EPA-452/R-02-017
August 2003
Economic Analysis of Air Pollution Regulations: NESHAP for Organic Liquids Distribution
By:
Katherine Heller
Brooks M. Depro
Laurel Clayton
RTI International*
Health, Social, and Economics Research
Research Triangle Park, NC 27709
Prepared for:
John L. Sorrels
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group (ISEG)
(C339-01)
Research Triangle Park, NC 27711
Contract No. 68-D-99-024
*RTI International is a trade name of Research Triangle Institute.
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
i. REPORT NO.
EPA-452/R-02-017
3. RECIPIENT'S ACCESSION NO.
4. TITLE AND SUBTITLE
Economic Analysis of Air Pollution Regulations: NESHAP for
Organic Liquids Distribution
5. REPORT DATE
August 2003
6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
Katherine B. Heller, Brooks M. Depro, and Laurel Clayton, RTI
International
8. PERFORMING ORGANIZATION REPORT NO.
RTI Project Number 7647.004.384
9. PERFORMING ORGANIZATION NAME AND ADDRESS
Research Triangle Institute (RTI)
Center for Economics Research, Hobbs Bldg.
Research Triangle Park, NC 27709
10. PROGRAM ELEMENT NO.
11. CONTRACT/GRANT NO.
68-D-99-024
12. SPONSORING AGENCY NAME AND ADDRESS
Steve Page, Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
13. TYPE OF REPORT AND PERIOD COVERED
Final
14. SPONSORING AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
16. ABSTRACT
This report evaluates the economic impacts of the final NESHAP for organic liquids distribution. The
industry impacts and social costs of the rule are estimated by incorporating the expected costs of compliance
to a partial equilibrium model of the U.S. industry and projecting the market impacts for affected markets
(organic chemicals, petroleum liquids, and commercial distribution). The report also evaluates small
business impacts.
17.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b. IDENTIFIERS/OPEN ENDED TERMS
c. COSATI Field/Group
economic impacts
small business impacts
social costs
Air Pollution control
Economic Impact Analysis
Regulatory Flexibility Analysis
18. DISTRIBUTION STATEMENT
Release Unlimited
19. SECURITY CLASS (Report)
Unclassified
21. NO. OF PAGES
105
20. SECURITY CLASS (Pag
Unclassified
22. PRICE
EPA Form 2220-1 (Rev. 4-77) PREVIOUS EDITION IS OBSOLETE
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CONTENTS
Section Page
1 Introduction and Executive Summary 1-1
1.1 Profile of the Affected Industries 1-1
1.2 The Costs of the OLD NESHAP 1-3
1.3 Estimated Economic Impacts of the OLD NESHAP 1-4
1.3.1 Market Responses to the NESHAP 1-4
1.3.1.1 Market- and Industry-Level Impacts 1-5
1.3.1.2 Facility-Level Impact Results 1-6
1.3.1.3 Company-Level Impacts Results 1-6
1.3.1.4 Social Costs 1-6
2 Industry Profile 2-1
2.1 Brief Description of Source Category 2-1
2.1.1 Current Economic Conditions and Trends 2-3
2.1.1.1 Chemical Production 2-3
2.1.1.2 Petroleum Refineries 2-3
2.1.1.3 Liquid and Petroleum Terminals 2-3
2.1.1.4 Crude Oil Pipeline Pumping and Breakout Stations . . 2-4
2.1.2 Environmental Concerns 2-4
2.2 Distribution of Organic Chemical Liquids 2-5
2.2.1 Overview of Distribution Service 2-7
2.2.1.1 Elasticity of Supply 2-7
2.2.2 Industry Organization 2-8
2.2.2.1 Facilities 2-11
2.2.2.2 Firm Characteristics 2-13
2.2.3 Uses and Consumers 2-18
2.2.3.1 Characterization of Demand—Derived Demand
Elasticity 2-18
2.2.4 Markets 2-19
2.2.4.1 Market Volumes 2-20
2.2.4.2 Market Prices 2-20
111
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2.2.4.3 Future Projections 2-20
2.3 Distribution of Petroleum Liquids 2-21
2.3.1 Affected Markets 2-22
2.3.2 Production/Service Overview 2-22
2.3.2.1 Elasticity of Supply 2-23
2.3.3 Industry Organization 2-24
2.3.3.1 Facilities 2-27
2.3.3.2 Firm Characteristics 2-27
2.3.4 Uses and Consumers 2-34
2.3.4.1 Characterization of Demand—Derived Demand
Elasticity 2-36
2.3.5 Markets 2-37
2.3.5.1 Market Volumes 2-37
2.3.5.2 Market Prices 2-38
2.3.5.3 Future Projections 2-38
Engineering Cost Analysis 3-1
3.1 Control Cost Estimates 3-1
Economic Impact Analysis: Methods and Results 4-1
4.1 Overview of Economic Modeling Approaches 4-1
4.2 Conceptual Approach 4-2
4.2.1 Operational Model 4-4
4.2.1.1 Market Supply 4-4
4.2.1.2 Market Demand 4-4
4.2.1.3 Control Cost Inputs and With-Regulation
Equilibrium 4-4
4.2.2 Results 4-5
4.2.3.1 Market- and Industry-Level Impacts 4-5
4.2.3.2 Facility-Level Impact Results 4-6
4.2.3.3 Company-Level Impacts Results 4-8
4.2.3.4 Social Costs 4-9
4.3 Energy Impacts 4-10
4.3.1 Increase in Energy Consumption 4-10
4.3.2 Reduction in Energy Consumption 4-11
4.3.3 Net Impact on Energy Consumption and Cost 4-12
IV
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5 Small Business Impact Analysis 5-1
5.1 Identifying Small Businesses 5-1
5.2 Screening-Level Analysis 5-1
5.3 Economic Analysis 5-2
5.4 Assessment 5-4
References R-l
Appendices
A Organic Liquids Distribution (OLD) Methodology A-l
B Economic Computations B-l
C OLD Economic Impact Analysis: Sensitivity Analysis
for Different Scenarios C-l
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LIST OF FIGURES
Number Page
2-1 Distribution of Organic Chemical Liquids Facilities that Responded
to the ICR Survey 2-14
2-2 The Distribution of Organic Chemical Liquids Facilities that Responded
to the ICR Survey by Employment 2-15
2-3 The Size Distribution of Companies that own OLD Facilities that
Responded to the ICR Survey and are Involved in Chemical Distribution,
by 1998 Sales (in $1997) 2-16
2-4 Size Distribution of Companies that own OLD Facilities that Responded
to the ICR Survey and are Involved in Chemical Distribution 2-17
2-5 Distribution of Companies Owning Organic Chemical Liquid Facilities
that Responded to the ICR Survey, by Profit Margin 2-19
2-6 Location of Petroleum Liquids Distributors that Responded to the
ICR Survey 2-28
2-7 The Distribution of Petroleum Liquids Facilities that Responded to the
ICR Survey by Employment 2-29
2-8 The Size Distribution of Companies that own OLD Facilities that
Responded to the ICR Survey and are Involved in the Distribution of
Nongasoline Petroleum Liquids, by 1998 Sales (in $1997) 2-32
2-9 Size Distribution of Companies that own OLD Facilities that Responded
to the ICR Survey and are Involved in the Distribution of Nongasoline
Petroleum Liquids 2-33
2-10 Distribution of Companies Owning Petroleum Liquid Facilities that
Responded to the ICR Survey, by Profit Margin 2-35
4-1 Market Responses to the OLD NESHAP 4-3
5-1 Impacts on Companies owning OLD Facilities: Cost to Sales Ratios 5-3
VI
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LIST OF TABLES
Number Page
1-1 Number of Facilities Affected by OLD NESHAP, by NAICS Code 1-2
1-2 Per-Facility and Nationwide Control Costs by Model
Plant (1997$/yr) 1-3
1-3 Market-Level Industry Impacts of the Proposed OLD
NESHAP (1997$) 1-5
2-1 Nationwide HAP Totals from OLD Activities (tons/yr) 2-5
2-2 Summary of Facility Categories, Liquids, Modes of Transportation, and
Emissions Sources Covered by the OLD Source Category 2-6
2-3 Principal OLD Facility Categories 2-8
2-4 Concentration Ratios by SIC Code 2-10
2-5 Number of Total OLD Facilities and Affected Facilities, 1997 2-12
2-6 Profit Margins of Firms that Responded to the ICR Survey and that
Own Organic Chemical Liquids Distribution Facilities 2-18
2-7 Organic Chemical Market Volumes, 1997 (106 Mt) 2-20
2-8 Petroleum Products Produced at U.S. Refineries, 1997 2-21
2-9 Principal OLD Facility Categories 2-23
2-10 Concentration Ratios by SIC Code 2-25
2-11 Number of Total OLD Firms and Affected Firms, 1996 2-30
2-12 Small Business Size Standards for OLD Industries 2-31
2-13 Profit Margins of Firms that own Organic Chemical Liquids
Distribution Facilities that Responded to the ICR Survey 2-35
2-14 Estimates of Price Elasticity of Demand for Petroleum Products 2-36
2-15 Petroleum Product Market Volumes, 1997 (106 Mt) 2-37
2-16 Petroleum Consumption and Net Imports in 1997 and 2020
(106 barrels/day) 2-40
3-1 Facility and Nationwide Control Costs for the OLD MACT 3-3
Vll
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4-1 Market-Level Industry Impacts of the Organic Liquid
Distribution (OLD) NESHAP: 1997 4-6
4-2 National-Level Industry Impacts of the Organic Liquid
Distribution (OLD) NESHAP: 1997 4-7
4-3 Estimated Company-Level Impacts of the OLD NESHAP: 1997 4-8
4-4 Distribution of Social Costs Associated with Organic Liquids
Distribution (OLD) NESHAP: 1997 4-10
4-5 Estimated Energy Impacts of the OLD NESHAP 4-11
5-1 Impacts on Small and Large Companies Owning OLD Facilities: Cost-
to-Sales Ratios 5-2
5-2 Impacts on Companies Owning OLD Facilities: Changes in Company
Profits 5-4
Vlll
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SECTION 1
INTRODUCTION AND EXECUTIVE SUMMARY
Under Title II of the Clean Air Act (CAA) Amendments of 1990, the Office of Air
Quality Planning and Standards (OAQPS) is developing a national emission standard for
hazardous air pollutants (NESHAP) to limit air emissions from organic liquid distribution
activities. Industries that will be affected by this NESHAP include chemical manufacturers,
liquid terminals, petroleum refiners, and pipeline owners and operators. The NESHAP
requires distributors of nongasoline organic liquids to meet emission standards for the release
of hazardous air pollutants (HAPs) into the environment. To meet these standards, some
firms will have to modify their equipment and institute leak detection and repair procedures.
These changes result in higher costs of production for the affected producers. They may also
have broader societal implications because these effects are transmitted through market
relationships to their customers. This report profiles the affected industries and analyzes the
economic impacts expected to be incurred as a result of the NESHAP.
1.1 Profile of the Affected Industries
The organic liquids distribution (OLD) source category consists of all the source
category operations that receive, store, and distribute organic liquids (other than gasoline)
throughout the economy. To provide data on the affected industry, EPA collected survey
information from OLD facilities. In this report, these survey data are scaled up to reflect the
entire affected universe of facilities. EPA estimates that 381 facilities will be affected by the
NESHAP. Table 1-1 shows a frequency distribution of facilities by North American Industry
Classification System (NAICS) code. Facilities affected may either produce, consume, store,
and distribute regulated organic liquids, or only store and distribute them. The four major
industries affected by the NESHAP are chemical manufacturing, petroleum refining, crude
oil and natural gas pipeline transportation,1 and liquid terminalling and warehousing. The
liquids being distributed fall into two broad categories:
'Natural gas pipeline distribution is not affected by this rule.
1-1
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Table 1-1. Number of Facilities Affected by OLD NESHAP, by NAICS Code
NAICS Code
211
325
32411
4831
493
48611
422, 454
Total
Description
Crude Petroleum and Natural Gas Extraction
Industrial Organic Chemical Production
Petroleum Refineries
Water Transportation
Liquid Terminals
Crude Petroleum Pipelines
Petroleum and Chemical Terminals
Number of Affected
Facilities
2
183
93
1
57
16
29
381
• organic chemicals, including synthetic chemicals and petrochemicals, and
• petroleum liquids, including crude oil, natural gas liquids, and nongasoline
refined products.
In NAICS 324 and 325, the majority of facilities employ more than 500 people.
Within the other NAICS codes, however, many facilities employ 25 or fewer people. Thirty
percent of affected organic chemical producers (NAICS 325) and 31 percent of facilities in
the other industry groups are located in Texas. Other states with substantial numbers of
facilities include Louisiana, Alaska, Ohio, Illinois, and California. Firms owning OLD
facilities range from small single-facility specialized distributors to large integrated
companies that own numerous production and distribution facilities. Of 57 known
companies owning affected OLD facilities, only 6 are considered small according to Small
Business Administration (SBA) criteria. Of OLD firms in NAICS 325, most have baseline
company sales exceeding $1 billion, and baseline employment exceeding 10,000 employees.
Among firms owning petroleum OLD facilities, however, baseline sales vary more widely.
Approximately 20 percent have sales less than $50 million, while more than 65 percent have
sales exceeding $1 billion. Many firms in the affected industries are highly integrated, both
vertically and horizontally. This means they may own numerous affected facilities, and that
their distribution facilities are an integral part of their overall organic liquid operations. For
this reason, we have paid special attention in our analysis to the impacts on the companies
owning the OLD facilities. In these integrated firms, EPA expects that many of the
distribution-only facilities in NAICS 422, 454, 483, 486, and 493 are not profit centers for
the firms that own them, but instead provide a service to other facilities owned by the firm,
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and operate as a cost center for the firm. Thus, the impacts of the regulation will be
evaluated in terms of its overall impact on the firm's profitability, in addition to examining
the impact on the profitability of individual facilities. For merchant firms, however, that own
only distribution facilities, EPA expects that the impact of the regulation will be evaluated in
terms of its effect on facility profitability.
1.2 The Costs of the OLD NESHAP
The OLD rulemaking will increase the costs of distributing organic liquids.
Specifically, the costs of several general types of businesses are expected to increase. These
businesses include facilities that manufacture and distribute organic chemicals and/or
nongasoline petroleum products and facilities that specialize in the distribution of these
products. Of the latter facilities, some are owned by companies that also manufacture the
products, while others are independent businesses that only distribute the products.
Table 1-2 shows the estimated costs for model plants. The costs are shown in greater detail
in Section 3.
Table 1-2. Per-Facility and Nationwide Control Costs by Model Plant (1997$/yr)
Model Plant Group
Totals for SIC 13
Totals for SIC 28
Totals for SIC 29
Totals for SIC 42
Totals for SIC 44
Totals for SIC 46
Totals for SIC 51
GRAND TOTALS
Scaled Number of
Facilities
2
183
93
57
1
16
29
381
Total Capital Cost
(1997 $)
12,350
14,093,459
4,739,352
12,669,737
2,500
6,316,442
11,476,167
49,310,007
Total Annualized Cost
($/yr)
45,776
9,404,551
3,556,461
6,802,304
12,233
1,861,567
3,425,106
25,107,998
1-3
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1.3 Estimated Economic Impacts of the OLD NESHAP
Section 4 presents the economic impact analysis methods and results. EPA
developed a multi-market partial equilibrium simulation model in which buyers and sellers
exert no individual influence on market prices of two aggregated commodities potentially
affected by the rule—petroleum and chemical products—and the market for distribution
services. Prices in these markets are set by the collective actions of producers and
consumers, who take the market price as a given in making their production and
consumption choices. Figure 4-1 illustrates this market in which prices and quantities are
determined by the intersection of market supply and demand curves. The baseline consists
of a market price and quantity (P, Q) that is determined by the downward-sloping market
demand curve (Dx) and the upward-sloping market supply curve (SJ.
With the regulation, the costs of production increase for organic liquid suppliers
because they incur additional costs associated with the rule. Incorporating these regulatory
control costs is represented by an upward shift (from S1 to S2) of the aggregate supply curve
by the per-unit compliance cost.
At the new equilibrium with the regulation, the market price increases from P1 to P2
and market output (as determined from the market demand curve, D) declines from qx to q2.
This illustrates the theory underlying estimation of the economic impacts of the rule. Note
that EPA is modeling the impacts of the rule on facilities and companies that both produce
and distribute organic liquids by examining the changes in market prices and quantities for
the liquids being distributed. For integrated organic liquid producers, distribution operations
are a cost center, not a profit center. The distribution operations are an essential part of the
process of providing the delivered liquids to customers, but are not required to be profitable
if they are to continue. Instead, the companies examine the impact of the rule on the overall
profitability of their chemical or petroleum product operations. In the merchant distribution
sector, however, distribution facilities are assumed to operate as profit centers; that is, they
continue to operate only if they are profitable.
1.3.1 Market Responses to the NESHAP
The theory presented above suggests that producers attempt to mitigate the impacts of
higher-cost production by shifting the burden on to other economic agents to the extent the
market conditions allow. We would expect the model to project upward pressure on prices
as producers reduce output rates in response to higher costs. Higher prices reduce quantity
demanded and output for each product, leading to changes in economic surplus to consumers
1-4
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and profitability of firms. These market adjustments determine the social costs of the
regulation and its distribution across stakeholders (producers and consumers).
1.3.1.1 Market- and Industry-Level Impacts
The increased cost of production due to the regulation is expected to slightly increase
the price of petroleum and chemical products and reduce their production/consumption from
baseline levels. As shown in Table 1-3, the regulatory alternative is projected to increase
prices of organic liquids by less than 0.1 percent. Domestic production of petroleum
products declines by 0.02 million metric tons and domestic chemical production declines by
0.02 million metric tons. Supply from foreign producers (imports) increases by 0.01 million
metric tons in the petroleum market and 0.001 million metric tons in the chemical market,
resulting in a net decline of 0.02 million metric tons in each market (less than 0.01 percent).
