmental regulations promulgated, pending
and anticipated. Section 9 details the economic impact of the Phase II
guidelines as published in the March 29, 1976 Federal Register.
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3-2
Technology Economically Achievable (BATEA) which will result
in reasonable further progress toward the national goal of
eliminating the discharge of all pollutants.
The Water Act further requires EPA to establish a
set of effluent standards known as New Source Performance
Standards (NSPS) to regulate new facilities on which con-
struction is begun after the publication of the proposed
NSPS effluent guidelines. Performance standards at such
new sources are to reflect the greatest degree of effluent
reduction achievable through the application of the Best
Available Demonstrated Control Technology (BADCT) which,
were practicable, affords a standard permitting no discharge
of pollutants.
Given the statutory requirements laid out in the
Water Act, EPA contracted with the Cyrus Rice Division of
NUS Corporation (NUS/Rice) to conduct an extensive engineering
study of the steel industry to develop effluent limitations
guidelines. For purposes of that analysis, the operations of
the industry were divided into two parts: raw steelmaking
processes and hot forming/cold finishing processes.
The first segment of the NUS/Rice study, which
covered steelmaking operations from raw material preparation
through continuous casting of steel, is referred to as the
Phase I document. The standards were published in the June 28,
1974 Federal Register?
o
EPA-440/l-?4-024-a, Development Document for Effluent Limitations Guide-
lines and New Soiatae~J>erformmae Standards for the Steelmaking Segment
of the Iran and Steel Manufacturing Point Source Category! June 1974.
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3-3
Subsequently, the Phase I guide!tnes came under
judicial review in court cases instituted by the AISI and
several steel companies. The resulting decision handed down
in November 1975, by the U.S. Court of Appeals, Third Circuit,
remanded the guidelines for review of certain sections by EPA.
That review is underway.
A draft version of the second segment, referred to
as Phase II operations, includes breaking of ingots into
primary forms and other processes through finishing and
coating processes. It was released by EPA in August 1975.
This Advanced Notice of Proposed Rulemaking (ANPR) documents
was also published in the August 21, 1975 Federal Register
but did not have the legal standing of proposed standards.
A revised version of the Phase II guidelines was published
in the March 29, 1976 Federal Register.
The statutory date for achievement of BPCTCA is
July 1, 1977. In many cases within the iron and steel indus-
try this compliance date may not be achieved due to construc-
tion lead times which depend upon the specific situation at
individual plants. The following analysis of the economic
impact of the Water Act has been based upon an assumption
that full compliance with BPCTCA requirements will occur some-
time during the period between July 1, 1979 and July 1, 1981.
EPA-440/1-75/048, Development Document for Advanced Notice of Proposed
Rulemakinq for Effluent Limitations Guidelines and New Source Performance
Standards for the Hot Forming and Cold Finishing Segment of the Iron and
Steel Manufacturing Point Source Category, August 1975.
4
EPA-440/l-76/048-b, Development Document for Interim Final and Proposed
Effluent Limitations Guidelines and New Source Performance Standards for
Forming, Finishing and Specialty Steel Segments of the Iron and Steel
Manufacturing Point Source Category, March 1976.
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3-4
The following analysis highlights the impacts of compliance
by July 1, 1979. The implications of compliance by July 1,
1981 are presented at the end of this section.
COSTING METHODOLOGY
In projecting the cost impacts of the Water Act
and other water pollution regulations, detailed engineering
cost estimates developed for EPA by NUS/Rice on the basis of
a model plant size were converted into capital cost and
operating cost equations which recognize scale economies in
the construction and operation of water pollution control
equipment. In so doing, TBS translated the NUS/Rice engineer-
ing cost estimates to a basis directly comparable with similar
estimates developed by ADL in its cost impact study for AISI.
The NUS/Rice engineering cost estimates, when com-
bined with the AISI inventory of steel facilities by process
and a schedule for compliance with BPCTCA, BATEA, NSPS and
other guidelines, permit a detailed analysis of the cost
impacts associated with the Water Act. These cost impacts
are then analyzed within the context of the previously cited
industry baseline conditions to determine the economic im-
pacts of environmental regulations.
CAPITAL EXPENDITURES FOR
WATER POLLUTION CONTROL EQUIPMENT
Capital expenditures for water pollution control
equipment expected to be placed into service during the
1975-1983 period to meet the requirements of the Water Act
and other water regulations are estimated as follows:
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3-5
CAPITAL EXPENDITURES FOR
WATER POLLUTION CONTROL EQUIPMENT
(billions
Phase I Processes
Phase II Processes
TOTAL
Storm Runoff
Other Water
GRAND TOTAL
of 1975 dollars)
Short Run
1975-1977
$0.25
1.33
$1.58
0.02
0.16
$1.76
Long Run
1975-1983
$0.65
2.18
$2.83
0.15
0.60
$3.58
These capital expenditures are detailed by stage of pro-
duction and by time period or by effluent guideline in
Exhibits 8 and 9, respectively.
Of the $3.6 billion in capital expenditures for
water pollution control equipment required in the long-run
period (1975-1983), nearly one-half will be expended during
the short-run period (1975-1977). By far the largest compo-
nent of these capital outlays is required to meet the antici-
pated Phase II effluent guideline which represents 75 percent
of the short-run and 60 percent of the long-run requirements.
The long-run relationship between capital expendi-
tures for process equipment to meet effluent guidelines and
expenditures for capacity additions can be approximated by
comparing NSPS costs to outlays for capacity expansion during
the same time period. Using the mix of capacity additions
during the 1981-1983 period, this long-run impact is estimated
to be less than 4 percent.
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3-6
Since capital expenditures herein defined include
increases in construction work in progress, short-run re-
quirements include cash payments for pollution 'control
equipment to be placed into service after 1977. In fact,
exactly one-half of the short-run capital expenditures
represent outlays for construction work in progress. In the
long run, expenditures for increases in construction work
in progress comprise 10 percent of total outlays during the
1975-1983 period.
OPERATIONS AND MAINTENANCE EXPENSES FOR
WATER POLLUTION CONTROL EQUIPMENT
Operations and maintenance expenses associated with
operating water pollution control equipment placed into service
during the 1975-1983 period are projected as follows:
OPERATIONS AND MAINTENANCE EXPENSES FOR
WATER POLLUTION CONTROL EQUIPMENT
(billions
Phase I Processes
Phase II Processes
TOTAL
Storm Runoff
Other Water
GRAND TOTAL
of 1975 dollars)
Short Run
1975-1977
$0.03
0.13
$0.16
—
0.03
$0.19
Long Run
1975-1983
$0.45
1.14
$1.59
$0.10
0.85
$2.54
Total O&M expenses are detailed by stage of production and by
time period or by effluent guideline in Exhibits 10 and 11,
respectively. It should be noted that these exhibits include
O&M expenses associated with water pollution control equipment
placed into service prior to 1975. The above table represents
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3-7
only the difference between total O&M expenses and those
expenses for equipment already placed into service. O&M
expenses for water pollution control equipment placed into
service prior to 1975 were detailed in Exhibit 6.5
The operations and maintenance expenses associated
with water pollution control facilities expected to be in-
stalled within the 1975-1977 period amount to less than
$0.2 billion in the short run. These short-run O&M expenses
are overshadowed by the $0.7 billion required to operate the
equipment placed into service prior to 1975. In the long run,
the additions to water pollution control equipment represent
$2.5 billion, more than 50 percent of the $4.8 billion re-
quired to operate water pollution control equipment. By 1983,
water pollution control equipment placed into service during
the 1975-1983 period will increase annual O&M expenses by more
than $0.6 billion.
By far the largest component of these additional
operating expenses is that linked to the operation of water
pollution control equipment on steel finishing mills. These
O&M expenses exceed $1.0 billion during the 1975-1983 period
and represent 65 percent of the operating costs for process-
related equipment. Another major component is associated
with other water regulations, including equipment required to
control thermal, non-contact cooling, utility area, and other
wastewater discharges not covered by either Phase I or Phase II
effluent guidelines.
5It- should be noted that O&M expenses comprise cumulative expenditures
during the period. Since the amount of pollution control equipment
installed increases in each year, no simple average will determine
the impact of pollution control relative to production expenses.
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3-8
COMPARISON OF ALTERNATIVE ENGINEERING
COST ESTIMATES FOR WATER POLLUTION
CONTROL EQUIPMENT
No cost impact analysis of the steel industry can
ignore the ADL study for the AISI which represents, in our
opinion, the first comprehensive evaluation of the capital
expenditures and operating costs associated with environ-
mental regulations. For this reason PTm(Steel) has been
designed to accept alternative engineering cost estimates,
including those provided by ADL.
At first glance, the above-mentioned capital ex-
penditures for process-related water pollution control
equipment appear to be quite comparable to those published
by ADL if capital expenditures for replacement facilities
g
are excluded. ADL estimates capital expenditures for water
pollution control to be $3.5 billion for existing facilities
and $0.9 billion for new facilities based on a pro rata
share of total expenditures for new facilities. Utilizing
NUS/Cyrus Rice engineering cost estimates, comparable TBS
estimates of capital expenditures totaled $4.3 billion—$1.5
billion for pollution control equipment placed into service
prior to 1975 and $2.8 billion for additional facilities
7
required to meet the requirements of the Water Act.
g*
One-half of the ADL $4.9 billion estimate of capital expenditures for
pollution control on new facilities represented replacement facilities;
that is, new capacity which replaces existing capacity "being retired.
7
An estimate of initial capital investment based upon the NUS/Cyrus Rice
costing methodology and engineering cost estimates, as reported in Table
70 of the Phase I Document and in Table 197 of the Phase II Document,
would be $2.4 billion in 1975 dollars. This differs significantly from
the comparable estimate utilizing the TBS methodology and NUS/Cyrus Rice
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3-9
However, these estimates are not directly comparable
since they differ in the underlying forecasts of steel ship-
ments, in the adjustment for commingling of wastestreams, in
the computation of expenditures for in-place facilities, and
in the inclusion of construction work in progress. After
these adjustments are made to place the capital expenditures
on a comparable basis, the ADL estimate of additional expen-
ditures during the 1975-1983 period exceeds the TBS estimate
by $0.9—S3.4 vs. $2.5 billion. Exhibit 12 provides a detailed
comparison of these alternative estimates of capital expenditures
A close process-by-process comparison of cost im-
pacts indicates significant differences for coke ovens and
blast furnaces. In addition, differences in the engineering
cost estimates for finishing mills can be explained partially
by the more stringent Phase II guidelines analyzed by NUS/Rice.
The above summary of capital expenditures excludes
the ADL estimate of requirements for replacement facilities.
ADL estimated that $0.9 billion would be required to bring
replacement facilities into compliance with the effluent
guidelines. Such an estimate could be consistent with the
ADL methodology wherein an estimate of capital expenditures
for pollution control equipment placed into service prior to
1975 was based upon actual industry expenditures without
consideration of whether the equipment in place is in com-
pliance with the effluent guidelines.
engineering cost estimates for four reasons; in order of importance: (1)
the TBS estimate is based upon 1983 capacity, the NUS/Cyrus Rice estimate
upon 1972 production levels; (2) the TBS estimate recognizes economies
of scale, the NUS/Cyrus Rice estimate does not; (3) the TBS estimate in-
cludes construction work in progress, the NUS/Cyrus Rice estimate does
not; and (4) the TBS estimate utilizes the AISI inventory of 1972 capacity
and the baseline forecast of domestic shipments, the NUS/Cyrus Rice es-
timate employs their own inventory of process units.
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3-10
On the other hand, these expenditures for replace-
ment facilities are inconsistent with the TBS methodology
which bases expenditures for equipment in place upon the
NUS/Cyrus Rice estimate of the proportion of existing facili-
ties which are in compliance with the BPCTCA and BATEA re-
quirements. Using this approach, it would be unlikely that
a steel company would bring an existing facility into com-
pliance only to retire or replace that facility during the
1975-1983 period.
Exhibit 13 provides a detailed comparison of opera-
tions and maintenance expenses based upon NUS/Cyrus Rice and ADL
engineering ccst estimates. Once again, significant dif-
ferences were found between the estimates for coke ovens and
blast furnaces.
Another area of significant difference in engineering
cost estimates is the storm runoff guideline—the ADL esti-
mate of capital expenditures ranges from $0.8 to $2.8 billion;
whereas , the estimate based upon NUS/Cyrus Rice engineering costs
is only $0.15 billion. This difference emanates from two
basic sources. First, ADL assumed that the runoffs from the
entire plant site must be contained and treated. The Phase II
guideline requires containment and treatment from only coal,
ore and stone piles. Second, there are major differences in
the engineering assumptions regarding the magnitude of the
storm for which facilities would be designed.
SENSITIVITY ANALYSIS:
BPCTCA COMPLIANCE SCHEDULE
While the statutory compliance schedule for the
BPCTCA guideline is July 1, 1977, the previous analysis has
been based upon a compliance schedule wherein all facilities
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3-11
achieve BPCTCA requirements by July 1, 1979. TBS has also
analyzed the impact of full BPCTCA compliance by July 1, 1981
as well as the statutory date of July 1, 1977.
The annual stream of capital expenditures during
the 1975-1983 period for these alternative schedules is as
follows:
CUMULATIVE CAPITAL EXPENDITURES FOR
ALTERNATIVE BPCTCA COMPLIANCE DATES
(billions of 1975 dollars)
1.5
1.0
0.5
1.56
Compliance with BPCTCA
July 1, 1977
July 1, 1979
July 1, 1981
1
1975
1977
1980
1983
In the long run, total capital expenditures differ marginally
as a result of timing differences in cash outlays.
As might be expected, however, compliance dates
significantly impact the short-run capital expenditures. Full
BPCTCA compliance by 1977 requires short-run capital expen-
ditures of $1.6 billion. However, since full compliance is
not expected until sometime between July 1979 and July 1981,
actual short-run capital expenditures are expected to be be-
tween $1.1 and $1.3 billion.
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3-12
The external financing implications of these alter-
native compliance schedules are analyzed in Section 7 of this
report.
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COST IMPACT OF CLEAN AIR ACT AND
OTHER AIR POLLUTION REGULATIONS
The Clean Air Act of 1970 (P.L. 91-604, herein-
after referenced as the Air Act), establishes authority
and regulatory responsibility in the area of emission stan-
dards. The Air Act's objectives are protection of public
health and welfare. For stationary point sources, such as
steel industry facilities, direct responsibility lies with
the states. EPA designates pollutants to be controlled and
approves state initiated implementation plans. Implementation
is to be accomplished in two stages—improvement to Primary
Air Quality Standards by July 1, 1975 and to Secondary Air
Quality Standards as soon as possible thereafter.
Each state must develop implementation plans to
achieve, maintain, and enforce the emission standards for
existing sources. Most state plans were approved by 1972;
however, several factors have combined to delay compliance
in some areas. First, some states such as New York have
delayed the date for compliance in their implementation
plans. Second, federal courts have stayed portions of the
implementation plans for some states (e.g., Ohio and Mary-
land). Third, portions of some implementation plans have
not yet been approved by EPA. Finally, implementation has
been delayed in some cases due to litigation by steel firms.
The statutory compliance date for Primary Air
Quality Standards is July 1, 1975. Recognizing the above-
mentioned delays, the following analysis has been based upon
compliance with the stack emission standard by July 1, 1978
and the fugitive emission standard by July 1, 1980.
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4-2
New Source Performance Standards (NSPS) apply
to all facilities where construction is begun after pro-
posal of the NSPS standard. Emission standards for new
sources are established by the EPA administrator. These
standards must employ "the base system of emission reduction
which (taking into account the cost of achieving such re-
duction) the Administrator determines has been adequately
demonstrated." Though new source standards have been specified
for some processes such as electric arc furnaces, standards
for other processes may not be proposed for several years.
New facilities constructed before proposal of new source
standards must meet the same standards as existing sources.
COSTING METHODOLOGY
Due to the varying and complex standards set by
individual states, no engineering cost analysis of compliance
based upon equipment specified by each state has been per-
formed. Available cost data are based on published re-
ports regarding equipment which may exceed or fall short
of the required standards. In the area of new source standards,
states may supersede EPA standards with more stringent con-
trols. Hence, as with the existing source costs, there is
a lack of precise cost data for new source standards.
The 1974 Cost of Clean Air report prepared for EPA
by Battelle Columbus Laboratories has been used as the basis
for projecting cost impacts for stack emission standards.
Some engineering cost data reported in the 1974 Cost of Clean Air and
used herein were obtained from A Systems Analysis of the Integrated
Iron and Steel Indue tryf Battelle Columbus Laboratories, 1969.
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4-3
Unlike water pollution control costs which were based on a
specific treatment model, Battelle cost estimates are based
on published data for equipment with varying specifications.
Engineering cost estimates for equipment to meet
fugitive emission standards were supplied by the EPA
Standards and Cost Analysis Branch in Durham, North Carolina.
These cost estimates relied upon ADL engineering cost
equations and assumed EPA air flow rates.
Utilizing these cost equations, the AISI inventory
of steel facilities by process and the schedule of compliance
described above, TBS performed a detailed analysis of the
cost impacts associated with the Air Act. These costs have
been analyzed within the context of the previously described
steel industry baseline conditions to determine the economic
impact of environmental regulations.
CAPITAL EXPENDITURES FOR
AIR POLLUTION CONTROL EQUIPMENT
Capital expenditures for air pollution control equip-
ment during the period 1975 to 1983 are estimated as follows:
AIR
Stack Emissions
Fugitive Emissions
Other Air
TOTAL
CAPITAL EXPENDITURES FOR
POLLUTION CONTROL EQUIPMENT
(billions of 1975 dollars)
Short Run
1975-1977
$1.33
0.63
0.13
$2.09
Long Run
1975-1983
$1.65
1.34
0.26
$3.25
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4-4
These capital expenditures are detailed by stage of pro-
duction and by time period or by emission standard in
Exhibits 14 and 15, respectively.
Of the $3.2 billion of capital expenditures re-
quired for air pollution control equipment in the long run,
nearly two-thirds will be expended during the 1975-1977
period. Requirements in the short run are disproportionately
large due to related increases in construction work in pro-
gress. Nearly $1.1 billion of the $2.1 billion required in
the short run represents increases in construction work in
progress. Nearly two-thirds of the funds expended in the
short run are required for stack emissions. Fugitive emissions
account for 40 percent of capital expenditures in the long
run.
OPERATIONS AND MAINTENANCE EXPENSES FOR
AIR POLLUTION CONTROL EQUIPMENT
Operations and maintenance expenses required to
operate air pollution control equipment placed into service
during the period 1975-1983 are summarized below:
Stack Emissions
OPERATIONS & MAINTENANCE EXPENSES FOR
AIR POLLUTION CONTROL EQUIPMENT
(billions of 1975 dollars)
Short Run Long Run
1975-1977 1975-1983
$0.19 $0.96
Fugitive Emissions - 1.15
Other Air
TOTAL
0.02 0.22
$0.21 $2.33
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4-5
Total operations and maintenance expenses are tabulated by
stage of production and by time period or by emission standard
in Exhibits 16 and 17, respectively. These exhibits include
O&M expenses for air pollution control equipment placed into
service prior to 1975. The above table represents only O&M
expenses for equipment placed into service during the 1975-
1983 period. Expenses for air pollution control equipment
installed prior to 1975 were detailed in Exhibit 7.
Operations and maintenance expenses of $0.4
billion in the short run are split nearly equally between
in-place and new equipment. In the long run, only 22 per-
cent of the $3.0 billion total for air pollution control is
attributable to equipment placed into service prior to 1975.
In 1983, when all air treatment facilities are in operation,
O&M expenses for air pollution control facilities installed
during the 1975-1983 period exceed $0.4 billion. On-site
raw materials preparation represents nearly 50 percent of
air pollution control costs. These costs are entirely at-
tributable to sintering and coking.
COMPARISON OF ALTERNATIVE ENGINEERING
COST ESTIMATES FOR
AIR POLLUTION CONTROL EQUIPMENT
The ADL study represents the most recent and complete
study of air pollution control costs done outside EPA. PTm(Steel)
has, therefore, been designed to accept alternative engineering
cost estimates, including those provided by ADL. ADL costs
can be examined in a series of comparisons.
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4-6
An initial comparison of capital expenditures and
operations and maintenance expenses indicates significant
differences in reported findings between ADL and this analysis.
Capital expenditures estimated for air pollution control in
this study are $3.9 billion which includes equipment in-
stalled prior to 1975. The comparable estimate from the ADL
study is $6.9 billion, including a pro rata share of expendi-
tures for new facilities, but excluding expenditures for
replacement facilities.2
Capital expenditures estimated by including ADL
engineering cost estimates within PTm(Steel) total $6.7
billion in the long run. Differences in the capital expendi-
tures estimated in this manner and those reported by ADL
reflect alternative assumptions regarding steel shipments and
cost escalation factors.
Given the ability of PTm(Steel) to reproduce ADL
costs, the results from PTm(Steel) with ADL engineering cost
estimates can be compared to PTm(Steel) results utilizing
Battelle Columbus Laboratories and EPA engineering cost estimates,
When these estimates of capital expenditures are placed on a
comparable basis, the ADL estimate for the 1975-1983 period
is more than double the estimate based upon Battelle and EPA
engineering cost assumptions—$6.7 billion vs. $3.3 billion.
This comparison of air pollution control costs by stage of
production is detailed.in Exhibits 18 and 19.
2
The alternative assumptions for replacement facilities have been dis-
cussed more fully in Section 3.
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4-7
More than 90 percent of the difference between
ADL and EPA cost impacts, for both capital expenditures and
operations and majntenance expenses, results from alternative
assumptions for the control of fugitive emissions. While
EPA engineering cost estimates are based upon the same cost
relationships as ADL, EPA assumes that considerably lower
air flows will be required to achieve fugitive emissions
control and that approximately 65 percent of open hearth
furnaces presently installed will not be treated for fugitive
emissions due to closure. The bulk of the differences be-
tween cost impacts is associated with the steelmaking furnaces,
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5, SUMMARY OF THE COST IMPACTS OF
ENVIRONMENTAL REGULATIONS
The economic impact of environmental regulations
can be summarized by focusing on five key indicators: capital
expenditures, operations and maintenance expenses, external
financing needs, revenue requirements, and average price
levels. Of these, the first two have been considered inde-
pendently for water and for air in the previous two sections.
The combined cost of air and water pollution control in terms
of capital expenditures and operations and maintenance ex-
penses will be summarized in this section. From these com-
bined costs, subsequent sections will evaluate the economic
impact of environmental regulations in terms of the remaining
indicators.
Expenditures for water and for air pollution control
are additive to the baseline—that is, total expenditures are
the sum of these two categories and the baseline.
CAPITAL EXPENDITURES
Capital expenditures for pollution control and base-
line are combined as follows:
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5-2
COMBINED CAPITAL EXPENDITURES FOR
HATER AND AIR POLLUTION CONTROL EQUIPMENT
WITH BASELINE REQUIREMENTS
(billions of 1975 dollars)
Baseline
Pollution Control Equipment
Hater
Air
TOTAL
GRAND TOTAL
Pollution Control as Percent of
Baseline
Short Run
1975-1977
$8.72
1.78
2.09
$3.85
$12.56
44.01
Long Run
1975-1983
$27.50
Capital expenditures for steel operations are
expected to total $34.3 billion during the period 1975 to
1983, an average of $3.8 billion per year. The annual amount
is somewhat higher in the near term and lower at the end of
the period. This is a significant amount when compared to
the $2.6 billion per year in constant 1975 dollars expended
by the steel industry for all purposes during the last decade,
Air and water pollution control combined represents
$6.8 billion in capital expenditures from 1975 to 1983. Over
one-half, $3.8 billion, of this amount is required in the
short run (1975-1977). Capital expenditures will be incurred
at the rate of $1.3 billion per year for the remainder of the
period. This bias toward early expenditures is caused by the
need to meet compliance schedules and the associated increases
in both equipment in service and construction work in progress,
Over 50 percent of short-run capital expenditures are for
increases in construction work in progress, while in the long
run, this figure drops to 12 percent.
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5-3
Capital expenditures for pollution control rep-
resent over 40 percent of total short-run needs and almost
25 percent of long-run needs. In the previous nine years,
capital expenditures for pollution control equipment placed
into service by the steel industry totaled $1.7 billion in
constant 1975 dollars—only 7 percent of capital expenditures
during this period.
OPERATIONS AND MAINTENANCE EXPENSES
Combined operations and maintenance expenses for
the baseline, water and air pollution control are tabulated
below:
COMBINED OPERATIONS AND MAINTENANCE EXPENSES FOR
WATER AND AIR POLLUTION CONTROL EQUIPMENT
WITH BASELINE REQUIREMENTS
(billions of 1975 dollars)
Baseline
Pollution Control Equipment
Water
Air
TOTAL
GRAND TOTAL
Pollution Control as Percent of
Baseline
Short Run
1975-1977
$78.17
Long Run
1975-1983
$282.87
2.54
2.33
'Steel Industry Enw.omi.cs and Federal Income Tax Policy, op.ait.
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5-4
O&M expenses are dominated by production costs.
Of the $287.7 billion of O&M expenses incurred from 1975
to 1983, air and water pollution control combined represent
only 1.7 percent. However, these cumulative amounts under-
state somewhat the long-run effect of pollution control O&M
expenses since only part of the equipment is in operation
throughout the period. In 1983, when all facilities are
fully treated for required pollution control, pollution control
additions during 1975-1983 represent 2.8 percent of total
O&M expenses.