Supply from merchant distributors declines by approximately 0.01 million metric tons, less
than 0.01 percent.
Table 1-3. Market-Level Industry Impacts of the OLD NESHAP (1997$)
Petroleum Products
Price ($/Mt)
Quantity (106Mt/yr)
Domestic
Foreign
Organic Chemical Products
Price ($/Mt)
Quantity (106Mt/yr)
Domestic
Foreign
Merchant Distributors
Price ($/Mt)
Quantity (106Mt/yr)
Absolute Change
$0.002
-0.02
-0.02
0.01
$0.006
-0.02
-0.02
0.00
$0.01
-0.01
Percent Change
0.001%
-0.001%
-0.001%
0.001%
0.001%
-0.002%
-0.002%
0.002%
0.106%
-0.001%
1-5
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Revenue, costs, and profitability of the directly affected industry also change as
prices and production levels adjust to increased costs associated with compliance. For
domestic petroleum producers, operating profits are projected to decline by $3.37 million
(see Table 4-2). For domestic chemical producers, operating profits are projected to decline
by $5.18 million. Operating profits earned by merchant distributors are projected to increase
by $0.09 million.
1.3.1.2 Facility-Level Impact Results
EPA estimated quantity adjustments by affected OLD facilities, in response to the
costs of compliance with the rule. EPA defined closure of an OLD operation when an OLD
facility is projected to reduce their quantity distributed by the entire amount of their baseline
distribution. One facility with very low baseline throughput is projected to close their OLD
operations in response to the rule.
1.3.1.3 Company-Level Impacts Results
For the company level analysis, EPA computed the change in profits associated with
the regulation to baseline company profits. A company may become unprofitable if the
predicted change in OLD facility profits eliminates total baseline profits of the firm (i.e.,
ratio = 100 percent). For companies affected by the rule, profit changes range from +5
percent to -23 percent. For the median company, profits decrease by less than 1 percent.
None of these firms are projected to become unprofitable as a result of the regulation.
EPA also performed a screening analysis to assess the impacts of the OLD NESHAP
on small businesses. The results of this screening analysis are shown in Section 5. EPA
examined the ratio of compliance costs to baseline company revenues, without incorporating
market adjustments to the rule. Six of the companies owning facilities responding to the
OLD questionnaire are small businesses. Of the six small firms, none is projected to incur
costs exceeding one percent of their baseline revenues. Given the relatively low costs and
the small number of small companies incurring them, EPA finds that significant economic
impacts will not be incurred by a substantial number of small businesses.
1.3.1.4 Social Costs
The value of a regulatory action is traditionally measured by the change in economic
welfare that it generates. The regulation's welfare impacts, or the social costs required to
achieve environmental improvements, will extend to consumers (customers) and producers
alike. Consumers experience welfare impacts due to changes in market prices and
1-6
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consumption levels associated with the rule. Producers experience welfare impacts resulting
from changes in profits corresponding with the changes in production levels and market
prices. However, it is important to emphasize that this measure does not include benefits that
occur outside the market, that is, the value of reduced levels of air pollution with the
regulation.
The economic analysis accounts for behavioral responses by producers and
consumers to the regulation (i.e., shifting costs to other economic agents). This approach
provides insights on how the regulatory burden is distributed across stakeholders. As shown
in Table 4-4, the economic model estimates total social cost of the rule of $17.6 million
(1997$). As a result of higher prices and lower consumption levels, consumers (domestic
and foreign) are projected to bear $10.1 million of the social costs, with petroleum
consumers accounting for slightly less than 50 percent of the total. Domestic producers lose
$8.46 million in profits, with chemical producers accounting for 61 percent of the total.
Foreign producers unambiguously gain as a result of the regulation, with profits increasing
by $1 million. Foreign producers benefit from higher prices while not incurring control costs
associated with the rule.
1-7
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SECTION 2
INDUSTRY PROFILE
The OLD NESHAP potentially affects companies and facilities that distribute
petrochemicals and petroleum liquids. Industries that will be affected by this NESHAP
include chemical manufacturers, petroleum refiners, liquid terminals, and pipeline owners
and operators (organic liquids other than gasoline). Information on the affected facilities,
companies, and industries is necessary in determining the effects of a regulation. This
profile describes the supply and demand of petrochemicals and petroleum liquids, the
facilities and companies that operate within affected industries, and the market conditions in
those industries.
Section 2.1 provides a brief description of the entire OLD source category. Sections
2.2 and 2.3 focus on the two primary facility categories—chemical liquids and petroleum
liquids, which are briefly described in Section 2.1. Sections 2.2 and 2.3 are both organized
as follows: background, production overview, industry organization, characterization of uses
and consumers, and market information. Facilities that may distribute either chemicals or
petroleum products are discussed in Section 2.3 only, for convenience.
2.1 Brief Description of Source Category
The OLD source category consists of all of the source category operations that
receive, store, and distribute organic liquids throughout the economy. For the purposes of
this maximum achievable control technology (MACT) standard, only those organic liquids
with appreciable HAP content (beyond trace quantities) are considered to be "organic
liquids." These liquids may consist of pure HAP chemicals (single HAP) or chemical
blends, refined petroleum products, natural gas liquids, or crude oil. They also may consist
of "appreciable" organic HAPs blended with inorganic, non-HAP liquids (such as water).
OLD operations are carried out by a large number of industries. "Plant sites
performing OLD activities include those that produce, consume, or merely store and
distribute organic liquids. The four principal industries with the greatest volumes of OLD
operations are chemical manufacturing, petroleum refining, crude oil and natural gas liquids
pipeline transportation, and liquid terminalling and warehousing" (Abt, 1998).
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Distributed organic liquids of concern in this profile fall under two broad categories:
• chemicals, including synthetic chemicals and petrochemicals (i.e., chemicals
manufactured from crude petroleum); and
• petroleum liquids, including crude oil, natural gas liquids, and nongasoline
refined products.
Gasoline, which is subject to the gasoline distribution NESHAP, is not covered by the OLD
source category. Sections 2.2 and 2.3 2 provide a more detailed description of the liquids
covered by this regulation.
For the purposes of this regulation, distribution includes the bulk transfer of an
organic liquid across a plant site boundary, either into or out of the plant site (Abt, 1998).
Also covered under this definition are the storage of OLD liquids after receipt and before
distribution. Not included in the OLD source category are the following activities: the
movement of packaged liquids (e.g., drummed or canned liquids); any production,
compounding, blending, or packaging activities at OLD facilities; and the transportation of
OLD liquids for activities other than loading and unloading.
The OLD activities described above take place at sites that serve as distribution
points from which organic liquids can be obtained for further use and processing.
Distribution activities are either collocated with liquid production operations, or they are
carried out at stand-alone storage and distribution terminals. Although the MACT standards
developed under this regulation will apply to any facility that receives, stores, and/or
distributes nongasoline liquids with HAP content, this profile focuses on five categories of
OLD facilities for which model plants were developed:
• chemical production,
• petroleum refineries,
• liquid terminals
• crude oil pipeline pumping/breakout stations, and
• petroleum terminals.
These categories were identified from EPA's April 1998 source category survey as
accounting for the majority of OLD HAP emissions (Gale Research, Inc., 1999a,b,c).
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2.1.1 Current Economic Conditions and Trends
OLD distribution points will incur the costs of this regulation; therefore, this profile
examines the current condition of the OLD source category as it relates to distribution
activities. This section briefly describes recent trends in each of the five principal, OLD
facility categories.1
2.1.1.1 Chemical Production
Recent trends in the chemical manufacturing industry include increased capital
spending and declining employment. In an effort to save money and increase efficiency,
many of the activities associated with repackaging, blending, reformulating, bar-coding,
testing, and quality assurance have been outsourced. That is, contracted out to third-party
operators. This trend has been growing in the chemical manufacturing business. With more
of this work being outsourced, manufacturers' costs are decreasing (Distribution, 1996).
2.1.1.2 Petroleum Refineries
Over the past two decades, oil companies have been closing refineries that are no
longer profitable. To avoid expensive environmental cleanup costs, companies have started
to convert the refineries' storage tanks and to operate them as storage and distribution
centers. However, in recent years, a stable supply market for crude oil has led to a reduction
in oil inventories, creating excess storage space at refineries. Refineries have responded to
this situation by leasing out this excess space to third parties. With continued merger and
cost-cutting activities in the source category, it is conceivable that more excess space will be
created in the future and more refineries will continue to lease increasing amounts of storage
space at their installations.
2.1.1.3 Liquid and Petroleum Terminals
The bulk liquid terminalling industry is undergoing changes as the major
manufacturers of organic liquids and chemicals are restructuring their industries to meet
present and future demands. Terminals face a dual challenge in the future. One challenge is
increasing regulatory demands that are raising the cost of operation for refineries, chemical
plants, and terminals. In addition, excess storage capacity at petroleum refineries and newly
created storage capacity at smaller chemical distributors have started to directly compete
'This discussion is largely based on the July 24, 1998, EPA memorandum entitled "Production Projections for
the OLD Source Category."
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with the larger bulk terminals. Major consolidations within the chemical industry have also
affected the bulk terminalling industry. Major chemical companies have begun to
consolidate their storage requirements by contracting out storage to outside firms that operate
single-party terminals, rather than spreading their operations across many terminals.
2.1.1.4 Crude Oil Pipeline Pumping and Breakout Stations
The Federal Energy Regulatory Commission (FERC) regulates interstate pipeline
companies. Similar to some of the other categories, these pipeline companies are
experiencing difficult times as well. In 1997 earnings from operations were down, following
a 2-year trend. The effects of warmer-than-normal weather during 1997 in North America
also caused oil deliveries to decrease. This decrease affected both operating revenues and
net income for pipeline companies (Oil & Gas Journal, 1998).
2.7.2 Environmental Concerns
EPA has identified four emission sources that account for the majority of HAP
emissions from OLD activities:2
• storage tanks,
• liquid transfer activities involving tank trucks and railcars (loading racks), and
• leaks from equipment components (e.g., pumps, valves).
Table 2-1 shows the nationwide HAP totals for each industry resulting from the different
emission sources. Storage tanks emit 63,315 tons/yr of HAPs, accounting for approximately
70 percent of the total OLD source category. Equipment leaks are the next greatest source of
HAP emissions, representing almost 19 percent of the source category total.
Table 2-2 lists all of the facility categories as well as the modes of transportation
employed and the emission sources covered by the OLD source category.
2Originally, wastewater and semi-aqueous waste were also believed to be sources of HAP emissions for the
OLD source category. However, responses to the OLD survey indicated that insufficient information is
available to determine nonzero MACT floors for wastewater. In addition, the survey indicated that semi-
aqueous waste generated from OLD operations is generally kept in closed containers once it is collected.
The handling of these wastes, at both chemical facilities and refineries, is already covered under the
Resource Conservation and Recovery Act (RCRA) ("MACT Floor Development for the OLD Source
Category," Memo, May 5, 1999). Consequently, emission sources associated with wastewater and semi-
aqueous waste are excluded from this analysis.
2-4
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Table 2-1. Nationwide HAP Totals from OLD Activities (tons/yr)a
Model Plant
Group
13
28
29
42
44
46
51
Total
No. of Major
Source
Facilities
Nationwide11
2
183
93
57
1
16
29
381
Storage
Tanks
<1
835
204
854
2
283
161
2,339
Loading
Racks
2
362
259
568
0
0
288
1,479
Container
Filling
0
345
0
0
0
0
6
351
Equipment
Leaks
5
1,306
199
537
8
10
199
2,265
Totals
7
2,503
662
1,959
10
293
648
6,082
a There are no transfer rack or container filling emissions at pipeline facilities.
b Estimated number of facilities based on industry data and scaled up to estimate national total.
Source: U.S. Environmental Protection Agency (EPA). 2000. Technical Support Document for the Organic
Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S. Environmental Protection
Agency, Office of Air Quality Planning and Standards.
2.2 Distribution of Organic Chemical Liquids
Organic chemical liquids include synthetic chemicals and petrochemicals (chemicals
manufactured from crude petroleum). Synthetic organic chemicals cover a wide range of
intermediate products, including inputs to the manufacture of synthetic resins, plastics
materials, and nonvulcanized elastomers, as well as cyclic organic intermediates and
dyes/pigments, and aliphatic and acrylic chemicals and solvents.
Petrochemicals are intermediate products resulting from the refinery process.
Petrochemical feedstocks include naphtha, a liquid obtained from refining crude oil, as well
as products recovered from natural gas and refinery gases (ethane, propane, and butane).
Other feedstocks include ethylene; propylene; normal- and iso-butylenes; butadiene; and
aromatics such as benzene, toluene, and xylene. The volume of petroleum liquids available
2-5
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Table 2-2. Summary of Facility Categories, Liquids, Modes of Transportation, and
Emissions Sources Covered by the OLD Source Category
Facility Category
Chemical
production
Petroleum
refineries
Liquid terminals
Liquids Handled
Synthetic chemicals
Petrochemicals
Crude oil
Natural gas liquids, (NGLs)
Nongasoline refined products
Synthetic chemicals
Petrochemicals
Mode of Liquid
Transportation
Tank truck
Tank car (railroad)
Sometimes pipelines
Pipeline
Tanker ships
Barges
Tank car
Tank truck
Tank car
Tank trucks
Emission Sources
Storage tanks
Liquid transfer
Container filling
Equipment leaks
Storage tanks
Liquid transfer
Container filling
Equipment leaks
Storage tanks
Liquid transfer
Crude oil
Nongasoline refined products
Container filling
Equipment leaks
Crude oil pipelines
Petroleum
terminals
Crude oil
Crude oil
NGLs
Nongasoline refined products
Pipeline
Tanker ships
Barges
Tank car
Tank truck
Tanker ship
Barge
Pipeline
Tank car
Tank truck
Storage tanks
Equipment leaks
Storage tanks
Liquid transfer
Container filling
Equipment leaks
Sources: Various background documents.
Gale Research Inc. 1999b. "Pipelines, Crude Petroleum." Ward's Business Directory of U.S. Private
and Public Companies: 1999. Detroit, MI: Gales Research, Inc.
American Petroleum Institute. August 1998. Heating Oil in the United States.
to the petrochemical industry depends primarily on the following three factors: crude
petroleum input to refineries, refinery process configuration and operating conditions, and
the demands and prices for naptha and gas oil in their primary fuel markets (DOE, EIA,
1999e).
Synthetic chemicals are associated with the OLD source category when they are
distributed from synthetic organic chemical manufacturing industry (SOCMI) facilities to
2-6
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liquid terminals. These chemicals are typically transported by means of tank truck or tank
car.
Petrochemical feedstocks travel by various modes throughout their product life. The
distribution components associated with the OLD source category are the shipments of
feedstocks from refineries to liquid terminals and SOCMI facilities. Most often,
petrochemicals travel by means of tank truck or tank car; however, some SOCMI facilities
have pipelines by which their products are distributed.
Synthetic organic chemical and petrochemical distribution facilities are most likely to
be classified under the three SIC codes listed in Table 2-3. The table includes the NAICS
codes that correspond to the affected SIC-coded industries.
2.2.7 Overview of Distribution Service
OLD distribution is a service that is part of the production process for organic liquids.
After a refining process, petrochemicals might be distributed to chemical production plants
for processing into synthetic chemicals, or they might be transported to an independent liquid
terminal for storage before further processing. In addition, independent liquid terminals may
also receive processed synthetic chemicals for storage. Liquids stored at independent liquid
terminals might be transported to chemical production plants or refineries for further
processing, they might be sent to a blending/packaging/distribution facility, or they might be
distributed to end users (Abt, 1998).
2.2.1.1 Elasticity of Supply
The supply elasticity for synthetic organic chemicals and petrochemicals depends on
the ability and willingness of firms to scale up production in the face of higher demand.
Supply elasticity refers to the ratio of a given percentage change in price to a resulting
percentage change in quantity supplied. At a given point in time, firms can be expected to
supply an approximately profit-maximizing quantity, given their available technology. For a
given increase in the price of chemicals, the increase in quantity supplied will be greater
when the producers of that chemical have excess capacity and when new production lines for
the chemical are easy and inexpensive to establish. In this analysis, EPA aggregates all
organic chemical liquids into a single market, and incorporates supply elasticities estimated
for other analyses. The elasticity of supply for the organic chemicals market is assumed to
2-7
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Table 2-3. Principal OLD Facility Categories
SIC
Code
SIC Description
NAICS
Codes
NAICS Description
Chemical Production (118 survey responses)
2821 Plastics Materials, Synthetic and
Resins, and Nonvulcanizable
Elastomers
2865 Cyclic Organic Crudes and
Intermediates, and Organic Dyes
and Pigments
2869 Industrial Organic Chemicals, NEC
325211 Plastics Material and Resin
Manufacturing
325192 Cyclic Crude and Pigment
Manufacturing
32511 Petrochemical Manufacturinga
325132 Synthetic Organic Dye and
Pigment Manufacturing
325188 All Other Basic Inorganic
Chemical Manufacturing3
32511 Petrochemical Manufacturing3
325193 Ethyl Alcohol Manufacturing
32512 Industrial Gas Manufacturing
325199 All Other Basic Organic Chemical
Manufacturing"
a Only part of the NAICS industry is made up of facilities from the corresponding SIC-coded industry.
Source: U.S. Census Bureau. March 2000a. "1987 SIC Matched to 1997 NAICS."
. As obtained on March 13, 2000.
be 1.5 (organic chemicals producers will distribute 1.5 percent more organic liquids for each
1 percent increase in price).
2.2.2 Industry Organization
This subsection describes the organization of the segments of the chemical industry
most likely to be affected by the NESHAP regulation and provides specific information on
affected OLD facilities and firms when such information is available. The section begins
with a discussion of market structure, followed by information on facilities that distribute
organic chemicals and the firms that own them.