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6, ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS:
REVENUE REQUIREMENTS AND PRICE EFFECTS
Thus far the impact of environmental regulations
has been limited to the cost impacts associated with capital
expenditures and operations and maintenance expenses. These
cost impacts must be converted to revenue requirements, re-
lated price effects, and external financing needs in order
to evaluate fully the economic impact of environmental reg-
ulations.
Most studies of the steel industry focus on the
cost impacts of expansion, modernization and environmental
regulations and their aggregate financing requirements by
utilizing historic cash flows. Such an approach, while
perhaps providing insight into future conditions within the
industry, assumes that economic, regulatory and industry
conditions in the recent past will be repeated in the near
future. Given that the last five years have included periods
of high inflation, limited capacity expansion, price con-
trols, record shipments and profit levels, worldwide steel
shortages, dollar devaluation (and revaluation), significant
inventory accumulation (and depletion) and a deep recession,
it is highly unlikely that events of a similar nature will
be equally important during the 1975-1983 period.
The TBS methodology recognizes this uncertain eco-
nomic and regulatory environment by focusing on revenue re-
quirements, the application of funds to capital expenditures
and other uses, internal cash flows, and the resulting
external financing needs. Revenue requirements within PTm(Steel)
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6-2
are defined as the recovery of all costs, including a target
rate of return on common equity. These costs include operating
expenses, depreciation, sales and property taxes, interest
income and expenses, federal and state income taxes, and net
income requirements. Since some of these costs vary with
economic and regulatory conditions, TBS has performed sensi-
tivity analyses on key economic and financial parameters.
A schematic diagram of the revenue requirements module within
PTm(Steel) is provided in Exhibit 20.
Once revenue requirements have been determined, an
average price effect can be computed by dividing the above-
mentioned revenue requirements in any given year by domestic
2
steel shipments. Given the level of detail captured with
PTm(Steel), these average price effects can be computed on an
overall basis, by product, by stage of production, or by
value-added at each process within the steel production
process.
Perhaps the most controversial revenue requirement is that associated
with the target rate of return on common equity. In order to determine
the impact of this key parameter, TBS analyzed rates of return equal to
those historically observed for all manufacturing firms, for steel firms
overall, and for steel operations by major steel companies. Baseline
conditions include net income requirements based upon a real (i.e., ad-
justed for inflation) rate of return equal to 3.5 percent, the real rate
of return realized overall by steel firms during the last decade.
2
During a period of increasing capacity requirements and increasing costs
of capacity expansion, the revenue per ton required to earn the target
rate of return on common equity employed for capacity expansion would
exceed the revenue per ton required to earn the same rate of return for
existing capacity. It should be noted that the price effect defined
herein would, on average, provide the target rate of return on common
equity.
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6-3
REVENUE REQUIREMENTS
During the 1975-1983 period, baseline revenue re-
quirements are anticipated as follows:
Sales Taxes
REVENUE REQUIREMENTS FOR
BASELINE CONDITIONS
(billions of 1975 dollars)
Short Run
1975-1977
$ 3.82
Operations & Maintenance
Expenses 78.17
Capital Related Costs
Depreciation
Property Taxes
Net Interest Expenses
Income Taxes
Net Income Requirement
SUBTOTAL
Revenue Requirements
$ 4.31
0.92
1.26
2.57
5.07
$14.13
$96.11
Long Run
1975-1983
$ 13.44
282.87
$ 13.70
3.15
4.^1
7.06
13.92
$ 42.30
$338.61
Required revenues, without consideration of additional pollu-
tion control equipment, will amount to $96.1 billion in the
short run and $338.6 billion in the long run. These baseline
revenue requirements will approximate $32.0 billion per year
during the 1975-1977 period and are expected to increase to
$37.6 billion per year in the long run. Of these revenue re-
quirements, more than. 80 percent represent operating costs.
The remaining revenues are associated with capital-related
charges with the exception of sales taxes which approximate
4 percent of revenues.
In computing required revenues, PTm(Steel) details
costs by category and attributes these costs to their appro-
priate sources. Revenue requirements associated with
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6-4
environmental regulations are as follows:
REVENUE REQUIREMENTS FOR WATER AND
AIR POLLUTION CONTROL EQUIPMENT
(billions of 1975
Water Pollution Control Equipment
Phase I Processes
Phase II Processes
TOTAL
Storm Runoff
Other Water
GRAND TOTAL
Air Pollution Control Equipment
Stack Emissions
Fugitive Emissions
Other Air
TOTAL
*Leae than $5 million
dollars)
Short Run
1975-1977
$0.11
0.53
$0.64
*
0.07
$0.73
$0.69
0.10
0.07
$0.86
Long Run
1975-1983
$0.98
3.25
$4.23
0.20
1.32
$5.75
$2.78
2.44
0.47
$5.68
Exhibits 21 and 22 provide revenue requirements allocated to
baseline conditions and water and air pollution control equip-
ment by cost category for the 1975-1983 period and by source
of requirement by time period, respectively.
Additional revenues for the water and air pollution
control equipment required to meet effluent guidelines, emis-
sion standards and miscellaneous environmental regulations will
approximate $1.6 billion in the short run and $11.4 billion
-------
6-5
in the long run. These increases in required revenues amount
to 1.6 percent of the baseline in the short run and 3.A per-
cent in the long run.
Thus more than $0.5 billion per year in additional
costs will need to be recovered during the 1975-1977 period.
These annual revenue requirements will continue to increase
as more pollution control equipment is added. By 1983 the
impact will be nearly $2.0 billion per year. During the 1975-
1983 period, revenues required due to the addition of pollution
control equipment will average $1.3 billion per year.
The major component of these added revenue require-
ments is capital-related charges. Depreciation and other
capital-related costs account for more than 50 percent of the
long-run increase in revenue requirements. Of the total $11.4
billion associated with pollution control equipment in the
long run, $3.0 billion represents earnings before income taxes—
an amount which would permit the steel industry to achieve its
historic rate of return on common equity.
PRICE EFFECTS
Average steel prices can be determined by dividing
revenue requirements by the appropriate level of steel shipments
For example, the baseline price per ton of domestic steel
shipped during 1975 is estimated to have averaged $363.46. This
average price is expected to decline in real terms (i.e., ad-
justed for inflation) through 1977 due to continued produc-
tivity gains and increasing capacity utilization factors.
However, sectoral inflation in the labor and basic raw material
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6-6
markets is expected to result in a real increase in long-run
prices. In real terms, the average baseline price level an-
ticipated in 1977 is $345.28. By 1983 the baseline price is
expected to increase to $365.21 in real terms.
3,4
Baseline
price levels, in both nominal and real terms, are as follows
BASELINE PRICE LEVELS
600
500
400
300
Prices:
Constant 1975 Dollars
—— Current Dollars
$557.00
$345.28
$365..21
1974
1977
1980
1983
These baseline prices include a charge of $4.11 per ton in 197? and
$3.25 per ton in 1982 whiah is associated with the continued operation
of pollution control equipment placed into service prior to 1975.
*
Once again3 the baseline price would, on average, provide the target rate
of return on common equity. In order to earn this rate of return on com-
mon equity for capacity expansion in excess of rounding out existing steel
finishing capacity, the 198S baseline price would need to be $387.18. At
this price level, the rate of return for existing capacity would be sig-
nificantly higher than the target.
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6-7
Pollution control equipment placed into service
during the 1975-1983 period is expected to increase the average
1983 price per ton of steel from $365.21 to $381.96, an in;isr
of $16.75 per ton as follows:
AVERAGE PRICE EFFECTS FOR WATER AND
AIR POLLUTION CONTROL EQUIPMENT
(1975 dollars per
Water Pollution Control Equipment
Phase I Processes
Phase II Processes
TOTAL
Storm Runoff
Other Water
GRAND TOTAL
Air Pollution Control Equipment
Stack Emissions
Fugitive Emissions
Other A1r
TOTAL
ton)
Short-Run
1977
$ 0.56
2.46
$ 3.02
0.02
0.38
$ 3.42
$ 2.98
0.54
0.30
$ 3.82
Long-Run
1983
$ 1.76
4.22
$ 5.98
0.53
3.09
$ 9.60
$ 2.70
3.70
0.75
$ 7.15
As previously mentioned, PTm(Steel) permits the computation
of the price per ton on an overall basis (Exhibit 23), by
steel product (Exhibit 24), by stage of production (Exhibit 25),
and by value-added at. each process (Exhibit 26). These ex-
hibits segment the 1983 price into the components associated
with baseline conditions and water and air pollution control
equipment. In addition, overall price levels are provided for
selected years (1974, 1977, 1980 and 1983) to permit a com-
putation of price trends with and without the impact of environ-
mental regulations.
-------
6-8
By 1977 the added requirements of pollution control
equipment will increase prices by 2.1 percent, with slightly
more than one-half associated with air pollution control. In
the long run the impact of environmental regulations on price
levels will total 4.6 percent, with water pollution control
equipment responsible for a 2.6 percent increase.
Some industry observers would conclude that these
price increases would have a negative impact upon steel ship-
ments. However, it should be noted that average steel prices,
measured in 1975 dollars, will approximate $382 per ton by
1983, up approximately $16 from comparable price levels re-
corded in 1974. Thus while steel prices will increase due
to environmental regulations, steel customers will face in-
creases in nominal steel prices which will exceed the rate of
overall inflation within the economy by only 0.5 percent.
Under these conditions the impact of environmental regulations,
while negative, would not result in significant declines in
the level of domestic steel shipments.
When price effects are evaluated by steel product,
the price increases range from $7.99 per ton for direct ship-
ments of semi-finished products to $25.31 for nails and other
wire products, from 3.5 percent for direct shipments of semi-
finished products to 5.6 percent for cold finished bars.
The price effects of water pollution control equipment vary
widely from one steel product to another since the major costs
of the effluent guidelines fall on the finishing mills. On
the other hand, air emission standards are specified only for
iron and steelmaking processes (including coke ovens), thus
reducing the variation in price increases among steel products.
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6-9
When price effects are computed for each process,
the most significant effects are associated with coke ovens
where the 1983 cost of coke is expected to increase by more
than $8 per ton. Emission standards will also adversely
effect all furnaces, with open hearth and electric furnaces
incurring added costs of more than $3.50 per ton. Effluent
guidelines impact all processes, but the finishing processes
represent more than 50 percent of the total impact for water
pollution control equipment.
SENSITIVITY ANALYSIS: ALTERNATIVE
BASIC RAW MATERIAL COSTS
A major factor in the determination of overall
price levels is the assumption regarding basic raw material
costs. The above-mentioned analysis of baseline conditions
includes iron ore, metallurgical coal and scrap metal prices
specified at market values which reflect sectoral inflation,
declining productivity in underground coal mines, and com-
parable costs for hot metal and scrap metal charges into
steelmaking furnaces.
In order to determine the impact of alternative basic
raw material costs, TBS analyzed a set of conditions wherein
iron ore, metallurgical coal and scrap metal prices escalate
from observed 1972 prices by the price/cost indices forecast
a
by Data Resources, Inc. Utilizing these raw material costs,
'Shis estimate of the price effect for coke ovens ignores the OSHA re-
quirements recently proposed. It should also be noted that ADL's
estimate of cost impacts on coke ovens was significantly greater them
those based upon NUS/Rice engineering cost estimates.
£ "Steel Raw Materials Long-Term Forecast", DPI Steel Forecast Service,
summer 1975.
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6-10
baseline prices would approximate $317 per ton and $313 per
ton in 1983. These average prices would represent a signifi-
cant decline from the above-mentioned baseline steel prices
of $345 per ton in 1977 and $365 per ton in 1983.
SENSITIVITY ANALYSIS: LESS
THAN FULL COST PASS-THRU
Analyses of revenue requirements and related price
effects have focused thus far upon the impacts when the steel
industry is able to recover all costs associated with pollu-
tion control abatement, including a target rate of return on
common equity equal to that earned on productive assets.
Some industry observers would seriously question this assump-
tion arguing that import competition or government regulation
wouDd constrain the ability to pass through these costs.
Clearly, if price increases due to expenditures for pollution
control were large (i.e., greater than those projected) or
competition from imports and/or substitutes was substantial,
either a measurable decline in demand or a reduction in rate
of return would occur.
In an effort to evaluate the economic implications
of less than full cost pass-through, TBS computed the revenue
requirements, price effects and external financing needs under
operating conditions where the costs of pollution control
equipment are not passed through to steel companies and steel
firms absorb these unrecovered costs through a realization
of net income below historic levels. These costs of pollution
control equipment were segmented further into operating ex-
penses and capital-related charges.
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6-11
As previously discussed, revenue requirements for
water and air pollution will total $11.4 billion in the long
run. If these costs were not passed through, approximately
65 percent would be absorbed by reductions in net income.
These costs would deplete more than one-half of the previously-
cited baseline net income of $13.9 billion. Given that operating
costs and capital charges for pollution control equipment are
approximately equal, zero cost pass-through would imply a
25 to 30 percent reduction in net income, for either operating
costs or capital-related charges. These combined decreases in
net income would result in a 2 percent decline in revenue re-
quirements.