The structure of the affected market(s) is an important factor in estimating the
potential impacts from a regulation. For example, in a competitive market where each
2-8
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producer has little market power, it would be difficult for an affected firm to pass on
compliance costs to its consumers. On the other hand, in an industry with very few
producers or where the products are highly differentiated, it may be possible for affected
firms to recover part or all of the compliance costs through price increases. The most
important factors determining the competitive structure of an industry are the number of
producers, the degree of product differentiation, and the presence of barriers to entry. The
remainder of this subsection provides a brief explanation of these factors and discusses the
competitive structure of the OLD markets in terms of each factor (CMA, 1995a,b).
EPA estimates that currently thirty-one companies produce and distribute organic
chemical liquids and will be affected by the rule. These companies include many large
integrated chemical companies. Only one OLD company that distributes organic chemicals
is classified as a small company. Product differentiation is a form of nonprice competition
used by firms to establish market power in a specific product market. Product differentiation
may result from unique product characteristics or from brand recognition. In general, a
company that sells a product with valued characteristics that no or few other products
possess will have more market power than a company that sells a product that has no
distinguishable characteristics from other products in the same market. Similarly, market
power is created if customers place a higher value on a product produced by a specific
company, or brand, even though the product characteristics are identical to the products
produced by other companies. The products of concern to the OLD source category are
characterized by a high degree of homogeneity. Thus, brand loyalty is not expected to be an
important factor in the organic chemicals market (CMA, 1995a,b; Arnold, 1989; Gale Group,
1999; DOE, EIA, 1999e).
The number of producers and the market shares of the largest firms are important
determinants of the degree of market power individual firms may have. The term
"concentration" refers to the combined percentage of total output accounted for by the largest
producers in the industry. For example, the four-firm concentration ratio (CR4) refers to the
market share of the four largest firms. The higher the concentration ratio, the more
concentrated the industry. A market is generally considered highly concentrated if the CR4
is greater than 50 percent. The Herfindahl-Hirschmann index (HHI) is an alternative
measure of concentration. It is equal to the sum of the squares of the market shares for the
largest 50 firms in the industry. The higher the index, the fewer the number of firms
supplying the industry and the more concentrated the industry is at the top. The Justice
Department uses the HHI for antitrust enforcement purposes. The benchmark used by the
Justice Department is 1,000, where any industry with an HHI less than 1,000 is considered to
2-9
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be unconcentrated. The advantage of the HHI over the concentration ratio is that the former
gives information about the dispersion of market share among all the firms in the industry,
not just the largest firms (Arnold, 1989).
In general, an industry with a large number of firms and a small concentration will be
relatively more competitive than an industry with few firms and a high concentration. Firms
that operate in a more competitive market will be relatively more affected by new regulations
because they are less likely to be able to pass on compliance costs.
Table 2-4 shows concentration ratios by SIC code for the affected OLD industries
from the 1992 and 1997 Economic Census.. Ratios are included for the census years 1987
and 1992 (where possible). The numbers in Table 2-4 show that, by and large, the OLD
industries are characterized by a large number of firms and generally unconcentrated
markets, indicating a high degree of competitiveness in their respective product markets.
The exception is Cyclic Organic Crudes and Intermediates, which undergoes a significant
increase in concentration between 1992 and 1997.
Table 2-4. Concentration Ratios by SIC Code
SIC/NAICS
Code Year
Chemical Production
Total
Number of
Firms
282 1 , 3252 1 1 : Plastics Materials,
1987
1992
1997
2865,325192: Cyclic
1987
1992
1997
288
240
299
4 Firm
Concentration Ratio
8 Firm 20 Firm 50 Firm
Herfindahl-
Hirschmann
Index
Synthetic Resins, and Nonvulcanizable Elastomers
20%
24%
26%
33%
39%
39%
Organic Crudes and Intermediates, Orj
131
150
36
2869, 325199: Industrial Organic
1987
1992
1997
491
489
487
34%
31%
62%
Chemicals, NEC
31%
29%
25%
50%
45%
79%
48%
43%
38%
61%
63%
64%
>anic Dyes and
77%
72%
99%
68%
67%
57%
89%
90%
89%
Pigments
96%
94%
100%
86%
86%
80%
248
284
304
542
428
1701
376
336
256
Source: U.S. Department of Commerce, Bureau of the Census. 1992. Economic Census. Washington, DC:
Government Printing Office, . (Includes results for
1987 and 1992).
U.S. Department of Commerce, Bureau of the Census. 1997. Economic Census. Washington, DC:
Government Printing Office,
2-10
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The chemical industry is undergoing a trend of mergers, acquisitions, and general
industry consolidation. According to an analysis by Speed (1999), "the market will
[comprise] fewer but larger companies, global in scope, and more focused in their business
pursuits."
Barriers to entry are the mechanisms through which the total number of firms in an
industry can be kept small and a high degree of market concentration can exist. Where
barriers to entry are present, new firms find it impossible or unprofitable to enter the market.
Barriers to entry therefore create market power for the firms that already operate in the
market. Typically, barriers to entry exist when industries are capital intensive, are
characterized by significant economies of scale, require specialized knowledge (e.g.,
patents), or are subject to government regulation (Speed, 1999). While relatively capital-
intensive, chemical production in general is not extremely specialized. Thus, the Agency
believes the barriers to entry are moderate.
2.2.2.1 Facilities
Table 2-5 presents an overview of the total number of facilities for each OLD NAICS
code, the total number of firms potentially affected by the OLD source category, and the
percentage of the source category potentially affected.
Although EPA received surveys from only about 32 percent (59 out of 183)3 of the
universe of affected organic liquids distributors in the chemical industry, an examination of
the data provided in the surveys does illustrate general characteristics of those facilities. The
figures and tables in this section include facilities classified in NAICS codes 325211, in
addition to the 117 facilities classified as part of the chemical industry. Facilities in NAICS
code 325211 use synthetic organic chemicals and petrochemicals as an input into their
production of various plastic parts and products.
3 Some portions of the Technical Support Document (TSD) report that 118 facilities in SIC code 28 returned
surveys. However, the report shows assigned model plant numbers for only 117 facilities in this SIC code.
(One facility, numbered 30-Q, was listed in the TSD but is nonexistent in the database compiled from ICR
survey responses.) The TSD failed to report a model number for plant 32-E, which was in the database.
Facility 30-Q was excluded from analysis and 32-E was included.
2-11
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Table 2-5. Number of Total OLD Facilities and Affected Facilities, 1997
Total Number % of Source
NAICS Total Number of Affected Category that
Code NAICS Description of Facilities8 Facilities'1 is Affected
Chemical Production
325110 Petrochemical Mfg 54
325132 Synthetic Organic Dyes and 112
PigmentS 183 12.5%
325192 Cyclic Organic Crudes and 50
Intermediates
325193 Ethyl Alcohol Mfg 38
325199 All Other Basic Organic 676
Chemical Mfg
325211 Plastics Materials, Synthetic 532
and Resins, and
Nonvulcanizable Elastomers
a U.S. Census Bureau. August 1999c. "Cyclic Crude and Intermediate Manufacturing." 1997 Economic
Census, Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government Printing Office.
b U.S. Environmental Protection Agency (EPA). 2003. Final OLD Costs 6-23-03.xls.
Sources: U.S. Census Bureau. August 1999a. "All Other Basic Inorganic Chemical Manufacturing." 7997
Economic Census, Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government
Printing Office.
U.S. Census Bureau. August 1999b. "All Other Basic Organic Chemical Manufacturing." 7997
Economic Census, Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government
Printing Office.
U.S. Census Bureau. August 1999d. "Ethyl Alcohol Manufacturing." 1997 Economic Census,
Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government Printing Office.
U.S. Census Bureau. August 1999e. "Industrial Gas Manufacturing." 1997 Economic Census,
Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government Printing Office.
U.S. Census Bureau. August 1999f. "Petrochemical Manufacturing." 1997 Economic Census,
Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government Printing Office.
U.S. Census Bureau. August 1999h. "Plastics Material and Resin Manufacturing." 1997 Economic
Census, Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government Printing
Office.
U.S. Census Bureau. August 19991. "Synthetic Organic Dye and Pigment Manufacturing." 7997
Economic Census, Manufacturing—Industry Series, E97M-3251I, Washington, DC: Government
Printing Office.
2-12
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Figure 2-1 shows the distribution of 105 organic chemical liquids distribution
facilities across 26 states. The data presented here are for the 105 facilities (out of 121) who
responded to the ICR and did not request that their surveys be considered confidential
information. Twenty-nine percent of organic chemical liquids distribution facilities are
located in Texas, 9 percent are located in Louisiana, and 8 percent are located in Ohio.
Capacity utilization at organic chemical facilities is about 80 percent. The OLD
NESHAP is specifically concerned with the distribution of chemicals, rather than their
production. However, a facility's ability to store and transfer chemicals is considered in the
calculation of plant capacity, so the data below provide some indication of storage and
transfer capacity.
Figure 2-2 shows almost all organic chemical liquids distribution facilities employ
more than 50 people and that more than 35 percent of those facilities employ at least
500 employees each.
2.2.2.2 Firm Characteristics
Although facilities are the physical unit regulated by the OLD source category, this
regulation may also affect the firms that own the facilities. Firms are legal business entities
that have the capacity to conduct business transactions and make business decisions that
affect the facility. In this analysis, the terms firm and company are used synonymously. The
chemical industry is heavily dominated by corporations, with few proprietorships or
partnerships.
Firm size is important when analyzing the distribution of the regulation's financial
impacts. Analysis of likely impacts on small entities is required under the Small Business
Regulatory Flexibility Enforcement Act (SBREFA) and requires the categorization of firms
as either small or large. The Small Business Administration (SBA) now publishes general
size standard definitions for small entities by NAICS code.4 The size standards are defined
either by employment or by annual firm revenue, depending on the NAICS code.
4As of October 1, 2000, small business determinations are defined based on NAICS codes rather than SIC
codes.
2-13
-------
0
Figure 2-1. Distribution of Organic Chemical Liquids Facilities that Responded to the
ICR Survey
2-14
-------
45% -,
40% -
| 35% -
il 30% -
° 25% -
0)
jf 20% -|
§ 15% -|
| 10% -
5% -
0%
less than 25 25 to 50
50 to 100 100 to 250 250 to 500
Employment Range
over 500
Figure 2-2. The Distribution of Organic Chemical Liquids Facilities that Responded to
the ICR Survey by Employment
Source: Nonclassified responses to the 1998 Industry Specific Information Collection Request for the
Development of an Organic Liquids Distribution Maximum Achievable Control Technology.
The SB A size definitions for all chemical industries is defined in terms of number of
employees. The size standard for these NAICS categories ranges from 750 to 1,000
employees. As previously stated, only 117 facilities (or 32 percent) of an estimated 370 that
handle organic chemical liquids responded to the ICR survey. Those facilities are owned by
31 different firms. Only one of those 31 firms is small according to the SB A small business
standards. That one small firm owns two facilities that distribute organic liquids. If the 121
facilities are an accurate sample of the actual facilities, we can conclude that only a very
small share of all affected facilities are owned by small businesses. Figures 2-3 and 2-4
show the distribution of surveyed firms by firm size as measured by revenue and
employment; respectively. In 1998, the majority of affected firms took in more than $1
billion in revenues (approximately 87 percent) and employed more than 10,000 people
(approximately 81 percent).
Vertical and horizontal integration are important determinants in analyzing a firm's
potential for impacts. Both measures are concerned with the types of industries in which a
firm operates. Vertical integration refers to the degree to which a firm operates facilities that
are part of the same supply chain. For example, if the same firm owns facilities in the
2-15
-------
70% -,
«> 60% -
| 50%-
o 40% -
a>
jf 30% -
8 20%
o>
°- 10%
Less than $5M to $50
$5M
$50Mto $500Mto $16 to $106 to over $1006
$500M $16 $106 $1006
Company Sales
Figure 2-3. The Size Distribution of Companies that own OLD Facilities that
Responded to the ICR Survey and are Involved in Chemical Distribution, by 1998 Sales
(in $1997)
Sources: Dun & Bradstreet. 1999. Company Capsules. As available on EBSCO.
Gale Group. 1999. General Business File International (formerly Business ASAP). Gale Group
Collections. As obtained from InfoTrac Web. .
Hoover's Incorporated. 1999. Hoover's Company Profiles. Austin, TX: Hoover's Incorporated.
.
Company websites.
Company 10k reports.
U.S. Environmental Protection Agency (EPA). 2000. Technical Support Document for the Organic
Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S. Environmental Protection
Agency, Office of Air Quality Planning and Standards.
petroleum production, refining, and transportation industries, it would be considered
vertically integrated. Vertical integration is potentially important in analyzing firm-level
impacts because a regulation could affect a vertically integrated firm at more than one level.
Horizontal integration refers to the scale of production in a single-product firm or its scope in
a multiproduct one. A single-product firm is considered horizontally integrated if it owns
more than one facility producing the same product, which may be an advantage to the firm's
ability to absorb costs if not all of the facilities are subject to the regulation and if the firm
can shift parts of the production to the unregulated facilities. A multiproduct firm is
considered horizontally integrated if it owns facilities in several unrelated industries. Here,
horizontal integration may improve a firm's ability to absorb compliance costs if only one or
2-16
-------
70% n
60% -
(A
.1 50% -
Li.
o 40% -
0>
jf 30% -
8 20% -
°- 10% -
0% -
1 l»j'''|''i')l'J'n')iyT'l
less than 500 to 1 ,000 1
500
V,'",
« ;>
'i V '•'
'' * ',* *'
' ' * ,"
i',:
» j.i
... ,.L1 ,,
,000 to 5,000 to 10,000 to over 100,000
5,000 10,000 100,000
Number of Employees
Figure 2-4. Size Distribution of Companies that own OLD Facilities that Responded to
the ICR Survey and are Involved in Chemical Distribution
Sources: Dun & Bradstreet. 1999. Company Capsules. As available on EBSCO.
Gale Group. 1999. General Business File International (formerly Business ASAP). Gale Group
Collections. As obtained from InfoTrac Web. .
Hoover's Incorporated. 1999. Hoover's Company Profiles. Austin, TX: Hoover's Incorporated.
.
Company websites.
Company 10k reports.
U.S. Environmental Protection Agency (EPA). 2000. Technical Support Document for the Organic
Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S. Environmental Protection
Agency, Office of Air Quality Planning and Standards.
a few of the industries in which the firm operates are directly affected by the regulation.
Firms producing and distributing organic chemical liquids are generally integrated both
horizontally and vertically, while firms only distributing organic chemicals are not highly
integrated.
The 31 firms that are known to own chemical facilities that will be affected by the
OLD NESHAP have an median (average) profit margin of 5.4 (5.3) percent. Table 2-6
shows the average, median, minimum, and maximum profit margins of these 31 firms.
Figure 2-5 shows the distribution of profit margins among the firms.
2-17
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Table 2-6. Profit Margins of Firms that Responded to the ICR Survey and that own
Organic Chemical Liquids Distribution Facilities
Median 5.41%
Average 5.28%
Minimum -4.09%
Maximum 11.83%
Source: Nonclassified responses to the 1998 Industry Specific Information Collection Request for the
Development of an Organic Liquids Distribution Maximum Achievable Control Technology.
2.2.3 Uses and Consumers
As with petroleum liquids, the demand for organic chemicals depends primarily on
their end use. Organic chemicals, particularly petrochemicals, play an important role in
society. Petrochemicals are usually an intermediate product that is converted into a variety
of consumer and industrial products. Some of the end products include plastics, antifreeze,
synthetic fibers, rubber, solvents, and detergents. Higher demand for these products
translates into higher demand for their inputs (EPA, 1995). This section lists the major
consumers of organic chemicals, the purposes of chemical consumption, and the factors
affecting the elasticity of demand for chemicals.
Nearly everyone is a consumer of chemicals in some way. Chemicals are used as
inputs into the majority of manufacturing industries both domestically and internationally.
As with petroleum products, the markets for end-use products drive the demand for
individual chemicals. The major industrial consumers of chemicals in the United States are
housing, motor vehicles, agriculture, tires, paper products, plastic products, textile mill
products, apparel, and furniture and fixtures (Oil & Gas Journal, 1999).
2.2.3.1 Characterization of Demand—Derived Demand Elasticity
As with petroleum products, the price elasticity of demand for chemicals depends on
the availability of substitutes, either substitute products for the same use or alternative
production processes that do not need this chemical. There are 65 HAPs covered; since the
availability of substitutes varies among these chemicals, so will their demand elasticities.
For this analysis, however, the Agency is employing an aggregated market model, using a
demand elasticity estimated for another analysis of the chemical industry. This demand
2-18
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45% -,
40% -
I 35% -
il 30% -
° 25% -
f 20% -
S 15% -
Ł 10% -
5% -
0% -
0%-3%
3%-5%
Profit Margin
Figure 2-5. Distribution of Companies Owning Organic Chemical Liquid Facilities that
Responded to the ICR Survey, by Profit Margin
Sources: Dun & Bradstreet. 1999. Company Capsules. As available on EBSCO.
Gale Group. 1999. General Business File International (formerly Business ASAP). Gale Group
Collections. As obtained from InfoTrac Web. .
Hoover's Incorporated. 1999. Hoover's Company Profiles. Austin, TX: Hoover's Incorporated.
.
Company websites.
Company 10k reports.
U.S. Environmental Protection Agency (EPA). 2000. Technical Support Document for the Organic
Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S. Environmental Protection
Agency, Office of Air Quality Planning and Standards.
Dun & Bradstreet. 1997. Industry Norms & Key Business Ratios. Desk-Top Edition 1996-1997.
elasticity is -1.5, meaning that a one percent increase in the price of organic chemical liquids
would decrease the quantity demanded by 1.5 percent.
2.2.4 Markets
A recent study conducted by the Chemical Manufacturers Association (CMA), now
known as the American Chemistry Council (ACC), showed that U.S. shipments of chemicals
and allied products for 1998 had increased by only 0.6 percent compared to the previous
year. Domestic demand was the main driver of this increase as exports declined 2.0 percent,
the result of the Asia crisis and the high U.S. dollar. Shipments of industrial chemicals,
however, fell by 6.9 percent. Imports rose 8.5 percent, which led to a reduction in the trade
2-19
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surplus from $19.1 billion (1997) to $13.4 billion (1998). Deficits occurred in organic
chemicals, Pharmaceuticals, and inorganic chemicals.
The CMA projected the overall condition of the U.S. economy to remain favorable
through the first half of 2000. The financial crisis in Asia has come to an end, and exports
rebounded through June 2000. With continued expansion of the U.S. economy, overall
growth in chemical and allied products production volume is expected to be 1.3 percent
during 1999 (CMA, 1999; CMA, 2000).
2.2.4.1 Market Volumes
Market volumes for EPA's analysis were compiled from published reports of
production, imports, and exports of all the chemicals produced or distributed by OLD
facilities (ChemExpo, 2000). Table 2-7 presents production, imports and exports in the
aggregated organic chemical market, for chemicals affected by the OLD NESHAP.
Table 2-7. Organic Chemical Market Volumes, 1997 (106 Mt)
Domestic Supply
191
Imports
11
Total
202
Sources: EPA OLD Industry Questionnaire Database; ChemExpo. . Reports for
all chemicals distributed by OLD facilities. Accessed June 2000.
2.2.4.2 Market Prices
The baseline market price used for the organic chemicals market, $498.62 per metric
ton, was estimated as a quantity-weighted average of the individual chemical prices obtained
from ChemExpo (ChemExpo, 2000).
2.2.4.3 Future Projections
Constant-dollar shipments of organic chemicals are forecasted to increase at less than
5 percent annually through 2002. This low growth rate is expected to result from slowing
U.S. domestic markets and competition from foreign producers. Competition in the chemical
industry is not only increasing in foreign markets, but in domestic markets as well. While
imports have grown consistently since 1989 (and now account for 17 percent of demand),
export prospects have been less positive. The United States is expected to remain a net
exporter but the country's trade surplus is expected to continue to decline (U.S. Department
of Commerce, 1998,2000).
2-20
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2.3 Distribution of Petroleum Liquids
Petroleum liquids are made up of a number of different liquids: crude oil, natural gas
liquids, and nongasoline petroleum products. Table 2-8 shows the distribution of petroleum
products in 1997. Since gasoline is already covered by the gasoline distribution NESHAP,
this profile discusses the two major categories of nongasoline refined products—fuels and
liquified petroleum gases (LPGs). The main fuel products included in the OLD source
category are distillate fuel oil, kerosene-type jet fuel, and residual fuel oil. Distillate fuel oil
includes diesel oil, heating oils, and industrial oils. It is used to power diesel engines in
buses, trucks, trains, automobiles, and other machinery. In addition, it is used to heat
residential and commercial buildings and to fire industrial and electric utility boilers.
Kerosene-type jet fuel is primarily used in commercial airlines. Sometimes it is blended into
heating oil and diesel fuel during periods of extreme cold weather. Residual fuel is used by
electric utilities to generate electricity. It is also used as fuel for ships, industrial boiler fuel,
and heating fuel in some commercial buildings (DOE, El A, 1999b).
Table 2-8. Petroleum Products Produced at U.S. Refineries, 1997
Petroleum Product Percent Produced
Motor gasoline 45.7%
Distillate fuel oil 22.5%
Jet fuel 10.3%
Residual fuel oil 4.7%
Still gas 4.4%
Petroleum coke 4.6%
Liquefied petroleum gases 4.6%
Asphalt and road oil 3.2%
Petrochemical feedstocks 2.9%
Lubricants 1.2%
Other 1.4%
Source: U.S. Department of Energy, Energy Information Administration. Julyl999b. Petroleum: An Energy
Profile 1999. DOE/EIA-0545(99).
2-21
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2.3.1 Affected Markets
Three types of petroleum liquids are covered by the OLD source category—crude oil,
NGLs, and refined petroleum products. Table 2-9 shows the SIC codes and NAICS codes
associated with their production. Since crude oil and NGLs are the primary inputs into the
production of refined petroleum products, the discussion in this section focuses on the
consumers of, demand for, and price elasticities of the refined petroleum products (DOE,
EIA, 1999e).
Petroleum liquids are inputs to virtually every industry in the United States. Crude
oil becomes gasoline, diesel fuel, and jet fuel, which affects the transportation industry and
facilitates the distribution of manufactured goods and the transportation industry. Refineries
separate crude oil into petrochemical feedstocks that are used as inputs in the chemical
industry and eventually become plastic or synthetic rubber products, automobile lubricants or
antifreeze, cleaning compounds, or cosmetics. LPGs also become inputs into chemical
compounds or fuel for household or farm use.
2.3.2 Production/Service Overview
OLD distribution is a service that is part of the production process for petroleum
liquids. Organic liquids first enter the path of the OLD source category at the point of
custody transfer, shortly before the refinery stage. Pipelines carry crude oil and/or NGLs
from production fields into the refineries. Along the way, the liquids are channeled through
crude oil pipeline stations, which are used for surge capacity, sorting, measuring, rerouting,
and temporary storage of the transported liquid. Crude oil pipeline stations are the first point
of OLD regulation for petroleum liquids.
From the crude oil pipeline station, crude oil and NGLs are transported to a
petroleum refinery; crude oil can also be transported to an independent liquid terminal (either
a liquid terminal or a petroleum terminal). Petroleum refineries process crude oil and/or
NGLs into refined petroleum products (including gasoline, distillate fuel oil, residual fuel oil,
liquified petroleum gases, and petrochemicals).
After the refining process, the refined petroleum products might be distributed to one
of three destinations—refined petroleum products might be distributed to end users
belonging to different industries or they might be transported to an independent liquid
terminal for storage before further processing. Liquids stored at independent liquid terminals
might be transported to chemical production plants or refineries for further processing, they
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Table 2-9. Principal OLD Facility Categories
SIC
Code
SIC Description
NAICS Code
NAICS Description
Oil and Gas Extraction (2 survey responses)
1311 Crude Petroleum and Natural
Gas
Petroleum Refinery (56 survey responses)
2911 Petroleum Refining
211 Crude Petroleum and Natural Gas
Extraction
32411 Petroleum Refineries
Liquid Terminal (32 survey responses)
4226 Special Warehousing and
Storage, NEC
Water Transportation Terminal
4412 Deep Sea Freight
Transportation
49311
49319
4831
General Warehousing and Storage
Other Warehousing and Storage
Deep Sea, Coastal, and Great Lakes
Freight Transportation
Crude Oil Pipeline Pumping/Breakout Station (24 survey responses)
4612 Crude Petroleum Pipelines
48611 Pipeline Transportation of Crude
Oil
Petroleum Terminal (10 survey responses)
5169 Chemicals and Allied
Products, NEC
5171 Petroleum Bulk Stations and
Terminals
42269 Other Chemical and Allied
Products Wholesalers
42271 Petroleum Bulk Stations and
Terminals
454311 Heating Oil Dealers"
454312 LP Gas Sold Via Retail Method3
a Only part of this NAICS-coded industry consists of facilities that would also be classified in the
corresponding SIC code.
Source: U.S. Census Bureau. March 2000a. "1987 SIC Matched to 1997 NAICS."
. As obtained on March 13, 2000.
might be sent to a blending/packaging/distribution facility, or they might be distributed to
end users.
2.3.2.1 Elasticity of Supply
The price elasticity of supply, or own-price elasticity of supply, is a measure of the
responsiveness of producers to changes in the price of a product. The price elasticity of
2-23
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supply indicates the percentage change in the quantity supplied of a product resulting from
each 1 percent change in the price of the product.
The EIA for the petroleum refinery NESHAP (EPA, 1995) econometrically estimated
the price elasticity of supply for five petroleum products (motor gasoline, jet fuel, residual
fuel oil, distillate fuel oil, and LPGs). The price elasticity of supply for the five petroleum
products was estimated to be 1.24. Foreign supply is assumed to have the same price
elasticity of supply as domestic supply. A supply elasticity of 1.24 is considered elastic,
because in response to a one percent increase in the market price, the quantity of petroleum
products would increase by more than 1 percent.
2.3.3 Industry Organization
This section describes the organization of industries that distribute petroleum liquids,
including market structure, the characteristics of distribution facilities, and the firms that own
them. Overall, the petroleum liquids distributors face a large degree of competition from
fellow distributors. This section describes the producers, product differentiation, market
concentration, and barriers to entry.
Suppliers in the petroleum industry can be divided into two principal types of firms:
• "Majors" are large companies that are typically fully vertically integrated and
operate facilities in all of the different petroleum sectors (i.e., exploration,
production, transportation, refining, and marketing).
• "Independents" are smaller, nonintegrated companies that generally specialize in
one aspect, such as crude oil exploration and production or product marketing
(DOE, EIA, 1999e).
Historically, majors have dominated the petroleum industry. However, the majors recently
began a trend of selective refining/marketing divestiture that reduced their share of U.S.
refining capacity from 72 percent in 1990 to 54 percent in 1998. Over the same period, the
share of the independents rose from 8 percent to 23 percent.
Petroleum products are produced according to quality grade specifications and
therefore do not vary much from one another. Brand loyalty is not expected to be an
important factor in the petroleum products market (DOE, EIA, 1999e).
Table 2-10 shows concentration ratios by SIC code for the affected OLD industries
involved in petroleum product distribution, based on data from the 1992 Economic Census.
(Concentration information by NAICS code from the 1997 Economic Census is not yet
2-24
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Table 2-10. Concentration Ratios by SIC Code
Total
Code Year Firms 4 Firm
Petroleum and Natural Gas Extraction
1311,211 Crude Petroleum and Natural Gas Extraction
1997 NA NA
Petroleum Refinery
29 1 1 , 324 1 1 : Petroleum Refining
1987 200 32%
1992 132 30%
1997 122 28%
Liquid Terminal
4226, 49319: Special Warehousing and Storage, NEC
1992 1,212 27%
1997 1,213 30%
Water Freight Transportation
4412, 483 Water Freight Transportation
1997 1,921 31%
Crude Oil Pipeline Station
4612: Crude Petroleum Pipelines
1992 52 60%
1997 382 48%
Petroleum Terminal
5169, 42269: Chemicals and Allied Products, NEC
1992 7,446 27%
1997 11,571 14%
5171: Petroleum Bulk Stations and Terminals
1992 8,266 21%
1997 7,690 19%
Concentration Ratio
8 Firm
NA
52%
49%
49%
36%
40%
41%
80%
71%
35%
21%
34%
34%
20 Firm
NA
78%
78%
82%
50%
57%
57%
97%
95%
50%
35%
53%
54%
Her
50 Firm I
NA
95%
97%
98%
64%
73%
77%
100%
100%
65%
52%
64%
66%
Source: U.S. Department of Commerce, Bureau of the Census. 1992. Economic Census. Washington,
Government Printing Office, . (Includes data
findahl-
chmann
ndex
NA
435
414
422
NA
NA
NA
NA
NA
NA
NA
NA
NA
DC:
for
1992 and 1987)
U.S. Department of Commerce, Bureau of the Census. 1997. Economic Census.
.
2-25
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available.) Industry concentration information is not yet available for the 1997 Economic
Census. Ratios are included for the census years 1987 and 1992 (where possible), although
only 1992 data are available for some SIC codes. The numbers in Table 3-7 show that, by
and large, the petroleum liquids distribution industries are characterized by a large number of
firms and generally unconcentrated markets, indicating a high degree of competitiveness in
their respective product markets. The exception is crude oil pipeline stations, which has
relatively few firms (52) and high concentration ratios (a CR4 of 60.3 percent and a CR8 of
79.7 percent), indicating a high degree of concentration. These numbers are not surprising
given that the pipeline industry is highly capital intensive (see discussion on barriers to entry,
above. In addition, FERC legislates and monitors the liquids pipeline industries. FERC
ensures fair access to pipeline transportation at reasonable rates. Interestingly, the vast
majority of crude oil pipeline companies with corporate offices in the United States are
operated as subsidiaries of other corporate entities, mostly major oil companies. Only a few
of the pipeline companies are independently listed on any stock exchange (Gale Research,
Inc., 1999b).
Recently, two trends in the petroleum market have affected the number and market
shares of firms—mergers/joint ventures and divestitures. Over the past few years, a number
of mergers and joint ventures have been undertaken in an effort to cut costs and increase
profitability. This merger activity has occurred among the largest firms (as best illustrated
by the recently approved acquisition of U.S.-based Amoco Corporation by UK-based British
Petroleum and the announced mega-merger of Exxon and Mobil Corporation) as well as
among independent refiners and marketers (e.g., the independent refiner/marketer Ultramar
Diamond Shamrock [UDS] acquired Total Petroleum North America in 1997 and announced
a joint venture with Phillips Petroleum in October 1998, which was later abandoned) (DOE,
EIA, 1999d).
As explained above, barriers to entry are an important component of the market
structure. As indicated above, common carrier pipelines in the United States are government
regulated due to the industry's structure, which can be characterized as a natural monopoly.
The crude oil pipeline industry is capital intensive. Start-up costs are high, and entry into the
industry is restricted, as is indicated by the small number of firms operating with
headquarters in the United States. However, since the day-to-day maintenance of capital-
intensive industries tends to be relatively moderate, successful companies within the pipeline
industries have been able to take advantage of economies of scale.
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2.3.3.1 Facilities
Although EPA has received surveys from only about 41 percent (81 out of 198) of the
universe of OLD in the petroleum industry, an examination of the data provided in the
surveys illustrates general characteristics of those facilities. The data presented here are for
the 118 facilities (out of 126 who responded to the survey) who did not request that their
surveys be considered classified information.
Figure 2-6 shows that of the 118 nonclassified facilities, 31 percent of petroleum
liquids distributors are located in Texas, 12 percent are in Louisiana, and 10 percent are
located in Alaska.
Facilities in NAICS code 32411 were operating at 91 percent capacity in 1998 and
1997 according to the U.S. Census Bureau (U.S. Census Bureau, 1999 f). Figure 2-7 shows
that almost 40 percent of facilities involved in the distribution of petroleum liquids employ
fewer than 25 people on-site, while another 40 percent of facilities employ more than 250
employees each.
2.3.3.2 Firm Characteristics
Table 2-11 presents an overview of the total number of firms for each petroleum
OLD SIC code, the total number of firms potentially affected by the OLD source category,
and the percentage of the source category potentially affected.
The OLD source category is heavily dominated by firms organized as corporations.
For example, in 1987, 177 of 200 petroleum refineries (or 88.5 percent) were classified as
corporations. In 1992, 914 of 1,212 liquid terminals (or 75.4 percent), and 49 of 52 crude oil
pipeline stations (or 94.2 percent) were classified as corporations (DOE, EIA, 1999e; Speed,
1999).
Table 2-12 presents the SB A small business standards for the OLD source category
and also shows the number of small firms in the industry. The SBA size definitions for most
OLD industries is defined in terms of employees. The size standard for these NAICS
categories ranges from 100 employees in the petroleum terminal industry to 1,500 employees
for petroleum refineries5 and crude oil pipeline stations.
5In addition to the maximum number of employees, small petroleum refining firms may not have more than a
total input capacity of 75,000 barrels per day of petroleum-based inputs, such as crude oil.
2-27
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0
Figure 2-6. Location of Petroleum Liquids Distributors that Responded to the ICR
Survey
2-28
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45% n
40% -
| 35% -
il 30% -
o 25% -
a>
jf 20% -\
g 15%
Ł 10% -
5% -
0%
less than 25 25 to 50
50 to 1 00 1 00 to 250
Employment Range
250 to 500
over 500
Figure 2-7. The Distribution of Petroleum Liquids Facilities that Responded to the ICR
Survey by Employment
Source: Nonclassified responses to the 1998 Industry Specific Information Collection Request for the
Development of an Organic Liquids Distribution Maximum Achievable Control Technology.
EPA's survey of OLD facilities provides data on firms owning facilities affected by
the OLD NESHAP. The 126 surveyed facilities are owned by 45 companies. According to
SB A standards, 9 percent (4 out of 45) of those companies are small businesses.
Figures 2-8 and 2-9 show the distribution of surveyed firms by firm size as measured
by revenue and employment. The majority of affected firms took in more than $1 billion in
revenues in 1998 and employ more than 5,000 people. The industry exhibits a high degree of
vertical integration with many firms operating in more than one sector (DOE, El A, 1999e).
For example, the crude petroleum pipeline industry is dominated by giant oil companies with
assets in many of the downstream sectors of the industry (Gale Research, Inc., 1999b). Of
the two types of petroleum firms, majors are generally fully integrated and operate facilities
in all the different sectors. Independents, on the other hand, are nonintegrated and generally
specialize in one aspect, such as crude oil exploration and production or product marketing
(DOE, El A, 1999e). Similarly, major petroleum companies are horizontally integrated, but
the smaller independent firms typically operate only one refinery each and are therefore not
horizontally integrated (EPA, 1995).
2-29
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Table 2-11. Number of Total OLD Firms and Affected Firms, 1996
Total
Number of % of Source
NAICS Total Number of Affected Category that
Code NAICS Description Establishments3 Facilities is Affected
Petroleum Refinery
32411 Petroleum Refineries 244 93 38.1%
Liquid Terminal
49311 General Warehousing and 3,911
Storage 57 1.1%
49319 Other Warehousing and 1,213
Storage
Crude Oil Pipeline Station
48611 Pipeline Transportation of 482 16 3.3%
Crude Oil
Petroleum Terminal
42269 Other Chemical and Allied 8,892
Products Wholesalers
3?b 0 0%
42271 Petroleum Bulk Stations and 6,729
Terminals
454311 Heating Oil Dealers 5,657
454312 LP Gas Dealers 6,623
a U.S. Census Bureau. February 1998. "Statistics for Industry Groups and Industries." 1997 Economic
Census, Manufacturing—Industry Series, E97M-3251I. Washington, DC: Government Printing Office.