SENSITIVITY ANALYSIS: ALTERNATIVE
RATES OF RETURN ON EQUITY
Throughout this study, TBS has considered net in-
come, or the return on common equity, as a cost of doing
business. This approach recognizes that a relatively capital
intensive industry like the steel industry must be able to
earn a competitive rate of return on its investment so that
it can attract new capital to finance its growth.
During the last decade the steel industry did not
expand its capacity and raised less than $1.0 billion in ex-
ternal financing. Under these conditions its low rate of
return relative to other manufacturing industries was not a
liability. However, the steel industry must expand during
the next decade if domestic steel shipments are to keep pace
with the historic trend. Within this environment external
capital must be attracted.
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6-12
In an effort to determine the revenue requirements
and price effect of alternative rates of return on equity,
TBS analyzed rates of return equal to those historically ob-
served for all manufacturing firms, for steel firms overall,
and for steel operations by major steel companies.
Manufacturing firms have achieved average rates of
return o' 7 percent in real terms (adjusted for inflation)
during the last decade. During the same period steel firms
have been able to earn only 50 percent of this rate. Unfor-
tunately , steel firms have been able to maintain even this
lackluster profitability only by diversifying into non-steel
ventures .and integrating backward into mining and/or forward
into fabrication, bridge building, ship building, etc.
While the profitability of steel operations is not
detailed in annual financial statements, major integrated
steel firms, representing more than 50 percent of raw steel
production, have provided data to TBS through the AISI on the
profitability of steel operations. From 1972 through the
first nine months of 1975, steel operations within these major
steel producers have realized real rates of return of minus
1 percent. That is, these operations would have operated at
a loss if raw materials were purchased at market value rather
than transferred from another division within the firm.
Any reduction in steel prices below the baseline
levels previously cited would reduce profitability, would in-
crease the industry's financing needs, and would decrease the
likelihood that these funds could be attracted to the steel
industry at acceptable terms. A more thorough discussion of
the economic impact associated with operating steel facilities
at a loss follows in the next section of this report.
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6-13
If steel firms were able to increase their profita-
bility from existing levels overall to the average of all
manufacturing firms, baseline prices would need to increase
by about 3 percent in both the short and long run. These
price increases would flow through to net income and would
increase retained earnings by more than 30 percent in the
long run. This increase in the target rate of return on com-
mon equity would increase the price effect associated with
pollution control equipment from 4.6 percent to 4.9 percent.
As will be discussed in the next section, increased profita-
bility will not only reduce the financing requirements of
the industry in absolute terms, but also increase the attrac-
tiveness of its financing instruments in the capital markets.
SENSITIVITY ANALYSIS: PRICE AND INCOME ELASTICITY
Most economists attempt to evaluate economic impact
within the context of the classical supply and demand model
and its assumptions regarding price and income elasticities
and cross-elasticities. Unfortunately, these kinds of elas-
ticity estimates are not readily available for the steel
industry, especially at the level of steel products. Those
estimates which do exist imply that demand is inelastic in
the range of small price movements and, in fact, that the
elasticity with respect to price is less than the elasticity
7
with respect to income. Under these conditions, a firm would
increase its price when costs increase and/or whon demand nI n
^i vr-,'n pn ce decreases .
See, for example, "Economic Factors Affecting Pricing Decisions,"
J. Fred Weston and Edward Rice, November 2975.
-------
6-14
While this study did not consider directly the im-
pact of domestic prices relative to import competition,
knowledgeable industry observers believe that domestic steel
firms are now competitive with imported steel due to dollar
devaluation, relative rates of inflation in the labor and
raw material markets, and other favorable trends. In addition,
it is quite likely that foreign steel producers will face
comparable environmental requirements in the near future.
-------
7, ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS:
EXTERNAL FINANCING NEEDS
Once revenue requirements have been determined, ex-
ternal financing requirements can be computed as the difference
between total applications and internal sources of funds.
Capital expenditures for capacity expansion and modernization,
including increases in construction work in progress, dominate
baseline applications; however PTm(Steel) also includes changes
in working capital and refundings of long-term debt. Internal
cash flows include depreciation charges and retained earnings.
Finally, external financing needs are met through issues of
long-term debt and common stock. The mix of debt and equity
issues is based upon the maintenance of an historic capital
structure. Exhibit 20 summarises these flows within the finan-
cing module by means of a schematic diagram.
Perhaps the best summary of baseline external finan-
cing requirements can be obtained from the following sources
and applications of funds:
BASELINE SOURCES AND
(billions of
Capital Expenditures
Increase In Working Capital
Refunding of Long-Term Debt
TOTAL APPLICATIONS
Depreciation
Retained Earnings
Internal Sources
Issues of Long-Term Debt
Issues of Common Stock
External Financing
TOTAL SOURCES
APPLICATIONS OF FUNDS
1975 dollars)
Short Run
1975-1977
$ 8.72
1.15
0.47
$10.34
$ 4.31
2.25
$ 6.56
$ 2.29
1.49
$ 3.77
$10.34
Long Run
1975-1983
$ 27.50
4.21
1.22
$ 32.93
$ 13.76
6.18
$ 19.94
$ 6.19
6.79
$ 12.99
$ 32.93
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7-2
Exhibits 27 and 28 provide sources and applications of funds
for the industry baseline and for pollution control equipment
in the short and long run, respectively.
In the short run, total baseline applications of
funds are expected to be $10.3 billion, of which nearly $6.6
billion will be generated internally through depreciation and
retained earnings. The remainder, nearly $3.8 billion, must
be obtained from the capital markets in the form of new issues
of long-term debt and common stock. These external financing
requirements in the short run will be nearly $1.3 billion per
year. In the long run the external financing needs are pro-
jected to be $13.0 billion, an average of $1.4 billion per year.
During the last decade the steel industry has depended
upon external sources for less than $1.0 billion. These ex-
ternal financing requirements represented only 5 percent of
total applications. The $13.0 billion of external financing
required in the long run represents nearly 40 percent of total
baseline applications. Thus the steel industry must attract
significant amounts of capital to finance expansion and moderni-
zation of steel operations after more than a decade of negli-
gible financing activity. Environmental regulations will in-
crease these financing requirements.
In fact, internal sources exceeded total applications by nearly $0.6
billion during 1973 and 1974.
-------
7-3
Financing pollution control equipment during the
1975-1983 period will require more than $4.5 billion in ex-
ternal financing. These requirements are as follows:
EXTERNAL FINANCING REQUIREMENTS FOR
WATER AND AIR POLLUTION CONTROL EQUIPMENT
(billions of 1975
Water Pollution Control Equipment
Phase I Processes
Phase II Processes
TOTAL
Storm Runoff
Other Water
GRAND TOTAL
Air Pollution Control Equipment
Stack Emissions
Fugitive Emissions
Other Air
TOTAL
dollars)
Short Run
1975-1977
$ 0.24
1.18
$ 1.42
0.02
0.15
$ 1.59
$ 1.16
0.62
0.12
$ 1.90
Long Run
1975-1983
$ 0.48
1.39
$ 1.87
0.12
0.49
$ 2.49
$ 0.93
0.95
0.18
$ 2.06
Exhibit 29 details these external financing needs by time
period.
External financing requirements represent more than
60 percent of the total applications of funds associated with
pollution control equipment. In addition, they increase total
financing needs by 35 percent in the long run.
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7-4
The most serious financing problem, however, exists
in the short run when environmental regulations will require
$3.5 billion, a near doubling of the financing requirements
for expansion and modernization. Nearly 90 percent of the
funds associated with pollution control must be financed in
the short run through external sources. These 1975-1977
capital market requirements pose serious problems for the
steel industry.
First, these external financing requirements far ex-
ceed historical flows. The 1972-1974 period was the most pros-
perous period in the history of the steel industry. During
these years, the industry was able to generate $7.1 billion
from internal sources for all of its activities—steel opera-
tions, mining, fabrication, non-steel operations, etc.—and
had applications of less than $6.7 billion. By way of com-
parison, the above-mentioned total requirements for steel
operations alone during the 1975-1977 period total $14.3
billion in applications and $7.3 billion in external financing.
Thus total uses of funds are expected to more than double, with
internal sources increasing marginally from $6.7 to $7.0 billion,
The net result is a significant gap to be filled by issues of
long-term debt and common stock.
Second, the industry's level of profitability has
seriously lagged the average of all manufacturing with the
exception of 1974 when the relaxation of price controls and
worldwide shortages of both steel and basic raw materials
enabled the steel industry to raise its prices and fully utilize
its productive capacity. Overall steel industry rates of re-
turn in 1974 equalled the all-manufacturing average, with
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7-5
natural resources extraction and some non-steel activities
(e.g., chemicals) far exceeding the returns on steel opera-
tions. Over the last decade, however, the steel industry's
rate of return on common equity has averaged one-half of that
for all manufacturing firms when profitability is adjusted
to reflect inflationary trends.
Third, the steel industry in the past has been bur-
dened with a poor assessment by financial analysts and investors
in general. During the last decade, the industry has not ex-
panded its capacity and, therefore, has not required infusions
of capital. This static operating environment, when coupled
with a dismal record of profits, helps to explain the industry's
performance in the stock market. From 1970 through 1974 the
ratio of market value to book value for the six major integrated
2
steel firms approximated 0.5. That is, investors have valued
the industry's securities at one-half the amount which these
securities would yield if the industry could liquidate its
assets at book values. If the steel industry were required to
issue common stock to finance its expansion and/or pollution
control equipment under these capital market conditions, the
value of the holdings by existing stockholders would be diluted.
thus discouraging further investment. Unless stock prices in-
creased to a level approximating book value, the need for con-
tinued financing in the long run would discourage investors in
the short run.
Finally, i:f the steel firms were unable to issue
common stock at prices near book value, they would have the
2
The stock market recovery during the 1st Quarter of 1976 has significantly
improved the ratio of market values to book values for steel firms. The
first new common stock issue by a major integrated steel firm since the
1950s was offered on March 29, 1976 by Inland Steel.
-------
7-6
option of cutting back on expansion plans or modifying the
historic debt-to-equity ratio of 30 to 40 percent. If the
industry were to finance its expansion and pollution control
equipment needs entirely with long-term debt issues, the debt-
to-equity ratio would increase to 100 percent by 1983. Even
if this mix of debt and equity were acceptable to investors,
the cause for the shift and its magnitude would most likely
have an adverse impact upon the current bond ratings of firms
within the steel industry. Under these conditions, most steel
firms would cut back on their capacity expansion plans.
The above-mentioned analysis does not necessarily
imply that the steel industry cannot finance its expansion
and its pollution control requirements in the short run. While
there is little doubt that financing these requirements will be
extremely difficult, TBS believes that the task is manageable.
However, the industry must be able to pass through the increased
operating costs and capital-related charges associated with
expansion, modernization and environmental regulations. In
addition, the industry must be able to earn a competitive re-
turn on its common equity.
It is TBS's opinion that the steel industry will be
unable to finance its expansion, modernization and pollution
control requirements without earning a rate of return on common
equity at least equal to those realized by other manufacturing
firms.
Some industry observers would argue that financing difficulties could be
eased further if steel firms could earn a rate of return which includes
a premium to counter the uncertainty associated with 1he cyclical na-
ture of the domestic steel industry and the industry 's inability to earn
an adequate return in the past.
-------
7-7
Several obstacles stand in the way of the stool in-
dustry's meeting these conditions. The increased prices implied
by the pass-through of all pollution control costs, including
an adequate return on common equity, could adversely impact
the ability of domestic producers to compete with imports and
substitute materials. However, TBS projects that future
prices will increase by less than 0.5 percent in real terms 1rom
1974 levels. In addition, most knowledgeable observers of the
steel industry believe that the domestic steel industry is now
cost competitive with foreign steel producers. Future capacity
expansion and the shift to more efficient steelmaking should
increase this comparative advantage.
Over the last decade the steel industry has been unable
to earn an adequate return. During this period foreign com-
petition was able to increase its share of the domestic steel
market. This competitive pressure, coupled with price controls
on steel products, limited profitability. The termination of
formal price controls and worldwide steel shortages, both of
which took place in 1974, enabled the domestic steel industry
to raise its prices and to earn a competitive rate of return.
Given the current competitive position of domestic steel pro-
ducers, an elimination of government restraints on price in-
creases should permit the steel industry to achieve adequate
rates of return without adversely impacting its ability to
compete with foreign producers. In addition, the format of
the current labor-management contract minimizes the threat of
future steel strikes. During the late 1950s and 1960s, fre-
quent strike threats permitted imported steel to increase its
penetration of the domestic market.
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7-8
Some observers of capital market conditions have
forecast a shortage of capital in the near future. While un-
willing to state without qualification that capital market
conditions will not restrict future economic growth, TBS has
projected capital availability by means of three, equally
plausible scenarios. Within two of these scenarios, the
overall availability of capital in the near future is not a
problem.