U.S. Census Bureau. September 1999g. "Petroleum Refinery." 1997 Economic Census,
Manufacturing—Industry Series. E97M-3251I, Washington, DC: Government Printing Office.
U.S. Census Bureau. January 2000c. "Transportation and Warehousing." 1997 Economic Census,
Manufacturing—Industry Series. E97M-3251I, Washington, DC: Government Printing Office.
U.S. Census Bureau. January 2000d. "Wholesale Trade." 1997 Economic Census, Manufacturing—Industry
Series. E97M-325II, Washington, DC: Government Printing Office.
U.S. Census Bureau. March 2000b. "Retail Trade." 1997 Economic Census, Manufacturing—Industry
Series, E97M-3251I. Washington, DC: Government Printing Office.
b This is the combined estimated number of affected facilities in this industry.
2-30
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Table 2-12. Small Business Size Standards for OLD Industries
NAICS
Code
NAICS Description
SBA Small Business Standard
Petroleum Refinery
32411 Petroleum Refineries
1,500 employees and 75,000
barrels per day capacity of
petroleum-based inputsa
Liquid Terminal
49311 General Warehousing and Storage
49319
Other Warehousing and Storage
$18.5 million13
Crude Oil Pipeline Station
4612 Crude Petroleum Pipelines
1,500 employees
Petroleum Terminal
42269 Chemicals and Allied Products, NEC
42271 Petroleum Bulk Stations and Terminals
454311 Heating Oil Dealers
454311 LP Gas Dealers
100 employees
100 employees
$9.0 million
$5.0 million
a Petroleum-based inputs include crude oil or bona fide feedstocks.
b The SBA small business standard for NAICS code 493 represents annual firm revenue. Firm size by revenue
is not available in Statistics of U.S. Businesses 1996.
Sources: Small Business Administration. "Small Business Size Standards Matched to North American
Industry Classification System Codes Effective October 1, 2000."
Speed, Phillip J. "The Changing Competitive Landscape of the Chemical Industry." Chemicalbond.
. As obtained on September 2, 1999.
U.S. Department of Energy, Energy Information Administration. Julyl999b. Petroleum: An
Energy Profile 1999. DOE/EIA-0545(99). Washington, DC.
2-31
-------
70% -,
jf 30% -
§ 20% -
°- 10% -
" ,'
V; "
H',if
fy
Less than $5 M to $50 $50M to $500M to $1Bto $10Bto over $1006
$5M $500M $1B $10B $1006
Company Sales
Figure 2-8. The Size Distribution of Companies that own OLD Facilities that
Responded to the ICR Survey and are Involved in the Distribution of Nongasoline
Petroleum Liquids, by 1998 Sales (in $1997)
Note: Sales data are from 1998 but were converted into 1997 dollars to facilitate comparison with other
figures reported in this profile and allow easy comparison with estimated compliance costs, which are
calculated in 1997 dollars.
Sources: Dun & Bradstreet. 1999. Company Capsules. As available on EBSCO.
Gale Group. 1999. General Business File International (formerly Business ASAP). Gale Group
Collections. As obtained from InfoTrac Web. .
Hoover's Incorporated. 1999. Hoover's Company Profiles. Austin, TX: Hoover's Incorporated.
.
Company websites.
Company 10k reports.
U.S. Environmental Protection Agency (EPA). 2000. Technical Support Document for the Organic
Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S. Environmental Protection
Agency, Office of Air Quality Planning and Standards.
2-32
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70% -,
. 60% -
.1 50% -
Li.
o 40% -
o>
jf 30% -
§ 20%
s>
°- 10% -I
less than 500 500 to 1,000
1,000 to
5,000
5,000 to
10,000
10,000 to
100,000
over 100, 000
Number of Employees
Figure 2-9. Size Distribution of Companies that own OLD Facilities that Responded to
the ICR Survey and are Involved in the Distribution of Nongasoline Petroleum Liquids
Sources: Dun & Bradstreet. 1999. Company Capsules. As available on EBSCO.
Gale Group. 1999. General Business File International (formerly Business ASAP). Gale Group
Collections. As obtained from InfoTrac Web. .
Hoover's Incorporated. 1999. Hoover's Company Profiles. Austin, TX: Hoover's Incorporated.
.
Company websites.
Company 10k reports.
U.S. Environmental Protection Agency (EPA). 2000. Technical Support Document for the Organic
Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S. Environmental Protection
Agency, Office of Air Quality Planning and Standards.
Throughout the 1990s, the U.S. refining and marketing industry was characterized by
unusually low product margins, low profitability, selective retrenchment, and substantial
restructuring. During 1997, the profitability of U.S. refining and marketing was the highest
since 1989, which was in part achieved by low energy costs as well as cost-cutting measures,
including a number of mergers and joint ventures in the downstream sector (DOE, EIA,
1999d). The crude petroleum pipeline industry has experienced modest but steady growth
since 1993. As a result, company profits have also increased. This trend has been a result of
lower operating costs and moderate expanses in deliveries (Gale Research Inc., 1999b; DOE,
EIA, 1999a). During 1999, Major U.S. energy companies experienced "50 percent increases
in cash flows from oil and gas production," but profits were uneven, reflecting volatility in
2-33
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petroleum prices (U.S. DOE, EIA, 2000, 2001). During 2000, petroleum producers almost
uniformly experienced tremendous increases in profits; for some, record levels of net income
were reported. For a sample of 11 major oil companies, profits increased by amounts
ranging from 58 percent to 2,387 percent.6 The average increase in profits over the period
1999 to 2000 for these oil companies was 366 percent.
Table 2-13 shows that, for the firms that own the 126 facilities that responded to the
EPA survey,7 the average (median) profit margin was (4.7) 4.3 percent. Figure 2-10 shows
the distribution of profit margins among firms that own petroleum liquids distributors.
2.3.4 Uses and Consumers
Five major economic sectors consume petroleum products (DOE, EIA, 1999e): the
residential sector, the commercial sector, the industrial sector, the transportation sector, and
the electric utility sector.
The demand for petroleum products is influenced by several factors, including crude
oil prices, economic growth trends, and weather conditions. Low oil prices tend to stimulate
demand. Demand also increases during periods of economic expansion, particularly in the
industrial and transportation sectors. Economic expansions lead to an increase in the
production of goods, which contributes in turn to an increase in the demand for
transportation of raw materials and the deliveries of finished products. Petroleum demand is
also influenced by weather conditions. Extreme weather tends to either increase or decrease
the use of heating oil and electricity, which contributes to the demand for petroleum
products. Weather can also contribute to the seasonal variations in demand for transportation
fuels (such as gasoline).
6See U.S. SEC 10-K reports for Amerada Hess, Anadarko, Atlantic Richfield, Chevron, CITGO, Conoco, Exxon
Mobil, Occidental Petroleum, Phillips Petroleum, Sunoco, and Texaco,
-------
Table 2-13. Profit Margins of Firms that Own Organic Chemical Liquids Distribution
Facilities that Responded to the ICR Survey
Median
Average
Maximum
Minimum
4.34%
4.73%
34.74%
-6.94%
Source: Nonclassified responses to the 1998 Industry Specific Information Collection Request for the
Development of an Organic Liquids Distribution Maximum Achievable Control Technology.
40% -
1 35% -
il 30% -
0 25% -
o>
i" 20% -
§ 15%-
Ł 10%-
5% -
n°/« -
* ^ ' S
/ ! i '
i
*>,",*, ,"
;";;"
*i ';l>.k
'• /'•"',
'>!' ''' '•" :J
*' 'l 1 « *
y;tf
V,1 '"' ''^
''"*/ ' /'
,"' ; , '
'*':,'' '.
, '//,,, , T'
'• "' ,"
J ifj I )
'" !*'*,/ l
III 1 . )fl
, X ' ' "
0%-3%
3%-5%
Profit Margin
Figure 2-10. Distribution of Companies Owning Petroleum Liquid Facilities that
Responded to the ICR Survey, by Profit Margin
Sources: Dun & Bradstreet. 1999. Company Capsules. As available on EBSCO.
Gale Group. 1999. General Business File International (formerly Business ASAP). Gale Group
Collections. As obtained from InfoTrac Web. .
Hoover's Incorporated. 1999. Hoover's Company Profiles. Austin, TX: Hoover's Incorporated.
.
Company websites.
Company 10k reports.
U.S. Environmental Protection Agency (EPA). 2000. Technical Support Document for the Organic
Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S. Environmental Protection
Agency, Office of Air Quality Planning and Standards.
Dun & Bradstreet. 1997. Industry Norms & Key Business Ratios. Desk-Top Edition 1996-1997.
2-35
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2.3.4.1 Characterization of Demand—Derived Demand Elasticity
The demand for petroleum is also influenced by the price of petroleum itself and the
price of available substitutes. The degree to which the price of petroleum influences the
quantity of petroleum products demanded is called the price elasticity of demand. Generally
speaking, the price elasticity of demand represents the percentage change in the quantity
demanded resulting from a 1 percent change in the price of the product. Table 2-14 lists the
price elasticities of demand for several of the major petroleum products. In modeling the
demand for the composite petroleum product, EPA has assumed a demand elasticity of-0.6.
Table 2-14. Estimates of Price Elasticity of Demand for Petroleum Products
Jet fuel -0.15
Residual fuel oil -0.61 to -0.74
Distillate fuel oil -0.50 to -0.99
Liquified petroleum gases -0.60 to -1.0
Source: U.S. Environmental Protection Agency (EPA). July 1995. Economic Impact Analysis for the
Petroleum Refinery NESHAP, Revised Draft for Promulgation.
The elasticity estimates indicate that each of these products has inelastic demand.
Regulatory control costs are more likely to be paid by consumers of products with inelastic
demand as compared to products with elastic demand, all other factors held constant. Price
increases for products with inelastic demand lead to revenue increases for the producers.
Thus, one can predict that price increases resulting from implementation of regulatory
control costs will lead to higher gross revenues for the producers (EPA, 1995).
Demand becomes more elastic with the availability of substitutes and the passage of
time. In the short run, there may not be substitutes readily available for consumption.
However, over time, consumers have the opportunity to adjust to the price increase and will
seek alternatives. In the case of the petroleum industry, as the prices of crude oil and
petroleum products increase, consumers may not be able to respond immediately. The short-
run demand elasticity is inelastic because petroleum plays a critical role in today's lifestyles
(Oil & Gas Journal, 1999). As time passes, consumers can adjust to price changes, and
consumer behavior may change, and the price elasticity of demand will be higher.
2-36
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2.3.5 Markets
The petroleum industry is a major sector in the U.S. economy. A significant portion
of the petroleum consumed domestically is imported. The industry experienced relatively
high prices in 1996 and 1997; however, petroleum prices declined substantially in 1998
(Gale Research, Inc., 1999b).
2.3.5.1 Market Volumes
Petroleum refining is one of the leading manufacturing industries in the United
States. The value of shipments by the petroleum refining industry accounts for about 4
percent of the value of shipments by the entire manufacturing sector of the U.S. economy. In
1996, the value of shipments by the petroleum refining industry was an estimated $158
billion (DOE, EIA, 1999b).
Table 2-15 shows domestic production and consumption, imports, and exports of the
aggregated petroleum product in 1997.
Table 2-15. Petroleum Product Market Volumes, 1997 (106 Mt)
Domestic Supply Imports Total
1,924 441 2,365
Source: EPA OLD Industry Questionnaire Database; ChemExpo. . Reports for
all chemicals distributed by OLD facilities. Accessed June 2000.
Foreign trade plays a critical role in the U.S. crude oil market, and imports of crude
oil in the United States far outweigh exports of crude oil. With a decline in domestic
production and an increase in consumption, crude oil imports provide the missing link as
U.S. oil demand continues to increase. U.S. imports of crude oil have increased 49 percent
in the last decade alone. Imports of refined petroleum products, on the other hand, have
declined since the mid-1980s, accounting for slightly more than one-third of total petroleum
imports in 1985, but less than one-fifth by 1997 (DOE, EIA, 1999a).
Although the United States is a net importer of petroleum, some exports of crude oil
and petroleum products do occur. The United States exported a combined 1 million barrels
per day of crude oil and petroleum products in 1997, matching the record level set in 1993.
The five leading countries that receive U.S. exports of petroleum are Mexico, Canada, Japan,
2-37
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Republic of Korea, and Spain. Crude oil exports averaged 110,000 barrels per day in 1998.
This average is down from its peak in 1980 of 287,000 barrels per day. Product exports have
averaged more than 600,000 barrels per day since 1986 and reached 896,000 barrels per day
in 1997, when they accounted for more than 89 percent of petroleum exports. This number
dropped in 1998 to 835,000 barrels per day, representing 88 percent of total petroleum
exports. The three leading petroleum product exports, in order of volume exported, are
petroleum coke, distillate fuel oil, and motor gasoline (DOE, EIA, 1999b,c).
2.3.5.2 Market Prices
Crude oil prices are set in international market and have been on a general decline
since 1981. The Organization of Petroleum Exporting Countries (OPEC) has the ability to
influence oil prices worldwide because its members possess such a large portion of the
world's oil supply. If OPEC restricts supply, prices increase. If OPEC floods the market
with crude oil, prices decrease. The sharp price decline in 1998 was attributable to plentiful
crude oil supplies (partly due to Iraq's increased production). There has also been a general
trend of price decline in petroleum products. Part of this decline is due to a reduction in
demand from suffering Asian economies and a decrease in U.S. demand for heating oil
because of unseasonably warm weather (API, 1999). In modeling the market for the
aggregate petroleum product, EPA estimated the price of the composite commodity as the
quantity-weighted average of the petroleum products distributed by OLD facilities. The
market price used in the model is $191.84 per metric ton.
2.3.5.3 Future Projections
The current status of the potentially affected industries is important to establish a
baseline for the economic impact analysis. However, since compliance costs will not be
incurred until some time in the future, it is also important to consider projections of future
economic trends when estimating likely impacts of a regulation.
The Energy Information Administration (EIA) publishes the Annual Energy Outlook,
which presents midterm forecasts on energy supply, demand, and prices. The analysis
performed focuses on a reference case and four other cases that assume higher and lower
economic growth and higher and lower world oil prices than in the reference case. The
projections are based on results from EIA's National Energy Modeling System (NEMS).
Information on petroleum found in this section is based on the 1999 Annual Energy Outlook.
Domestic crude oil production is expected to continue to decline throughout the next
20 years. It is expected to decrease by 1.1 percent a year, from 6.5 million barrels per day in
2-38
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1997 to 5.0 million barrels per day in 2020. This decline in domestic production will lead to
a decline in domestic petroleum supply. Domestic supply in 1997 was 9.4 million barrels per
day. In NEMS's low price projection, supply drops to 7.6 million barrels per day in 2020; in
its high price projection, supply drops to 9.3 million barrels.
Domestic consumption of petroleum is expected to increase over the next 20 years.
U.S. petroleum consumption is projected to increase by 6.0 million barrels per day between
1997 and 2020 in the reference case, 3.9 million barrels per day in the low growth case, and
8.2 million in the high growth case. The transportation sector is expected to account for
most of the increase in petroleum consumption. However, a change in the consumption
pattern of the transportation sector is expected to occur. Gasoline accounted for 65 percent
of the petroleum consumed for transportation. However, this share is expected to decrease to
61 percent in 2020 as alternative fuels are introduced to the transportation market. The share
of jet fuel is expected to increase from 13 percent to 17 percent as air travel continues to
expand.
As domestic production continues to decline and domestic consumption continues to
grow, oil imports will continue to increase. The projections for net petroleum imports in
2020 range from a high of 18.3 million barrels per day in the low oil price case to a low of
14.3 million barrels per day in the low growth case. This is more than double the 1997 level
of 9.2 million barrels per day. Table 2-16 shows consumption and net imports of crude oil
and petroleum products for 1997 and projections for 2020.
As discussed earlier, crude oil imports currently account for the majority of foreign
imports of petroleum. Crude oil is expected to continue as the major component of
petroleum imports. However, the import share of refined products is expected to increase in
the future. More imports of petroleum products will be needed as growth in demand for
refined products exceeds the expansion of domestic refining capacity.
Future exports of petroleum from the United States will depend on economic
conditions worldwide and the restrictions placed on trade both in the United States and
abroad. The industrialized countries will continue to be the major oil consumers over the
next 20 years. However, petroleum use will increase at the fastest rate in developing
countries. The United States will continue to export petroleum products (especially the
heavy products, which are in less demand in this country) (DOE, EIA, 1999c).
2-39
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Table 2-16. Petroleum Consumption and Net Imports in 1997 and 2020 (106
barrels/day)
Year and
Projection
1997
2020 Projections
Reference
Low oil price
High oil price
Low growth
High growth
Consumption
18.6
24.7
26.0
24.0
22.5
26.8
Net Imports
9.2
16.0
18.3
14.6
14.3
17.7
Net Crude Imports
8.1
12.0
13.1
11.5
11.4
12.6
Net Product
Imports
1.0
4.0
5.2
3.1
2.9
5.1
Source: U.S. Department of Energy, Energy Information Administration. 1999a. Annual Energy Outlook,
1999.
Oil prices have fluctuated greatly in the past, which makes future price projections
uncertain. However, future oil prices are expected to be higher than current prices. The
latest year for which comprehensive data is available is 1998, a year which saw
uncharacteristically low prices for petroleum-based products. The world price for crude oil
is most heavily influenced by OPEC's limits on production. As of the publication of this
document, prices for crude oil and petroleum-based products are much higher than during the
years presented in the tables in this report. Increased world demand has not been met with
production increases, resulting in higher prices.