The ability of major non-financial corporations to
finance their operations appears to be feasible under all
three scenarios—the unanswered question is the difficulty of
so doing in terms of the cost of capital in the form of interest
rate or stock price. The capital availability question is most
relevant to the marginal, interest-sensitive borrower. Nor-
mally, these borrowers would include state and local govern-
ments, small business firms, and individuals requiring home
mortgages and/or consumer credit.
SENSITIVITY ANALYSIS: STEEL SHIPMENTS FORECAST
Perhaps the most uncertain element in the set of
industry conditions thus far analyzed would be the forecast
of the future level of steel shipments. In establishing its
baseline forecast, TBS assumed that domestic steel shipments
would rebound from the recession levels in 1975 to the long-
run trend by 1977. Recognizing the sensitivity of capital ex-
penditures and related external financing needs to this fore-
cast of domestic steel shipments, TBS evaluated alternative
forecasts of domestic steel shipments, including the following:
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7-9
shipments would recover from the current
recession by 1977 and would exceed the
long-run trend by 10 percent in subse-
quent years,
shipments would not fully recover from
the current recession and would remain
permanently below the long-run trend by
10 percent, and
shipments would recover more slowly from
the current recession and would not
reach the long-run trend until 1980.
OPTIMISTIC FORECAST OF SHIPMENTS
The short-run financing problem uncovered in the pre-
vious analyses would be exacerbated if the industry growth were
to exceed the long-run trend after 1977. Under these conditions
capital expenditures for capacity expansion would be $13.5
billion in the short run, $8.4 of which would require external
financing., Thus baseline capital expenditures would increase
from $8.7 to $13.5 billion, or 55 percent, all in the form of
an increase in construction work in progress. External finan-
cing requirements for capacity expansion and modernization
would increase from $3.8 to $8.4 billion, an increase of more
than 120 percent.
While the short-run incremental impact of pollution
control equipment under this optimistic forecast of shipments
would increase by less than 10 percent for capital expendi tures
and external financing, the combined requirements for capacity
expansion, modernization and pollution control equipment under
these conditions would be excessive. Total short-run capital
expenditures and external financing requirements would be $17.7
billion and $12.2 billion, respectively. On an annual basis,
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7-10
these capital expenditures would average $5.9 billion per year,
$4.1 billion of which would be financed within the capital mar-
kets. These external financing requirements in the short run
represent a 67 percent increase over the previously cited $2.4
billion.
In the long run, the requirements of optimistic growth
would be no less acute. Total capital expenditures would in-
crease from $34.3 to $43.4 billion with external financing re-
quirements increasing from $17.5 to $24.7 billion.
It is TBS's opinion that these optimistic growth re-
quirements, coupled with the capital needs for pollution control
equipment, would exceed the industry's financing abilities—
especially in the short run.
PESSIMISTIC FORECAST OF SHIPMENTS
If the sharp decline in steel shipments during 1975
represents a permanent, structural shift away from steel prod-
ucts or toward lighter materials, whether it be thinner gauge
steel or substitute materials, the short-run financing problem
within the industry would be eased. Under these conditions
total short-run capital expenditures would decline from $12.6
to $9.6 billion, a decline of nearly 25 percent. Related ex-
ternal financing requirements would decline from $7.3 to $4.6
billion, a decline in excess of 37 percent. Thus annual external
financing needs which averaged more than $2.4 billion under base-
line conditions would decline by $0.9 billion.
It is TBS's opinion that a combination of slower ex-
pansion of capacity, continued modernization of existing capac-
ity, and compliance with environmental regulations would be
quite manageable, in both the short and long run.
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7-11
SLOW RECOVERY FROM RECESSION
If the sharp decline in steel shipments during 1975
represents a temporary, but prolonged setback for the steel
industry, the previously mentioned short-run financing problem
is somewhat eased. Under these conditions, total short-run
capital expenditures decline from $12.6 to $11.5 billion with
a near dollar-for-dollar decrease in external financing require-
ments. Since the slow recovery does not alter the long-run
trend, no change in the long-run impacts are evident with the
exception of minor differences attributed to the timing of
expenditures.
SENSITIVITY ANALYSIS: PLANNING UNDER UNCERTAINTY
All of the above-mentioned sensitivity analyses as-
sume that the steel industry is able to forecast future economic
conditions with great accuracy and plan accordingly. A far
more likely set of conditions would be those wherein the in-
dustry would plan for a rebound from the 1975 recession to the
long-run trend in 1977, but the uncertainty in steel shipments
would result in operations above or below those levels anticipated,
For example, the industry might expand to meet the
long-run trend only to find that the 1975 recession represented
a structural shift in steel consumption. Under these condi-
tions, unit costs would increase due to lower capacity utiliza-
tion and higher fixed costs per ton of shipments. It is likely
that steel firms would attempt to recover these higher costs
through price increases without which net income would decline
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7-12
below the target rate of return on common equity. If ship-
ments fell below the long-run trend by 10 percent, price ad-
justments would result in increases of approximately $6 per
ton in the long run.
If shipments were to exceed the long-run trend by
10 percent and capacity additions were planned to meet trend
requirements, the steel industry would find itself in a posi-
tion where it could decrease its price and continue to achieve
the target rate of return. Facing capacity shortages, it is
likely that firms within the steel industry would maintain
price, increase internal sources by realizing a rate of return
on common equity in excess of their target, and thereby re-
duce external financing needs.
This analysis, coupled with the earlier conclusion
that the steel industry would have extreme difficulty in
financing its expansion plans under the optimistic shipments
forecast, would suggest that the steel industry would not
undertake rapid expansion at this time.
SENSITIVITY ANALYSIS: ALTERNATIVE
RATES OF RETURN ON EQUITY
In the previous section the economic impact of al-
ternative rates of return on equity was analyzed in terms of
revenue requirements and price effects. Equally important is
the impact of profitability upon external financing needs.
An increase in the rate of return on common equity, other
things equal, would increase net income, retained earnings and
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7-13
internal cash generation, and decrease external financing
requirements. Furthermore, maintenance of a given capital
structure would imply that this increase in retained earnings
would result in a complementary decrease in common stock
4
issued.
If steeJ firms were able to achieve a rate of re-
turn on equity comparable with the average of all manufacturing
firms, short-run retained earnings would increase from $5.4
to $6.8 billion with a net decrease in external financing needs
from $9.6 to $8.4 billion. Thus while increased profitability
would considerably enhance the ease with which the steel in-
dustry could obtain its external financing, it would not sig-
nificantly reduce its financing needs.
Far more drastic would be the financing difficulties
which would coincide with a continuation of the inadequate
profit levels en steel operations reported by the major inte-
grated steel firms. Under these conditions retained earnings
in the short run would decline by nearly 50 percent from $5.4
to $2.9 billion. The corresponding increase in external finan-
cing needs would be from $9.6 to $11.8 billion. This 23 percent
increase in external financing requirements certainly would ex-
acerbate the short-run financing problem; however, the inability to
earn an adequate return on common equity by itself would undermine
the ability of steel firms to attract capital at acceptable rates.
It should be noted that the increase in net -Income results -in increased
revenues and, therefore, increased working capital requirements. This
increase in working capital would be financed through a mix of debt and
equity.
Once again, it should be noted that the rate of return on steel operations
alone is not publicly available from annual financial statements. Es-
timates of this rate of return have been provided by AISI.
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7-14
SENSITIVITY ANALYSIS: HIGHER COST OF CAPITAL
Many industry observers fear that the external
financing burden of the next decade will erode security
ratings on its long-term debt issues and/or require increased
yields to investors on its common stock. In order to eval-
uate the impact of an increased cost of capital upon exter-
nal financing requirements and average steel prices, TBS in-
creased the long-term interest rate and the target rate of
return on common equity by 1 percent.
Under these conditions, total long-run external
financing requirements decline from $17.5 to $16.8 billion—
a decrease of 4 percent. This results from the increase in
net income and retained earnings, an increase which results
in a price increase of less than $3.50. Thus a 1 percent
increase in the cost of capital would result in an average
price increase of less than 1 percent.
SENSITIVITY ANALYSIS: BPCTCA COMPLIANCE SCHEDULE
As described in an earlier section, the date by which
full compliance with BPCTCA is obtained has a significant
effect on the timing of capital expenditures. Alternative com-
pliance dates affect not only the timing of external financing
requirements, but also the amount required in any given time
period.
Both of these impacts can be observed in the following
figure:
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7-15
1.5
1.0
0.5
CUMULATIVE EXTERNAL FINANCING OF
ALTERNATIVE BPCTCA COMPLIANCE DATES
(billions of 1975 dollars)
1.30
Compliance with BPCTCA
July 1, 1977
July 1, 1979
July 1, 1981
1977
1980
1983
Compliance by the 1977 statutory date for BPCTCA requires $1.3
billion in short-run external financing. In addition, these
financing requirements peak in 1977 and steadily decline there-
after as a result of the increased cash flow from related
internal sources, primarily in the form of depreciation.
The short-run external financing needs associated
with a 1979 compliance schedule is $1.2 billion, reducing the
total financing requirements of environmental regulations by
3 percent in the short run. While this delay in the BPCTCA
compliance schedule appears to increase financing needs during
the 1975-1983 period, these streams of cumulative financing
needs converge as the related water pollution control equip-
ment becomes fully depreciated. Delay of the compliance
schedule until 1981 decreases short-run financing reouirements a
total of $0.4 billion, or 10 percent.
-------
8, OTHER IMPACTS OF ENVIRONMENTAL REGULATIONS
Environmental regulation in the steel industry
will have other economic effects. The most significant
of these other impacts will concern changes in the industry's
consumption of energy and its levels of employment. Effects
may also be expected in communities where significant
amounts of steelmaking are concentrated and in the nation's
balance of trade. This section discusses these impacts.
ENERGY IMPACTS
The manufacture and finishing of iron, steel and
steel mill products requires extremely large amounts of
energy. In recent years the steel industry has used ap-
proximately 20 percent of the total energy consumed within
the manufacturing sector. At least half of this amount is
consumed in the ironmaking stage of production, which
includes both coke ovens and blast furnaces.
In calculating the energy requirements for the
steel industry, TBS relied on estimates of fuel and electrical
power consumption per ton of throughput for each process.
These engineering estimates were provided by Arthur D. Little
for the production processes and by EPA technical contractors
and alternatively by ADL for water and air pollution control
equipment. With the exception of metallurgical coal, these
estimates do not include the energy content of the raw materials
used in the steelmaking process. Thus the energy consumed in
mining and/or preparation of iron ore, limestone, steel scrap,
oxygen, and fluxes and alloying materials is not included.
In addition, non-process related consumption of energy is not
included.
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8-2
Because of its large magnitude, the energy con-
tent of metallurgical coal used as input to the coke ovens
was included in these calculations. Furthermore, the ADL
energy estimates include the energy generated in the forms
of blast furnace and coke oven gas, which is typically used
in downstream processes. The production of these gases
results in a net energy credit being assigned to these
two processes.
A summary of energy requirements is as follows:
ENERGY REQUIREMENTS
(quadrillion Btu)
Short Run
1975-1977
Baseline 6.71
Pollution Control Equip-
ment
Water 0.03
A1r 0.01
TOTAL 0.04
GRAND TOTAL 6.75
Pollution Control as a
Percent of Basllne 0.062
Long Run
1975-1983
22.95
0.33
0.11
0.44
23.39
1.9%
Exhibits 30 and 31 detail these energy requirements by time
period and by stage of production and by environmental regu-
lation, respectively.
The energy impact of environmental regulations is
minor when compared to the large energy requirements for
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8-3
steel production. Pollution control equipment placed into
service during the 1975-1983 period will increase energy
consumption by 0.4 quadrillion Btu, approximately 2 percent
of the baseline levels.
When the energy consumption of pollution control
facilities already in place is included, total energy use
associated with environmental regulations is calculated to
be 0.8 quadrillion Btu, or less than 4 percent of the in-
dustry total. Water pollution equipment is responsible for
more than 60 percent of total pollution control energy
consumption with air pollution equipment responsible for
the remainder.
The energy requirements to operate all pollution
control facilities within the steel industry will be
approximately 135 million barrels of residual fuel oil or
equivalent during the 1975 to 1983 period. These requirements
amount to 41,000 barrels per day.
Projections of requirements utilizing NUS/Cyrus
Rice and Arthur D. Little estimates of energy use associated
with water pollution control equipment are comparable—0.5
quadrillion Btu, including equipment placed into service
prior to 1975. However, the ADL estimate of energy requirement
for air pollution abatement is twice that based upon the
energy use assumed by Battelle Columbus Laboratories and
EPA-Durham. This significant difference follows from the
air flow assumptions employed by EPA-Durham in its assess-
ment of fugitive emission requirements.
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8-4
EMPLOYMENT EFFECTS
The construction, installation, and operation of
pollution control facilities will create additional jobs.
Total employment from the operation of these facilities is
summarized below:
SUMMARY OF STEEL INDUSTRY EMPLOYMENT
(thousands of Jobs)
Short Run
1977
Baseline Conditions '444.7
Water Pollution Control 1.4
A1r Pollution Control .4.
TOTAL EMPLOYMENT 446.5
Long Run
1983
444.5
9.0
3.5
457.0
Includes process-related direct end indirect
employees only.
Exhibits 32 and 33 detail these employment effects by time
period and by stage of production and by environmental
regulation, respectively. The decline in baseline employment
is the result of increasing domestic shipments being more
than offset by the underlying assumption that productivity
will continue to improve at its historical rate of 2.3
percent per year.
It is anticipated that 1,800 steel industry jobs
will be required by 1977 to operate the additional pollution
control equipment placed into service in or after 1975. These
new jobs represent less than 1 percent of the industry's total
employment and are in addition to the 2,400 jobs linked to
the operation of pollution control equipment placed into
This improvement in productivity alone would be responsible for the
loss of more than 31,000 jobs in the short run and more than 88,000
jobs by 1983 if production requirements did not increase.
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8-5
service prior to 1975. By 1983, compliance with all environ-
mental regulations will have created 12,500 additional
jobs—a 3 percent increase over baseline employment. In
total, more than 14,900 jobs will be required by 1983 to
operate pollution control equipment within the steel industry.
In addition to jobs created directly within the
steel industry, employment will also be created in the
manufacture and installation of pollution control equipment.
Utilizing the national average of 20 jobs per million dollars
of annual production of pollution control equipment, the
previously cited long-run capital expenditures of $6.8
billion will generate an annual average of 15,000 jobs in
pollution control equipment-related industries. This
employment will, in turn, create additional employment in
unrelated industries.
Some reduction in production labor may offset these
employment increases. Jobs could be lost if the higher prices
due to the cost of pollution control result in a decline in
domestic steel shipments. Jobs could also be lost if specific
mills or plants were shut down. However, shutting down one
operation might require expanding production at another plant.
The net effect of either of these conditions would be a
decline in employment only to the extent that production is
shifted from more labor-intensive operations to less labor-
intensive ones or domestic production is replaced by imports
and/or substitute materials.
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8-6
COMMUNITY EFFECTS
The effect on communities of compliance with the
proposed environmental regulations will vary by geographic
region. Where plants are large and where significant amounts
of steelmaking capacity are concentrated (e.g., in Pennsyl-
vania with over 20 percent of steelmaking capacity), closing
of processes at one plant may result in additional jobs at
another plant nearby.
Steel facilities in all but EPA Regions III and V
are scattered, frequently small and specialized. Production
lost from closures in other regions may not be made up near-
by. It will be replaced, possibly by very distant and unre-
lated plants. Therefore, closures in these areas will more
likely result in loss of jobs to a community than would be
true in EPA Regions III and V. However, should implementation
of the effluent guidelines result in closures, some communities
where the resulting lost production is supplemented will
experience growth.
A direct assessment of potential community effects
requires a detailed analysis of facilities which are marginally
profitable and are likely to curtail operations when confronted
with the necessity of installing pollution controls. Such
specialized micro-economic analysis requires plant-specific
data which are not generally available. Consequently, the EPA
has been unable to conduct detailed economic studies of all
such marginal facilities.
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8-7
EPA has conducted an in-depth analysis of the poten-
tial economic effects of pollution control costs on the eight
steel plants in the Mahoning Valley region of eastern Ohio.
The study was prompted by the knowledge that (1) the regional
economy depends heavily upon steel production, and (2) these
steel operations are among the most marginal in the country
as a result of a variety of economic factors.
The EPA study found that the imposition of pollution
controls (or any other major increase in production costs) is
likely to degrade substantially the profitability of these
plants. In these situations, there is considerable risk that
the steel firms might elect to curtail operations rather than
make the investments in pollution control necessary to meet
environmental regulations.
On the basis of the findings from the Mahoning Valley
study, EPA decided to provide substantial relief from the in-
dustry-wide effluent guidelines. This relief for the plants
in the Mahoning Valley delays and possibly reduces the major
investment required for effluent controls.
BALANCE OF TRADE EFFECTS
Since the mid-1950s, there has been a steady and
rapid growth in imports of steel into the United States.
Domestic steel companies have met this competition through
improved service, specialized production and transportation
benefits, as well as some price cutting—all of which have
decreased profitability. In 1974 steel imports resulted in an
unfavorable balance of trade of $3.0 billion, the greatest
deficit of the decade.
2
Economic Impact of Pollution Control Regulations on Steel Plants in the
Mahoning River Valley, Booz, Allen, and Hamilton, Inc., March 1976.
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8-8
Compliance with the pollution control regulations
will result in price increases on the order of $7 per ton
in 1977 and $17 per ton in 1983. Thus competitive pres-
sure may increase. However, as mentioned previously,
the steel customer will face increases in nominal steel
prices only slightly in excess of the rate of inflation in
the overall economy.
A second mitigating factor is that worldwide
demand approached worldwide capacity prior to the recent
worldwide recession. At the same time foreign producers
are experiencing an escalation in operating costs due to
increased labor rates and raw materials prices. Foreign
steel companies may voluntarily reduce exports to the United
States in order to serve closer markets which would increase
profitability through reduced transportation costs.
It is expected that foreign producers will face
pollution abatement requirements in the near future. Thus
the relative impact of public policy toward environmental
issues within the United States and in foreign countries
may play a dominant role in determining our balance of trade.
The final impact of these events on our balance of
trade is unclear. Net imports of steel is the most difficult
measure of demand to forecast since it is directly affected
not only by domestic economic developments but by foreign ones
as well. In addition, foreign steel has been an instrument of
government policy in the past.
Under baseline conditions, net imports are expected
to reach 16.7 million tons in 1980 and 18.9 million tons in
1985. In the short and long run, net imports will fall within
12 percent of these tonnages should total demand fluctuate 10
percent above or below the baseline.
-------
9, THE COST AND ECONOMIC IMPACT
OF PHASE II EFFLUENT GUIDELINES
The analysis which follows describes the impact of
the Phase II Effluent Guidelines as published in the March 22,
1976 Federal Register. These Phase II guidelines include
regulations for the control of water pollution from the pri-
mary breaking mills through the finishing mills, with the ex-
ception of the cold coatings (i.e., tin and chrome plating).
The guidelines also make provision for the control of storm
runoff, which is included under the requirements for Best
Available Technology Economically Achievable (BATEA). Water
pollution control costs for Phase I processes, cold coating
costs, miscellaneous water regulations anticipated but not
yet promulgated, and all costs of controlling air pollution
are not included in this section.
The statutory date for achievement of Best Prac-
ticable Control Technology Currently Available (BPCTCA) is
July 1, 1977. In many cases within the iron and steel indus-
try this compliance date may not be achieved due to construction
lead times which depend upon the specific situation at individual
plants. The following analysis of the economic impact of the
Water Act has been based upon an assumption that full com-
pliance with BPCTCA requirements will occur sometime during
the period between July 1, 1979 and July 1, 1981. The following
analysis highlights the impacts of compliance by July 1, 1979.
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9-2
CAPITAL EXPENDITURES
The capital expenditures required to meet the Phase
II Effluent Guidelines are as follows:
CAPITAL EXPENDITURES FOR PHASE II EFFLUENT GUIDELINES
To
To
To
(billions
meet BPCTCA
meet BATEA
meet NSPS
TOTAL
of 1975 dollars)
Short Run
1975-1977
$1.20
0.11
0.01
$1.32
Long Run
1975-1983
$1.39
0.83
0.09
$2.31
Because of the need to bring present steel produc-
tion facilities up to BPCTCA standards, the relative impact
of the 'Phase II Effluent Guidelines on capital expenditures
will be greatest in the short run. These Phase II require-
ments are expected to exceed $1.3 billion during the short-
run period—an amount representing more than 15 percent of
baseline capital expenditures and nearly 76 percent of total
expenditures for water pollution control equipment. More
than 90 percent of Phase II capital expenditures during this
period are associated with the BPCTCA guideline.
In the long run, capital expenditures required to
meet the Phase II Effluent Guidelines are expected to increase
to $2.3 billion. Thus these expenditures will decline to 8
percent of baseline requirements and less than two-thirds of
water pollution control requirements. Since the cold coating
process will be covered by a forthcoming guideline, $20 million
in capital expenditures incurred by steel finishers have not
been attributed to the Phase II Effluent Guidelines, in both
the short and long run.
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9-3
OPERATIONS AND MAINTENANCE EXPENSES
The operations and maintenance (O&M) expenses re-
quired to meet the Phase II Effluent Guidelines are as
follows:
OPERATIONS & MAINTENANCE EXPENSES FOR PHASE II
EFFLUENT GUIDELINES
(billions of 1975 dollars)
Short Run
1975-1977
$0.12
*
To meet BPCTCA
To meet BATEA
To meet NSPS -
TOTAL $0.12
*less than $5 million
Long Run
1975-1983
$0.96
0.24
0.01
$1.21
All of the O&M expenses are associated with the BPCTCA guide-
line in the short run. These operating expenses will approxi-
mate $0.1 billion during this period, less than 0.2 percent
of baseline O&M expenses.
In the long run, O&M expenses associated with the
Phase II Effluent Guidelines are expected to amount to $1.2
billion, less than 0.5 percent of the baseline expenses and
nearly one-half of the operating expenses associated with water
pollution control.
REQUIRED REVENUES
The incremental revenues required to comply with the
Phase II Effluent Guidelines are as follows:
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9-4
REVENUE REQUIREMENTS FOR PHASE II EFFLUENT GUIDELINES
(billions
To meet BPCTCA
To meet BATEA
To meet NSPS
TOTAL
of 1975 dollars)
Short Run
1975-1977
$0.51
0.02
*
$0.53
Long Run
1975-1983
$2.59
0.77
0.05
$3.41
*less than $5 million
Revenues exceeding $0.5 billion will be required during the
short-run period to meet the increased operating and capital-
related charges incurred for compliance with the Phase II
guidelines.
These revenue requirements in the long run exceed
$3.4 billion, increase the baseline requirements by 1 percent,
and amount to nearly 60 percent of the requirements associated
with water pollution control equipment. Cold coating processes,
which are excluded from the Phase II guidelines, would require
$20 million of additional revenues in the short run and $40
million in the long run.
PRICE EFFECTS
If the full annualized costs of the Phase II Effluent
Guidelines are to be recovered, the implied price effects are
as follows:
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9-5
AVERAGE PRICE EFFECTS
(1975
To meet BPCTCA
To meet BATEA
To meet NSPS
TOTAL
FOR PHASE II EFFLUENT
dollars per ton)
Short Run
1977
$2.31
0.13
-
$2.44
GUIDELINES
Long Run
1983
$2.66
1.90
0.13
$4.69
Thus the capital expenditures and O&M expenses required to
comply with Phase II guidelines will increase the 1977 average
steel price by $2.44 per ton, an increase of less than 1 per-
cent over the baseline.
By 1983 the average price increase will amount to
$4.69 per ton, or 1.3 percent of the baseline price.
EXTERNAL FINANCING
The external financing requirements associated with
the above-mentioned capital expenditures are as follows:
EXTERNAL FINANCING REQUIREMENTS
FOR PHASE II EFFLUENT GUIDELINES
To
To
To
(billions of
meet BPCTCA
meet BATEA
meet NSPS
TOTAL
1975 dollars)
Short Run
1975-1977
$0.72
0.45
0.01
$1.18
Long Run
1975-1983
$1.11
0.31
0.07
$1.49
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9-6
In the short run, $1.2 billion of external financing will be
required. These financing needs amount to 32 percent of the
baseline requirements during the 1975-1977 period. In addi-
tion, they comprise approximately 75 percent of the external
financing for water pollution control equipment.
The long-run financing requirements will require
$1.5 billion more, for an 11 percent increase in baseline
needs.
ENERGY IMPACT
The energy requirements for the operation of pollu-
tion abatement mandated by the Phase II Effluent Guidelines
are as follows:
ENERGY REQUIREMENTS FOR PHASE II
EFFLUENT GUIDELINES
(quadrillion Btu)
To meet BPCTCA
To meet BATEA
To meet NSPS
TOTAL
Short Run
1975-1977
0.03
0.03
Long Run
1975-1983
0.23
0.04
0.27
The energy requirements associated with the Phase II guide-
lines amount to 0.03 quadrillion Btu in the short run and
0.27 quadrillion Btu in the long run. This long-run energy
consumption by Phase II pollution control equipment represents
only 1 percent of the energy requirements for iron and steel
production.
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9-7
EMPLOYMENT IMPACT
Operation of the water pollution control equipment
required to comply with the Phase II Effluent Guidelines will
result in additional jobs as follows:
EMPLOYMENT EFFECTS OF EFFLUENT
(thousands of jobs)
Short Run
1977
To meet BPCTCA 0.72
To meet BATEA 0.04
To meet NSPS -
TOTAL 0.76
GUIDELINES
Long Run
1983
1.51
1.49
0.05
3.05
Nearly 800 jobs are associated with these guidelines
by 1977 and the total will exceed 3,000 jobs by 1983.