The reference case for oil projects prices to rise by about 0.9 percent a year, reaching
$22.73 in constant 1997 dollars in 2020. In nominal dollars, the reference case price exceeds
$43 in 2020. The low price case projects prices rising to $14.57 by 2005 and remaining at
about that level until 2020. The high price case has a price rise of about 2.5 percent per year
until 2015 and then remains at $29.35 until 2020. The leveling off at about $29.35 in the
high price case is due to the market penetration of alternative energy supplies that could
become economically viable at that price (DOE, EIA, 1999a).
2-40
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SECTION 3
ENGINEERING COST ANALYSIS
HAP emissions occur at several common points during the storage and distribution of
organic liquids other than gasoline. To control these emissions, EPA has developed MACT
floor levels of control under the authority of Section 112 of the CAA. This section
summarizes EPA's control costs estimates for the rule.
3.1 Control Cost Estimates
The engineering analysis identified 381 major sources that are potentially affected by
the rule. To estimate nationwide costs, EPA developed 15 model plants with control costs
for the following emission points:
• storage tanks,
• cargo tank transfers, and
• equipment leaks.
The costs include capital costs associated with tank, rack, and leak detection and repair
devices (appropriately annualized using the equipment lifetime and discount rate) and
variable costs associated with operating and maintaining pollution control devices and other
costs associated with monitoring, recordkeeping, and reporting (MRR). The Agency
identified 273 facilities, or 72 percent of the total that will incur control and MRR costs, with
the remaining 108 facilities (28 percent) incurring MRR costs only.
3-1
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The nationwide compliance cost estimates for the rule are $25.11 million for the
required controls (see Table 3-1).1 These costs are distributed by industry as follows:
• SIC 13 Oil and Gas Extraction—$0.46 million (1.8 percent)
• SIC 28 Chemical Production—$9.40 million (37.4 percent)
• SIC 29 Petroleum Refineries—$3.56 million (14.2 percent)
• SIC 42 Liquid Terminals—$6.80 million (27.1 percent)
• SIC 44 Water Transportation—$0.12 million (0.5 percent)
• SIC 46 Crude Oil Pipelines—$1.86 million (7.4 percent) and
• SIC 51 Petroleum Terminals—$3.43 million (13.7 percent)
EPA expressed these control costs on a per-unit basis for input in the market model described
in Appendix A. EPA also assigned costs to individual facilities within each industry, as
described in Appendix B, and scaled the facility-specific costs up to SIC totals using
escalation factors. In addition, the Agency assigned model plant costs to each of the 248
survey facilities2 to compute cost-to-sales ratios (CSRs) for facilities and their ultimate
parent companies (see Appendix B).
'Although most of EPA's analysis employs NAICS codes, model plants were developed based on the SIC codes
listed in the facilities' survey response.
2The Agency collected survey data for 140 of 381 potentially affected facilities (37 percent) and these are
referred to as the "known" facilities in the analysis.
3-2
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SECTION 4
ECONOMIC IMPACT ANALYSIS: METHODS AND RESULTS
The NESHAP requires distributors of nongasoline organic liquids to meet emission
standards for the release of HAPs into the environment. To meet these standards, firms will
have to modify their plant and equipment and institute leak detection and repair procedures.
These changes result in higher costs of production for the affected producers. They may also
have broader societal implications because these effects are transmitted through market
relationships to their customers.
The OLD rulemaking will increase the costs of distributing organic liquids.
Specifically, the costs of several general types of businesses are expected to increase. These
businesses include facilities that manufacture and distribute organic chemicals and/or
nongasoline petroleum products and facilities that specialize in the distribution of these
products. Of the latter facilities, some are owned by companies that also manufacture the
products, while others are independent businesses that only distribute the products.
4.1 Overview of Economic Modeling Approaches
Several types of economic impact modeling approaches have been developed to
support regulatory development. Models incorporating different levels of economic
decisionmaking can generally be categorized as with behavior responses (behavioral
approach) and without behavior responses (nonbehavioral/accounting approach).
The behavioral approach is grounded in economic theory related to producer and
consumer behavior in response to changes in market conditions. In essence, this approach
models the expected reallocation of society's resources in response to a regulation. The
behavioral approach explicitly models the changes in market prices and production.
Resulting changes in price and quantity are key inputs into the determination of a number of
important phenomena in an EIA, such as changes in producer surplus, changes in consumer
surplus, and net social welfare effects. For example, a large price increase may imply that
consumers bear a large share of the regulatory burden, thereby mitigating the impact on
producers' profits and plant closures. The following describes the methods and results of
this approach.
4-1
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In contrast the nonbehavioral/accounting approach essentially holds fixed all
interaction between facility production and market forces. In this approach, a simplifying
assumption is made that the firm absorbs all control costs, and the analysis assesses the
burden of the control costs under this assumption. Typically, engineering control costs are
then compared to facility, company, or industry sales to evaluate the regulation's economic
impact. The Agency employed a nonbehavioral approach to conduct an initial screening
analysis of impacts on small businesses (described in Section 5).
4.2 Conceptual Approach
EPA developed a simple competitive market model in which buyers and sellers are
price takers in three commodity markets potentially affected by the rule: petroleum and
chemical products and merchant organic liquid distribution services. Prices in these markets
are set by the collective actions of producers and consumers, who take the market price as a
given in making their production and consumption choices. EPA's model compares baseline
conditions in the two product markets and the merchant distribution service market to with-
regulation conditions in those markets. Because the suppliers of organic chemicals and
petroleum liquids are also the demanders of merchant services, EPA paid particular attention
to the interactions between the markets.
With the regulation, the costs of production increase for organic liquid suppliers and
distributors because they incur additional costs associated with the rule. Incorporating these
regulatory control costs is represented by an upward shift of the aggregate supply curve in
each of the three markets. In addition, the increased costs incurred by organic liquid and
petroleum product facilities reduces their demand for merchant distribution services.
At the new equilibrium with the regulation, the market prices of organic chemicals
and petroleum products increase and output in those markets (as determined from the market
demand curve, DM) declines. In the market for merchant distribution services, market
quantity declines. However, depending on the interaction of the decrease in demand and the
decrease in supply in that market, the market price may either increase or decrease.
Figure 4-1 illustrates the theory underlying estimation of the economic impacts of the rule.
4-2
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D
a) Quantity of organic liquid distributed by SICs 28 and 29
b) Quantity of organic liquids distributed by merchant distributors
Figure 4-1. Market Responses to the OLD NESHAP
4-3
-------
4.2.1 Operational Model
To develop quantitative estimates of economic impacts, the Agency developed an
operational model using spreadsheet software. As described below and in detail in
Appendix A, this model characterizes baseline supply and demand and the behavioral
responses to changes in costs and/or market prices.
4.2.1.1 Market Supply
For each organic liquid market, EPA defines market supply as the sum of domestic
and foreign supply. Domestic supply is the sum of baseline quantities supplied by facilities
within the market. EPA obtained questionnaire data on baseline quantities of liquids
distributed by a subset of facilities, and estimated the quantities distributed by the rest of the
estimated universe of OLD facilities as described in Appendix B. Each supply function's
parameters were calibrated using baseline production, price data, and the responsiveness of
supply to changes in price (supply elasticity).
4.2.1.2 Market Demand
Similar to supply, the Agency modeled two aggregate consumers (domestic and
foreign) in each product market, and domestic demand for distribution, with downward-
sloping demand curves that are consistent with the theory of demand. This characterization
simply indicates that consumption of commodities is high at low prices and low at high
prices. The Agency constructed demand functions for each consumer using baseline
quantity, price data, and assumptions about the responsiveness to changes in price (demand
elasticity). EPA obtained estimated demand elasticities for the liquid markets from previous
EPA economic impact analyses. The elasticity of demand for distribution services, like the
demand itself, is derived from the demand for the liquids being distributed.
4.2.1.3 Control Cost Inputs and With-Regulation Equilibrium
The OLD NESHAP will increase the cost of distributing organic liquids, which will
increase the costs of facilities producing organic liquids both directly (because they also
distribute organic liquids) and indirectly (because they purchase merchant distribution
services, whose costs will also increase due to the regulation). The increased cost and
reduced quantity of organic liquids distributed by producing facilities also reduces the
demand for merchant distribution services. EPA's analysis estimates the adjustment in
equilibrium quantity at each distribution facility and in each market, using the model
described in Appendix A.
4-4
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Many of the facilities potentially affected by the regulation are located in 1-hour
ozone nonattainment areas. These facilities probably have many of the controls and
processes on which the estimated costs of compliance are based in place at baseline. The
costs of compliance for these facilities would likely be much lower than the costs estimated
by EPA. They would therefore incur lower impacts as a result of the regulation, and the
market adjustments would be somewhat smaller. To account for these differences, EPA
conducted two sensitivity analyses. Sensitivity Analysis A decreases estimated compliance
costs for facilities located in 1-hour ozone nonattainment areas by the amount of leak
detection and repair (LDAR) costs and MRR costs. Sensitivity Analysis B reduces their
costs by the amount of MRR costs only. The results of these two sensitivity analyses are
shown in Appendix C.
4.2.2 Results
The theory presented above suggests that producers attempt to mitigate the impacts of
higher-cost production by shifting the burden on to other economic agents to the extent the
market conditions allow. We would expect the model to project upward pressure on prices
for merchant distribution services as producers reduce output rates in response to higher
costs. Increased price of merchant services, plus direct costs of compliance for organic
liquid producers that also distribute, results in increased prices for organic liquids as
producers reduce output rates to respond to higher costs. Higher prices reduce quantity
demanded and output for organic liquids, leading to changes in economic surplus to
consumers and profitability of firms. Reduced production of organic liquids reduces the
demand for merchant distribution services. These interacting market adjustments determine
the social costs of the regulation and its distribution across stakeholders (producers and
consumers).
4.2.3.1 Market- and Industry-Level Impacts
The increased cost of production due to the regulation is expected to slightly increase
the price of petroleum and chemical products and reduce their production/consumption from
baseline levels. As shown in Table 4-1, the regulatory alternative is projected to increase
prices by 0.001 percent in the markets for petroleum products and organic chemicals.
Domestic production of petroleum products declines by 0.021 million Mt and domestic
chemical production declines by 0.016 million Mt. Supply from foreign producers (imports)
increases by 0.006 million Mt in the petroleum market and less than 0.001 million Mt in the
chemical market, resulting in a net decline of 0.015 million Mt and 0.006 million Mt
respectively (less than 0.002 percent). In the market for merchant distribution services,
4-5
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Table 4-1. Market-Level Industry Impacts of the Organic Liquid Distribution (OLD)
NESHAP: 1997
Petroleum Products
Price ($/metric ton)
Quantity (106 metric tons/yr)
Domestic
Foreign
Chemical Products
Price ($/metric ton)
Quantity (106 metric tons/yr)
Domestic
Foreign
Distribution Services
Price ($/metric ton)
Quantity (106 metric tons/yr)
Baseline
$191.84
2,365
1,924
441
$498.65
836
825
11
$12.32
478
With
Regulation
$191.84
2,365
1,924
441
$498.66
836
825
11
$12.33
478
Change
Absolute
$0.002
-0.015
-0.021
0.006
$0.006
-0.002
-0.002
0.000
$0.013
-0.006
Relative
0.001%
-0.001%
-0.001%
0.001%
0.001%
-0.002%
-0.002%
0.002%
0.106%
-0.001%
equilibrium quantity is projected to decline by 0.006 million Mt, less than 0.01 percent, and
market price is projected to increase by $0.013, less than 0.2 percent.
Revenue, costs, and profitability of the directly affected industry also change as
prices and production levels adjust to increased costs associated with compliance. For
domestic petroleum producers, operating profits are projected to decline by $3.4 million (see
Table 4-2). Operating profit losses are the net result of three effects: decreased revenue,
reductions in production costs as output declines, and increased control costs. For domestic
chemical producers, operating profits are projected to decline by $5.2 million.
4.2.3.2 Facility-Level Impact Results
Using the quantity adjustment equation shown in Appendix A, EPA estimated each
facility's adjustment to the regulation. First, EPA estimates the change in the facility's
quantity distributed. EPA then combines the estimated decrease in quantity, coupled with
the change in the market price for the commodity distributed, to estimate the facility's
change in revenue.
4-6
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Table 4-2. National-Level Industry Impacts of the Organic Liquid Distribution (OLD)
NESHAP: 1997
Absolute Change
Petroleum
Revenue -$0.03
Costs $3.34
Operating Profit -$3.37
Facilities 0
Chemicals
Revenue -$2.71
Costs $2.46
Operating Profit -$5.18
Facilities 0
Distribution Services
Revenue $6.17
Costs $6.07
Operating Profit $0.09
Facilities -1
Total
Revenue $3.42
Costs $11.88
Operating Profit -$8.46
Facilities -1
Detailed information about facility-level profitability was unavailable from ICR
survey responses. However, Agency estimated the change in each facility's profit, using the
following formula:
An; = (Ap - CiHi! + 0.5(Ap - c^-A^ (4.1)
This formula estimates the facility's change in producer surplus based on the change in the
market price and the facility's quantity and compliance costs. Facility costs are estimated by
subtracting estimated with-regulation facility profits from with-regulation facility revenues.
EPA then aggregated the changes in facility revenues, costs, and profits across facilities in
4-7
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each market to estimate national-level industry impacts shown in Table 4-2. One facility is
projected to become unprofitable and close its OLD operations as a result of the rule.
In the petroleum markets, revenues fell slightly, and costs increased, so that overall,
profits decreased by approximately $3.4 million. In the chemicals market, revenues fell by
$2.7 million, and costs increased by $2.5 million, so that overall profits fell $5.2 million. For
the merchant distributors, revenues increased by $6.2 million and costs increased by $6.1
million, so profits increased slightly, by $0.1 million. Nationwide, profits fell by $8.5
million across all three affected sectors.
4.2.3.3 Company-Level Impacts Results
To analyze the impacts of the rule on the companies owning affected facilities, EPA
estimated the change in profits they would experience as a result of the regulation. These
results are shown in Table 4-3. Generally, the regulation is projected to result in slight
reductions in the profits of companies owning OLD facilities. No company that was
profitable at baseline is projected to become unprofitable due to the regulation. Of the 57
companies owning facilities analyzed in the market model, nine are projected to experience a
positive percentage change in profits as a result of the regulation. Three companies are
projected to experience a reduction in profits of more than 5 percent. Forty-three are
projected to experience reductions in profits less than 1 percent, and two companies are
projected to experience reductions in profits of between 1 percent and 5 percent. Seven
companies are expected to experience positive absolute changes in profits. This differs from
the number of companies expected to experience a positive percentage change because some
companies that are not profitable at the baseline level would experience negative absolute
profit changes, resulting in positive percentage changes.
Table 4-3. Estimated Company-Level Impacts of the OLD NESHAP: 1997
Percent Change in Profits Number of Companies
Positive 19
Between-1.0 and 0 33
Between-1.0 and-5.0 2
Greater than -5.0 3
Total 57
4-8
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In addition to the companies owning facilities included in the market model, the
companies owning the Trans-Alaska Pipeline (TAP) will also be impacted. (The TAP was
omitted from the market impacts model because the volume of petroleum transferred via the
pipeline is so large, and because it is not really competing with other pipeline facilities
affected.) EPA analyzed the impacts of the rule on the company owning the TAP by
comparing the costs of compliance with company sales. Affected TAP facilities include 11
pipeline pump stations and the Valdez Marine Terminal. The TAP is owned by the Alyeska
Pipeline Company, the major partner in which is BP-Amoco. Presently, BP Amoco owns
46.93 percent of the TAP. To be conservative, EPA compared the TAP's costs with the
revenues of BP-Amoco, ignoring revenues of other partners. The TAP is estimated to incur
$0.41 million to comply with the regulation, which is 0.0006 percent of Amoco's annual
sales. If revenues of other pipeline owners were included, the estimated costs of the rule
would represent an even smaller share. EPA thus believes that the rule will not impose
significant impacts on the owners of the TAP.
In addition to analyzing impacts on companies in general, EPA also examined the
impacts of the regulation on small businesses. This analysis is presented in Section 5.
4.2.3.4 Social Costs
The value of a regulatory action is traditionally measured by the change in economic
welfare that it generates. The regulation's welfare impacts, or the social costs required to
achieve environmental improvements, will extend to consumers and producers alike.
Consumers experience welfare impacts due to changes in market prices and consumption
levels associated with the rule. Producers experience welfare impacts resulting from changes
in profits corresponding with the changes in production levels and market prices. However,
it is important to emphasize that this measure does not include benefits that occur outside the
market, that is, the value of reduced levels of air pollution with the regulation.
The economic analysis accounts for behavioral responses by producers and
consumers to the regulation (i.e., shifting costs to other economic agents). This approach
provides insights on how the regulatory burden is distributed across stakeholders. As shown
in Table 4-4, the economic model estimates the total social cost of the rule of $17.6 million.
As a result of higher prices and lower consumption levels, consumers (domestic and foreign)
are projected to lose $10.1 million, with chemical consumers accounting for slightly more
than half of the total. Domestic producers lose $8.5 million in profits, with chemical
producers accounting for 61 percent of the total. Foreign producers unambiguously gain as a
4-9
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Table 4-4. Distribution of Social Costs Associated with Organic Liquids Distribution
(OLD)NESHAP: 1997
Value ($106/yr)
Change in Consumer Surplus -$10.14
Petroleum -$4.95
Chemical -$5.19
Change in Producer Surplus -$7.47
Domestic Producers -$8.46
Petroleum -$3.37
Chemical -$5.18
Distribution Services $0.09
Foreign Producers $0.99
Petroleum $0.92
Chemical $0.07
Total Social Cost -$17.6
result of the regulation with profits increasing by $1.0 million. These producers benefit from
higher prices with additional control costs associated with production.
4.3 Energy Impacts
Executive Order 13211 "Actions Concerning Regulations that Significantly Affect
Energy Supply, Distribution, or Use" (66 Fed. Reg. 28355, May 22, 2001) requires federal
agencies to estimate the energy impact of significant regulatory actions. The NESHAP will
directly affect the distribution of petroleum products, and will trigger both an increase in
energy use due to the operation of new abatement equipment and a decrease in energy
distribution due to a small increase in its cost. Neither of these impacts is expected to be
significant, however. The reduction in coal, natural gas, and electricity output resulting from
this rule is expected to be negligible.