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EXHIBITS
-------
EXHIBIT 1
DOMESTIC STEEL SHIPMENTS 1960-1983
(MILLIONS OF TONS)
150
KEY:
• •••
ACTUAL
TREND
FORECAST OF TOTAL
SHIPMENTS
BASELINE FORECAST
OF SHIPMENTS
128.2
119.2
77.1
50 —*
1
60 1965
ACTUAL
1 1
1970 1974
1
1977
•FORECAST >
1 1
1980 198
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Exhibit 2
CAPITAL EXPENDITURES FOR CAPACITY EXPANSION BY TIME PERIOD
1975-1983
(billions of 1975 dollars)
Process Equipment Placed into Service
Raw Materials Preparation
Ironmaking
Steel ma king
Casting and Forming
Finishing Mills
Subtotal
Changes in Construction Work in Progress
Total
1975-1977
$0.34
-
0.55
0.35
2.09
$3.33
0.40
$3.73
1978-1980
$0.66
0.28
0.51
0.68
0.78
$2.90
0.61
$3.51
1981-1983
$0.64
0.36
0.47
0.96
0.94
$3.38
0.99
$4.37
1975-1983
$1.64
0.65
1.53
1.99
3.80
$9.61
2.01
$11.62
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Exhibit 3
CAPITAL EXPENDITURES FOR REWORKS AND MODERNIZATION
BY TIME PERIOD
1975-1933
(billions of 1975 dollars)
Process Equipment Placed into Service
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Total
1975-1977
$0.47
0.52
0.15
1.05
2.80
$4.99
1978-1980
$0.52
0.53
0.17
1.08
3.03
$5.34
1981-1983
$0.58
0.56
0.19
1.11
3.13
$5.56
1975-1983
$1.58
1.61
0.51
3.24
8.95
$15.89
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Exhibit 4
SCHEMATIC OF STEEL PRODUCTION PROCESS
Direct Shipments of Pig Iron
ff=—____Z_i^=
Direct Shipments of Ingots, Slabs, Billets and Blooms
_Bars and Ligh
""Structural*
—Seamless Pipe
Hot Rolled
-Sheet and
Strip
Cold Rolled
-Sheet and
Strip
Galvanized
Products
Tin and Other
Plated Products
RAW MATERIALS
IRONMAKING
STEELMAKING
CASTING AND FORMING
FINISHING MILLS
-------
Exhibit 5
OPERATIONS AND MAINTENANCE EXf>ENSES FOR IRON AND STEEL PRODUCTION
BY TIME PERIOD
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Total
1975-1977
$40.03
0.90
13.78
5.06
17.50
$77.27
1978-1980
$51.56
1.10
16.19
6.55
21.17
$96.56
1981-1983
$58.68
1.14
16.63
7.25
22.37
$106.07
1975-1983
$150.27
3.15
46.60
18.86
61.03
$279.91
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Exhibit 6
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL
EQUIPMENT PLACED INTO SERVICE PRIOR TO 1975 3Y TIME PERIOD
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Total
1975-1977
$0.10
0.10
0.06
0.03
0.39
$0.68
1978-1980
$0.12
0.12
0.06
0.03
0.46
$0.79
1981-1983
$0.12
0.12
0.07
0.03
0.48
$0.82
1975-1983
$0.34
0.35
0.19
0.09
1.32
$2.29
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Exhibit 7
OPERATIONS AND MAINTENANCE EXPENSES FOR AIR POLLUTION CONTROL
EQUIPMENT PLACED INTO SERVICE PRIOR TO 1975 BY TIME PERIOD
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steelmaking
Casting -and Forming
Finishing Mills
Total
1975-1977
$0.01
-
0.20
-
-
$0.22
1978-1980
$0.02
-
0.21
-
-
$0.23
1981-1983
$0.02
-
0.20
-
-
$0.22
1975-1983
$0.05
-
0.62
-
-
$0.67
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Exhibit 8
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL
EQUIPMENT BY TIME PERIOD
NUS/Cyrus Rice Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment Placed into Service
Raw Materials Preparation
Ironmaking
Steel ma king
Casting and Forming
Finishing Mills
Subtotal
Changes in Construction Work in Progress
Total
Storm Runoff
Other Water1
Grand Total
1975-1977
$0.01
0.04
0.06
0.11
0.59
$0.81
0.77
$1.58
0.02
0.16
$1.76
1978-1980
$0.03
0.05
0.04
0.14
0.69
$0.95
(0.14)
$0.81
0.08
0.29
$1.18
1981-1983
$0.06
0.04
0.06
0.12
0.45
$0.73
(0.29)
$0.44
0.05
0.15
$0.64
1975-1983
$0.10
0.13
0.15
0.37
1.74
$2.49
0.34
$2.83
0.15
0.60 :
$3.57
1
Includes changes in construction work in progress
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Exhibit 9
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL
EQUIPMENT BY EFFLUENT GUIDELINE
NUS/Cyrus Rice Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment Placed Into Service
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Subtotal
Changes in Construction Uork in Progress
Total
Storm Runoff1
Other Water1
Grand Total
<
Effluent Guidelines
BPCTCA
$0.01
0.08
0.03
0.15
1.12
$1.39
0.15
$1.54
BATEA
$0.07
0.04
0.06
0.07
0.57
$0.81
0.06
$0.87
1
NSPS
$0.01
0.02
0.06
0.15
0.04
$0.28
0.13
$0.41
Total
$0.10
0.13
0.15
0.37
1.74
$2.49
0.34
$2.83
0.15
0.60
$3.57
Includes changes in construction work in progress
-------
Exhibit 10
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL
EQUIPMENT BY TIME PERIOD
NUS/Cyrus Rice Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steel making
Casting and Forming
Finishing Mills
Subtotal
Storm Runoff
Other Water
Grand Total
1975-1977
$0.11
0.11
0.08
0.04
0.50
$0.84
*
0.03
$0.87
1978-1980
$0.16
0.15
0.11
0.09
0.84
$1.35
0.02
0.18
$1.55
1981-1983
$0.23
0.21
0.14
0.11
1.01
$1.70
0.09
0.63
$2.42
1975-1983
$0.50
0.47
0.32
0.24
2.35
$3.88
0.10
0.85
$4.83
*less than $5 million
-------
Exhibit 11
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL
EQUIPMENT BY EFFLUENT GUIDELINE
NUS/Cyrus Rice Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Subtotal
Storm Runoff
Other Water
Grand Total
Effluent Guidelines
BPCTCA
$0.37
0.37
0.20
0.17
2.20
$3.31
BATEA
$0.10
0.09
0.06
0.02
0.14
$0.41
NSPS
$0.03
0.01
0.06
0.05
0.01
$0.16
Total
$0.50
0.47
0.32
0.24
2.35
$3.88
0.10
0.85
$4.83
-------
Exhibit 12
COMPARISON OF CAPITAL EXPENDITURES
FOR WATER POLLUTION CONTROL EQUIPMENT
NUS/Cyrus Rice vs. Arthur D. Little Engineering Cost Estimates
In Place 1974 vs. Additions 1975-1983
(billions of 1975 dollars)
Process Equipment Placed into Service
Raw Materials Preparation
Ironmaking
Steel making
Casting and Forming
Finishing Mills
Subtotal1
NUS/Cyrus Rice
Engineering Cost Estimates
In Place
1974
$0.50
0.28
0.17
0.13
0.42
$1.50
Additions
1975-1983
$0.10
0.13
0.15
0.37
1.74
$2.49
Total
$0.59
0.42
0.32
0.50
2.15
$3.98
Arthur D. Little
Engineering Cost Estimates
In Place
1974
$0.33
0.39
0.15
0.09
0.43
$1.39
Additions
1975-1983
$0.80
0.61
0.17
0.35
1.45
$3.38
Total
$1.13
1.00
0.32
0.43
1.88
$4.76
Process equipment only
-------
Exhibit 13
COMPARISON OF OPERATIONS AND MAINTENANCE EXPENSES
FOR WATER POLLUTION CONTROL EQUIPMENT
NUS/Cyrus Rice vs. Arthur D. Little Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Subtotal1
NUS/Cyrus Rice
Engineering Cost Estimates
Equipment
In Place
$0.34
0.35
0.19
0.09
1.32
$2.29
Equipment
Additions
$0.16
0.12
0.13
0.15
1.03
$1.59
Total
1975-1983
$0.50
0.47
0.32
0.24
2.35
$3.88
Arthur D. Little
Engineering Cost Estimates
Equipment
In Place
$0.59
0.36
0.14
0.08
0.34
$1.51
Equipment
Additions
$0.49
0.87
0.08
0.22
1.04
$2.70
Total
1975-1983
$1.09
1.24
0.22
0.30
1.37
$4.22
Process equipment only
-------
Exhibit 14
CAPITAL EXPENDITURES FOR AIR POLLUTION CONTROL
EQUIPMENT BY TIME PERIOD
Battelle Columbus Laboratories Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment Placed into Service
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Subtotal
Changes in Construction Work in Progress
Total
Other Air
Grand Total
1975-1977
$0.64
-
0.27
-
-
$0.91
1.05
$1.96
0.13
$2.09
1978-1980
$0.68
0.36
0.48
-
-
$1.52
(0.69)
$0.83
0.08
$0.91
1981-1983
$0.06
0.01
0.13
-
-
$0.20
0.01
$0.21
0.04
$0.25
1975-1983
$1.37
0.37
0.88
-
-
$2.62
0.37
$2.99
0.26
$3.25
1
Includes changes in construction work in progress
-------
Exhibit 15
CAPITAL EXPENDITURES FOR AIR POLLUTION CONTROL
EQUIPMENT BY EMISSION STANDARD
Battelle Columbus Laboratories Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment Placed into Service
Raw Materials Preparation
Ironmaking
Steel making
Casting and Forming
Finishing Mills
Subtotal
Changes in Construction Work in Progress
Total
Other Air1
Grand Total
Emission Standard
Stack
$0.93
-
0.49
-
-
$1.42
0.23
$1.65
Fugitives
$0.44
0.37
0.39
-
-
$1.20
0.14
$1.34
Total
$1.37
0.37
0.88
-
-
$2.62
0.37
$2.99
0.26
$3.25
1
Includes changes in construction work in progress
-------
Exhibit 15
OPERATIONS AND MAINTENANCE EXPENSES FOR AIR POLLUTION CONTROL
EQUIPMENT BY TIME PERIOD
Battelle Columbus Laboratories Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steel making
Casting and Forming
Finishing Mills
Subtotal
Other Air
Grand Total
1975-1977
$0.19
-
0.21
-
-
$0.40
0.02
$0.42
1975-1980
$0.59
0.12
0.35
-
-
$1.06
0.07
$1.13
1981-1983
$0.70
0.20
0.42
-
-
$1.32
0.13
$1.45
1975-1983
$1.48
0.32
0.98
-
-
$2.78
0.22
$3.00
-------
Exhibit 17
OPERATIONS AND MAINTENANCE EXPENSES FOR AIR POLLUTION CONTROL
EQUIPMENT BY EMISSION STANDARD
Battelle Columbus Laboratories Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steel making
Casting and Forming
Finishing Mills
Subtotal
Other Air
Grand Total
Emission Standard
Stack
$0.99
-
0.65
-
-
$1.64
Fugitives
$0.50
0.32
0.33
-
-
$1.15
Total
$1.48
0.32
0.98
-
-
$2.78
0.22
$3.00
-------
Exhibit 18
COMPARISON OF CAPITAL EXPENDITURES
FOR AIR POLLUTION CONTROL EQUIPMENT
Battelle Columbus Laboratories vs. Arthur D. Little Engineering Cost Estimates
In Place 1974 vs. Additions 1975-1983
(billions of 1975 dollars)
Process Equipment Placed into Service
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Subtotal1
Battelle Columbus Laboratories
Engineering Cost Estimates
In Place
1974
*
-
0.68
-
-
$0.68
Additions
1975-1983
$1.37
0.37
0.88
-
-
$2.62
Total
$1.37
0.37
1.56
-
-
$3.30
Arthur D. Little
Engineering Cost Estimates
In Place
1974
$0.11
-
0.66
-
-
$0.77
Additions
1975-1983
$1.48
0.82
3.50
0.09
0.01
$5.90
Total
$1.58
0.82
4.16
0.09
0.01
$6.66
*Less than $5 million
1
Process equipment only
-------
Exhibit 19
COMPARISON OF OPERATIONS AND MAINTENANCE EXPENSES
FOR AIR POLLUTION CONTROL EQUIPMENT
Battelle Columbus Laboratories vs. Arthur D. Little Engineering Cost Estimates
1975-1983
(billions of 1975 dollars)
Process Equipment
Raw Materials Preparation
Ironmaking
Steelmaking
Casting and Forming
Finishing Mills
Subtotal1
Battelle Columbus Laboratories
Engineering Cost Estimates
Equipment
In Place
$0.05
-
0.62
-
-
$0.67
Equipment
Additions
$1.43
0.32
0.36
-
-
$2.11
Total
1975-1983
$1.48
0.32
0.98
-
-
$2.78
Arthur D. Little
Engineering Cost Estimates
Equipment
In Place
$0.07
-
0.80
-
-
$0.87
Equipment
Additions
$1.44
0.74
2.83
0.81
0.37
$6.19
Total
1975-1983
SI. 50
0.74
3.64
0.81
0.37
S7.06
1
Process equipment only
-------
EXHIBIT 20
SCHEMATIC OF TBS METHODOLOGY FOR ESTIMATING
REVENUE REQUIREMENTS AND EXTERNAL FINANCING NEEDS
x a
I
RETAINED
EARNINGS
•
DIVIDENDS
-------
Exhibit 21
REVENUE REQUIREMENTS FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT
1975-1983
(billions of 1975 dollars)
' Cost Category
Sales Taxes
Operations and Maintenance Expenses
Depreciation
Property Taxes
Net Interest Charges
Federal and State Income Taxes
Net Income
Total
Baseline
Conditions1
$13.44
282.87
13.76
3.15
4.41
7.06
13.92
$338.61
Pollution
Control Equipment
Water
$0.23
2.53
0.83
0.27
0.41
0.50
0.98
$5.75
Air
$0.23
2.34
0.90
0.27
0.45
0.51
1.00
$5.68
Includes pollution control equipment placed into service prior to 1975.