4.3.1 Increase in Energy Consumption
The implementation of the NESHAP may result in a minor increase in energy
consumption for affected facilities. Energy consumption may increase due to the increased
need for pumps, blowers, and automatic valves and dampers. Energy in the form of
4-10
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electricity and supplemental fuels may display this slight increase. Some of the vapors that
result from organic liquid storage, transfer, and distribution may also serve as fuel for
combustion devices, which may partially offset increases in energy consumption. It is
anticipated that the energy requirements for the control devices mandated by this NESHAP
will comprise only a very small fraction of the energy required to operate an OLD-type
facility. It is therefore anticipated that there will be no significant increases in energy
consumption attributable to this NESHAP.
4.3.2 Reduction in Energy Consumption
The NESHAP will directly increase the cost of petroleum distribution operations,
resulting in a series of responses within the market for distribution services and the market
for petroleum products. The estimated impacts are summarized in Table 4-5. As a result of
these market adjustments, the quantity of petroleum products distributed is projected to fall
by about 15,500 metric tons per year (slightly over 300 barrels per day). In addition,
commercial distribution of petroleum products is projected to decline by approximately6,500
metric tons per year (130 barrels per day). The price of petroleum products is projected to
increase by approximately 0.001 percent, and the price of commercial distribution services is
projected to increase by approximately 0.1 percent. As shown in Table 4-5, none of these
impacts is estimated to be large enough to be considered significant as measured by the
screening criteria described by the White House Office of Management and Budget (OMB)
Memoranda M-01-27, Guidance for Implementing E.G. 13211 (OMB, 2001).
Table 4-5. Estimated Energy Impacts of the OLD NESHAP
Type of Impact
OMB Significance
Criterion
Estimated OLD
NESHAP Impact
Reduction in quantity of Petroleum Products Distributed 4,000 bbl/day 311 bbl/day
by Producer
Reduction in quantity of Petroleum Products Distributed 4,000 bbl/day 130 bbl/day
Commercially
Increase in price of petroleum products 1 percent 0.001 percent
Increase in price of energy distribution 1 percent 0.1 percent
4-11
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4.3.3 Net Impact on Energy Consumption and Cost
As described above, the operation of control equipment at affected OLD facilities is
projected to require negligible increases in the use of energy, the quantity of petroleum
products distributed is projected to decrease by an insignificant amount, and the cost of
petroleum products and petroleum distribution services are projected to increase by
insignificant amounts. The reduction in coal, natural gas, and electricity output resulting
from this rule is expected to be negligible. Hence, the NESHAP is not likely to have any
significant adverse impact on energy prices, distribution, availability, or use.
4-12
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SECTION 5
SMALL BUSINESS IMPACT ANALYSIS
Although environmental regulations can affect all businesses, small businesses may
have special problems complying with such regulations. The Regulatory Flexibility Act
(RFA) of 1980 requires that special consideration be given to small entities affected by
federal regulations. The RFA was amended in 1996 by the Small Business Regulatory
Enforcement Fairness Act (SBREFA) to strengthen its analytical and procedural
requirements. Under SBREFA, the Agency must perform a regulatory flexibility analysis for
rules that will have a significant impact on a substantial number of small entities (SISNOSE).
This section focuses on the compliance burden for the small businesses to determine whether
this final rule is likely to impose a SISNOSE within this industry.
5.1 Identifying Small Businesses
The Small Business Administration (SB A) defines a small business in terms of the
sales or employment of the owning entity. These thresholds vary by industry and are
evaluated based on the industry classification (NAICS code) of the affected facility. EPA
identified 26 different four-digit SIC codes, and an even larger number of NAICS codes, for
the affected companies. The size standards for these industries range from a maximum of
100 to 1,500 employees or from a maximum of $5 million to $18.5 million in revenues.
Based on the reported company employment or revenue and SIC size standards, EPA
classified six of the 57 known companies in the survey as small, or 10.5 percent of the total.
In other sections of this analysis, the Agency scaled up the number of known facilities to
represent all facilities potentially affected by the ruling. Scaling up the number of companies
using the methods described in appendix B, EPA estimates that there are!39 large companies
and 16 small companies affected by the rule.
5.2 Screening-Level Analysis
For the purposes of assessing the potential impact of this rule on these small
businesses, the Agency calculated the ratio of the annual compliance cost relative to baseline
sales for each company. When a company owns more than one affected facility, the costs for
each facility it owns are summed to develop the numerator of the test ratio. For this
screening-level analysis, annual compliance costs were defined as the engineering control
costs imposed on these companies; thus they do not reflect the changes in production
5-1
-------
expected to occur in response to imposing these costs and the resulting market adjustments.
As shown in Table 5-1, the Agency estimated that all of the affected small firms have CSRs
between 0 and 0.5 percent. The distribution of CSRs presented in Figure 5-1 shows that,
based on available information, small firms are not disproportionately affected compared to
large firms. Ninety-six percent of the large companies have CSRs between 0 and 0.5 percent.
Table 5-1. Impacts on Small and Large Companies Owning OLD Facilities: Cost-to-
Sales Ratios
Large Companies Small Companies
(139 Companies) (16 Companies)
Cost-to-Sales Ratio (CSR)
Minimum 0.00% 0.00%
Median 0.00% 0.02%
Maximum 3.76% 0.10%
Number of Companies with
CSR<1%
CSR between 1% and 3%
CSR>3%
133
3
3
16
0
0
5.3 Economic Analysis
The Agency also examined the economic impacts on small businesses under with-
regulation conditions expected to result from the rule. Unlike the screening analysis
described above, this approach examines small business impacts in light of the expected
behavioral responses of producers and consumers as described in Section 4. As shown in
Table 5-2, for affected small companies, profit percentage changes range from 0.00 to -11.84
percent. The median percentage change in small company profits is approximately -0.21
percent. The median absolute decline in small company profits is approximately $21,000
dollars. Large companies were expected to experience a median percentage change of-0.003
percent and a median absolute decline of $33,000.
5-2
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a) Small Companies
0.5% to 1% 1% to 3°/,
CSR Range
b) Large Companies
0.5% to 1% 1% to 3%
CSR Range
QSIC 28
• SIC 29
QSIC 42
nSIC 46
Figure 5-1. Distribution of Compliance CSRs by Industry
5-3
-------
Table 5-2. Impacts on Companies Owning OLD Facilities: Changes in Company
Profits
Percent Change in Profits
Minimum
Median
Maximum
Number of Companies for which
Profits increase or unchanged
Profits decrease by less than 1 %
Profits decrease by 1% to 5%
Profits decrease by more than 5%
Large Companies
-22.75%
0.00%
5.00%
52
76
5
5
Small Companies"
-11.84%
0.00%
0.00%
3
11
0
3
1 Note: number of companies does not equal the estimated total (138 and 16) due to rounding.
5.4 Assessment
The RFA generally requires an agency to prepare a regulatory flexibility analysis of
any rule subject to notice and comment rulemaking requirements under the Administrative
Procedure Act or any other statute unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities. Small entities include
small businesses, small organizations, and small governmental jurisdictions.
For purposes
defined as
ses of assessing the impacts of today's rule on small entities, small entity is
a small business whose parent company has fewer than 100 or 1,500 employees,
depending on size definition for the affected SIC or NAICS code, or a maximum
of $5 million to $18.5 million in revenues;
a small governmental jurisdiction that is a government of a city, county, town,
school district or special district with a population of less than 50,000; and
a small organization that is any not-for-profit enterprise independently owned and
operated and is not dominant in its field.
5-4
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It should be noted that companies in 26 four-digit SIC codes and 42 NAICS codes are
affected by this rule, and the small business definition applied to each industry by SIC code
or NAICS code is that listed in the SB A size standards (13 CFR 121, and on
www. sba.gov/size).
After considering the economic impacts of the rule on small entities, EPA certifies
that this action will not have a significant economic impact on a substantial number of small
entities. The Agency has determined that of the 57 companies with known sales data, only 6
are small companies that may be affected by the ruling. Scaling up, EPA estimates that a of
a total 155 companies affected by the rule, 16 are small. Out of the affected small firms,
none are estimated to have compliance costs that exceed 1 percent of their revenues. The
reported impacts on the small firms are therefore not considered to be significant. Finally,
while there is a difference between the median compliance cost-to-sales estimates for the
affected small and large firms (0.02 percent for small firms compared to 0.0003 percent for
the large firms), both groups of facilities generally incur costs below 1 percent of sales.
Although this rule will not have a significant economic impact on a substantial
number of small entities, EPA nonetheless has tried to reduce the impact of this rule on small
entities. In this rule, the Agency is applying the minimum level of control to affected
sources allowed by the CAA.
5-5
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Arnold, Roger A. 1989. Microeconomics. 2nd Ed. St. Paul: West Publishing Company.
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White House Office of Management and Budget (OMB) Memoranda M-01-27, p. 4-
12
Oil & Gas Journal. 1998. "Weather, Construction Inflation could Squeeze North American
Pipelines." 96(35).
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Shapiro, M.D. 1987. "Measuring Market Power in U.S. Industry." Cowles Foundation
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Small Business Administration. Statistics of U.S. Businesses, 1996. Washington, DC.
Small Business Administration. "Small Business Size Standards Matched to North
American Industry Classification System Codes Effective October 1, 2000."
Speed, Phillip J. "The Changing Competitive Landscape of the Chemical Industry."
Chemicalbond. . As obtained on
September 2, 1999.
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U.S. Census Bureau. February 1998. "Statistics for Industry Groups and Industries." 7997
Economic Census, Manufacturing—Industry Series, E97M-3251I. Washington, DC:
Government Printing Office.
U.S. Census Bureau. August 1999a. "All Other Basic Inorganic Chemical Manufacturing."
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DC: Government Printing Office.
U.S. Census Bureau. August 1999b. "All Other Basic Organic Chemical Manufacturing."
1997 Economic Census, Manufacturing—Industry Series, E97M-3251I, Washington,
DC: Government Printing Office.
U.S. Census Bureau. August 1999c. "Cyclic Crude and Intermediate Manufacturing." 7997
Economic Census, Manufacturing—Industry Series, E97M-3251I, Washington, DC:
Government Printing Office.
U.S. Census Bureau. August 1999d. "Ethyl Alcohol Manufacturing." 1997 Economic
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Government Printing Office.
U.S. Census Bureau. August 1999e. "Industrial Gas Manufacturing." 1997 Economic
Census, Manufacturing—Industry Series, E97M-3251I, Washington, DC:
Government Printing Office.
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Manufacturing—Industry Series. E97M-3251I, Washington, DC: Government
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Government Printing Office.
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U.S. Census Bureau. March 2000a. "1987 SIC Matched to 1997 NAICS."
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Printing Office.
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Manufacturing—Industry Series. E97M-3251I, Washington, DC: Government
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Refining and Gasoline Marketing Industry." Recent Structural Changes in U.S.
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Refining and Gasoline Marketing Industry." Overview of Domestic Petroleum
Refining and Marketing, . As obtained on July 9, 1999e.
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U.S. Department of Energy, Energy Information Administration. January 2001.
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.
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the Petroleum Refinery NESHAP, Revised Draft for Promulgation.
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Organic Liquids Distribution (Non-gasoline) Industry. Washington, DC: U.S.
Environmental Protection Agency, Office of Air Quality Planning and Standards.
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APPENDIX A
ORGANIC LIQUIDS DISTRIBUTION (OLD) METHODOLOGY
The primary purpose for the EIA for the OLD rule is to "describe and quantify" the
reallocation of society's resources in response to the regulatory action. To develop these
estimates, we used a basic framework that is consistent with other EIAs performed by ISEG.
This approach employs standard microeconomic concepts to model behavioral responses
expected to occur with regulation.
EPA compared baseline conditions in two organic liquid product markets (chemicals
and petroleum products) and a service market (distribution) in 1997 with with-regulation
conditions in the same markets. By including the service market, we placed particular
emphasis on the interactions between the market for organic liquid products and the market
for distribution services.
The regulation will increase the costs of performing distribution services. This will
increase the costs of facilities producing organic liquids, either directly or indirectly. For
example, costs will increase for chemical and petroleum manufacturing companies
performing on-site distribution services. We assumed that all producers of organic liquids
perform on-site distribution, either while bringing their organic liquid inputs into the facility,
while sending their organic liquid products out of the facility, or both. Costs will also
increase for stand-alone distribution service providers, both independent merchant
distribution facilities and captive distribution facilities owned by the same companies
producing the organic liquids. The increase in the price of merchant distribution services
will indirectly increase the costs of chemical and petroleum producers purchasing
distribution services. Figure 4-1, in Section 4, illustrates the interacting market responses.
This methodology plan describes the model in detail and discusses how the Agency
• characterized the supply and demand of the affected commodities and services at
the market level,
• linked three standard partial equilibrium models by specifying the interactions
between supply functions and then solving for prices and quantities across all
markets simultaneously,
A-l
-------
• introduced a policy "shock" in the model with control costs inducing shifts in the
affected supply functions, and
• used a solution algorithm to determine a new with-regulation equilibrium.
A.I Baseline Data Set
ISEG collected the following market information to characterize the baseline:
• Market quantities—Using responses from the EPA industry survey, the Agency
identified known facilities producing petroleum and chemical products potentially
affected by the rule. Quantities for unknown facilities were developed using the
procedure described in Appendix B. Import and export quantities for these
commodities were collected from ChemExpo. Domestic and import quantities
were aggregated to develop baseline market quantities for the petroleum and
chemical markets (see Table A-l). The market quantity of distribution services
was computed by multiplying the estimated share (a) of the organic liquid
product distributed by merchant service providers and the total baseline quantities
of the known and unknown facilities. Using data contained in the facility
database, the Agency estimated a = 17.4%.
• Market prices—Petroleum and chemical prices were collected from the Chemical
Market Reporter. A weighted average price for each aggregate market was
computed based on the petroleum and chemical quantities. Absent data on the
market price for distribution services, we assumed that the market price is set by
the highest unit cost service supplier. Using an engineering cost function1 and
quantities for service providers, the baseline market price for services was
estimated to be $12.32 per metric ton.
• Supply and demand elasticities—For the chemical and petroleum industries, we
utilized industry (SIC) elasticities gathered from previous EPA economic impacts
analyses (EPA, 1995; Shapiro, 1987). For the distribution service industry, we
assumed a supply elasticity of one. The model does not specify an exogenous
demand function for services because this demand is derived from the supply
decisions of the chemical and petroleum producers. Table A-2 shows the
elasticities used.
'The engineering cost function used for this analysis is as follows: TC = 598(q/29)08.
A-2
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Table A-l. Baseline Data Set, 1997
Domestic
Average Price Production Imports Exports
Market ($/metric ton) (106 metric tons) (106 metric tons) (106 metric tons)
Petroleum $191.84 1,924 441 25
Chemical $498.65 191 11 8
Distribution Services $12.32 368 NA NA
Table A-2. Supply and Demand Elasticities Used in the Market Model
Market Supply Demand
Petroleum 1.2 -0.6
Chemical 1.5 -1.5
Distribution Services 1 derived demand
A.2 Market for Organic Liquid Products
A.2.1 Market Supply
Market supply for the organic liquid product market i can be expressed as:
n
Q S = Ł qjS + qSp (A.1)
where
q
s = product (i) supply from plant (j), and
= product (i) supply from foreign sources (imports).
A-3
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A.2.1.1 Domestic Facility-Level Supply
Domestic facilities will be affected by the change in costs of distribution on-site and
by changes in the price for distribution services. Foreign producers do not face additional
costs of production with regulation. However, their output decisions are affected by price
changes expected to result from the regulation. The facility survey did provide sufficient
information on baseline revenues, costs, or profits. Therefore, estimates of the change in
supply were generated as follows:
Pm
(A.2)
where
.Si
q.™ is the with regulation supply for facility j,
q®' is the baseline supply for facility j,
gSi is the domestic supply elasticity,
Apj is change in price for market i,
c= is the per-unit control costs for facility j,
Cj is the share of output distributed through merchant terminals,
Apgvc is the change in the price of merchant services, and
pio is the baseline price for market i.
A-4
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A.2.1.2
Foreign Supply (imports)
Foreign producers do not face additional costs of production with regulation.
However, their output decisions are affected by price changes expected to result from the
regulation. Therefore, changes imports were modeled as follows:
1 + e* • 1
PiO.
(A.3)
where
is the with regulation imports for market i,
^ is the baseline imports for market i,
fSi is the foreign supply elasticity,
Apj is the change in price for market i, and
pio is the baseline price for market i.
A.2.2 Market Demand
Market demand for market i can be expressed as the sum of domestic and foreign
demand, that is,
(A.4)
where
is the domestic demand and
is the foreign demand (or exports).
A.2.2. 1 Domestic Demand
Changes in domestic demand for each market was computed as follows:
Di _ Dt
4doml~ QdamO
1 + rf' • 1 +
PiO.
(A.5)
A-5
-------
where
*s ^ w^ regulation demand for market i,
*s ^ Baseline domestic consumption for market i,
is the domestic demand elasticity,
Apj is the change in price for market i, and
pio is the baseline price for market i.
A.2.2.2 Foreign Demand (Exports)
Changes in domestic demand for each market was computed as follows:
Di Di
F =
-------
A.3 Market for Old Distribution Services
A. 3.1 Market Supply
Market supply for OLD distribution services can be expressed as
QS"° = Ł qj8"' (A.7)
where
_ swo = supply from plant (j) providing distribution services.
A.3. 1.1 Domestic Facility-Level Supply
1 + 6s
Pw
where
.Si
q.™ is the with regulation supply for facility j,
q.®1 is the baseline supply for facility j,
gSi is the domestic supply elasticity,
Apgvc is the change in price for the service market,
c= is the per-unit control costs for facility], and
PBVCO ^s t^6 baseline price for the service market.
(A.8)
A-7
-------
A.3.2 Market Demand
(A.9)
j=i
As noted above, demand for services is derived form the supply decisions of
chemical and petroleum producers. Therefore, individual facility demand, n DSVC, is
computed as follows:
= «-qf (A.10)
A-8
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APPENDIX B
ECONOMIC COMPUTATIONS
To prepare the baseline for the economic impact analysis of the OLD NESHAP, EPA
used data from a variety of sources, including publicly available data on the chemical and
petroleum industry, publicly available data on distribution firms and the independent liquid
terminals, and data provided by respondents to the Agency's Organic Liquid Distribution
Questionnaire. To establish the baseline for each affected facility and sector, EPA needed to
estimate
• baseline quantity of product (chemical or petroleum liquid) at each facility and
for the sector as a whole;
• baseline quantity distributed through captive distribution system, for each facility
and sector-wide;
• baseline quantity distributed through merchant distributors, for each facility and
sector-wide; and
• baseline price of chemicals, petroleum liquids, and merchant distribution services.
B.I Baseline Quantities of Chemicals and Petroleum Liquids Distributed by Each
Facility
All organic liquids produced and marketed in the United States must be distributed.
Thus, EPA all organic liquids (except gasoline) sold in the United States could potentially be
affected by the OLD NESHAP. EPA has publicly available data on total quantities of
organic chemicals and petroleum products produce in the U.S. In addition, EPA has data on
organic liquids distribution facilities responding to the OLD questionnaire, and the quantities
of organic liquids they distribute. The questionnaire data provide information on a subset of
organic liquids, distributed by a subset of organic liquid distributors. To construct the
model's baseline, EPA first examined the database information, then developed a method for
estimating the volume of organic liquids distributed by the "unknown" organic liquids
distribution facilities. This section describes these methods.
B-l
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B.I.I Quantities of Organic Liquids Distributed Onsite and Off-site by Known OLD
Facilities
To compute the baseline quantity of product distributed at each facility, EPA began
with the OLD questionnaire database information on quantities of each organic liquid
transferred at each facility. EPA first designated each product distributed by these "known"
facilities as either organic chemical or petroleum liquid, then aggregated across products to
estimate the quantity of chemicals and/or petroleum products distributed at each known
facility.
Facilities in model plant groups 28 and 29 are assumed to both produce and distribute
organic liquids. The increased costs associated with the regulation are assumed to directly
increase their costs of supplying delivered organic liquids to the organic liquid markets they
serve. Facilities in model plant groups 13, 42, 44, 46, and 51 offer off-site distribution
services to the producers and consumers of organic liquids. EPA does not have sufficient
data to be able to determine which of the off-site suppliers of OLD services offer their
distribution services to each organic liquid producer. Thus, EPA has assumed that all of the
off-site distribution facilities are merchant suppliers of distribution services, who supply
these services to the distribution market. Similarly, EPA is not able to determine which of
the organic liquid producers purchase off-site distribution services and which ones supply
their organic liquids directly to customers. EPA has computed the share of organic liquid
distribution that takes place at off-site facilities (17.4 percent) and assumes that all organic
liquid producers distribute 17.4 percent of their output through off-site distributors. This is
clearly a simplification that reduces the variability of secondary impacts of the NESHAP on
organic liquid producers. In the absence of more detailed information, however, it is a
reasonable simplifying assumption.
For the market model, EPA assumes that companies owning more than one OLD
facility regard their individual facilities as part of a single integrated production and
distribution operation. Thus, we model supply at the company level, rather than at the
facility level, by summing the quantities distributed at all facilities owned by a company
within each model plant group. This is probably a simplification in that companies would
consider the profitability of individual facilities incurring unusually high compliance costs in
addition to considering the profitability of the overall operation.
B-2
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B.I.2 Estimating Quantities of Organic Liquids Distributed by Unknown OLD Facilities
To complete the baseline characterization of quantities of organic liquids distributed
by OLD facilities, EPA created pseudo-facilities and assigned quantities of organic liquids to
them. EPA has an estimate of the number of OLD facilities represented by each model plant.
Subtracting known OLD facilities from the database that are assigned to each model plant
from the total number represented by each model plant yields an estimated number of
unknown plants in a model plant group. The unknown facilities are divided between those
incurring only monitoring, recordkeeping, and reporting costs (MRR-only facilities) and
those incurring costs of compliance control and MRR costs. Table B-l presents the number
of known and unknown facilities by model plant group.
Table B-l. Number of Known and Unknown Facilities by Model Plant Group
Model
Total
Plant Group
13
28
29
42
44
46
51
Total Facilities
2
183
93
57
1
16
29
381
Known Facilities
2
59
31
21
1
16
10
140
Unknown Facilities
0
124
62
36
0
0
19
241
EPA used a two-step process to estimate the quantity of organic liquids distributed by
the unknown facilities. First, for model plant groups 28 and 29, EPA assigned quantities
randomly over the interval between the minimum and maximum quantities distributed by
facilities in each model plant group. Then, EPA estimated the total quantity of merchant
distribution services demanded by these unknown facilities in model plant groups 28 and 29
by multiplying their total distribution times 0.174. EPA allocated employment to the
unknown facilities within each model plant group randomly over the range of actual
employment for known facilities in each model plant group and allocated the merchant
distribution quantity to these facilities proportional to their estimated employment.
B-3
-------
It should be noted that EPA analyzed the Trans-Alaska Pipeline (TAP) differently
from other merchant distributors. According to the OLD database, the TAP distributes
715,851,794 Mt per year, 55 times the total for all other model plant group 46 firms. This
volume of crude oil also represents more than half of the total market quantity of petroleum
products distributed in the U.S. in a year. Clearly, the TAP is completely different from the
other "merchant" distributors in our database. For this reason, EPA has chosen to model the
impacts of the NESHAP on the TAP separately from the market model. The impact of the
rule on the owners of the TAP will be approximated by examining the costs of the rule for
the TAP as a share of the baseline company revenues of the largest shareholder in the
consortium that owns and operates the TAP (BP/Amoco).
B.2 Market Prices of Organic Liquids and Distribution Services
EPA obtained data on pro duct-specific prices for organic liquids mentioned in the
OLD database. EPA estimates the market price for organic chemicals as the quantity-
weighted average of the prices for organic liquids designated as organic chemicals.
Similarly, EPA estimates the market price for petroleum liquids as the quantity-weighted
average of the prices for organic liquids designated as petroleum liquids.
The market price of organic liquid distribution services was found by first estimating
the cost of OLD services, then setting the price equal to the maximum average cost. The
costs of distribution services were estimated based on loading, unloading, and tank storage
costs, scaled to the volume of liquid distributed. Baseline costs of merchant distribution
services range from $1.68/Mt to $12.32/Mt. The baseline market price of distribution
services is thus set at $12.32/Mt.
B.3 Compliance Costs per Facility
EPA estimated costs of complying with the rule based on 16 model plants, and
assigned each known facility to a model plant. Within each model plant, a range of
compliance costs are possible depending on the baseline equipment and processes in place at
a facility. EPA has estimated costs for
Because some of the OLD facilities are located in ozone nonattainment areas, and
would therefore be likely to have LDAR and MRR operations in effect at baseline, EPA also
prepared sensitivity analyses that reduce the costs of compliance for each facility located
within a nonattainment area by the amount of MRR costs and by the sum of MRR and
LDAR costs.
B-4
-------
B.3.1 Scaling Nonbehavioral Impacts to Provide Industry-Wide Estimates
Of the 381 facilities potentially affected by the rale, 140 are estimated to incur costs .
For the nonbehavioral analysis, of company impacts used in the SBREFA screening analysis,
EPA did not create simulated facilities. Instead, EPA computed scaling factors relating the
number of known facilities to the total number of facilities within each model plant group
(see Table B-2):
where
(B.I;
Nj = number of facilities estimated to incur compliance costs for model plant group
i, and
n4 = number of known facilities in model plant group i.
Table B-2. Facility Counts and Scaling Factor for each Model Plant Group
Model plant group
13
28
29
42
44
46
51
Total Number of
Facilities in Model
Plant Group
2
183
93
57
1
16
29
Number of Known
Facilities in Model
Plant Group
2
59
31
21
1
16
10
Scaling Factor
1.0
3.1
3.0
2.7
1.0
1.0
2.9
Using these scaling factors, we estimate the impacts incurred by all facilities that
incur costs. This method also assumes that the facilities estimated to incur costs for control
and MRR that are unknown are similar to the known facilities in the same model plant group,
and that the companies that own them are also similar.
B-5
-------
B.4 Company-Level Factors: Cost-to-Sales Ratios (CSRs) and Scaling Factors
To assess the potential economic impact of the rule on companies, the Agency
calculated a cost-to-sales ratio as follows:
CSR (%) =
E Cfi
Sales
100
(B.3)
where SCfi is the sum of the annual control cost for all facilities owned by company p and
sales is the total revenue for company p.
Baseline company profit margins were collected from secondary source data (see
Section 2). If these margins were not available, an industry profit margin (D&B return-on-
sales) was used for the company. With-regulation profit margins were computed by
subtracting the CSR from the baseline profit margin.
B.4.1 Scaling Company Impacts to Provide Industry-Wide Estimates
To estimate company impacts on an industry-wide basis, the Agency used a scaling
process similar to the approach used for facilities. First, we assign a company model plant
group based on the model plant group for the largest number of facilities owned by the
company. Next, we compute the average number of facilities per company by model plant
group, based on the facilities and companies in the database as follows:
— (B.4)
nk
where
F = number of firms,
n = number of facilities, and
k = known facilities in database.
We then create a company scaling factor for each model plant group by dividing the total
number of facilities by the average number of facilities per company. This method provides
an estimate of the total number of companies in that model plant group.
B-6
-------
JE
\
(B.5)
where
F = number of firms,
n = number of facilities,
k = known in database, and
t = total number affected.
Next, we compute the scaling factor for the model plant group as the ratio of the estimated
total number of companies divided by the companies in the database.
F
S = -i (B.6)
Fk.
Finally, we tabulate the cost-to-sales and profit margin results by model plant group and
scale it up using the scaling factor.
B-7
-------
APPENDIX C
OLD ECONOMIC IMPACT ANALYSIS: SENSITIVITY ANALYSIS FOR
DIFFERENT SCENARIOS
To provide an alternative set of results that incorporate differing assumptions about
baseline controls at affected plants, EPA conducted sensitivity analysis, varying the costs
assigned to facilities depending on whether they are located in NAAQS ozone nonattainment
areas. EPA expects that facilities located in 1-hour NAAQS ozone nonattainment areas will
have MRR and perhaps also LDAR operations in effect at baseline. Such facilities would not
incur the full estimated compliance costs, but rather they would incur the estimated total
annual cost minus either monitoring recordkeeping and reporting and leak detection and
repair costs (Sensitivity Scenario A) or total annual costs minus monitoring, recordkeeping
and reporting (Sensitivity Scenario B). This appendix presents results of these sensitivity
analyses. Tables C-1 through C-4 present the results of Sensitivity Scenario A, and
Tables C- through C-8 present the results of Sensitivity Scenario B.
Overall, if facilities in NAAQS ozone nonattainment areas have monitoring,
recordkeeping, and reporting operations in place at baseline (Sensitivity Scenario B), the
social cost of the rule will be $12.5 million instead of $17.6 million. Operating profits will
fall by $6.0 million nationwide as opposed to $8.5 million. Price and output changes will
also be somewhat diminished. If in fact affected facilities located in NAAQS ozone
nonattainment areas have both leak detection and repair and monitoring, recordkeeping, and
reporting operations in effect at baseline (Sensitivity Scenario A), estimated impacts of the
rule will be even smaller. Social cost will be $5.4 million rather than $17.6 million, and
profits will fall by $2.5 million rather than $8.5 million.
C-l
-------
Table C-l. Market-Level Industry Impacts of the Organic Liquid Distribution (OLD)
NESHAP: 1997
Sensitivity A: No LDAR or MRR for Nonattainment Area Facilities
Baseline
With
Regulation
Change
Absolute
Relative
Petroleum Products
Price ($/metric ton)
Quantity (106 metric tons/yr)
Domestic
Foreign
Chemical Products
Price ($/metric ton)
Quantity (106 metric tons/yr)
Domestic
Foreign
Distribution Services
Price ($/metric ton)
Quantity (106 metric tons/yr)
$191.84
2,365
1,924
441
$498.65
836
825
11
$12.32
478
$191.84
2,365
1,924
441
$498.65
836
825
11
$12.32
478
$0.001
-0.01
-0.01
0.00
$0.002
-0.00
-0.00
0.00
$0.01
-0.00
0.000%
-0.000%
-0.000%
0.000%
0.000%
-0.001%
-0.001%
0.001%
0.036%
-0.001%
C-2
-------
Table C-2. National-Level Industry Impacts of the Organic Liquid Distribution (OLD)
NESHAP: 1997
Sensitivity A: No LDAR or MRR for Nonattainment Area Facilities
Absolute Change
Petroleum
Revenue
Costs
Operating Profit
Facilities
Chemicals
Revenue
Costs
Operating Profit
Facilities
Distribution Services
Revenue
Costs
Operating Profit
Facilities
Total
Revenue
Costs
Operating Profit
Facilities
-$0.01
$1.08
-$1.08
0
-$0.80
$0.76
-$1.56
0
$2.07
$1.97
$0.10
-1
$1.28
$3.81
-$2.53
-1
C-3
-------
Table C-3. Distribution of Social Costs Associated with Organic Liquids Distribution
(OLD)NESHAP: 1997
Sensitivity A: No LDAR or MRR for Nonattainment Area Facilities
Value ($10"/yr)
Change in Consumer Surplus -$3.19
Petroleum -$1.60
Chemical -$1.59
Change in Producer Surplus -$2.21
Domestic Producers -$2.53
Petroleum -$1.08
Chemical -$1.56
Distribution Services $0.10
Foreign Producers $0.32
Petroleum $0.30
Chemical $0.02
Total Social Cost -$5.40
C-4
-------
Table C-4. Company Impacts Associated with Organic Liquids Distribution (OLD)
NESHAP: 1997
Sensitivity A: No LDAR or MRR for Nonattainment Area Facilities
Cost-to-Sales Ratio
Minimum
Median
Maximum
Number of Companies with
CSR less than 1%
CSRl%to3%
CSR over 3%
Percent Change in Profits
Minimum
Median
Maximum
Number of companies for which
Profits increase or are unchanged
Profits decrease by less than 1 %
Profits decrease by 1% to 5%
Profits decrease by more than 5%
Large Companies
0.00%
0.00%
3.76%
133
3
3
-46.7%
0.0%
1.4%
54
73
5
5
Small Companies
0.00%
0.02%
0.07%
16
0
0
-7.8%
-0.2%
0.0%
3
11
0
3
C-5
-------
Table C-5. Market-Level Industry Impacts of the Organic Liquid Distribution (OLD)
NESHAP: 1997
Sensitivity B: No MRR for Nonattainment Area Facilities
Baseline
With
Regulation
Change
Absolute
Relative
Petroleum Products
Price ($/metric ton)
Quantity (106 metric tons/yr)
Domestic
Foreign
Chemical Products
Price ($/metric ton)
Quantity (106 metric tons/yr)
Domestic
Foreign
Distribution Services
Price ($/metric ton)
Quantity (106 metric tons/yr)
$191.84
2,365
1,924
441
$498.65
836
825
11
$12.32
478
$191.84
2,365
1,924
441
$498.71
836
825
11
$12.33
478
$0.001
-0.01
-0.01
0.00
$0.005
-0.01
-0.01
0.00
$0.01
-0.00
0.001%
-0.000%
-0.001%
0.001%
0.001%
-0.001%
-0.001%
0.001%
0.061%
-0.001%
C-6
-------
Table C-6. National-Level Industry Impacts of the Organic Liquid Distribution (OLD)
NESHAP: 1997
Sensitivity B: No MRR for Nonattainment Area Facilities
Absolute Change
Petroleum
Revenue
Costs
Operating Profit
Facilities
Chemicals
Revenue
Costs
Operating Profit
Facilities
Distribution Services
Revenue
Costs
Operating Profit
Facilities
Total
Revenue
Costs
Operating Profit
Facilities
-$0.01
$2.16
-$2.17
0
-$2.05
$1.88
-$3.93
0
$3.55
$3.47
$0.08
-1
$1.49
$7.50
-$6.01
-1
C-7
-------
Table C-7. Distribution of Social Costs Associated with Organic Liquids Distribution
(OLD)NESHAP: 1997
Sensitivity B: No MRR for Nonattainment Area Facilities
Value ($10"/yr)
Change in Consumer Surplus -$7.14
Petroleum -$3.20
Chemical -$3.94
Change in Producer Surplus -$5.37
Domestic Producers -$6.01
Petroleum -$2.17
Chemical -$3.93
Distribution Services $0.08
Foreign Producers $0.65
Petroleum $0.60
Chemical $0.05
Total Social Cost -$12.5
C-8
-------
Table C-8. Company Impacts Associated with Organic Liquids Distribution (OLD)
NESHAP: 1997
Sensitivity B: No MRR for Nonattainment Area Facilities
Large Companies
Small Companies |
Cost-to-Sales Ratio
Minimum
Median
Maximum
Number of Companies with
CSR less than 1%
CSRl%to3%
CSR over 3%
0.00%
0.00%
3.76%
133
3
3
0.00%
0.02%
0.07%
16
0
0
Percent Change in Profits
Minimum
Median
Maximum
Number of companies for which
Profits increase or are unchanged
Profits decrease by less than 1 %
Profits decrease by 1% to 5%
Profits decrease by more than 5%
-46.7%
0.0%
1.4%
60
68
5
5
-7.8%
-0.2%
0.0%
3
0
C-9
------- |