-------
Exhibit 22
REVENUE REQUIREMENTS FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT BY TIME PERIOD
1975-1983
(billions of 1975 dollars)
Source of Requirements
Iron and Steel Production
Water PCE In Place
Air PCE In Place
Total Baseline
Additional Water PCE to meet:
BPCTCA Guideline
BATEA Guideline
NSPS Guideline
Storm Runoff Guideline
Other Water Requirements
Total Water
Additional Air PCE to meet:
Stack Emission Standard
Fugitives Emission Standard
Other Air Requirements
Total Air
1975-1977
$94.87
0.93
0.32
$96.11
$0.58
0.03
0.03
*
0.07
$0.73
$0.69
0.10
0.07
$0.86
1978-1980
$114.54
0.95
0.29
$115.78
$1.20
0.21
0.14
0.04
0.32
$1.92
$1.10
0.99
0.16
$2.24
1981-1983
$125.55
0.93
0.26
$126.73
$1.11
0.67
0.24
0.16
0.93
$3.11
$1.00
1.35
0.24
$2.59
1975-1983
$334.95
2.80
0.85
$338.61
$2.90
0.92
0.41
0.20
1.32 |
$5.75
$2.78
2.44
0.47
$5.68
*less than $5 million
Pollution control equipment denoted
as PCE
-------
Exhibit 23
AVERAGE PRICE EFFECTS FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT FOR SELECTED YEARS
1974-1983
(1975 dollars per ton of steel shipments)
Source of Effect
Iron and Steel Production
Water PCE In Place
Air PCE In Place
Baseline Price
Additional Water PCE to meet:
BPCTCA Guideline
BATEA Guideline
NSPS Guideline
Storm Runoff Guideline
Other Water Requirements
Total Water
Additional Air PCE to meet:
Stack Emission Standard
Fugitives Emission Standard
Other Air Requirements
Total Air
1974
$361.09
3.61
1.32
$366.01
1977
$341.17
3.12
0.99
$345.28
$2.62
0.19
0.21
0.02
0.38
$3.42
$2.98
0.54
0.30
$3.82
1980
$350.76
2.79
0.81
$354.36
$3.64
0.93
0.50
0.19
1.30
$6.56
$3.15
4.04
0.54
$7.73
1983
$361.96
2.57
0.68
$365.21
$2.96
2.22
0.80
0.53
3.09
$9.60
$2.70
3.70
0.75
$7.15
Pollution control equipment denoted as PCE
-------
Exhibit 24
PRICE EFFECTS FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT BY STEEL PRODUCT
1983
(1975 dollars per ton of steel product)
Steel Product
Direct Shipments of Ingots,
Blooms, Billets and Slabs
Heavy Structure Is and Rails
Nails and Wire Products
Bars and Light Structural s
Cold Finished Bars
Seamless Pipe and Tubing
Welded Pipe
Hot Rolled Sheet and Strip
Galvanized Products
Tin and Other Plated Products
Cold Rolled Sheet and Strip
Plates
Baseline
Condi ti on s^
$219.68
281.95
482.25
330.59
332.18
384.88
417.35
289.28
492.63
521.56
406.48
367.03
Pollution
Control Equipment
Water
$3.36
5.84
16.06
9.81
11.47
10.25
11.99
6.69
13.95
14.60
11.24
7.17
Air
$4.63
5.96
9.25
7.02
7.04
7.66
7.45
5.77
9.15
9.43
8.01
6.54
'Includes pollution control equipment placed into service prior to 1975.
-------
Exhibit 25
PRICE EFFECTS FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT BY STAGE OF PRODUCTIONl
1983
(1975 dollars per ton of steel production)
Process Equipment
Raw Materials Preparation
Ironmaking
Steel making
Casting and Forming
Finishing Mills
Total
Baseline
Condi tion$2
$182.98
8.12
54.23
30.36
89.52
$366. 21
Pollution
Control Equipment
Water
$1.00
0.89
0.94
1.49
5.28
$9.60
Air
$3.10
1.25
2.80
-
-
$7.15
1
Price effects are computed on the basis of a weighted
average of steel products and process-by-process yields.
'Includes pollution control equipment placed Into service prior to 1975.
-------
Exhibit 26
PRICE EFFECTS FOR INDUSTRY BASELINE AND i
WATER AND AIR POLLUTION CONTROL EQUIPMENT BY PROCESS
1983
(1975 dollars per ton of unit operation output)
Process equipment
Ore Yard
Coal Yard
Scrap Yard
Sinter Strand
Coke Oven
Blast Furnace
Open Hearth Furnace
Basic Oxygen Furnace
Electric Furnace
Vacuum Degassing
Ingot Casting
Billet Caster
Slab Caster
Blooming Mill
Billet Mill
Slabbing Mill
Structural Mill
Bar Mill
Wire Mill
Cold Finishing
Seamless Pipe Mill
Hot Strip Mill
Pickling
Welded Pipe Mill
Cold Reduction
Galvanizing
Tin Plating
Plate Mill
Baseline
Conditions2
$34.32
60.09
114.81
12.32
4.27
8.63
56.55
29.14
56.45
0.44
4.71
13.35
45.23
19.63
29.75
8.30
19.22
54.49
135.13
1.59
86.40
36.98
13.43
76.91
56.84
69.89
98.82
79.41
Pollution
Control Equipment
Water
$0.03
0.03
0.03
0.13
2.66
0.97
0.86
0.42
0.48
0.60
0.06
0.82
0.90
1.18
1.79
0.91
1.75
4.75
5.76
1.67
4.78
2.35
1.64
3.27
2.29
2.26
2.91
2.96
Air
-
-
$1.04
5.38
1.40
3.59
1.16
3.63
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Wice effects represent value added (including the purchase
of raw materials) at each unit operation.
Includes pollution control equipment placed into service
prior to 1975.
-------
Exhibit 27
SOURCES AND APPLICATIONS OF FUNDS FOR INDUSTRY BASELINE AND
MATER AND AIR POLLUTION CONTROL EQUIPMENT
1975-1977
(billions of 1975 dollars)
Applications of Funds
Capital Expenditures
Increase in Working Capital
Refunding of Long-Term Debt
Total Applications
Sources of Funds
Depreciation
Retained Earnings
Subtotal --Internal Sources
Issues of Long-Term Debt
Issues of Common Stock
Subtotal --External Financing
Total Sources
Baseline
Conditions1
$8.72
1.15
0.47
$10.34
$4.31
2.25
$6.56
$2.29
1.49
$3.77
$10.34
Pollution
Control Equipment
Water
$1.76
0.02
-
$1.78
$0.07
0.12
$0.19
$0.43
1.15
$1.59
$1.78
Air
$2.09
0.04
-
$2.13
$0.09
0.14
$0.23
$0.53
1.37
$1.90
$2.13
Includes pollution control equipment placed into service prior to 1975.
-------
Exhibit 28
SOURCES AND APPLICATIONS OF FUNDS FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT
1975-1983
(billions of 1975'dollars)
Applications of Funds
Capital Expenditures
Increase in Working Capital
Refunding of Long-Term Debt
Total Applications
Sources of Funds
Depreciation
Retained Earnings
Subtotal — Internal Sources
Issues of Long-Term Debt
Issues of Common Stock
Subtotal —External Financing
Total Sources
Baseline
Conditions1
$27.50
4.21
1.22
$32.93
$13.76
6.18
$19.94
$6.19
6.79
$12.99
$32.93
Pollution
Control Equipment
Water
$3.57
0.21
-
$3.78
$0.83
0.47
$1.29
$0.75
1.73
$2.49
$3.78
Air
$3.25
0.19
-
$3.44
$0.90
0.48
$1.38
$0.66
1.40
$2.06
$3.44
Includes pollution control equipment placed into service prior to 1975.
-------
Exhibit 29
EXTERNAL FINANCING REQUIREMENTS FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT BY TIME PERIOD
1975-1983
(billions of 1975 dollars)
Source of Requirements
Iron and Steel Production
Water PCE In Place
Air PCE In Place
Total Baseline
Additional Water PCE to meet:
BPCTCA Guideline
BATEA Guideline
NSPS Guideline
Storm Runoff Guideline
Other Water Requirements
Total Water
Additional Air PCE to meet:
Stack Emission Standard
Fugitives Emission Standard
Other Air Requirements
Total Air
1975-1977
$3.74
0.04
(0.01)
$3.77
$1.20
0.12
0.11
0.02
0.15
$1.59
$1.16
0.62
0.12
$1.90
1978-1980
$4.80
(0.10)
(0.05)
$4.65
$(0.07)
0.45
0.10
0.08
0.26
$0.81
$(0.08)
0.51
0.06
$0.48
1981-1983
$4.69
(0.09)
(0.04)
$4.56
$(0.29)
0.14
0.13
0.03
0.09
$0.09
$(0.15)
(0.17)
*
$(0.32)
1975-1983
$13.23
(0.15)
(0.09)
$12.99
$0.84
0.71
0.33
0.12
0.49
$2.49
$0.93
t
0.95 ;
0.18
$2.06 :
*Less than $5 million
Pollution Control Equipment denoted as PCE.
-------
Exhibit 30
ENERGY CONSUMPTION FOR IRON AND STEEL PRODUCTION BY TIME PERIOD
1975-1983
(quadrillion Btu)
Process Equipment
Raw Materials Preparation
Ironmaking
Steel making
Casting and Forming
Finishing Mills
Total
1975-1977
4.28
(1-07)
0.82
0.74
1.82
6.59
1978-1980
5.11
(1.26)
0.93
0.87
2.15
7.80
1981-1983
5.40
(1.34)
0.96
0.87
2.28
8.17
1975-1983
14.79
(3.67)
2.71
2.48
6.25
22.56
-------
Exhibit 31
ENERGY CONSUMPTION FOR INDUSTRY BASELINE AND
WATER AND AIR POLLUTION CONTROL EQUIPMENT BY TIME PERIOD
1975-1983
(quadrillion Btu)
Source of Consumption
Iron and Steel Production
Water PCE In Place
Air PCE In Place
Total Baseline
Additional Water PCE to meet:
BPCTCA Guideline
BATEA Guideline
NSPS Guideline
Total Water
Additional Air PCE to meet:
Stack Emission Standard
Fugitive Emission Standard
Total Air
Total Energy Consumption
1975-1977
6.59
0.05
0.07
6.71
0.03
-
-
0.03
0.01
-
0.01
6.75
1978-1980
7.80
0.06
0.08
7.94
0.10
0.01
0.01
0.12
0.01
0.03
0.04
8.10
1981-1983
8.17
0.06
0.07
8.30
0.11
0.05
0.02
0.18
0.02
0.04
0.06
8.54
1975-1983
22.56
0.17
0.22
22.95
0.24
0.06
0.03
0.33
0.04
0.07
0.11
23.39
Pollution control equipment denoted as PCE.
-------
Exhibit 32
EMPLOYMENT FOR IRON AND STEEL PRODUCTION FOR SELECTED YEARS
1974-1983
(thousands of jobs)
Process Equipment
Raw Materials Preparation
Ironmaking
Steel ma king
Casting and Forming
Finishing Mills
Total
1974
54.8
21.9
120.0
73.5
194.2
464.4
1977
52.9
21.3
111.2
71.6
185.2
442.3
1980
52.9
21.2
107.6
75.4
185.9
443.0
1983
52.5
21.0
104.1
78.7
185.8
442.1
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